ANALYSIS OF THE MOTOR BODY REPAIRERS INDUSTRY

ANALYSIS OF THE MOTOR BODY REPAIRERS INDUSTRY DRAFT REPORT 10/07/2012

Outline • Introduction • Stakeholders consulted • Drivers of growth in industry • Findings • Observations and conclusions • Recommendations • Questions and inputs

Study Objectives • profile of the sub-sector - its categories, their sizes, dynamics, and capacity; • total annual revenues in the sub-sector; • skills gap and skills development initiatives in the sub-sector; • key challenges prohibiting industry growth; • logistics and infrastructure requirements; • proposed interventions by the sub-sector industry to empower Previously Disadvantaged Individual (PDI) – owned SMMEs

Study Objectives • influence of the short term motor vehicle insurance industry: • the number of panel beaters - other than the insurance industry (self-insured/ state-owned enterprise and large fleets); • the ‘total spend’ with these panel beaters, both insured and non-insured clients; • turnover from short-term insurance as a percentage of total turnover of individual enterprises; • the insured spend with these panel beaters – procurement from short-term insurance companies; • Grading qualification used by the short term vehicle insurance industry; • Short term insurance total spend on repairs, and spend on black-owned SMMEs in the industry; and • % spend and turnover from servicing and repairing Government (all spheres) and State-owned enterprises (SOE) fleets

Methodology

Data Collection Process • Interviews conducted on 17 relevant stakeholders to the industry- MBR Forum members (& their membership) and other stakeholders such as critical group service/ product suppliers to the MBR industry • Primary data collection- face to face interviews, telephonic interviews • Secondary data collection- trade statistics and publications

Strategic fit of methodology with research objectives

Drivers of growth in the industry • Increased number of registered vehicles • Increased road congestion that cause higher frequency of accidents (incidence & magnitude of accidents) • Inflation pressures that increase the cost of repair per vehicle

Barriers to Entry and Exit into the motor body repair industry- Economies of Scale • Economies of scale - highly volume critical - sustain the heavy fixed costs (investment in facilities and equipment) - variable costs (direct material and direct labour costs) • Economies of learning • Heavy impact of technology into the industry e.g. motor body materials, micro dotting • High level skills e.g. competence shifts • Cost structures have seen the industry be replacement part driven e.g. the motor insurance industry spent R16 billion on component parts in 2010. • Economies of scope • Investment into the tow truck business, motor dealerships

Barriers to Entry and Exit into the motor body repair industry- Capital/ Investment Requirements • Capital/ investment requirements • Facilities and equipment required to meet the grading/ standards • Skills required in the industry e.g. artisans/ panel beaters • Access to formal business networks is difficult

Barriers to Entry and Exit into the motor body repair industry- Access to distribution channels • target markets for motor body repairers: • Insured motor vehicle market that constitutes 30-35% of the South African car parc. • Uninsured motor vehicle market that constitutes 65-70% of the South African car parc • Business networks that need to be infiltrated are: • Insurance industry comprising the motor insurers - panel lists - insurance estimators and assessors - insurance brokers (undertake claim management processes) • Motor vehicle dealers - small touch ups or cosmetic repairs on used or premium select used vehicles • Fleet managers both in the public and private sectors

Barriers to Entry and Exit into the motor body repair industry- Customer switching costs • typical customers to motor body repair companies dependent on these factors: • Level of capitalisation - first economy or second economy - access to market and distribution channels • Type of market targeted defined by insured motor vehicles and the uninsured vehicles • Extent of market depth of a motor vehicle brand in South Africa and the distribution of those vehicle owners across the geographic expanse of the country • Switching costs are thus classified in three categories, namely: • informal segment of the market - high volume of panel beaters clustered in the respective geographic areas e.g. Ivory Park, Bambanani - switching costs for clients low; • SAMBRA graded and approved motor body repairers - motor insurance companies and fleet managers - price takers - switching costs are low for motor insurance and fleet managers • OEM approved motor body repair workshops - niche operators - restricted by geography - high capital investment - harness brand equity - switching cost high - highly integrated supply chain

