Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Let me give you some context before we start. I've been studying the auto industry for some time now. My overarching question is, with electric vehicle penetration increasing over time, how is this impacting the entire ecosystem and its stakeholders? I've been looking at franchise dealers, independent dealers, financing companies, salvage operators, part recyclers, and part retailers. Maybe the first question for our audience would be if you could briefly run us through your experience in the auto industry.

When I was at Federal-Mogul, which is today part of Tenneco, I had divested one of my brands, Carter Fuel Pumps, to what is today First Brands. I got a chance to meet the CEO, and it was actually a carve-out. I was taking members of my staff and sending them over to work for what is today First Brands.

Over time, First Brands began acquiring companies from a combination of two different places, essentially carve outs from Federal- Mogul. And then what was the demise of what had been known as UCI FRAM which was owned by the Rank Group down in New Zealand. I at that point had left Federal-Mogul and was working with a number of private equity firms. And twice I was working with a private equity firm and lost out to First Brands. And First Brands at this point now is rolling up a series of manufacturers. And so it was strategic, it could bid a higher amount. So I called the CEO, the second time I lost out. He said, what are you doing? That led to me consulting with them in 2020.

During 2020, they acquired a number of companies, including Raybestos, which was Brake Parts Inc., Centric Brakes, and Champ Labs. I joined them the following year, in 2021, as Executive Vice President over Supply Chain, IT, HR, Demand Planning, and Procurement. Those were the roles I played there. I terminated my relationship with First Brands in April of last year.

I was looking at First Brands' website, and they have many brands. What exactly did they sell?

So first off, there were three main strategies of the company. The first one was based on the presumption that there would be a backlash against importing automotive parts from China. So, the strategy was to aggressively move to nearshore production in places like Romania, in Europe, and Mexico, and the United States.

The second strategy was to buy companies in pairs or triplicates. As Chinese imports surged, many European and American auto parts manufacturers were negatively impacted. They tended to choose one of two strategies. One was to focus on the brand, customer connections, and marketing, while outsourcing manufacturing to China. The second strategy was for those without a strong brand or close customer relationships, acting more as manufacturers of record for private labels. They aimed to achieve economies of scale and be ruthlessly cost-efficient.

He would buy one of each type of plant, bring them together, and take all the contract manufacturing orders that had been going to China, running them through plants in Mexico or Romania. His goal was to achieve a 40% or higher market share within the geography served.

The last part of the strategy was ruthless back-end, post-merger integration synergies. This involved shrinking down multiple corporate offices, supply chains, and independent procurement teams, integrating everything as quickly as possible.

For example, in filters like oil filters, air filters, and cabin air filters, there's a duopoly in the United States between MANN+HUMMEL of Europe and First Brands. There are five relevant brands of wiper blades in the US, and he manages or has acquired three of the five. In friction, there are four key brand names within the US, and he has two of the four.

In lift supports, which hold the hood or trunk of an SUV open, he's one of the two primary competitors. In fuel pumps, there are three relevant brands, and he has two of the three. In remanufacturing, which involves products like alternators, starters, or brake calipers, there are three surviving companies; two very large and one very small. He has one of the two very large companies, and I suspect the small company will get acquired by one of the dominant players.

He also got into trailer hitches, a product line historically made in the United States but suitable for manufacturing in Mexico. Despite the diverse set of product types, the commonality is that manufacturing is either in Mexico, Romania, or some remaining in China and India. In each product class, within the geography served, he tends to have a 40% or higher market share.

So, if I understand correctly, whatever brand he bought, whether it was a known brand or an unbranded white-label manufacturer, all of those had their own manufacturing plants for the parts.

