Sam Street caught up with Mathew Cooper, group chief operating officer at AMA Group to discuss recent site closures and amalgamations and the AMA Group strategy in regard to achieving appropriate remuneration for repairing cars going forward.
AMA Group recently announced the closure of its Preston site - NSW Prestons and the amalgamation of two sites in WA. The closure of the Preston site was because an agreement couldn’t be reached with a work provider to adjust a fixed cost contract that didn’t cover the cost of repairing the cars.
Cooper said: “In many cases the cost of repair was twice what the average fixed price was. So, it was significant, it wasn’t just $50 here or $50 there, it was a significant differential that we had on that contract. There’s only so long that you’ll invest to try and adjust and change and get the right commercial outcome before the losses get to a point where you’ve just got to let it go, and that’s where we got to with this one.
Presumably at one point AMA could have repaired the car for the agreed price - what has changed?
“When you get these average price models, it’s still very dependent upon the types of cars and the types of accidents that occur and where those cars come from. Over time in this facility, we ended up with a higher mix of premium vehicles and a higher mix of heavier hits. They were being towed from all over Sydney to this facility.
“So, when you have those two elements change, the average cost of repair has to go up, and that’s all calculated in the insurer systems as well. So this is not just us doing our own calculations as to what something costs to repair. We’ve done all these calculations in the insurer’s system, which is a globally recognised system, and has calculated the average repair cost to be higher than what the average was expected to be.
Were there also inflationary issues?
“That’s relevant as well because it’s included in the average cost. I think to address your point around inflation, there are inflationary issues right through the industry at the moment. We’ve got a scarcity of labour which is driving wages pressure, we’ve got parts prices increasing and that differs by marque. I’ve seen numbers of up to 19% on one of the brands in terms of their parts pricing increases in 12 months.
“We’ve also got the supply chain impacts which are running through in terms of increased shipping costs which are impacting consumables and those sorts of elements.
Paint is another area where we’re expecting significant increases in cost. That’s because we’ve got challenges with China in terms of some of the elements of the supply chain there are locked down and movement is difficult. In Europe we’ve got the challenges of gas prices and a lot of these paint chemicals - these base paint chemicals -require that heat and reaction and so forth to generate them. So, we’re expecting significant forward pressure on paint as well.”
Looking forward we’re looking at higher interest rates and a rise in inflation inevitably in the next 12 months?
“Unquestionably we’ve got an inflationary environment. We had a 5.1% inflation annualised for the last quarter. I’m not an economist, but I can’t see that slowing down any time soon. The price of petrol didn’t go down, it’s still over $2 a litre and it’s a really good simple indicator that inflation is continuing.
What will happen to the Preston site?
“We haven’t made a decision yet as to what to do with the site. It may re-open in the future. It may ultimately just close and be handed back to the landlord at the end of the lease.’
Will we see other AMA sites closing before of cost efficiencies?
“We evaluate the profitability of our sites on a regular basis. So we’ll make decisions based upon the continuity of sites, based upon what work is available, what other insurers can go in. There are a number of factors that go into that. We’ve not made any other decisions to close sites at present. We may do that in the future, but we’ll continue to analyse things and work our way through it.
“For us though, when we have an unprofitable site, we need to really engage with our insurance partners to understand why it’s unprofitable. There are times when there are operational issues that we need to fix and that’s why a site might be unprofitable. There are other times where it’s just not commercially viable under the commercial construct that’s in place, and that’s where you’ve got to have the negotiation and discussion about adjustment to those commercial terms.
“Focusing in on pricing in general, it’s clear to me that more regular adjustment of prices is required. So that means that there needs to be a greater responsiveness to what’s happening in the market.
"I think that responsiveness has not been there and certainly in the last few years where the industry has been significantly impacted by volume shortages with COVID impacts, people have been hanging on to what volume they’ve got. In those two years I think things have substantially changed. There has been wages inflation, there has been parts inflation, there has been other elements of inflation and the pricing and commercial constructs haven’t caught up with that yet.
You are not the only ones to have handed contracts back to insurers when they have proved to be unprofitable...
“I think everyone needs to make sensible business decisions. I’m not sure what others will do but certainly what we’re going to do is engage more proactively around these issues of the commercial position, more actively and more regularly. That means that there will be more requests for price adjustment because it’s necessary. I would hope that that actually helps the remainder of the industry feel that they can move forward in pricing as well, because it’s needed - efficiencies will only get you so far.
One of my fears in this space is that operators will complete substandard repairs because they feel that they don’t have sufficient remuneration - I think that’s a real risk. It’s obviously not a risk for our business because we’re going to continue to repair everything absolutely appropriately, but I think that is an industry risk and one that the insurers need to be mindful of.”