Contents

2. Contents

3. Executive Summary Key Findings

4. Aftermarket outlook continued to improve Respondents indicate increased optimism from the lows seen in 2012 Have our expectations been reduced?

5. AASA Barometer Dashboard Sales New order Volume *Note: Please note that survey responses regarding price and GM are delayed by one quarter in order to comply with antitrust ‘safe harbor’ guidelines; change and Direction are calculated from 2012 Q4 to 2013 Q1

6. AASA key takeaways: Increased optimism despite slowing sales

7. AASA key takeaway: A failing warranty system provides an opportunity for supply chain collaboration

8. Special Questions:Warranty and the Aftermarket

9. Importance of “reducing warranty costs” averaged 6.3 for respondentsHowever, for 43% of respondents reducing warranty was rated as a very important issue to their company 43% Average: 6.3 Base: n = 79

10. Importance of warranty cost reduction ranked highest for “General Service Parts”, “Cooling/HVAC” and “Engine/Driveline” product categories Several product categories indicated even more concern with the problem. With these product categories averaging nearly 7 and above for the importance of warranty reduction, there is clearly some segements who feel the negative impact of warranty costs on their business.

11. Approach to warranty review process is split among respondents Roughly half indicate that their company has implemented an extensive warranty review process while others have limited or no warranty review What type of internal warranty review process do you use, if any? For full results, see Appendix

12. Average hidden cost of warranty return was 10.1% These additional costs contribute even further to the aftermarket warranty burden; with direct and indirect costs, warranty reduces industry profits by $3.9 billion* Average: 10.1% Base: n = 77 *Source: 2013 AASA Pulse KPI Benchmarks ~= 3.5+ billion value of parts warranty returns and 10.1% of indirect costs

13. Respondents indicated that “installation errors” and “insufficient training” were the largest contributors to warranty returns *Note: Scale is from 1 to 10 where 1 is “No contribution” and 10 is “Large contribution”

14. However, “customer satisfaction” and poor incentives at channel partners are also key contributors in the issue of warranty returns What other factors do you think contribute to warranty returns? What are examples of “abuse” of the warranty system that you have seen recently in the aftermarket? For full results, see Appendix

15. To improve the aftermarket warranty system, most agreed that collaboration across the value chain is crucial Whoever the “blame” falls on in regards to unnecessary warranty costs, increased knowledge, collaboration, and training for the aftermarket are the only way forward to reduce this growing issue among suppliers What can be done to improve the system and prevent unnecessary warranty costs? “Their systems often times do not capture issues or provide option for employees, those that do have sometimes poor compliance. The entire industry needs to own this issue.” “Better education at the installer level to improve problem diagnosis.” “Our customers have to take ownership over their customer’s neglect. Our customers believe that if they tell their customer no they will lose that customer to a competitor. This will not change until the industry changes.” “Clear warranty process for customers to follow and a clear explanation of warranty by product line.” “Training at the installer level and enforcement of policy.” “Better communication at all levels, starting with the point of sale.” “Get the channel partners more involved through training.” “Installation and diagnostic training.” “Eliminate lifetime warranty and broad customer satisfaction policies” For full results, see Appendix

16. Detailed Results: Market Conditions

17. Sales performance stayed tepid; declined slightly from Q1While roughly half (52%) experienced growth, sales performance continued to be weaker than the highs seen in 2010- 2011; 23% of respondents saw sales declines Growth Decline Base: n = 87 Note: “No change” is shown as neutral (as a zero value) on the chart to allow a visual depiction of trends

18. Majority of respondents (64%) expect growth in sales in the third quarter of 2013Only 7% expect declines Expect increases: 71% Expect declines: 7% Base: n = 87

19. Respondents’ independent aftermarket sales grew on average by 1.5%Although majority indicate growth, the low average (+1.5%) indicated that growth has slowed for the aftermarket Average: +1.5% Base: n = 82

20. OES average growth rate dropped to +0.2% Majority (56%) indicate OES sales down or unchanged, contributing to further weakness in growth Average: +0.2% Base: n=74

21. Q1 pricing environment increased slightly as 37% increased prices and 9% decreased Please note that survey responses regarding price and GM are delayed by one quarter in order to comply with antitrust ‘safe harbor’ guidelines Price Increases Price Cuts Base: n= 91 Note: “No change” is shown as neutral (as a zero value) on the chart to allow a visual depiction of trends. Price is delayed a quarter due to privacy laws.

