September/October 2010
Some consider the vertical integration of auto dismantlers, scrap processors, and steel producers the wave of the future; others caution that though the businesses are related, success in one does not guarantee success in all three.
By Theodore Fischer
Where’s the profit in an end-of-life vehicle? If you’re an auto dismantler, you probably make most of your money from culling and selling the reusable parts. If you’re a scrapyard, you might be looking at the value in the vehicle’s ferrous and nonferrous metals. But what if your company both dismantles and shreds, or if you’re a steel mill that also owns dismantling and shredding operations? Do you operate each operation to maximize its profitability, or do you focus on one unit and have the other units primarily serve those needs?
This is more than an academic question. Though the vertical integration of steel, scrap, and dismantling companies is nothing new, several large sales and acquisitions have taken place in the past two years. Scrap processors and auto dismantlers might well wonder how this trend, as well as the trend of smaller auto dismantling firms being bought by large chains, will affect the industry as a whole.
Major Players
Some of the biggest names in steel and scrap also operate auto dismantling and parts resale businesses. Take Schnitzer Steel Industries (Portland, Ore.): In 1989, when the company sought to establish an additional source of scrap metals for its recycling unit, it bought a 50-percent interest in Pick-n-Pull, a chain of self-service recycled automobile and truck parts stores founded in Stockton, Calif. In 2003 Schnitzer paid an estimated $85 million to buy out its partners’ interest and make Pick-n-Pull a wholly owned subsidiary.
Since then Pick-n-Pull has continued to expand, acquiring three new stores in Canada in 2004, buying 22 Greenleaf Auto Recyclers facilities in 2005, and subsequently adding other operations in Arkansas, California, Missouri, Ohio, Oregon, Texas, and Virginia. Last year Schnitzer decided to focus its dismantling unit solely on self-service operations, saying the full-service stores no longer fit its business strategy and generated lower profit margins. It sold 17 full-service Greenleaf facilities to LKQ (Chicago) and received six of LKQ’s self-service stores as part of the deal. Pick-n-Pull now consists of 45 locations in 14 states and western Canada.
A much more recent vertical integration is that of Nucor Corp. (Charlotte, N.C.) and The David J. Joseph Co. (Cincinnati). In 2006 DJJ launched U-Pull-&-Pay, its own self-service automobile parts recovery and resale company, which now has eight retail operations nationwide, each with inventories of 1,500 to 3,500 vehicles. In 2008, Nucor, North America’s largest steel manufacturer, acquired DJJ for about $1.44 billion.
Even with those two heavy-hitters in the market, the company that claims to have the biggest presence in the U.S. auto dismantling and recycled parts world is neither a steel producer nor a scrap processor. LKQ—its name is an acronym of “like kind and quality,” buzzwords in the recycled parts business—calls itself “the largest U.S. provider of aftermarket collision replacement products, recycled OEM products, and refurbished OEM collision replacement products.” The public firm started in 1998 as a merger of several wholesale recycled auto parts businesses in Florida, Michigan, Ohio, and Wisconsin. In 2007 it purchased Keystone Automotive Industries, which at that time was the leading provider of aftermarket collision replacement parts, and in 2008 it entered the recycled heavy-duty truck parts business. In 2009 it grew further when it bought the Greenleaf facilities from Schnitzer.
With more than 80 acquisitions since its inception, for a total of 290 facilities across the country, LKQ plans to continue its growth in the dismantling, you-pull-it, and recycled parts businesses, primarily by purchasing existing facilities instead of building new ones. “Frequently when we buy, we’re buying strategically in order to get entry into a specific market area,” explains Sarah Lewensohn, LKQ’s director of investor relations. It can be “challenging to get licensing or permits” for a new auto salvage yard, “so it’s typically easier—or takes less time—if you make an acquisition.”
Despite its continued growth, LKQ has no plans to enter the scrap processing business, Lewensohn says. “We have relationships with lots of different shredders. … We’re not focused on scrap supply; we’re focused on parts supply.”
