When Americans take fewer trips and drive fewer miles, it inevitably has an impact on the supply of salvaged vehicles and demand for replacement parts and components. That means COVID-19, the pandemic caused by the novel coronavirus, has affected the automotive salvage and recycled parts business as it has nearly every other aspect of life in 2020.
The second-quarter 2020 financial results of one of America’s largest automotive recycling firms, Chicago-based LKQ Corp., demonstrate the pandemic-related challenges facing the sector but also include bright spots pointing to its resilience.
Sandy Blalock, executive director of the Automotive Recyclers Association (ARA), Manassas, Virginia, says some ARA member companies are struggling because of the economic slowdown, but the sector’s early recognition as an essential business has set the tone for most companies to work their way through the difficult conditions.
Less bang, fewer bucks
It is an unfortunate aspect of the auto recycling business that a percentage of its inventory stems from auto accidents that result in insurance companies declaring one or more vehicles involved as having been completely written off, or totaled.
Among the many aspects of Americans staying home from work and vacation in 2020, “Less people on the road has resulted in fewer accidents and less inventory at the salvage pools for automotive recyclers to purchase,” Blalock tells Recycling Today.
The fairly sudden lack of supply in the second quarter of 2020 meant “prices for salvage have increased due to that lack of inventory,” Blalock adds. “Many of our members experienced strong sales, as those individuals who needed to be on the road during the last few months of the pandemic really needed reliable vehicles, and ARA is proud that having access to safe, quality recycled OEM (original equipment manufacturers) parts helped make that happen.
“Some automotive recyclers are reporting strong sales; however, many of our members are struggling to cope,” Blalock says. “It really is depending on the local market, local impact the virus has had there and any related local government restrictions.”
Publicly traded LKQ, which has more than 550 locations in the United States, says its second-quarter 2020 revenue fell by 19.1 percent compared with the second quarter of 2019. The company says, however, it “implemented targeted cost actions” to achieve net income of $119 million. Although that was down 21.2 percent compared with the year-ago quarter, LKQ remained profitable.
Remaining active and profitable as the U.S. continues to navigate COVID-19 and the resulting downturn will remain a critical day-to-day focus for LKQ and other ARA member companies.
Blalock says ARA initially concentrated on helping its members enact safe and healthy operating procedures. “From the onset of the pandemic, ARA launched daily ‘COVID-19 Update’ email blasts to keep members informed of all news, state and federal regulatory guidance, health information and other resources that could impact member businesses,” she says.
“COVID-19 resources have been added to the ARA University curriculum and will be a topic of multiple educational sessions at the 77th Annual ARA Convention this fall,” Blalock says, referring to the association’s annual gathering, a “virtual” event scheduled for Nov. 11-14.
When the auto recyclers gather online, they will have issues beyond COVID-19 to discuss as the sector makes plans for the remainder of this decade.
Original and acceptable
In April, the ARA issued a press release expressing “extreme concern” that Subaru of America Inc. had included guidance to its dealers stating that it “does not support the use of parts that have been removed, salvaged or recycled from an existing vehicle.”
ARA and its members have been down this road with other automakers in the past, and in its statement of concern, ARA states that the position taken by Subaru is in violation of the federal Magnuson-Moss Warranty Act by saying the use of recycled components could negate its warranty.
“The Federal Trade Commission (FTC) expressly states that ‘simply using an aftermarket or recycled part does not void your warranty,’” the ARA states in an April news release, citing an FTC Consumer Information memo titled “Auto Warranties and Routine Maintenance,” dated May 2015.
Blalock says being on the lookout for manufacturer guidelines, such as the one attempted by Subaru, is one of ARA’s core missions. “ARA actively tracks all state and federal legislative activity that positively or negatively impacts the recycled original equipment (ROE) parts market and ARA member businesses,” she comments.
“Any proposed legislation that could explicitly limit consumer choice when it comes to sourcing replacement parts for their vehicle, or limit consumer choice as an unintended consequence, is something that ARA is on the lookout for daily,” she says. “In the coming year, ARA will be leveraging its growing social media presence to change some of the public misconceptions out there about recycled automotive parts—misconceptions in many cases promulgated by the auto manufacturers.”
The ROE designation Blalock cites is part of a wider ARA effort to increase the visibility of recycled automotive parts in the vehicle repair and maintenance supply chain, as designated in a strategic plan recently updated and adopted by the association.
A favorable choice
In addition to the updated strategic plan the ARA adopted earlier this year, Blalock says in 2018 the association launched a public awareness campaign titled “Choose Recycled Parts.”
Visitors to a website touting the benefits of parts supplied by the auto salvage industry can read about the quality and environmental benefits of using such components. “By choosing recycled auto parts, you help preserve natural resources, reduce air and water pollution and divert material from landfills,” the ARA says.
Earlier this year, the ARA trademarked the term Recycled Original Equipment, and Blalock says the organization will update its Choose Recycled Parts website and other campaign materials to use the new term.
The use of the ROE term is part of a larger effort pertaining to branding or raising the profile of the auto salvage and recycling sector. The ARA says its strategic plan “is grounded in the association’s mission to advance the automotive recycling industry and promote its beneficial effects on society.”
Blalock adds, “We have some exciting things in production that we think will help put a new spin on ROE parts.”
Those efforts include taking steps along with automotive recycling organizations from around the world to designate Sept. 18 as World Vehicle Recycling Day.
On the financial side, Dominick Zarcone, president and CEO of LKQ Corp., says, “While the company’s second-quarter performance exceeded our expectations at the beginning of the quarter, there remains a high degree of uncertainty about the ongoing rate and shape of the COVID-19 recovery.”
The ARA’s wider membership sees much of the same thing, Blalock and current ARA Acting President Scott Robertson of Robertson’s Auto Salvage Inc., Wareham, Massachusetts, say.
Commenting on the release of ARA’s strategic plan in late July, Robertson says, “2020 has been a game-changer. During these challenging times, and given the unprecedented impact that a global pandemic is having on all businesses and industries, the direction outlined in this strategic plan will help ARA continue to move forward.”
Before longer range strategic plans are implemented, Blalock says auto recycling business owners will keep a close eye on revenue and expenses—and employee and customer safety.
“Automotive recyclers have incorporated the standard COVID-19 safety measures into their business operations, meaning taking steps to ensure social distancing, face coverings, hand sanitizer and so on,” she comments. “Many have gone beyond this and changed the way they interact with customers, such as employing drive-through windows and an increased focus on electronic commerce and enhanced delivery services rather than face-to-face [transactions].”