I'll give you two examples. In filters, he bought two companies; FRAM, which is the best known filter brand in the United States, and Champ Labs. There are no Champ labs filters. Champ Labs was the manufacturer of record of a large number of private label programs. They had the STP filter line for AutoZone. They were the manufacturer record for all of Alvalene and all of their oil change locations, but no brand of their own

All of FRAM had been outsourced to China. He bought both companies, took all the volume of FRAM's production in China, ran it through the Champ Labs plants, and took them to what must have been 150% of their original rated capacity. He did a modest amount of expansion, but it was mostly about getting a lot more production through existing facilities. Now, all of it is being made in the US. The products are either made in the US or Mexico for North American markets, but all are branded as either made in America or made in North America.

In the US, there's a broad contingent of consumers that have become anti-China manufacturing. So, he's actually able to get a price premium, and his distributors are getting a price premium for being able to claim that the products are made either in the States or nearshore.

The second example is he acquired Brake Parts Inc., which is Raybestos brakes. There are almost no Raybestos brakes on the shelf, but they are the manufacturer of record for ACDelco, which is the number one seller of brakes in America, and the ultra-premium line of NAPA, which is the number one brake line of NAPA. They have proprietary technology that NAPA claims as their own due to an exclusive licensing deal, but the technology is actually owned by First Brands.

He has been able to differentiate himself there. Then, he bought Centric. Centric is one of the best-known brake brands in the US. All of it had been outsourced to China. He ran all of Centric's production through the Raybestos plants, took them to probably 200% of their previous production capacity, and then integrated the two supply chains, procurement teams, and the entire back ends of those companies.

In the case of wipers, he bought Pylon, which was procuring wiper blades from China and had a licensing agreement with Michelin to use the Michelin brand on wiper blades. He also got Anco from Federal-Mogul. All of the Anco wipers were coming from Italy, which was a very high-cost plant. He ran them all through a single facility in Matamoros, Mexico. So, Trico, Anco, and Michelin are now produced there. That facility has got to be doing at least double what it was originally doing for Trico. Now, they have three of the five dominant brands of wipers in the US. Those are the types of moves he was making.

So basically, what he was doing is buying brands that were either manufacturing in China or elsewhere in Europe, and taking all the volume and running it through a single facility, whether in the US or Mexico.

Correct.

Would this yield a lower cost per unit than if it was manufactured in China due to the higher volume?

So, a couple of things. One, they charge a premium for their products for being manufactured either in the EU or in North America. They don't have to be the low-cost leader because they can claim nearshore production. Second, in the US, initially, the Trump administration and then the Biden administration put tariffs on Chinese cars and Chinese auto parts, so their low cost of manufacturing was partially offset by these tariffs. The combination of those two factors made them a very competitive supplier.

What was interesting is, because they bought so many of the remaining players, there really was no one left to follow their strategy. The only competitive threat they had was their former suppliers in China choosing to set up factories in Mexico and essentially out First Brands. Several made announcements that they were going to do that, and the Biden administration sent them notification that it was merely an attempt to avoid US tariffs and that they would be applying the tariffs to their plants in Mexico. That was never part of First Brand's strategy. But sometimes good fortune becomes a factor in the viability of your business model. Essentially, no Chinese auto part manufacturers have successfully moved their production to Mexico.

So, at the end of the day, whatever product he decided to sell, he ended up manufacturing in one of his First Brand-owned plants.

Yes. They keep acquiring companies. When I joined them in 2020, it was a $1 billion company. When I left them last year, it was a $4 billion company. And they're still adding acquisitions on a go-forward basis. They are buying pairs of companies intentionally, one with manufacturing plants and one without. They're continually procuring from China, but it's a point in time. As they finish their post-merger integration, those contract manufacturing purchases either decline or drop.

If you think of it as there are three ways that you could be selling to a distributor. You're just a reseller of somebody else's product. You're using components that you're buying and you're just assembling components. Or it's truly, you're bringing raw materials in and the complete value add. They have all three phases of their various product lines, but their goal as a company is to get down to raw materials. And so there's this never ending process of taking things that are finished goods and at least moving them to components, or taking things that are today components and moving them to raw materials so that they have the complete value add in their facilities.