Barriers to Entry and Exit into the motor body repair industry- Impact of brand equity/ loyalty • Factors driving • Globalisation- consumerism movement • Brand consciousness - Brand Equity Consequences • OEM approved workshops across a spectrum of motor vehicle brands. • Fully approved OEM approved motor body repair workshops exclusive only to motor vehicle brands e.g. Mercedes and BMW • Multi-approved OEM approved workshops - obtain badges from motor vehicle manufacturers that identify them as licensed to conduct motor body repair on those brands e.g. Toyota, Nissan, VW, Audi

Barriers to Entry and Exit into the motor body repair industry- Likelihood of retaliation - High • increased insolvencies and liquidations in the industry - diminishing market due to the following factors: • Technological improvements in the motor vehicles such as mitigating accident technologies e.g. lane assist, park distance control etc. which mitigate the risk of accidents • Facilities and equipment - using technology - enhance throughput and enable market access • Technology that is mitigating the extent and magnitude of corruption in the industry e.g. Audatex system • Policy and regulatory environment - enhance road safety - Arrive Alive Campaign • Increased role of OEM’s in controlling their brands - protection of their brand in the product lifecycle, - standards and approvals for certified motor body repairers

Barriers to Entry and Exit into the motor body repair industry- Government regulations impacting on the industry • Government regulations in the industry have been minimal except in the provision of: • Company registration through Companies and Intellectual Property Commission (CIPC) • Certificate of compliance to the Occupational Safety, Health Act from the National Department of Labour • Zoning of the premises as compliant to business use through the respective local municipality with respect to new businesses • Motor Industry Bargaining Council (MIBCO) - Labour Relations Act • Compliance to tax - annual tax clearance provided by the South African Revenue Services (SARS). • Compliance also to the Broad Based Black Economic Empowerment Act - access the motor insurance, fleet management and OEM approved workshops

Barriers to Entry and Exit into the motor body repair industry • Conclusion: Barriers to entry/ exit in the industry are high – Formal / Informal Economy

Bargaining power of suppliers to the motor body repair industry in South Africa- Supplier concentration in the industry • Suppliers comprise: • Original Equipment Manufacturers (OEM’s -7) and component manufacturers in the automotive industry - motor group holdings • Approved (by auto manufacturers) workshop equipment suppliers to the motor body repair workshops such as Cellete South Africa and Aerocure. • Labour provided by various training institutions under the aegis of merSETA

Bargaining power of suppliers to the motor body repair industry in South Africa- Branding among the suppliers • commands a price premium - communicates quality, safety and reliability - integral to the brand equity of the motor manufacturer • Variables considered of MBR • Location • Facilities and equipment • Labour competence • Financial position • Throughput of workshop • Customer relationship experience

Bargaining power of suppliers to the motor body repair industry in South Africa- Profitability of suppliers • Highly integrated supply chain defined by business model of OEM

Bargaining power of suppliers to the motor body repair industry in South Africa • Threat of forward integration Among suppliers to the motor body repair industry is increasing - motor holding groups • Importance of volume to the suppliers Capital intensive nature of the industry - technological lifecycle of motor manufacturing - optimise their return on assets - panel lists of motor body repairers in the insurance industry - geographic positioning of OEM approved motor body repairers - Mercedes and BMW -importance of volume to the supplier - profitability and sustainability of supply chain partners

Bargaining power of suppliers to the motor body repair industry in South Africa • Role of quality and service • ensuring the motor vehicle brands perception as one of impeccable quality and condition • motor manufacturers and their respective supply chain partners - vehicle brands lifecycle - ensure that the vehicles are roadworthy and restored to motor manufacturers standards • Importance of industry customer groups to the suppliers • competitive paradigm from company to company competition to supply chain against supply chain • motor body repairers becoming an important customer group in the automobile supply chain.

