FOURTEEN

Stalled

BY SHOLNN FREEMAN

July 17, 2000

If you think any industry can easily be tamed by e-commerce, think again.

Consider the labyrinthine business of distributing parts to car and truck repair shops.

On this front, the opportunities for e-commerce look enticing. The industry is fragmented, and glutted with middlemen.The parts makers sell their wares to giant warehouse distributors. These giants in turn sell goods to smaller players called “jobbers” that have their own warehouses to hold local inventory. The big distributors also sell to various retailers, such as the Memphis, Tenn., auto-parts chain AutoZone Inc. and the Philadelphia-based Pep Boys—Manny, Moe & Jack.

By the time the wheel bearing or a motor mount has been sold to an installer who has put it into a vehicle and billed the customer, more than half the price paid for that part has gone into the pockets of one or more middlemen.

This profusion of players adds days to vehicle-repair times. It leads to chronic problems with excess inventory, mix-ups and availability. Moreover, with so many buffers between the far-flung parts factories and the commuter who is stuck with a dead car, there is no easy way to gauge product demand.

Yet despite a flurry of investment in e-commerce aimed at streamlining the auto-parts market, no overarching e-parts strategy has yet emerged to obliterate the middlemen.

“E-commerce people are attracted to the inefficiencies” of the vehicle-parts business “because of the massive amount of inventory and the large number of distributors,” says James Lang of Lang Marketing Resources Inc., based in Wyckoff, N.J. “But it takes an incredibly established bricks-and-mortar infrastructure.”

There are more than 201 million cars and light trucks on U.S. roads, and the vast array of parts needed to fix them must sit somewhere ready and waiting. “It’s not like an office-supply store, where if they don’t have one size paper clip, another size will do the job. There is no flexibility with a vehicle. You have to have the exact part to get the vehicle on the road,” Mr. Lang says. And so as the business has evolved, this inventory reality has led to an industry dependent on the thousands of middlemen across the country who get the right parts from the manufacturers to repair shops.

The parts manufacturers so far have balked at selling directly to repair shops, even though the technology is already here to allow that. Manufacturers don’t want to alienate the warehouses by taking their valves and struts directly to service garages over the Web. This is the same “channel conflict” that keeps manufacturers in many other industries from embracing the habit of selling online.

“E-commerce will definitely have a place, and will take costs out of the system,” says Pat Biermann, president of HD America, a St. Louis–based warehouse distributor. “But I don’t see installers buying direct from suppliers and cutting out middlemen. It’s not like buying a shirt or a cigar over the Internet.”

A person who buys a shirt over the Internet and gets the wrong color might be able to live with it. But there are thousands of auto parts, from air cleaners to drive axles, and the tiniest mistake in order identification renders the part useless for the installer. Moreover, when parts are ordered by phone, there is often considerable back-and-forth between the repair garage and the parts middleman.

Consider the collaborative approach taken by one 14-month-old online parts store, Wrenchhead.com. Gus Conrades, the start-up’s chief executive officer, says the old-line industry is “riddled with inefficiencies.” The company began by selling parts directly to do-it-yourself enthusiasts. But last month, it introduced business-to-business software that refers orders from parts installers to traditional distributors. Many of these distributors still take orders by phone, adding 10% to the final cost of the part, Mr. Conrades says. He says he could reduce that overhead to 2%: “It’s a supply-chain tune-up, not a blow-up.

“We try not to disrupt current relationships. We don’t want to take margin away from anyone,” he adds. “There are true barriers to entry into this industry. As long as we keep our heads down and keep our focus on product development, we’ll do fine.”

One parts manufacturer that is leery of selling directly over the Internet is Tenneco Automotive Inc. of Lake Forest, Ill., a $3.3 billion-a-year supplier of suspension and exhaust-systems parts. Even though Tenneco could sell directly to repair shops online, the company isn’t even considering it, says Dave Gabriel, senior vice president of Tenneco’s North American aftermarket operations.

“Our interest in the Internet right now is not flattening the distribution channel,” Mr. Gabriel says. Tenneco needs the middlemen, he says, particularly for their distribution networks, which move and deliver a lot of the company’s products.

Tenneco is using the Web to take orders from a handful of its bigger customers—mostly big warehouse distributors and retail muffler-repair chains, which are using the system to buy exhaust-system parts. But the company isn’t allowing repair shops to use that system.

There are still dozens of start-ups floating ideas to restructure the so-called aftermarket. Some of the many players in this camp are Carstation.com, MechanicNet.com, eKeystone.com and PartsMerchant.com.

“We are being flooded with people who have dot-com scenarios,” Mr. Gabriel says. “There are going to be people who get in and out of the business with several models. The situation is very, very fluid.” While the company plans to stick with existing channels, Mr. Gabriel says, Tenneco will continue to consider e-commerce possibilities.

Mr. Gabriel and other executives in the industry are mindful that e-commerce still could spur a broader restructuring of the business.

Some of the big retailers in the replacement-parts market already are pushing into each other’s territory, sometimes using the Internet as a wedge. NAPA Auto Parts, which primarily sells parts to repair shops, recently launched a Web site targeting the do-it-yourself business. Meanwhile, AutoZone, the biggest parts retailer, wants to expand from its base of selling to do-it-yourself customers by improving the credit and delivery services it offers to repair shops.

These forces already are causing the jobber ranks to shrink, says Mr. Lang of Lang Marketing Resources. He estimates that the jobber population has seen yearly declines of 2.2% for the past three years. And he expects the numbers to shrink even more. By 2005, he predicts a jobber population of 15,500, a decline of about 4,700 from current levels.

One closely watched Web strategy in the auto replacement-parts industry is iStarXchange, a new company whose initial investors include Toyota Motor Corp. and i2 Technologies Inc. of Dallas, a top provider of supply-chain-management software. IStarXchange wants to take key players online under an industry-wide standard. Jim Andrew, vice president of business development at iStarXchange, says the venture is currently trying to sell the concept to industry executives and is working to identify the “allergies” or points of resistance that different players have to the concept.

Mr. Andrew says the group is close to announcing major partners for the effort. “To make everybody happy,” he says, “iStar has got to provide value to each player in the marketplace.”

Mr. Freeman is a staff reporter in The Wall Street Journal’s Detroit bureau.