Private label business with Europe

If you are a parts manufacturer, and if you are still doing OEM business with America, then you are lucky. Most likely, you are very worried – rightly so.

U.S. light-vehicle sales sank to their lowest level in 27 years in January. Chrysler's sales were 55 per cent down on January 2008, while GM's slid 49 per cent. Toyota disclosed on Friday that it expects a $5bn operating loss in the fiscal year to March, three times higher than forecast. As a parts manufacturer, car sales don’t interest you as much as cars manufactured. The latest car manufacture data from North America are horrible. 442,241 vehicles were built in January, compared with 1,170,816 in January 2008. Total U.S. vehicle output plunged 65.6 percent; Canada fell 58.0 percent; and Mexico shriveled by 49.8 percent. All three Detroit auto manufacturers are teetering on bankruptcy.  Next week, both Chrysler and General Motors have to prove to Congress that their business is viable. If they can’t prove viability – and it doesn’t look like they can – bankruptcy will be the only way out unless the U.S. government changes their rules again and injects more billions of dollars into a car industry that looks worse by the day.

As reported, large system manufacturers who supply OEMs are in increasing trouble also. The Nikkei just reported that Japanese autoparts manufacturers “brace for seismic blows to their bottom lines.” Many of these manufacture in China.

German parts manufacturers and integrators – who also rely on China to a large degree -  are in similar trouble. The German Autohaus expects them to experience a loss of profits in the 6 billion Euro area, which many will not survive.

With sales to OEMs and system integrators in trouble, where should you go to sell your parts? You know my recommendation: Go to Europe, a huge market for cars and parts, two times larger than America.  Go for the after sale market. A new car needs two sets of brake pads. A used car will need 10 to 20 sets over its lifetime. Purchase of a new car can be delayed. Urgent repairs cannot be delayed. As more and more people hold on to their old cars, more repairs are needed.

Who is holding the key to parts sales in Europe? Cleary, it’s the parts wholesaler. Repair shops rarely stock any parts, they order them from their wholesalers as needed. Wholesalers deliver to workshops just-in-time, sometimes six times a day. In Germany alone, there are more than 3000 parts wholesalers. Estimates for all of Europe range from 20000 to 30000 wholesalers.  In Germany, approximately 250 parts wholesalers have sales over 10 million Euro per year.

The mid-sized to large wholesalers typically carry two or three large brands per product group. They prefer brands with a wide assortment of product groups, this way, the wholesaler can maximize considerable year end bonuses.

Reacting to the new competitive environment, more and more midsized to large wholesalers are now turning toward their own private label. This own private label will not replace the two to three large brands they carry, it will support them. The target of this private label usually are price sensitive segments, owners of cars 4 years or older.

The product will be delivered in the packaging and under the brand of the wholesaler. By buying directly in China, the wholesaler can realize much higher margins, while being price competitive.

Private label marketing is a huge worldwide trend. Many call it the second wave after branded product. Private label marketing eliminates most costly steps between manufacturer and customer and is able to deliver high quality at competitive prices. A wholesaler’s private label is based on his good contacts and good reputation with his dealers.

This business can be a very rewarding and long-term relationship. However, it will be a different relationship than with an OEM:

1.)    There is a limited amount of wholesalers who can afford the minimum order quantities.

2.)    The manufacturer should be flexible with pieces per item ordered. The first order often is a large sample order with  low numbers per item, (50 – 200) which the wholesaler will use to test the market. Follow-up orders can be higher.

3.)    A wholesaler who gets product over night from his European supplier often is shocked when he hears that the first order can take 3 months to arrive (8 weeks for preparation and manufacture, 4 weeks for shipping.) Any flexibility on the manufacturer’s side will help.

4.)    Don’t expect as much technical expertise from a wholesaler as from the purchasing and engineering department of an OEM. The wholesaler understands his market, but he expects the manufacturer to understand everything about the product.

5.)    While price is important, quality is also. The wholesaler is the key to the market, but the mechanic at the shop is the person that decides whether the product will be re-ordered and whether the private label will be a success or a failure. If the product doesn’t fit, if the product fails, or if the customer complains, the mechanic will not re-order. The private label project will fail, and you will never see the customer again. The parts wholesale world is small, word spreads quickly, and your will find yourself being avoided. If the product is covered by a standard, especially if the product must have an E-Mark, strict compliance with the standard and the E-Mark is a must. Cutting corners is an invitation to trouble.   

The private label strategy is getting more and more traction as margins come under pressure and consumers become more cost conscious. Many wholesalers are eager to try to start their own house brand. Some large wholesalers had tried it and had bad experiences. The biggest complaint we hear is that the quality they received from China wasn’t as consistent as they hoped. To which we answer: “Did you open your permanent sourcing office in China? Did you dedicate manpower resources to manage the quality you expect, or did you shop on price alone?”

Companies such as ours that specialize in contract private label manufacture can make the life of both manufacturers and wholesalers much easier. Companies like ours add local presence in China and European engineering know-how to the mix. Assisted by these companies, wholesalers come to you ready to place an order. These companies know (or should know) the technical details involved.  They can aggregate several small orders into a large order. They can (or should) organize independent quality assurance programs and assist the Chinese manufacturer with certification if needed. They make sure that the wholesaler gets the exact quality and quantity as ordered. Be careful if a consulting company asks you for an upfront payment to help you penetrate this market. Our company gets paid by the wholesaler in Europe. All we expect from you are the best products at the best prices.

Next week:  Small misunderstandings can kill the biggest deal.

About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.