Bargaining power of suppliers to the motor body repair industry in South Africa - Switching costs • Cost of suppliers getting new customers is very high - enhance brand equity of motor brands - increased shorter ownership lifecycles (5-7 years) among motor vehicle buyers • harnessing brand equity among customers and customer groups mainly for the following reasons: • Acquisition costs for new customers are high • Harness brand loyalty among existing clients • Referrals from existing clients to new/ potential customers on the worthiness of the motor vehicle brand • Back end sales and lifetime value created for the motor brand • Enhances the market value of the motor manufacturer brand through its clientele.

Bargaining power of suppliers to the motor body repair industry in South Africa • Conclusion Bargaining power of suppliers to the MBR’s is very high – Control their Brands- Brand Equity- Brand Loyalty

Bargaining power of buyers to the motor body repair industry in South Africa • Classified as institutional and non-institutional buyers • Institutional buyers being: • Motor Insurance market comprising of vehicles under warranty and those without • Fleet managers in the public and private sectors • Motor Dealerships • Non-institutional buyers comprising: • Uninsured motor vehicles.

Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration - Institutional Buyers Motor Insurance Market • short term insurance - insured vehicles on South African roads average 30-35% of the registered motor vehicles • variables considered to be on the panel system include: • car parc of motor policy holders by vehicle brand • Geographic positioning of these vehicle brand car parc of policy holders by their residences • Motor body repair technical checklist within the geographic areas identified by vehicle brand catering for the following perspectives: • Type, brand and age of equipment • Type of premises and safety of the premises with aspects such as zoning of the area • Staff complement • Good business practices - good administrative systems and procedures

Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration - Fleet Managers • segmented by public and private sectors • Private sector fleet managers include motor group holdings • Public sector fleet management through the following methodologies: • Outsourced service provider - public private partnership contract with National Treasury - contract RT46/ 2009CV - WesbankFirst Auto - three quote system of panel members graded and compliant to OEM global standards of motor body repair • Subsidised government fleet - 70% work, and 30% private - transfer 4 years or 160,000 km - maintenance through RT 62 and insurance through RT 58 - MmelaFinancial Services that utilise the warranty and therefore the OEM approved motor body repair workshops - approximately 15, 000 vehicles - Toyota, Nissan, and General Motors. • Government owned fleet that is purchased through RT 57 either through ownership by the National Department of Transport (complies with trading account) or a respective Department owning the vehicle (complies with Budget system)

Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration - Motor Dealerships • offer opportunities for cosmetic motor body repair - classified into two market segments: • Conglomerate/ corporatisation motor holding groups - have their own motor body repair businesses to service their dealerships • Independent Motor Dealerships - utilise franchised or independent motor body repairers - networking and long established relationships with motor dealerships.

Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration - Non-Institutional Buyers • drive in customers who seek to repair accident damages in both the formal and informal economy motor body repair players • choice of motor body repairer is heavily dependent more on price than quality • informal economy of the industry constitutes mainly emerging players in the industry • Challenges experienced • Lack of resources to buy or rent facilities/ premises • Lack of financial resources to buy new equipment( ageing infrastructure) • Lack of support from RMI (institutional leverage) • Unable to obtain the required technical qualification (i.e. trade test) due to financial barriers, approximately costing R12, 000 per head • Do not meet required grading standards • Policy and regulatory issues from business zoning, grading and accreditation, to waste management

Bargaining power of buyers to the motor body repair industry in South Africa - Buyer concentration Extent of product/ service differentiation • Mass market - insured and uninsured vehicles out of warranty - extent of facilities and equipment, skills to cater for the 70% of the highly fragmented market • Niche market - OEM brand equity and loyalty - insured vehicles that have warranties Profitability of these buyers • sensitivity of the motor insurance industry to the magnitude of motor body repair done - affordability, profitability and sustainability of motor insurance • Automatic number plate recognition project - mitigate vehicle theft • Lobbying for third party compulsory motor insurance to mitigate third party motor accident losses • Cost of parts project aimed at mitigating the cost of OEM parts in the repair process

