Technical Trends

by L. Bryant Underwood

Reverse Logistics Magazine, Edition 15

Auto Madness

If you have been in the Reverse Logistics business for very long there is no doubt that you have seen some strange things. One such very complicated set of practices that you may only mildly be aware of is Car Repair. Calling the auto repair practice odd is an understatement. It is more than odd; it is the level of oddness that could only be achieved with government-assistance. This is something I have researched for a number of years but over time my interest waned because there was just no movement. Several new trends however have gotten me interested in the possibility that some major opportunities might be forthcoming.

The new government mandate for ultra-low sulfur diesel fuel is playing havoc for the truck OEMs. There are many, many issues developing from the change in fuels and they are driving significant repair costs. You can scan YouTube and find videos of new diesel trucks with problems. Some with several feet of flames shooting from the exhaust pipes others that just flat stop running from fuel issues or clogging of the new and massive exhaust filters. These are all coming back to the dealers for warranty repair.

My son and I are building a car and to boost the power we have been looking for a good turbo to use. I have a couple of friends in the car business and recently one of them brought me a used turbocharger from a diesel truck that was repaired under warranty for a clogged filter/muffler. The mandated repair process not only requires the defective parts be replaced but the complete turbo assembly as well. The problem that ‘damages’ the turbo is caused from large amounts of soot coating the turbine side impeller. This occurs because exhaust gases cannot exit due to the clogged exhaust filters downstream from the turbo. This soot collects inside the turbo and promotes early failure from the collection of heat and an unbalanced operation. The old turbos and other removed parts are stockpiled by the dealers for an inspection period then sold for scrap. My scrap turbo cost $20. These are fine for me because all I need to do is clean them before placing it in service. So why would a major OEM require a replacement of a ~$2000 part rather than clean it? Mostly due to state regulation and liability. Case law and state regulation is such that it is cheaper have a consistent practice where parts are only cleaned if they remain on the car. Cleaning of injectors is good example. Repair technicians have tools to chemically clean injectors while on the car. If the injector gets removed it must be replaced with a new one.

Great you say--I don’t want old parts on my new car. It’s the OEM’s problem make them pay. The point is though we all pay warranty costs in the price of the car and that same practice then hits you when it comes to non-warranty repairs. Consider the same problem described above only this time the truck is out-of-warranty. Wouldn’t you rather the option to have your turbo cleaned rather than replaced? Yes the dealer might perform the cleaning if pressed--but you may not get warranty coverage for non-standard work and you would need to know enough about the technical details to ask for something like cleaning in the first place.

On top of this the technician that did the warranty repair only got paid for 6.5 of the 8.4 hours it took to do the work. But he did not mind that much, because overall for the week he logged ~44 hours of labor while just working 35 hours. The way this sort of math comes about is from the need to standardize. The major players driving this are the manufacturers and the insurance companies. Their desire for standard costs forces the dealers and independent repair shops to use ‘labor guides.” The labor guide specifies how much time each and every repair task should take. This covers changing a brake light all the way to complete motor overhaul. Interesting enough the labor guides change over time as more and better data is collected.

Often the standard time for repair will be underestimated initially, but as more data comes in, the standard repair time will grow to be closer to an actual or even sometimes more. Also interesting to note that standard times for labor charges tend to grow as more units of a particular model of car are on the road and out of warranty… This is how a repair tech can be paid for more time than they actually worked.

But you can still take your vehicle to an independent repair shop and avoid all this right? No, not really. There is a new political effort called “Right to Repair.” It stems from a consortium of consumer groups that are working to get state and federal laws changed to allow independent repair shops to have access to the needed information and software to repair any car regardless of warranty status. Since all transportation operates under computer control not having access to the required software tools makes many repairs just impossible. These efforts to change the laws are gaining momentum and making their way through several state legislatures. Behind the scenes, some at the OEMs are glad to see this happen. The auto makers are under huge cost pressure and they all know that warranty costs should be lower. The dealers have a very different view because there is almost no money made by a dealer from new car sales. A new car dealer’s real profit comes from used car sales and repairs. As such they are very opposed to losing a major barrier to competition.

Even if you have a failure that could be repaired by an independent repair shop, you will still be exposed to the problems of the “labor guides.” For a repair technician, they always have the “pay hours” in their head about how fast the work needs to get done. Many times this drives some very clever innovation with tools and processes but often it just drives shortcuts for the repair and poor workmanship.

To really see how much all of this varies and how disconnected the process really is, take a look at figure 1. This is from a quote for service a municipality sent out to new car dealers for repair on the city’s transportation fleet. Notice how the billing and hours needed varies by almost 100% on some jobs and they both are using the same labor guides just different schedules.

So we have a major business segment that desperately needs to cut costs. Repair service would be a good target to start with. Not for only reducing overall repair cost but improving customer experience. Regulations that vary from state to state and long-standing practices create a situation that mandates outcomes that no one wants. What’s the future?

My take is that this is much like what the PC market faced in the late 90s. Costs were high and service was very poor. The best practice became outsourcing repair and customer care. There are problems with the PC repair business to be sure--but there is much improvement, lower costs and overall better performance than before. How could this happen for the automobile industry? Easier than it might appear. Consider that any major notebook computer company already outsourced on-site repair to any number of companies. That basic capability is very similar to auto repair and is basically a staff management problem. We even have cellphone carriers with outsourced techs in their stores. With efforts like “Right to Repair” and the need to cut costs, the impeding regulations are ripe to get cleared out of the way and then there will be change and I think it will happen faster than anyone would guess.

The reason is the shear size of the opportunity. There is no aspect of what we use for our lives that is not connected to transportation and everything eventually breaks. To estimate the size of this developing opportunity, consider the recent report from the US International Trade Administration. This report states that auto part transactions for imports and exports totaled ~$160B in 2007! With that data and the SEC filing a good estimate of the total repair service opportunity in the US for all OEMs with labor is ~$40-60B/Yr.

Would you like to be a leader in a $50B market that grows in down and up cycles? Yea, me too, let’s get going…