22. Gross margin performance increased slightly in Q1Those indicating gross margin growth increased from 18% to 29%; while those indicating declines decreased from 29% to 23% Increase Please note that survey responses regarding price and GM are delayed by one quarter in order to comply with antitrust ‘safe harbor’ guidelines Decline Base: n=90 Note: “No change” is shown as neutral (as a zero value) on the chart to allow an effective visual depiction of conditions. Gross Margin was a new question in 2011 Q2, therefore only limited historical data is available

23. Detailed Results:Outlook

24. Respondents continue to indicate a more positive outlook Outlook continues to improve from the lows seen in Q3 of 2012 with 50% indicating optimism from Q1 vs. only 16% who become more pessimistic in Q2 Positive Negative Note: “No change” is shown as neutral (as a zero value) on the chart to allow a visual depiction of trends Base: n = 88

25. Respondents indicated a slight increase in inventory additions in Q2 versus Q134% added to inventories while 23% cut Additions Cuts Note: “No change” is shown as neutral (as a zero value) on the chart to allow a visual depiction of trends Base: n = 85

26. Capacity trends have remained steady over the past five quartersMore (39%) added to production capacity in Q2 Increase Cuts Note: “No change” is shown as neutral (as a zero value) on the chart to allow a visual depiction of trends Base: n = 84

27. Hiring increased slightly with 47% indicating growth from Q1Only 8% of respondents indicated “Job cuts” Hiring Job Cuts Base: n=85

28. New orders average growth decreased year-over-year, dropping from +3.7% in 2012 Q2 to +2.8% in 2013 Q2New orders are still relatively low, but improvement continues from the low seen in Q4 Orders Up Orders Down Note: “No change” is shown as neutral (as a zero value) on the chart to allow a visual depiction of trends Base: n=80

29. Detailed Results:Issues

30. “Lack of pricing power” and “Weak sales” moved to top concerns for Q2“Extended payment” continued to remain as a key issue facing suppliers More Important Less Important

31. Increased competition from low cost suppliers, economic uncertainty and rise in gas/oil prices impacted suppliers business in the past quarter What events or changes have impacted your business in the past three months? (Open-ended) Increased Competition Economic Uncertainty Rise in Gas / Oil Prices • “2nd tier suppliers” • “New entrants [in] online channels.” • “Completion from off-shore manufacturers” • “Global unrest, inability of government to deal with offshore threats…” • “Hyper competitive pricing at the street level.” • “Low price supplier competition.” • “The rapid influx of low cost competitors.” • “Slow economic recovery.” • “Poor demand.” • “Weaker then expected market conditions in the first half of 2013.” • “Fuel price increases and new car sales increases.” • “Gas prices going up is damaging to the whole Aftermarket…” • “Higher gas prices, lower consumer confidence.” For full results, see Appendix

32. IMR Repair ShopSurvey

33. Shop sales increased quarter-over-quarter

34. Channels purchased from in past 12 months Note: Respondents could pick multiple categories; therefore, total will add up to more than 100% Retail WDs Dealers/OES Note: The information in this section comes from IMR’s monthly Repair Shop survey research. IMR’s data includes significantly more on shop insights, category insights and shop demographics. IMR offers a 10% discount on their services to AASA members. See www.automotiveresearch.com for more information.

35. Appendix Respondent’s Product Categories Full Answers to Selected Questions Barometer Methodology

36. Respondents’ product categories Base: n = 74 Note: Respondents could pick multiple categories; therefore, total will add up to more than 100%

37. What events or changes have most impacted your business or business conditions in the past three months? (1/2)

38. What events or changes have most impacted your business or business conditions in the past three months? (2/2)

39. What other factors do you think contribute to warranty returns? What are examples of "abuse" of the warranty system that you have seen recently in the aftermarket? (1/3)

40. What other factors do you think contribute to warranty returns? What are examples of "abuse" of the warranty system that you have seen recently in the aftermarket? (2/3)

41. What other factors do you think contribute to warranty returns? What are examples of "abuse" of the warranty system that you have seen recently in the aftermarket? (3/3)

42. What type of internal warranty review process do you use, if any? (1/3)

43. What type of internal warranty review process do you use, if any? (2/3)

44. What type of internal warranty review process do you use, if any? (3/3)

45. What can be done to improve the system and prevent unnecessary warranty costs? (1/3)

46. What can be done to improve the system and prevent unnecessary warranty costs? (2/3)

47. What can be done to improve the system and prevent unnecessary warranty costs? (3/3)

48. AASA Supplier Barometer methodology notes • Comments are edited only for spelling and diction and may contain grammatical errors due to their verbatim nature. • Note that responses to questions related to price and gross margin trends are delayed by one quarter to comply with anti-trust safe harbor guidelines. • Responses to this survey are confidential. Therefore, only aggregated results will be reported. Individual responses will not be released and will be destroyed after results are compiled. • The AASA Supplier Barometer survey presents the latest information on aftermarket supplier sentiments and market trends. • The purpose of the survey is to provide members with general information on business conditions and market trends and to allow high-level benchmarking of sector performance. The information and opinions contained in this report are for general information purposes only. • Participation is only available to AASA supplier members. There were 88 survey responses in this quarter’s report.

49. Contact Information AASA | Automotive Aftermarket Suppliers Association 10 Laboratory Drive | Research Triangle Park | NC | 27709 | USA www.aftermarketsuppliers.org Paul McCarthy Vice President Industry Analysis, Planning and Member Services Office: +1 919.406.8812 | Mobile: +1 248.914.2567 Email: pmccarthy@aasa.mema.org Bailey L. W. Overman Analyst/Coordinator Industry Analysis and Member Services Office: +1 919.406.8823 Email: bwatson@aasa.mema.org