Inflation has been volatile and unpredictable. Interest rates remain high.
And the resultant economic uncertainty is instilling fear and doubt in both automakers and their customers.
Vehicle demand is softening as buyers delay upgrades, stretch ownership cycles, and become more price-sensitive. Brand loyalty also wanes as simple cost comparison becomes more important, intensifying competition.
As sales fall and the cost of materials rises, automakers are seeing profits and margins shrink. Squeezed between a rock and a hard place, they are having to do more with less: absorbing higher costs while delivering greater value with fewer resources.
At the same time, due to high borrowing costs, major technological and operational overhauls are being delayed, precisely when they are needed most.
How can businesses meet this challenge?
It calls for more than just cutting costs or marginal operational efficiency gains. It requires a strategic shift to a new source of competitive advantage.
Vehicle sales used to be the source of stable, predictable revenue. Is there anything that can match it?
Nestled in the rough, there is a diamond: the aftermarket.
Aftermarket as strategic growth engine
The business potential of service-based aftermarket models is enormous.
Airbus, for example, estimates that “aircraft-focused lifecycle services represent the largest segment of growth…[with] a cumulative value of $2.2 trillion over a 20-year period”.
Similarly, Deloitte has found that aftermarket sales deliver 2.5x higher margins than original equipment sales.
With new vehicle sales under pressure and customers keeping cars longer, demand for parts, service and support is holding steady and, in many cases, even growing. This represents a rare pocket of commercial stability in an otherwise volatile environment.
If executed well, the aftermarket has the potential to drive high margin sales, deepen customer relationships, and consolidate long-term growth, even in tough economic climates.
But making the most of this opportunity means approaching the aftermarket, not as a cost center or support function, but as a core strategic asset in its own right.
The limits of traditional aftermarket thinking
The aftermarket has long been treated as more of an afterthought than a core strategic asset.
As a result, many such operations are still managed with a traditional mindset: functions are siloed, processes are manual, and services are static and reactive.
This setup makes it hard to see where margin is leaking or where new value could be captured. And when inflation and interest rates, as well as customer behavior are in constant flux, slow and disconnected aftermarket operations are going to miss out on valuable opportunities.
One reason for this is that, seen as a support function, the aftermarket hasn’t received the same level of technology investment as core manufacturing systems (e.g. ERP systems, automation tools etc.).
What can help automakers to transcend the limits of traditional aftermarket thinking is using sophisticated data approaches to enable faster, smarter decisions and entirely new business models.
Getting data right allows you to shift from delivering reliable equipment priced on cost, to providing data-driven services priced instead on value, which have much higher margins and long-term growth potential.
The connected, data-driven aftermarket
What does a modern aftermarket function look like?
It’s connected across teams and systems. It uses up-to-date data to make smarter, faster, more profitable decisions. And it prioritizes high-margin, service-led offerings designed around customer value.
New service-based business models rely on being able to:
- Incorporate many complex data variables from across your business
- Perform deep data analytics
- Leverage the predictive power of AI and ML
- Automate business processes at scale
Here are three examples of how this might look:
1. Dynamic pricing, not fixed formulas
Static, cost-plus pricing models that leverage a blanket increase once or twice a year lack the granularity required to optimize margins.
This approach doesn’t take into account the context of each part and its value to the customer. For example, maybe in certain markets a given part is more in-demand than others, giving you greater leeway to raise prices without losing sales.
Dynamic pricing systems use AI to factor in variables like cost inputs, demand elasticity, customer segment, geography, currency fluctuations, competitor pricing and others. They can accurately calculate the perfect trade-off between margin and risk, taking into account the unique context of each part.
This allows you to continuously optimize for margins, while using automated workflows to deploy changes across thousands of SKUs quickly, as often as you need.
Ultimately delivering higher revenue per part, greater pricing agility and margins that you know are in the sweet spot.
2. Data-driven inventory management
Automakers struggle to balance meeting customer expectations against spare parts availability.
Too little inventory, and you run the risk of disappointing customers and losing sales, but too much, and you have to meet substantial carrying costs that could have been used for other business needs.
Traditional approaches rely on historical averages to predict the optimum stock levels. But smarter, AI-enabled approaches allow you to forecast demand based on current service patterns, market trends, regional seasonality, and even specific dealer and customer data.
By leveraging the right data, you can redistribute inventory across your network dynamically, ensuring availability where it’s needed, without holding unnecessary surplus where it’s not.
The result is happier customers and lower costs.
3. Financial forecasting and performance visibility
When economic volatility is high, forecasting matters more than ever.
Commercial teams need high-quality tools and end-to-end visibility to make the best financial decisions across different markets and product lines.
Yet, many aftermarket functions still lack the tools to deeply understand profitability. There’s no clear view of margins across the board, where the greatest risks lie and what the financial impact of new and different strategies and business models might be.
With modern aftermarket tools, OEMs can simulate the financial effects of different pricing, cost, and demand scenarios, so they can test strategies before executing them.
What happens if you absorb a cost increase in one market and pass it on in another? Which service contracts are at risk of losing money over time? What is the financial impact of a new value-based service offering?
Financial forecasting gives you accurate answers to these questions so you can lower risk and confidently take advantage of market opportunities.
Conclusion
When key economic indicators are so changeable, automakers and their customers change their behaviour, looking for an island of stability and predictability in the storm.
OEMs can’t rely on traditional manufacturing sales to maintain their growth trajectories. And they’re under pressure to transform, but with limited resources to do so.
They need to deliver new sources of business value, but this isn’t going to come from just doubling down on existing ways of working.
The aftermarket represents a bridge between the old world and the new.
It’s a known quantity, but also a doorway to step into a new, connected data-driven world where it becomes a strategic lever for stability and growth.
Businesses that get the aftermarket right can enjoy higher profits, as well as a blueprint for powerful data-driven business models that they can iterate on and expand over time. Get our latest ebook, Navigating disruption in the automotive industry: 5 Strategic responses to unprecedented uncertainty and change.