Bargaining power of buyers to the motor body repair industry in South Africa - Role of price, quality and service to the buyer decision Quality: • Adherence to the global standards set by OEMs - vehicle brands with warranty agreements - guarantees certain standards of safety • Facilities and equipment that have to adhere to OEM global standards or SAMBRA standards (vehicles out of warranty) Service: • turnaround times in the repair of the vehicles has to adhere to global OEM standards • Customer relationship management is critical as the customer experience -brand equity and loyalty Price: • Formal economy motor insurance segment is sensitive to price of motor body repair as this impact on the affordability of motor insurance and depth of the industry in any given country • informal economy price is also sensitive - negotiate pricing with informal economy motor body repairers, sometimes to the detriment of quality and service

Bargaining power of buyers to the motor body repair industry in South Africa Threat of backward integration • Potential backward integration emanates from: • Motor dealerships which due to evolving business models of the OEM’s • Motor insurance companies - high incidences of corruption and fraud within the industry – cost of repair Switching costs to buyers • The depth of motor vehicle brands and their pricing impacts on the switching costs of buyers - price is a discriminator as to the brand of vehicle purchased - entry level cars (or starter packs) to niche premium brands such as Mercedes or BMW

Bargaining power of buyers to the motor body repair industry in South Africa Effect of buyer volume • critical to the profitability and sustainability of motor body repair industry players – desire for motor insurance business • carrying capacity of the industry relative to the car parc of brand in the country and by geography (provinces) Price sensitivity • Price sensitivity is high among the insured and uninsured market segments • Insured segment - formal economy, motor accident claims are the major cost centre of a motor insurance firm - to control and manage the risk so as to enable affordability, profitability and sustainability of motor insurance • Uninsured segment - clients have less disposable incomes to take on motor insurance – motor body repair added cost

Bargaining power of buyers to the motor body repair industry in South Africa • Conclusion Bargaining power of buyers to the motor body repair industry in South Africa – high – second to the power of suppliers – MBR’s Price Takers

Threat of substitute products and services to the motor body repair industry in South Africa - Impact of technological innovation on the operations of the industry • Technological innovation in the industry - redefined the players and competitive forces in the industry • Evolving technological life cycles - incorporated in the motor vehicle brands e.g. growing use of vehicle obstacle detection systems • Evolving product lifecycles through the immense number of motor variants per brand - requires constant training at the cost of the motor body • Evolving operational efficiencies - enhance efficiencies in the motor claim processes and mitigate avenues and cases of corruption and fraud.

Threat of substitute products and services to the motor body repair industry in South Africa - Relative price performance or price performance trade off • price performance trade off in the industry is very low • Two perspectives noted • Uninsured market segment, good quality motor body repair serves as a client referral system especially for informal economy players • Insured market segment good quality work and fair pricing that does not compromise road safety is the driving force among motor insurers

Structure of competition in the motor body repair industry in South Africa Competition in the motor body repair industry is categorised within the dual economy of South Africa • Second economy or informal economy - highly fragmented comprising many panel beaters who lack critical mass to influence the industry - structural factors • Low barriers to entry as they require low capital requirements -absence of physical facilities, grading and policy and regulatory requirements; • Lack industry defining standards to comply -perspective of how much the customer is willing to pay • Given the nature of their customers high levels of trust are required due to payment methodologies adopted • First economy or formal economy that can be classified as: • Insurance approved motor body repairers utilising SAMBRA standards of accreditation who - highly fragmented lack large market share to influence the industry’s trajectory in the future • OEM approved motor body repairers utilising the OEM global standards that allows them access also to the insured segment of the market - moderately fragmented market segment - increased corporatisation - most lucrative segment of the motor body repair industry. • market structure of the motor body repair industry in South Africa is oligopsonic- has many motor body repairers who interface with a small group or cluster of buyers (institutional and non-institutional).

