Chicago--The economy, in many respects, is working in LKQ Corp.’s favor.
Yes, according to Walter Hanley, senior vice president of LKQ, the drop in vehicle miles traveled has reduced the number of collisions in the United States. That has had some adverse effect on the company, which operates more than 60 wholesale auto recycling centers and about 40 self-service recycled auto parts yards around the country.
“But certainly the issues the OEMs are facing give us opportunities to sell parts when OEM parts are in an out-of-stock position,” Hanley said. “We have invested so much in our inventory and distribution network that we’ve got availability of parts. We’re generally able to deliver them to the shop the next day so they don’t have downtime, especially when the customer is in a rental vehicle.”
The slump in new-car sales also offers LKQ opportunities, Hanley said.
“As vehicle owners are keeping their cars longer and they’re not buying as many new cars, we think we’ll get more business on the mechanical repair side,” he said. “They’re going to need replacement engines or transmissions more frequently. We’re not just selling collision parts; we’re also selling mechanical parts.”
Recycled parts give also LKQ and its shop customers a way to tap into the growing environmental movement as well, Hanley said.
“We bought over 440,000 vehicles last year, and recycled the parts and sold the hulks to shredders to recycle the steel,” he said. “That has a tremendous benefit to our environment.
“We’re a green company. People don’t often recognize that. It’s an important ancillary benefit not just to our customers but to everyone. That’s 440,000 fewer vehicles that could have been a detriment that were turned into something positive.”
The 440,000 figure is just one of LKQ’s impressive numbers. It’s most recent financial report showed $1.9 billion in 2008 annual revenue. Including Keystone Automotive, the non-OEM parts supplier it acquired five years ago, and its refurbished parts and heavy-duty truck operations, LKQ has 9,600 employees at 280 locations in four countries.
That size and scope give it an advantage in meeting shops’ needs for alternative parts, Hanley said.
“On the recycled side, for example, we have a distribution network that allows us to share inventory regionally,” he said. “If a shop in, say, Chicago calls for a part, and we have it in any of locations in Wisconsin, Illinois, Indiana or even our yard near St. Louis, we sell it to the shop, and our distribution network has overnight transfer runs. We’ll get the part to the shop the next day, no matter which of those locations it came from.”
LKQ recognizes that speed and accuracy is becoming increasingly important to its shop customers, Hanley said.
“Insurance carriers don’t want to pay for those rental cars,” he said. “So being able to get the right part to the shop on a timely basis is critical. We can’t be sending the wrong part or taking multiple days to deliver a part to the shop.”
Hanley said the company works to offer the benefits of working with a large company without customers feeling like they are dealing with a large company.
“Most shops have a dedicated salesperson, so they have a relationship with a person who can help them,” he said. “And we have the best warranty terms in the industry. We stand behind our parts.”
Hanley said he sees shop interest in recycled parts growing, particularly in the short term, as the vehicle population ages and cash-strapped motorists look for ways to make repairs affordable or to keep cars from being totaled.
“Also, we see insurance carriers having a more active role in the repair process and pushing for the most cost-effective parts,” he said. “I think alternative parts utilization is a number that is getting more and more attention.
“We see more of the carriers insisting on minimum levels. I think all of that points to more use of recycled and aftermarket parts.”
What does Hanley see in LKQ’s future? First, he said, the company is optimistic that it will grow this year even without any additional acquisitions.
“On the acquisition side, we continue to look, and when we see a good deal, our balance sheet allows us to continue to acquire companies selectively,” he said. “On the wholesale recycled side, there are still a few holes in our map where we could do some acquisitions.”
In addition to looking for the right location and good revenue in the yards it acquires, Hanley said, LKQ looks for operations with good management that will stay on after the acquisition, and yards with good environmental practices and technology in place to help integrate the yard’s inventory into LKQ’s.
“Real estate is also a big issue because we often grow revenue at a yard to a point where the footprint gets constrained,” he said. “It’s difficult to get the permits and licenses to expand these businesses, so we’re always looking for yards that have sufficient acres for growth.”
Hanley said the company also will continue to look for complementary business lines, such as its refurbished parts business, which offers reconditioned wheels, bumpers, headlamps, and tail lamps. Last year, for example, LKQ acquired its first heavy-duty recycled truck parts business and now operates four such locations in Houston, Chicago, Tampa, Fla., and Toledo, Ohio, as well as one in Canada.
For shops, he said, online ordering of recycled parts is coming.
“We have that today with respect to our aftermarket parts division. As more and more shops become more technically proficient, that’s going to become more important to them in the future.”
LKQ and Ford reach parts settlement
Under a settlement agreement reached in April, LKQ Corp. will be the only company allowed to sell certain non-OEM collision parts for Ford vehicles. The non-OEM parts involved are those designed to replace parts for which Ford owns design patents.
As part of the agreement, LKQ will pay Ford a royalty fee for each part sold and has agreed not to challenge the validity of Ford's design patents during the term of the agreement (which extends until October 2011 but may be renewed).
“We feel it’s in the consumer’s best interests to have multiple choices,” said Walter Hanley, senior vice president of LKQ Corp.
Other details of the agreement were not disclosed.
Ford said the settlement "does not endorse the quality or use of non-OEM replacement parts sold by LKQ Corp."
The agreement ends two legal battles Ford has waged to protect its design patents on collision parts for its F-150 pickup and Mustang.
The agreement may also split the non-OEM parts industry which has been working as the “Quality Parts Coalition” to limit automakers' rights to hold design patents on collision parts.