Over time, it was never the plan of First Brands to keep procuring from a third-party plant, whether in China or elsewhere.

That is correct.

In terms of customer mix, who are First Brand's customers?

So essentially, it's the entire distribution industry of North America and Europe. Specifically, they are providing products to the OEs. This includes all three of the big three in North America, and they are a substantial supplier to OEs like Volkswagen and other Stellantis in Europe. However, that's a relatively small part of their business.

Companies like Tenneco, for instance, have a business model that is about two-thirds OE and one-third aftermarket. First Brands, on the other hand, is quite the reverse. They are 80% to 90% aftermarket and 10% to 20% OE, but they do have an OE component.

Downstream, I'll give you an example of what they did in wipers. The most pure auto part distributors are those that distribute directly to commercial garages. First Brands acquired Anco from Federal-Mogul, which was the number one wiper blade for mechanics. They also acquired Trico, the number one brand of wiper blades for DIYers, sold in retailers like AutoZone or O'Reilly. Additionally, they bought Pylon, the Michelin-licensed brand of wipers, carried in Walmart, Target, and Sam's Club, which is the discount channel.

All three of those brands come from a single factory in Matamoros, Mexico, coming down the same line, using the same components. At the very end, they get a different blister pack and go off to different retailers or distributors. They have no channel conflict because they've neatly separated these brands by end customer, yet they get the synergies as though it was a single brand.

So you said First Brands had 80% to 90% aftermarket and 10% to 20% OEs as customers?

Correct.

Of this 80% to 90% aftermarket, how is this broken down in terms of distributors versus parts retailers versus directly to garages?

Their biggest aftermarket customers are the largest aftermarket distributors. In the US, they refer to the big four, which is AutoZone, O'Reilly's, Advance Auto Parts, and NAPA. All four of those companies are big customers, as they are big distributors in the US.

Second to that is the discount channel, which includes Walmart, Kmart, Target, Sam's Club, and Costco. They are present in all of these discounters. Then there's a channel of trade that sits beneath the big four, called the traditional channel. This includes many companies, none of which are publicly traded. They are largely family-owned, multi-generation type companies. Especially with their Centric brand and Anco brand, they are almost universally across all of those smaller companies.

I'm just curious, why use distributors in the first place? Why not just sell directly to garages? Why go through AutoZone and O'Reilly?

The biggest part of the industry within the aftermarket is what they call DIFM, or do it for me. It's roughly 60% of the total volume. That's professional mechanics who install the part for you. Their expectation is that the product will reach them within 30 minutes of when they realize they need that part.

A very common occurrence within the industry is somebody realizes they need new tires. They just look down at the tire and think, "Oh, my goodness, I need new tires." They bring it into a shop, and the shop goes, "Do you know that your radiator is leaking? Do you realize that your brakes are shot?" That upsell is a significant part of the industry.

The problem is the customer either says, "No, just replace the tires," or they say, "Oh, yes, please do these other repairs." The mechanic has no clue. Once that decision is made, the customer will ask, "Wait a second before I answer. If I say yes, how long is it going to take to get my car back?" If they say, "Oh, maybe a day or two," the customer will say, "No, just put the tires on." If they say, "Oh, maybe I can get it done within an hour or two," then the customer will go, "Okay, fine, charge me more. Do this additional work."

So the entire industry is set up almost like there are no doctors, only emergency rooms. A person comes in with their car and says, "Please save my car's life." This speed component means that the top players, what they call the big four, each have 6,000 locations. In the United States, it takes 6,000 locations to be within 30 minutes of all shops in the country.

As an example, when I was at Federal-Mogul, my chairman of the board was Carl Icahn, a large activist here in the US. He asked the same question and said, "Why can't we just disintermediate these distributors and sell directly to garages?" There is an element of that that goes on. Federal-Mogul sold friction products to Firestone. First Brands sells loaded calipers to Les Schwab.