Dissecting the Trend
Is vertical integration the wave of the future? Brookfield Resource Management (Elmsford, N.Y.) certainly thinks so. Brookfield, a scrap recycling company serving the New York and Chicago metropolitan areas, started its corporate life as a dismantling firm, moved entirely into scrap, and now says it has fully integrated dismantling operations and scrap processing. Last year it acquired Kaufman Auto Parts, which occupies a 10-acre site in Montrose, N.Y., and this year it bought Salient Auto Salvage, an auto wrecker and used parts operation in the Bronx, N.Y.
Tom Malone, Brookfield’s president, is confident of the company’s ability to manage the basics of auto dismantling and recycling. “For handling fluids, for handling mercury switches, for doing the paperwork associated with processing and dismantling vehicles, we’re very comfortable with that. We’ve had over 40 years to refine all those processes.” But the salvage facilities may be changing their emphasis, he says. “Traditionally, they were focused on used auto parts, and that certainly has value; however, we see considerable additional value in utilizing the facilities to collect end-of-life vehicles from a scrap perspective.” In practical terms, Malone says, that means “identifying and handling only the parts that have a short shelf life; everything else is scrap.”
He explains that “we don’t see much value in handling components with marginal demand as reusable parts. Instead, we leverage the constant demand for scrap for this type of material.” Instead of being “the company with the largest inventory of used parts or the company with the biggest scrap pile,” he says, “we see value in being the company that leverages the synergies between scrap processing and vehicle dismantling with a focus on inventory turn. The bottom line,” he adds, “is we buy right, process quickly, sell back into the market, and get on to the next trade.”
Though Malone considers Brookfield “firmly on the scrap side now,” he insists that “anyone who’s running a shredder already has at least a toe in the water of dismantling. ... We certainly see value in that business model, and I can’t believe we’re the only ones.”
Tennessee Valley Recycling’s Joel Denbo takes the opposite view. Though the Decatur, Ala.-based company’s roots also lie in auto dismantling—and his business license would permit it—Denbo says he’s not tempted to go that route. Entering the dismantling business “might adversely affect my business and the relationship I have with dismantlers that I do business with now,” he says. He would only enter that niche “if I’m forced to do so due to competitive reasons.” In other words, so long as dismantlers continue to sell their scrap to TVR, Denbo says he sees no need to compete with them.
Companies can successfully combine dismantling and scrap, but “our view is that they are two entirely different businesses,” says Steve Levetan, senior vice president of Pull-A-Part, an Atlanta-based self-service dismantling and parts recycling company that began as a sideline of scrap processor Central Metals. In his experience with those two companies, Levetan says, he found that if dismantling yards and scrapyards are “operated as two completely separate businesses, it can work, but to look at one as the natural outgrowth of the other, that’s a fallacy. … We found it was only when we were able to focus solely on the used parts business that we were able to really begin our growth and expansion.”
It’s a matter of how you’re focusing your attention, he explains. “If you think [dismantling is] one extra stop before the car gets to the shredder, that’s a bit different than being in the parts business and doing what you need to do to be successful at that.” Both scrap processing and auto dismantling/parts recycling “are profitable businesses if run properly,” he emphasizes.
Linda Pitman, co-owner of Dulaney Auto and Truck Parts (Amarillo, Texas) and immediate past president of the Automotive Recyclers Association (Manassas, Va.), points to Ford Motor Co. (Dearborn, Mich.) as a cautionary tale of how not to integrate. Ford entered the auto dismantling industry in the late 1990s, when it formed Greenleaf Auto Recyclers from its purchase of several auto salvage yards and parts recycling operations. It exited the industry just a few years later. In 2002, one Ford executive characterized the company’s move into dismantling as “a poor business decision” and the operations of those yards “abysmal failures.” Ford “learned that being an auto recycler is not the easiest thing in the world to be, and they didn’t last long,” Pitman says.
