Despite Economic Contraction, Parts Sales Set Records

For families, communities and businesses around the world, we are now several weeks (or in some cases, months) into the ‘new normal’ that COVID-19 has presented. This time has brought new challenges coupled with feelings of uncertainty. For manufacturers of durable goods like trucks, cars and heavy equipment, however, there are many reasons to view the future with optimism despite declining sales of new products.

As some brands have recently announced their first-quarter earnings, companies like PACCAR indicated record-breaking sales in its parts division and industries like the automotive aftermarket are seeing a significant spike in online sales. As we learned in the last economic crisis, after-sales service becomes increasingly important in a down economy. Below, we outline today’s current economic climate, how service business optimization can provide financial stability and what the future, post-coronavirus future will look like.

Current Climate

Many economists are forecasting that the Q2 contraction will be significant, with Goldman Sachs suggesting the GDP will shrink by 34 percent. Orders for durable goods plunged the most they have since 2014, many automotive OEMs posted double-digit declines in March, orders for civilian aircraft dropped 300 percent and new construction projects have been canceled or delayed.

Despite these somewhat grim statistics, there is a silver lining. The world has rallied around truckers – often unsung heroes – to show appreciation for their hard work, displaying ‘thank you’ signs on roadways. Manufacturers also have a renewed interest and appreciation for employee health and safety, while simultaneously pivoting their operations to produce critical medical and/or personal protective equipment. Although the ‘new normal’ may look different than anything we’ve seen previously, there is reason to be hopeful for the future. 

After-sales Service & Financial Stability

As OEMs’ customers cut budgets for new product acquisitions, they will simultaneously seek ways to extend the life of their current equipment. And in industries like trucking, automotive and heavy equipment where products are critical to essential business, efficient and effective service operations are key to success.

In an economic contraction like we are experiencing currently, OEMs can use parts’ revenue to offset declining new sales revenue, providing financial stability in an otherwise uncertain time. In the instance of PACCAR, while truck sales are down and truck manufacturing plants are temporarily closed, parts and service sales are up. The leading truck manufacturers’ new product sales and revenues fell in the first quarter of 2020, but its parts division set a record profit. This validates the hypothesis that improving after-sales service creates an opportunity for OEMs to minimize negative impacts of the economic downturn, generate more predictable, high-margin revenue, differentiate from competitors and increase customer satisfaction and retention. 

Future Outlook

In many parts of the world, economies are beginning to slowly reopen and the resurgence of new car sales in China is providing hope for automotive manufacturers in Europe and North America. One lesson that we have learned recently, however, is oftentimes the future is difficult to predict. But with the right resources, infrastructure and technologies in place, manufacturers can maximize financial performance and provide an extra layer of security and stability when faced with the unexpected. What companies do now in the face of uncertainty will determine how they emerge in the future.

During challenging times, it’s natural for companies to act swiftly and take action to preserve cash, but focusing too much on cost-cutting measures can lead to missed growth opportunities that could improve top and bottom-line performance. The companies that emerge from this financial storm fastest, strongest and best-positioned for success will be the ones that balance cost-cutting measures with strategic investments that positively impact revenue, profits and customer loyalty.