Everyone has these kinds of programs, but they're small because the shop needs to carry those products within their location on the hope that a customer will soon come in needing that part. These shops are not that big. They're not designed to hold many parts at all. They have a huge bias of wanting to have it delivered to them because they don't actually know what they need until the last minute.

Let's say you need a set of front tires, front brakes, and a radiator. You can give the car back to the customer when the last one shows up. They will avoid things that might significantly drag out the job because the customer often says, "No, forget it, I can't be without my car that long." They try to compact what they can physically do to the car in an hour or two. This means these products need to be very nearby and they need to have essentially every part for every car that might pull in today.

That requires these locations. A typical auto parts store will be 7,000 to 10,000 square feet, just wall to wall with parts. It's as big as their repair garage, but it is completely filled with nothing but parts.

And how hard is it to just replicate this logistic footprint? Because what you just described is these big four, these big players, the O'Reillys and the Advances, are basically logistics companies, right? They are able to deliver parts quickly to the DIFM providers. This is because they have so many locations and transportation systems that are adapted. What's so hard about replicating this other than capital?

It's capital and the entrenched relationships. On the DIY side, which is 40% of the business, those customers are relatively disloyal. When I was at Advance Auto, when O'Reilly's would open a location, if you drew a circle around their location and a circle around ours, it would be a Venn diagram. We would overlap each other, and in the middle, we would lose half of all the volume in that Venn diagram. Half the customers would go because they're one minute closer to their house, and they would just start driving to this new location.

The 6,000 locations give you this proximity to those rooftops. So those DIYers will come to you not because they're loyal, but just because you're more convenient. On the commercial side, there's a concept called first call. First call is what it sounds like; when you need parts, call them first and the lion's share of your ordering goes to them. If they say no, sorry, pal, I don't have it. Can't get you the part till tomorrow. They literally have a Post-it note on a wall and they just start calling. Who's the second most likely guy that I've tended to find parts at that first call?

That first call, nationally, across the entire United States, is two-thirds of all parts sales. Commercial parts sales go from the first call distributor to that shop. Those relationships, on average, are over 10 years old. So if you drop a new business in, you'll be closer to someone, and you'll pick up a fraction of those DIY sales. You have about 10 years to extract a sufficient number of first call relationships to take out somebody else.

To give you an example, when I was at Federal-Mogul, Carl Icahn said, "I want you to disintermediate the big four and the traditional channel." I laid out a plan for him, but I told him, "You have little to no chance of succeeding." We didn't quite see eye to eye, which is how I ended up working with private equity. My successor acquired a company called Pep Boys. They had 1,000 distribution locations that were actually combined with repair centers. That's an unusual configuration. In the US, it's normally repair shops here and a parts store there. Pep Boys had a single building and then acquired another distributor called Auto Plus and began acquiring more commercial garages. They got AAMCO Transmission, Cottman Transmissions, Brakes R Us, a series of companies.

They ended up in bankruptcy. All of the former Pep Boys parts stores were either closed or sold to a competitor. All of the Auto Plus locations were closed, and they've collapsed down. The only thing they have left at this point is the Pep Boys repair centers. He was the 17th richest man in the world. Federal-Mogul was a $12 billion company. They spent God knows how much money trying to disintermediate the big four, and it ended up in bankruptcy.

What went wrong?

What I told him is that Pep Boys was a great acquisition, but he needed to spin the bays out. Advance Auto had done that. There was a company called Western Auto that was similar. It had both repair centers and a parts store. We spun out all the bays to our customers and only ran the parts stores, renaming them Advance Auto. I personally bought the Strauss chain in the Northeast. We did the same thing same deal. We spun the bays out to Monro and only operated the parts stores and called them Advance Auto.