When asked to speculate about why that venture was unsuccessful, Levetan points to a fundamental principle of management guru Peter Drucker: Define what business you’re in. Ford thought “parts is parts”—and whether salvaging them or manufacturing them, “what could be so different?” Levetan says. “They found out it was entirely different. … They were used to dealing with a different type of customer, a different raw material, different sources of supply. They could have been successful, but they never defined this as part of their business… . It was an absolute sideline.”
The scrap business and the recycled parts business are just as different, Levetan says, but “with the proper focus, it’s possible to be successful in both.” As Pitman puts it, “other big corporations have accomplished wonderful things [in the dismantling industry] all across the United States and continue to grow.”
Will the trend toward consolidation and vertical integration continue? Pitman thinks so. “It’s slowed down some, but I don’t think it’s finished yet.” Levetan thinks it’s perhaps a mani festation of the grass-is-always-greener syndrome: “You see people jumping from both sides, going from one business to the other,” he says. When scrap values were hitting record highs, that “attracted a lot of folks to the [scrap] industry, including folks from the dismantling industry,” he says. “But as we’ve learned over the last 40 years, markets go up and they go down.”At the same time, dismantling might look attractive because its revenue is “not commodity-dependent,” Levetan says. “Parts don’t fluctuate in value the way scrap does, but there are other issues that affect profitability that you don’t deal with in the scrap industry.”
Brookfield’s Tom Malone is convinced such integration will continue. In fact, despite what the LKQs of the world say, he thinks it’s only a matter of time before that and similar companies enter the scrap business. “I live in both worlds, so I can comfortably make the argument that if your company is generating considerable amounts of scrap and you’re not vertically integrated, you’re doing your shareholders a disservice,” he says. “Nucor is there, Schnitzer is there, among others. If the LKQs want to give themselves the best chance to compete in the future, they’ll need to be there and position themselves to leverage the benefits of vertical integration.”
Theodore Fischer is a writer based in Silver Spring, Md.
Is Bigger Better?
Among dismantlers, opinions vary over whether industry consolidation is good, bad, or neutral for individual companies and the industry as a whole. Linda Pitman, co-owner of her family’s dismantling firm, Dulaney Auto and Truck Parts (Amarillo, Texas), and immediate past president of the Automotive Recyclers Association (Manassas, Va.), says her initial opposition to consolidation has moderated over the years. “The good thing about the consolidators is that they make those of us who have not consolidated run better businesses,” she says. “Because of the way they buy things, sell things, [and] deal with their customers, it raises the bar for the rest of us—kind of like when Wal-Mart moves into town and local businesses have to clean up their act.” Randy Reitman, owner of Reitman Auto Parts & Sales (Melbourne, Ky.) and second vice president of ARA, concedes that competition with larger firms has motivated him to fine-tune some business practices.
Both Pitman and Reitman say they’re determined to remain independent. “I’ve been approached by corporations twice, and both times I’ve turned them down,” Reitman says. “There’s no way in the world I would ever sell to them.” These owners plan to continue doing things their own way. “When you consolidate, you’re not the boss anymore; you’re an employee, and anything can happen,” Pitman says. As Reitman puts it, the large firms “put you in charge for a while, until they put in their own people to do whatever they do.”
Some independent dismantlers have joined consortia to better compete with consolidated firms. Each company in a consortium uploads its parts inventory to a central database, giving members a wider selection of parts they can sell or buy for customers. For example, two years ago Norfolk Recycling Corp. (Suffolk, Va.) became part of Premium Recycled Parts, a nationwide consortium of 61 facilities in five regional alliances. “We just broker a whole lot more parts, buying and selling from each other,” says S. Warren Richard Jr., company president.
Ron Sturgeon, an auto salvage consultant based in Fort Worth, Texas, sees more consolidation in the cards. To figure out where the big companies will go next, he says, look at a map of the United States’ top 50 markets, and determine which ones these companies are not in. “You can probably predict with some amount of [accuracy] which markets they want to get into,” he says.
Some consider the vertical integration of auto dismantlers, scrap processors, and steel producers the wave of the future; others caution that though the businesses are related, success in one does not guarantee success in all three.