Economy drives increase in totaled vehicles, cut in auto recyclers' inventory

Economic pressures have converged on the automotive industry to create a condition that's difficult to swallow for many recyclers and collision repairers. Expensive vehicle technology, an increasing number of foreign repairers, and the rising cost of scrap metal add up to more totaled vehicles, said John Fischl, a longtime automotive recycler in Phoenix and a participant in the United Recyclers Group (URG) and Premium Recycled Parts (PRP).

Those market conditions have prompted insurance companies to total many more vehicles, Fischl said. What collision repair shop owners may not recognize, however, is the reverberating effect those totals have on their business.

"What's disturbing is that most shop owners don't realize that the total-loss situation has created a counterculture of underground repairers," Fischl said, adding that vehicles totaled in the United States are being exported to places in Europe, Asia, and Latin America for cheap repairs.

As totals continue to leave the United States, that means less work for legitimate collision repairers and less inventory for recyclers wholesaling parts, Fischl said, adding that acquiring inventory for his yard, Riteway Auto Parts, is becoming increasingly difficult.

That trend results in even more totals because of a lack of available used parts, forcing estimators to write repair orders with higher-priced OEM or aftermarket parts, he said, causing many repairable vehicles to be totaled, thus perpetuating the cycle.

Competition at the auction
Insurers look to recoup money from total losses at salvage auctions, where automotive recyclers are seeing increased bidding competition from the public and international black- market repairers, Fischl said. In the past, recyclers acquired inventory at local auctions, reviewing hundreds of totals, with approximately 25 percent of them being repairable, he said.
Today competition is fierce, he said, and that percentage is far greater. "Recyclers today are previewing thousands of vehicles at auctions in many states to get the inventory they need to survive.

"We're having difficulty getting cars for inventory, which reduces the supply of good reusable parts," Fischl said. "For the collision repairer, there's risk with sending a repairable vehicle to the (salvage) pool." That sale of a repairable vehicle to a rebuilder or exporter creates greater demand for additional total-loss vehicles, driving their price up, he said.

"You're empowering the competition to cause the next total," he said, because those vehicles are being repaired at 50 percent the cost of the original estimate, they're sold at a profit.

The rebuilder or exporter returns to the auction the next week, ready to buy more repairables, causing the price of totals to continue to rise, Fischl said. "As the total loss threshold drops, the collision repairers lose more repairable vehicles to the salvage pool."

Keeping valuable components salable
"We as an industry cannot stand by and watch components be legislated out of the repair market," said Sandy Blalock, president of the Automotive Recyclers Association (ARA) and owner of Capo's Truck & Auto Parts in Albuquerque. "We're constantly vigilant on keeping pace with the industry."

For example, Blalock pointed to the federally mandated testing required to resell used catalytic converters as an example of legislation that negatively affects recyclers. Current market prices for precious metals, such as the platinum found in catalytic converters, have offset this, however, she added.

A salable item in many totaled vehicles is nondeployed airbags, Blalock said, asserting that they're just as safe as new OEM airbags.

ARA's nondeployed airbag protocol
Jeff Kantor, ARA's chairman of the nondeployed airbag committee and owner of CarWorld Used Parts in Candia, N.H., has been instrumental in developing a nondeployed OEM airbag protocol that resulted in a program now run by Airbag Resources. The inspection and training program for recyclers who resell airbags operates under ARA Product Services LLC, he said.

The accepted use of nondeployed OEM airbags could keep a lot of otherwise totaled vehicles in collision repair facilities, Blalock said, adding that the price difference between nondeployed airbags and new ones can be anywhere from 40 to 80 percent. Since insurers and OEMs do not accept the use of nondeployed airbags, she said, they're mainly being sold to rebuilders.

"There has never been a report of a nondeployed airbag sold in the industry that's had a failure," she said, adding that airbag systems in vehicles have a self-diagnostic capability that catches problems.

ARA Product Service's Web site www.airbagresources.com gives recyclers access to software applications, airbag training, access to hazardous-materials certification, and airbag inspection, Kantor said.

The Web site contains an airbag recall check database, Blalock said. "A user can input the VIN in the database to make sure there are no problems with the airbag before it goes into commerce," she said. "It also assures the customer that they're getting the exact match for their vehicle."

Kantor said the protocol covers the airbags sold by ARA airbag protocol trained and certified recyclers, which are branded with the ARAPro logo, assuring repairers that the airbag they purchased meets the standards required by the ARA protocol. He pointed out that the protocol does not cover wires, the airbag computer, or connectors.

Greater profits, reduced cycle time
"Collision repair shops sell two things--parts and labor," says Jerry Cathcart, general manager of Autoworks International in Thornton, Colo. "To truly understand where money is being made, you have to know where it's coming from," he said.

Instead of simply looking at the gross profit margin on a repair, Cathcart said he narrows profitability down to the gross profit margin on parts and the type of parts used. It's this knowledge, he said, that inclines him to use aftermarket and recycled parts in each repair.

Cathcart said his gross profit margin on recycled parts for the first quarter of 2008 was between 26.5 and 27 percent, up to 5 percent more profit than OEM parts. In addition, he said he uses recycled parts to reduce cycle times since the delivery service by local and regional recyclers is quick. "You can get parts the next day," he said, adding that they usually come with extra parts, such as a door with a good lock rod and run channel.

April People & Parts