When you do both, every DIFM customer that thinks of you as a potential distributor knows that you're part of one of their competitors. Pep Boys is your biggest competitor in repairing cars. You remember the customer you lost to them, how they outbid you. You think they're selling their parts cheaper to their own bays and stealing from you. That's why you can't compete with them, because they charge you more. It doesn't work; it's a dying part of the industry.

Carl wanted to keep both of them, and these first-call relationships are very sticky, lasting a decade or longer. He's coming in with a tough-to-sell value proposition for something with a slow uptick on a good day. Additionally, the big four were livid and began dropping Federal-Mogul manufactured brands because Federal-Mogul was trying to disintermediate them. The Wagner brake brand was the number one brand of brakes in America when I was there. It's almost not on any shelves today because there were other alternatives like Centric, Raybestos, and Bendix. They said, "If you're going to go to war with us, we're going to go to war with you." It became an enormous channel conflict that affected both the vertical integration he was trying and the manufacturing operation. That's why the company was ultimately acquired by Tenneco.

Tenneco made a definitive statement to their customers and Federal-Mogul's former customers that they were not going to continue with Icahn's vertical integration strategy. They refused to pick up that portion of the business when they acquired Federal-Mogul. Shortly afterward, those distribution assets fell into bankruptcy.

By trying to bypass the distributors, they're actually losing them as customers. They're also losing the repair shops, because as you acquire competitors of theirs, they stop buying from you.

As I was working with Carl Icahn on this, I collaborated with both Bain & Company and BCG. I had relationships with them from my time at Best Buy and Advance Auto Parts. I asked them to provide examples of weak manufacturers disintermediating powerful distributors and to help me understand the path to success. Both firms researched extensively and concluded that there was not a single instance in all their engagements where that strategy had succeeded.

There are examples of powerful manufacturers disintermediating weakened distributors. Apple is a perfect example; they bypassed Best Buy and opened their own stores. The path to success, according to them, was for Federal-Mogul to do what First Brands has done. Get each of the businesses you're in to 40 plus percent market share to where the industry can't live without you, and then do it. What Federal-Mogul was is they had 23 separate brands, and there were instances where we had 5% share. Anco was a 5% share business. So they had these tiny shares across countless product categories. They said it has nothing to do with how many product categories you're in. It's how deep you're in to certain product categories. So they said, spin out.

The strategy was to spin out underperforming brands. This was akin to Jack Welch's approach. You know, get to 40% share or fix it, sell it or close it. That's how we spun out Carter to First Brands is there were three brands of fuel pumps. It was Airtex, Delphi and Carter. I approached the Rank Group to acquire Airtex. They weren't in the mood to sell. We contacted Delphi to see if they would spin out their fuel pump division. They weren't interested. And so there was no path, no reasonable near term path to get to 40% share. So we sold it all.

If they had achieved a dominant position in a meaningful number of categories and then attempted it, there was a path to success. One approach was to act quickly. For many years, Advance Auto was the lowest valued of the big four. Acquiring Advance Auto and making them the exclusive outlet for premier brands could work. However, you couldn't take a small player like Pep Boys, which had $1 billion in distribution, and expect to compete against the big four, which ranged from $12 billion to $17 billion in annual revenue. Combined, they had over $50 billion in distribution. Acquiring a $1 billion distributor wasn't enough to change the competitive landscape.

Unless you have 40% market share in the OEM parts, you can't effectively challenge the big four distributors. You need significant market share in parts to be able to compete and threaten the big four.

I believe that's correct. Something very similar is happening in Europe. LKQ in the US is the dominant player in recycled body parts. Essentially, when a car gets in an accident and is totaled, they dismantle it and sell whatever parts are still usable. When they entered Europe, they adopted a completely different strategy and became the NAPA of Europe. They acquired a whole slew of competitors. Europe is far more DIFM. There's very little DIY business; the typical European doesn't fix their own car. So the model was much more like GPC's NAPA. GPC saw what LKQ was doing and dove into Europe. Now, those two players are number one and number two in distribution in Europe. So what happened in the US is now happening in the EU some years later.