Structure of competition in the motor body repair industry in South Africa- Structure of industry costs

Structure of competition in the motor body repair industry in South Africa- Degree of product/ service differentiation among industry players • globalisation of the automobile supply chain - increased supply chain integration - motor body repair industry evolve from a commodity market to differentiated market based on the motor vehicle brand car parc in the country • OEM business model - development and reconfiguration of motor body repair business - brand equity - guarantees no compromises are made on safety • tie in motor warranties have impacted on the motor repair industry and the extent and amount of motor claims paid out

Structure of competition in the motor body repair industry in South Africa- Stage of the industry in the life cycle Cost/ shake out phase • Economies of scale/ scope and learning - high number of liquidations and insolvencies of motor body repairers, industry consolidation through acquisitions • Barriers to entry and exit into the industry have increased astronomically due to global nature of the automobile industry and its integrated supply chain Maturity phase • established and well capitalised OEM approved motor body repair workshops - increasing market share - increased corporatisation

Major observations and conclusions • Lack of trust/ transparency in sharing information • Skills development of artisans - scarce occupations required are: • Automotive motor mechanic • Panel beater • Diesel motor vehicle mechanic • Automotive spray painter • Automotive mechanist • Vehicle body builder • Automotive electrician

Major observations and conclusions • development of the motor body repair industry has as its core the sustainability of vehicle financing and motor insurance in the country • panel system though controversial among some stakeholders is also a method for ensuring the motor insurers do not lack adequate motor body repairers • business networks in the industry have been harnessed through long term relations that mirror the supply chain collaboration of the automobile supply chain • Technology in motor vehicle production and operational processes of the motor body repair processes is heavily defining who plays in the industry • Motor manufacturers have realised that to harness optimal returns on their motor vehicle brands they have to invest in the products life cycle through harnessing brand equity • increasing power of OEM brands into the product life cycle of the motor vehicle entails that relevant key stakeholder associations are incorporated into the MBR Forum • global nature of the automobile supply chain and the strategic fit with the country’s history and stage of economic development needs to harnessed and managed well so as to realistically manage the expectations of various stakeholders to the industry • Transformation in the motor body repair industry cannot be adequately addressed without looking at transformation in the financial services

Recommendations Regulatory/ Policy • Strengthen the MBR Forum including all relevant key stakeholders e.g. merSeta, OEMs, SaTec • motor body repair industry standards that serve as access to market tool - developed with input from the other representative MBR stakeholders in the Forum and segmented according to target markets and capitalisation requirements with clear stipulations on how to grow within those standards- consolidation of standards • definition and role of the consumer should be noted and identified so as to enable appropriate targeting and understanding among stakeholders- consumer code of conduct • panel system of motor insurance companies should be open to qualifying motor body repairers and the grading and accreditation of who can be on the panel should be open for independent audit to ensure fairness and consistency of standards • Government look into the prospect of compulsory third party insurance to ensure the affordability and sustainability of motor insurance

Recommendations SMME Development • Development of enterprise development fund anchored within code 600- enterprise development (BBBEE scorecard elements) e.g. 50% of 1% of turnover into the fund • Strategic linkage of Financial Sector Charter to MBR industry- enterprise development, procurement, skills development, employment equity Skills Development • Marketing and communications campaign should be collaboratively developed by the MBR Forum members so as to adequately manage the expectations of MBR association stakeholders • Align and synchronise initiatives on skills development by stakeholders from merSETA (FET’s), RMI, AIDC MBR Industry Development • Government harness the Automotive Incentive Scheme within the APDP to promote OEMs (make it one of the pillars)- assist emerging motor body repairers strengthen their contribution in the industry - enterprise development, skills development within the OEM approved motor body repair workshops

Competitive Forces- Ecosystem

Conclusion • Questions • Thank you

ANALYSIS OF THE MOTOR BODY REPAIRERS INDUSTRY