What We Can do to Prepare and Position Ourselves for the Next Year
After eighteen months, we are now entering what we hope will be the post-COVID world. So, I want to talk about what we have experienced in the past eighteen months, what the future holds in store for us, what we should expect, and what we can do to prepare and position ourselves.
I want to touch on some things that have happened in our industry during COVID. During COVID, we have experienced things that we have never encountered. The first obvious one is, during COVID, our industry was fortunate because we were all deemed “Essential Workers.” For all of us, hopefully we were able to keep everybody working. During the lockdown and slow months of April and May of 2020, the smart owners kept everyone working, and were using this time to get their house in order and prepare for a time when business would hopefully get back to normal.
For all of us, this anxious period only lasted for two months. We also had the Payroll Protection Program (PPP). In my 37 years of being in business and being an owner, this is the first time that I have gotten something free (for now) from the government. This was definitely a shot in the arm for all of us, having this extra cash. It helped us to keep everyone working during the slow period and beyond.
Come June of 2020, for the most part we all realized business was not only getting back to normal, but actually being better.
With demand exceeding supply, simple economics will always tell us that when demand is up and supply is down, price goes up. Most of us also had the luxury of being able to increase our prices at this time.
Now let’s take a look at the present. During COVID, I think it’s safe to say that average miles driven were 30% less. With this being said, there would be 30% less instances of vehicles needing repairs, so there should be 30% less demand for the parts to fix these broken vehicles, as well as 30% less work for the shops that repair them. This did not affect us because COVID created a lot of supply-side shortages and interruptions for new product. This drove a lot of customers to us because they couldn’t get these parts anywhere else. Again, what hurt other parts suppliers actually helped our industry. At the time of writing this article, these supply-side interruptions and parts shortages will probably continue for the next 6-9 months.
So, for all of us, the immediate future looks pretty good, right? What should we expect going forward?
- Higher taxes: Even though for most of us, the PPP program was forgiven, at some point we are going to get handed a bill through higher taxes to pay for it.
- Getting product: Because there are less new cars being built, the average age of a vehicle has gone up about 14 months. This means diminished quality for the Recycler at the auctions, as well as increased competition for better quality salvage. Again, supply is down, demand is up, price goes up.
- What we really need to be aware of is that at some point we will see equilibrium (things getting in sync and back to normal). As new car production gets back to normal levels, we will see an accelerated number of certain carlines being taken out of service. When a vehicle is taken out of service, two things happen, there is one more vehicle available for parts, and there is one less vehicle in use that would need these parts. Remember the “Cash for Clunkers” program? As things get back to normal, we will see demand for our parts get back to the pre-COVID levels. What will happen with our parts prices now? Again, I refer to simple economics. Supply goes up, demand goes down, price goes down. Typically, in our industry, what we see at this point is the proverbial “race to the bottom.” Will we now find out that we have overpaid on some of our purchases and fall far short on our projected revenue?
- For those that pay commission to their salespeople: Currently, they have probably enjoyed a nice increase in pay due to the higher prices and demand for our parts. When things do get back to normal and we have to lower our prices to be competitive, what will happen with their pay? They will be getting a smaller paycheck for sure, and what effect is this going to have on them? While I am not a fan of pay for performance, I will say this: If you are paying commission, and it works for you, great. But this may be the time for you to change your pay plan. You will need to find a happy medium to keep your business profitable, and be fair with the people that make your business what it is. Any changes you make in your pay plan should promote teamwork and not individual achievement. What is best for the company is always what is best for all.
- Lastly, Electric Vehicles: While this isn’t going to affect us directly for the next twelve months, this will probably be the future of the automotive world. While for most of us, this will be a challenge with learning how to safely handle and dismantle these new vehicles, but with challenge also comes opportunity.
Your Association, ARA, has been working hard on Electric Vehicles, as well as all of the other issues and regulations that we will have to deal with. They have created a great certification program to help train, educate, and make the Auto Recycling Industry the best it can be. Going forward, this type of training and certification will be necessary if you want your business to not only thrive, but survive.
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ARA Secretary · Northlake Auto Recyclers — Hammond, IN
Hollingshead has been in the professional automotive recycling industry for 45 years, including 34 years as President/Owner of Northlake Auto Recyclers, one of the industry’s leading facilities. Hollingshead prides himself on taking a hands-on approach in the business, employing the use of checks and balances for quality control to ensure customers only receive the highest quality parts. Northlake was one of the first automotive recycling facilities in the state of Indiana to receive from the Indiana Department of Environmental Management the Indiana Clean Yard – Gold Level Certification in 2009. Northlake was certified as one of the Indiana Certified Automotive Recycler Exemplary Standards (INCARES) program’s inaugural medalists and was the highest scoring facility in Indiana in 2014, 2015, 2016, 2017, and tied for first place in 2018. Northlake was also the recipient of the 2016 ARA Certified Automotive Recycler of the Year award, having been nominated by his peers in the industry.