I'm curious about how electric vehicles are impacting OEM parts and, more specifically, companies like First Brands. Maybe you can start by explaining this. I'm keen to hear your thoughts because EVs are said to have fewer parts. If this is true, how has your business been affected by the rise of electric vehicles?

There are a couple of factors here, and they all interplay to give the answer. One is, at what point in the distribution path are you referring to? Is it into the OEs factory? Is it into what's called OES, which is the parts on the shelf for warranty repair work? Is it in the aftermarket? And if it's in the aftermarket, is it aimed at the DIFM professional installer or the DIYer?

The second factor is, what part are we talking about? Is this a wiper blade, a brake pad, or a spark plug? The third factor is, when are you talking about this? Where are we today, and where will we be five or 10 years from now? The worst example was Federal-Mogul. The biggest part of their business was piston rings, pistons, cylinders for blocks, and valves. When Tesla, for example, buys none of these parts, every Tesla sold is a customer that Federal-Mogul's powertrain division loses.

If you consider some of the big car manufacturers, they are choosing to stop carrying internal combustion engines in certain platforms and have come out with battery-powered replacements. As that plant tools up and the other model winds down, 100% of Federal-Mogul's pistons, rings, and seals business goes away. At the OE level, you just have to look at what percent of car sales are now EVs, and for those product lines, it drops in a linear fashion.

The second factor is moving into OES. Depending on the warranty, which is usually three to five years from the time the plant moved to an EV, you'll have three to five years of OES business remaining because the cars under warranty were sold with an internal combustion engine. When you move into the aftermarket, the newest cars are being fixed by a professional mechanic.

This is someone who probably bought the car out of lease from the previous owner. You're now the second owner of the car. The car is only three or four years old. It's a very valuable car. You spend a lot of money on it, and you don't know much about cars. You're going to bring it back to Monro and Firestone and the large franchise repair dealers. So, those cars are now starting at three to five years old, up to, let's call it, 10 years old.

An EV plant that ships today, five to 10 years from now, will start showing up as a change within the DIFM business. Then there are DIYers; that is sweat equity. That is someone who has a car at the tail end of its life. They can't afford a better car or to fix this car, so they're making their repairs on their own. Those cars are almost universally 10 to 20 years old. So, a plant that shut down and switched to an EV count 10 to 20 years from now will begin affecting the DIY market.

The next thing to consider is the actual impact. Spark plugs go to zero. Pistons, rings, and seals go to zero. Exhaust mufflers go to zero. Turbochargers go to zero. However, many product categories are either completely unaffected, like wiper blades and tires. Actually, tire usage goes up because these vehicles are heavy and go through tires quickly. Shocks, steering, and suspension products remain unaffected.

There are also many new products. Today, when you steer, it uses parasitic losses off the internal combustion engine to power the power steering. With no engine turning, power steering now has what it had before, plus an electric motor for power-assisted steering. There was never an electric motor on it before. That electric motor can fail.

Your air conditioning unit looks like an internal combustion engine air conditioning unit, but it too has a motor on it because there's no belt to drive it anymore. Those motors will fail. These batteries throw off a ton of heat. While the radiator for the engine is gone, there's now a radiator to cool the batteries. The fan belt that circulated the water and pulled air through the radiator no longer exists. So, there's a large motor that circulates the water or antifreeze and pulls air through a smaller radiator. There's a whole series of products that have been added that weren't there before.

Additionally, these cars are increasingly moving from what's called ADAS, essentially collision avoidance technology, and they're rapidly moving from level one up to level four. This includes adaptive cruise control, parking sensors, lane change warnings, and whatnot. There's a whole series of technologies going into cars that were never there in the past. This technology is independent of the drivetrain.

