NRMA recently commissioned a report into the smash repair industry from Deloitte Access Economics. Paint and Panel takes a look at some of the report’s difficult but realistic conclusions.
Late last year, NRMA commissioned Deloitte Access Economics to inquire into the Australian smash repair industry. The Smash Repair Industry report makes some sobering findings, but few of them are unexpected.
NRMA’s head of supply chain, Roy Briggs, says the report has in the main confirmed what we already know is happening in the industry,
“My background is in finance, so I came to this job with no industry baggage or vested interest,” Briggs says. “I have taken a pragmatic approach to how we need to do business with the industry and this report was to check we weren’t off beam.
“We wanted independent confirmation of where the industry is going to support our strategy of forming a more sustainable relationship with repairers. It confirmed that we need a stronger industry that is more commercially aware and productive.”
The main report headlines will come as no surprise to the industry, there are less accidents, safer cars with increasingly sophisticated repair methods and these factors, amongst others, are driving consolidation in the smash repair industry.
Some of the key observations the report made included:
- Overseas experience suggests that Australia is still in the early stages of consolidation based on the number of repairers per captita.
- The future of the industry will be further consolidation, as current trends are expected to continue. This impact is likely to differ across the different market segments. For instance premium car repairers and those specialising in major repairs are expected to face the lowest degree of consolidation due to their niche markets. High value cars are the most likely to be repaired rather than written off, and these will require skilled repairers. With the current and expected future skills shortage in the industry, it is likely that these qualified tradespeople will specialise in the higher value end of the market.
- Specialisation is likely to be a stronger force in major population centres. In regional areas, the volume of work may only be able to support one smash repair shop catering for minor and major repairs.
With a likely skill shortage in regional areas, as well as a higher cost of parts due to their distance from major centres, maintaining smash repair shops in regional areas may become unviable. There is already a trend of transporting vehicles from regional areas to cities to be repaired, then returning the cars to their owners, with total costs lower than if they had been repaired locally.
It is the transactional nature of the relationship between smash repairers and insurers that allows such inefficiencies to exist. Each repair is treated as an individual transaction where both parties aim to maximise profit, leading to conflict regarding the quoted price for repair. Efficiency in the sector could be improved if long-term supply agreements could be arranged to maximise overall profit in the sector.
Future of the INDUSTRY
The report concludes with a chapter on where the industry is likely to be in five years time.
‘The industry is on a path of consolidation and decline. The path of consolidation is changing the structure of the smash repair industry towards a more sustainable model of operation.
A sustainable industry is one where supply meets demand without excess capacity. It should also have sufficient flexibility to respond to changes in demand over time.
As uneconomic businesses close, it is likely that larger ‘factory’ shops and companies with multiple premises will become more dominant at the expense of small independent repairers. This is due to their ability to benefit from economies of scale which will give them a competitive advantage.
A sustainable industry will be made up of a smaller number of enterprises with higher productivity in metropolitan areas. A range of shops delivering high quality, fast turnaround repairs will be supplemented by niche operators catering to the choice-related, premium car and regional markets.
The financial relationships within a sustainable industry would be based on efficient business models with accurate and competitive pricing for time and parts, with timely payment for services.
Key drivers
Automotive technologies are likely to continue to become more complex and costly. As such, in the event of an accident, the cost of replacement may be comparable to the cost of repair, with an ongoing trend towards less work required of the repair industry. This is likely to reduce the skill requirements and employment in the industry over time.
Regulatory factors will continue to have cost impacts on the industry and will drive the services towards what consumers require. As this continues to evolve, the industry will become more competitive, with the more efficient enterprises performing more strongly.
The trends in wages for the industry will be highly dependent on the skills required. The skills required may increase or decrease. This will depend on the interplay of the technological complexity and specialisation factors. Overall, it appears that consolidation of the industry is leaning towards differentiated market model, with evolution towards specialisation.
With Australia’s wide market for cars, there needs to be a flexible repair strategy to provide the right service for customers. For instance, in metropolitan areas, the development of SMART shops to cater towards fast processing of low value repairs would be part of the consolidation process, transitioning away from the smaller repairers. However, this would not be viable in regional areas due to insufficient volumes of repairs, as well as the fact that a greater proportion of crashes are high speed collisions involving major structural damage.
As there are a diverse range of factors affecting consolidation, it is likely that the pace of change will be gradual. The key drivers present evolving forces on the smash repair industry rather than requiring immediate restructure in response to a major shakeup of the industry.
Overseas experience
One of the major differences between the European and Australian smash repair markets is the presence of smash repair chains. While they are beginning to develop in Australia, they are not currently enjoying the economic benefits of the network as yet. Continued consolidation and development of these chains as their benefits are realised is likely to change the structure of the industry towards these larger operations.
Further, these chains will increase the concentration of the industry towards international models. As the Australian market currently has low levels of concentration, there is significant scope for this to increase. Also in line with international experience, there is likely to be a trend towards larger shop sizes to achieve economies of scale.
Obstacles
Some industry practices are presenting obstacles to the consolidation and improved efficiency of the industry. In particular, the end of the Funny Time Funny Money (FTFN) relationship between insurers and repairers will provide better price signals to the industry and, hence, what is a sustainable number of enterprises and employment.
As the insurance industry is largely responsible for the volumes of work referred to smash repairers, they also have an important role to play in minimising obstacles to the consolidation of the repair industry. They stand to benefit from the consolidation through the increased competitiveness of the industry. As such, it is in their best interests to assist restructuring forces.
Key strategic propositions
- The AAMI model (limited choice, SMART shops) will continue to spread, driving consolidation and constraining price increases for minor repairs in metro markets. QBE, Allianz and other insurers are offering products that reinforce this.
- Prestige car makers will continue to try to tie their customers to their accredited repair shops. The challenge will be to maintain price differentials – large, specialist insurers should be able to offer better prices.
- Regional markets will continue to offer greater diversity of repairers.
- However, large chains may encroach in regional areas over time.
- Greater numbers of repairs could occur outside the region, especially if transport links with major centres improve.
- Insurers will be able to price for choice, offering basic no-choice of insurer cover and more expensive with-choice cover. Choice does not appear to be a powerful motivator for consumers, as illustrated by the acceptance of the AAMI model and prestige manufacturers’ efforts to tie their customers’ hands.
- Technology will lead to a shrinking volume of repairs.
- Technological advances will push up the cost of skilled labour and equipment, favouring larger repairers who benefit from scale.
- The trend towards replacement over repair will continue.
- Regulations will provide a mild incentive to build scale.
- A lower volume of car crashes, due to technological factors and safer driving conditions, will place downward pressure on the cost of insurance, all else being equal.