Automotive aftermarket outlook

The automotive aftermarket has traditionally been much less affected by economic downturns than the overall auto market and hence has been a relatively reliable investment. When consumers defer new car purchases because of a difficult economy, demand for parts to repair and maintain older vehicles, including tires, brakes, and shocks, increases, boosting sales for part makers and suppliers.

That stability and reliability is one reason investors have shown a strong interest in the automotive aftermarket, and their interest has been rewarded. That reliability, however, is being challenged by the growing popularity of electric vehicles (EVs). With fewer moving parts to break and wear out, EVs have lower lifetime maintenance costs than vehicles with internal-combustion engines (ICE). Also, as Advanced Driver Assistance Systems (ADAS) become more prevent in cars, need for collision parts are likely to reduce.

Consequently, investors will need to understand how the dynamics of the automotive aftermarket are likely to change over time and by type of part:

• Demand for ICE-specific parts—motor oil, and spark plugs, as well as engine accessories used to enhance ICE performance—is expected to fall as more EVs take to the road.
• For aftermarket parts shared by both EVs and ICEs, demand is likely to be mixed. Manufacturers closely tied with ICEs will become risky at various time horizons (depending on the part replacement cycle) but will generally remain a viable option for the near term. The same applies for many collision parts as well. Opportunities for consolidation among these suppliers will likely increase.
• Makers of powertrain agnostic parts, like tires, lead acid batteries, and windshields, will remain a safe bet for the long term and will generally weather economic downturns.
• For the long term, look for suppliers that are gearing up for the accelerating shift to EVs.

Given these rapid changes in the auto industry, investors in the automotive aftermarket will need to be cautious about where they place their bets. However, investors that understand these dynamics can still do very well in this sector.