If you compare all internal combustion cars to all electric cars, nearly all electric cars have this technology. Only a single-digit percentage of internal combustion cars do because many of them on the road are older. The average car on the road in the US is 12 years old now, and most don't have that technology.

The last point is the life of these products. If you look at a Tesla, it actually has two complete braking systems. It has rotors, pads, and calipers, just like a regular car. It also has inductive braking that slows the car down and stops it by spinning the alternators or drive motors in reverse to recharge the battery.

It helps if you are good at one-pedal driving. I have an EV and I pride myself on almost never hitting the brakes. Therefore, the rotor pads and caliper will last an exceptionally long time. So, you don't lose brakes; it just becomes a much smaller business. An example would be spark plugs. 10 years ago, spark plugs were made of copper. Then they became made of platinum. Now they're made of iridium. Copper plugs last one year, iridium plugs last 10. And so they were much more expensive. Iridium plugs cost way more than copper, but they're being changed at one-tenth the rate. So, the total market share or volume of spark plugs went down. That will happen to brakes. They won't go away; they just won't get used as often.

Now, to my horror, my wife drives the same EV, and she uses the brakes like she does on any other car. I've given her all the training classes I can to show her how you're supposed to drive the car, but she hits the brakes just as often on the EV as she did on the internal combustion. So, it's not yet known how much driving behavior will change if you add it all together. If everything works as advertised, and I don't believe it will, but if everything works as advertised, total repairs will drop by 40% on an EV versus an internal combustion engine vehicle. And it's actually a larger drop than 40% on the parts that you see today. But it's partially being offset by these incremental motors and components that are being added to the car.

The proposal from the Biden administration is that 50% of all cars will be EVs by 2030. We are as far off that prediction as we are on limiting global warming emissions. It's aspirational. Just today in the Wall Street Journal, Audi is looking to close a plant that's supposed to be making EVs because they're just not selling as quickly as the regulators would have wanted. But I just spent almost a year working on the carve-out of Worldpac from Advance Auto Parts.

We went deep into this question because it's a distributor of auto parts. So, how meaningful is this? The conclusion that I've drawn is by 2030, this is a low single-digit headwind for the industry. But as you move out, call it 2040, that's a meaningful headwind for the industry. And if you just say, we eventually get to 100% EVs, and eventually all the internal combustion engine vehicles are in a junkyard somewhere. At that terminating point, it's roughly a 40% drop in the volume of the industry worldwide.

It's interesting because one thing you said is, some parts that exist in internal combustion engine vehicles will just disappear with EVs. Some parts, like the wiper blades, will stay the same because you have them on both internal combustion engine vehicles and EVs. And then you said that some parts would disappear from internal combustion engine vehicles, but they will have the equivalent in EVs. The easiest example is a battery and a combustion engine. The thing is, when you talk to people at Tesla, they will tell you that this last category of more technical parts is being manufactured by Tesla itself. So, my question is, how is First Brands thinking about this? How do you build defensibility there?

I should have mentioned one other factor, and that is the point you're making. 75% of all car repairs in the United States are made in the aftermarket, either DIFM or DIY, and 25% are made at car dealerships. That's actually reversed in Europe. In Europe, two-thirds of car repairs are done at the dealership, and only one-third are done in the aftermarket. Of that, nearly all are DIFM. It really isn't a DIY industry in Europe. The question was, will there be a huge movement away from the aftermarket and towards being repaired at dealerships with EVs?

Just to make sure we're talking about the same thing. When you say the dealership, you mean the franchise dealership?

Yes, the franchised dealer.

So you're not including the independent ones.

Will EVs be too complicated for DIYers to fix? Or will they even be too complicated for independent repair shops? Will they have no access to the parts? Two things came from it. One is the reason why the independent aftermarket is so large in the US. There's a body of legislation called Right to Repair, and the entire aftermarket banded together. I had members on that committee when I was at Advance Auto Parts and Federal-Mogul. They have won nearly every single case, with the exception of one, which was body parts. Body parts are protected because the silhouette of a car is protected, but outside of body parts, you can't protect a headlight or a taillight. Everything else is protected, and you cannot legally prevent the aftermarket from making your product.

