Road worthy: auto recyclers remain competitive as suppliers of components harvested from salvaged vehicles.

Auto dismantlers operate in an environment where many of their competitors as well as some of their customers are among the largest and most powerful companies in the world. The salvage and dismantling experts offer components that can compete with OEM parts made directly by the world's automakers, many of which can be found in the upper tier of the annual Fortune 500 survey.

At the same time, many of the salvaged components are purchased by auto insurance companies, several of which make appearances of their own on any "who's who" roster of corporate America.

In this land of giants, these family businesses are finding new ways to stay viable, often by sharing information, cooperating on joint marketing efforts or through the more traditional merger and acquisition route.

CONDITION STABLE. Economists are calling 2004 a slow-growth year for the U.S. economy, an assessment that many auto recyclers might agree with.

A tepid consumer economy combined with vehicles that are lasting longer can both help and hurt auto recyclers, according to Bob Hoffmann of Quality Replacement Parts (QRP), Schofield, Wis., a co-op with several dozen member companies.

Much as in the scrap industry, auto recyclers need generated material (in their case, scrapped or totaled cars) before they can have a product to sell.

Galvanized steel and greater attention to the quality of mechanical systems are giving cars longer life, Hoffmann notes. "Cars are staying on the road longer, with some 150,000- and 200,000-mile cars out there," he remarks. "It used to be that no one wanted to drive, or certainly buy, a car with 75,000 miles on it, especially if rust was starting to set in."

A new form of competition for totaled automobiles is coming from exporters, who are having success selling the cars to buyers in nations such as Mexico and Russia, where dealers can repair and re-sell them without having to meet the stringent safety and emissions requirements of the United States, according to Hoffmann.

On the other hand, motorists who wish to keep their current models running rather than enter the new car market can provide a portion of the overall market for recycled automobile components.

Cutthroat competition among auto insurers is another wider economic factor that is affecting auto recyclers. "They are competing hard in terms of keeping premiums down and looking to hold repair costs down," notes Hoffmann. "The term they use is 'claim severity.' If they can keep severity down, perhaps by sourcing more affordable recycled parts, then they are in a better position to keep premiums down and remain competitive."

Joe Holsten, CEO of LKQ Corp., Chicago, agrees. "Every major insurance company is focused on increasing their use of alternative parts. They're keenly focused on managing the cost side of their business, even more than in the past."

On the competitive front, auto recyclers continue to face competition from the makers of new OEM parts, who would rather have 100 percent of the market. Hoffmann says that in some markets, these efforts are getting help from auto dealership owners who are establishing delivery fleets and parts warehouses in different parts of a metropolitan market to blanket a wider geographic zone.

The variety of factors has still provided auto dismantlers with a market that is good for the resale of their parts--if they can procure enough totaled automobiles to harvest usable components for late model vehicles.

Interestingly, air bags are playing a role in the supply equation. "Air bag deployment means a car is more likely to be declared totaled because of the high cost to replace them," notes Holsten. Two air bags deploying will almost certainly tilt an adjuster toward declaring a car as totaled.

"Five years ago, the number of cars on the road with two air bags was far less; now most have two," says Holsten. This may be why statistics show the percentage of crashed cars declared as totaled rising from 8 percent to 9 percent in the late 1990s to 12 percent to 13 percent this year.

STICKING TOGETHER. Although the David-vs.-Goliath aspect of family businesses competing among corporate giants might be fun from a distance, in the trenches many auto recyclers are taking steps to make it a fairer fight.

QRP has offered a remedy through its co-op arrangement, according to Hoffmann. The co-op arrangement can provide smaller companies with access to a wider network of parts and access to other helpful information, while still allowing company owners to remain independent.