The average repair cost in the United States between a dealership, the branded car manufacturer's repair department, and the independent aftermarket is anywhere from one-half to one-third the cost. That's what drives people there. The Chinese government actually sued Mercedes-Benz a number of years ago because they found it would cost three times as much to buy the parts as to buy the car. They said you can't have negative assembly costs, so you must be overcharging for the parts.

Raybestos had one plant that sent products to NAPA for their ultra-premium line. That same plant sent them to ACDelco for their silver and gold line. That same plant went into the OES and would end up on the shelf as General Motors parts.

Those parts were sold at the same price across the board. It was significantly higher on the OE shelf because independent car dealers have no choice. They cannot buy parts for warranty other than from General Motors or Audi. Generally, 80% to 90% of the parts for warranty work have to come through that captive supply chain, and the OEs overcharge for those parts. It's a way to keep the dealers in their place.

The movement to the independent aftermarket is driven by labor rates and parts costs being half to a third of what they are at dealers. As long as people are trying to save money, that word gets out, and the shift occurs. We looked at early movers that had expired warranties, like the Chevy Bolt, and hybrids from Toyota. What's the behavior in the independent aftermarket for hybrid vehicles and plug-in hybrid vehicles?

Once you account for warranty where cars get fixed by dealers for free, it's hard to beat free in terms of value. As those warranties expire, there's a similar movement to the aftermarket, and those parts are not made by the dealers. The biggest expense at this point is swapping out the battery. However, similar to an internal combustion engine, batteries will likely last 10 to 15 years. They just haven't been around long enough for those to fail. There will be independent aftermarket batteries as long as they match the same switching, conform to the same configuration, and can be installed.

Engine technology hasn't radically changed in the last 10 years. A 10-year-old engine of the same cubic inch displacement will fit in the exact same spot. A lithium-ion battery 10 years from now is highly likely to charge faster, be cheaper, and be lighter in weight.

The aftermarket batteries will likely exceed the capability of the factory-installed battery and cost half to a third as much. One of the big questions we had was whether the independent aftermarket could swap out batteries. You can find this on YouTube. They put a car on a lift, use a scissor jack to lift the battery, disconnect it, lower it to the ground, and then use an engine hoist to lift the battery, place it in a box, and tap a lid on it. The distributor picks it up with a forklift and takes it away, doing the exact same thing in reverse with a reconditioned battery.

They lifted the reconditioned battery with an engine hoist, set it on the scissor jack, raised it back into the car, plugged it in, and lowered the jack. They've been changing engines for years, and engines weigh more than a battery pack. Batteries will get changed in the independent aftermarket.

The drive motors, I've heard, will last forever. However, have you ever had a dryer motor go out, a ceiling fan motor fail, or needed to replace a starter or alternator in a car? Motors fail. That's the preponderance of the remanufactured industry. It's a relatively easy repair to fix an electric motor.

These cars are filled with electric motors because they don't have a rotating engine to power things. Instead, they have numerous small electric motors and one or more large drive motors. All those will fail. Imagine a $1,500 repair at a dealer versus a $500 repair at Midas. Records show that 75% of people, when given that alternative, end up choosing the independent aftermarket, I believe.

And one last thing we looked at, I think it was either Norway or Finland. They had already reached 50% of the cars on the road being EVs. There were no changes in the volume of the independent aftermarket. They were essentially just shifting from 100% working on ICE vehicles to some mix of ICE and EVs.

The biggest factor here, to give you the punchline to your question, is that this is going to take a long time. It will be 10 to 20 years before this has a meaningful impact. But when it does, it will be a 40% drop in total part installation worldwide.