In 2004, QRP has added new member companies and also introduced a service called QRT, a towing program that can allow the small member companies in bring in vehicles from a farther distance than they may otherwise be able to reach. Hoffmann says part of the way QRT works is by arranging "backhauls" so that network member tow truck drivers will have a vehicle to tow in both directions. "It opens up the buying of salvaged vehicles to a wider geographic range," he notes. The towing companies bid to haul the cars to QRP members."

Consolidating through merger and acquisition is also a part of the automotive recycling story, particularly in the case of LKQ Corp.

The Chicago-based company now runs more than four dozen dismantling, recycling and parts distribution facilities in the United States, as well as three in Central America. An LKQ subsidiary known as Action Crash Parts supplies aftermarket collision automotive replacement parts from 20 locations in the U.S. Midwest.

The company has operated profitably in 2004, with recent quarterly revenue of $104.9 million and net income of $5.3 million, growing by nearly 30 percent in both revenue and in income throughout the second quarter of 2003.

"Our second quarter results were within our expectations," says Holsten. "We continued our history of double-digit organic revenue growth, at 11.4 percent, and our recent acquisitions contributed a further 18.1 percent in revenue growth."

Holsten cites the Action Crash subsidiary as having a positive effect on LKQ's financial picture. "Our Action Crash Parts division, an aftermarket collision automotive replacement parts company we acquired in the first quarter of 2004, contributed $17.2 million of revenue for the six months ended June 30, 2004 with a related gross margin of 44.3 percent."

The company made its Central American acquisitions in April. "We intend to use these facilities as a future platform to sell certain types of product into Central America from our U.S.-based recycled OEM automotive replacement parts facilities," says Holsten of the new locations in Costa Pica and Guatemala. "Much of this product is currently being disposed of as scrap or mechanical core product by our U.S. facilities."

Moving from tropical heat to the colder climate of Minnesota, LKQ Corp. also acquired Albert Lea Auto Salvage Inc. in that city, approximately 90 miles south of Minneapolis.

In the western United States, steelmaker and scrap recycler Schnitzer Steel Industries Inc., Portland, Ore., has moved downstream into the auto recycling market with its operation of its chain of Pick-N-Pull self-service auto parts stores.

Schnitzer had been a 50 percent owner of the California-based Pick-N-Pull business before acquiring full ownership in early 2003. In its most recently completed financial quarter, revenue within the Pick-N-Pull operating segment grew by more than $8.5 million, which was 42 percent above the operating income of $6 million in the prior year's comparable quarter. The company credits increases in both the retail and wholesale segments of the business as well as the addition of three new western Canadian locations that were acquired in March of 2004.

SWITCHING OFF MERCURY

When it comes to the proper disposal of mercury switches found in obsolete vehicles, auto dismantlers do not want to be left holding the bag.

In states such as New Jersey, auto recyclers have joined scrap processors, steel mills, pipe foundries and environmentalists to promote legislation to codify the removal of mercury switches in the state.

The NJ Partnership for Mercury-Free Vehicles is seeking sponsors for legislation that would require the removal of mercury switches from end-of-life cars and trucks before the vehicles are crushed and melted down in steel mills and foundries.

In a study of mercury pollution, the state Department of Environmental Protection (DEP) found that mercury switches used for convenience lighting and antilock brake systems contribute to the problem, as mercury can pollute air and water when end-of-life vehicles are melted down for recycling. Although New Jersey mills and foundries use emission-controls that meet current limits for mercury, the 75-percent mandated reduction announced in early 2004 is beyond the technical and financial capabilities of their furnaces, industry officials say.

The coalition says that a relatively simple and effective way to reduce mercury contamination is to remove mercury switches from vehicles before melting. Legislation similar to that which the group supports was enacted into law in Maine last year and is being considered in several other states, including Massachusetts, New York and Rhode Island. It would require auto manufacturers to fund a DEP-approved program for the safe removal and disposal of the switches and would require automakers to provide information on the location and safe removal of those switches containing mercury.

The author is editor of Recycling Today and can be contacted via e-mail at [e-mail].