Think Tank: Auto Dismantling

September/October 2015

Automotive dismantlers are feeling many of the same market pains as their scrap processing counterparts, but they also have unique challenges that they—and their trade association—must address to protect and expand their industry.

Automotive dismantling and scrap processing are sister industries that conduct significant business with each other and share some of the same challenges and priorities. They both suffer, for example, when commodity prices decline—as in the past year—and both industries face ongoing consolidation as well as competitive threats from illegal operators. They also encounter potentially hazardous materials in old and new cars, components that weren’t designed for recycling, and institutional obstacles when dealing with automakers. Their shared priorities include a focus on safe, ethical, and environmentally sound operations, which ties into their support of industry certification programs. Both industries also share the goal of recycling a higher proportion of each end-of-life vehicle. Beyond these similarities, however, the automotive dismantling industry faces distinct issues, such as product recalls, counterfeit parts, and the potential hazards of dismantling a growing volume of hybrid and electric vehicles.

Fortunately, car recyclers don’t have to address these issues alone; they have the Automotive Recyclers Association (Manassas, Va.) in their corner. That trade group, which has represented automotive recyclers for 72 years, now counts more than 1,200 companies among its members. Scrap talks with Michael Wilson, ARA’s CEO, on the automotive recycling industry’s priority issues and key challenges ahead.

Some car manufacturers’ practices make it difficult for automotive dismantlers to recover and sell certain used parts. What are the most significant of these practices, and what could automakers could do better, from your perspective? The most significant barrier to the increased harvesting and use of recycled [original equipment manufacturer] automotive parts is the restrictions automakers place on OEM parts data, such as parts numbers and build-sheet information. The European Union’s End-of-Life Vehicles Directive requires automakers there to “take the necessary measures to encourage the reuse of components which are suitable for reuse” and provide this data, but these same automakers put up significant barriers to prevent recyclers and others from accessing this data in the United States.

For several years, ARA has advocated for access to OEM parts data so recyclers have the necessary information to recover more than the customary 25 to 35 parts off each vehicle. We’ve met with automakers, federal regulators, members of Congress, consumer advocacy groups, and others to explain why professional automotive recyclers need to know that a part fits across several makes and models. What’s more, we need that parts data in an efficient, easy-to-use format to easily integrate into automotive recyclers’ inventory management systems in bulk format. Automakers must be more open to working with and providing this information to automotive recyclers and other sectors in the parts supply chain.

The record number of automotive safety recalls is putting pressure on automakers, as such recalls underscore the importance of access to OEM parts data. Without providing more detailed information to their automotive supply chain partners, automakers have no definitive way of knowing where their parts ultimately end up. As a result, automakers cannot proficiently track the remedy rates of their recalls and are undermining their own commitment to safety.

How has the air bag recall from Takata (Tokyo) affected that aspect of the used parts business? What are the prospects of the recycled air bag sector going forward? Last year, the number of recalled vehicles in the United States skyrocketed to 64 million. Within the last few months, the number of vehicles recalled for Takata air bags spiked from 17 million to 34 million, and the total figure is about 53 million vehicles if you look back to 2008. It’s important for automotive recyclers to be able to identify those vehicles in inventory and make sure those defective parts do not enter the market. We must work with the manufacturers to get the information into our inventory management systems in an integrated way so there is efficiency in running the [vehicle identification number] and parts check on recalls.

As for the prospects of recycled nondeployed OEM air bags, there is a long-established history of the safe use of those products. They have been used since the first air bags appeared in the 1990s, and they are an acceptable replacement for new OEM air bags throughout virtually the entire United States. ARA strongly supports the reuse of nondeployed, recycled OEM air bags that have met specific industry standards for safety. The use of these evaluated components is a cost-effective option for consumers, and extensive research and years of experience have proven them as a safe alternative.

To ensure safety standards in this product sector, ARA’s subsidiary, ARA Product Services, launched ARAPro™ as a brand in 2006. The ARA Air Bag Protocol (www.airbagresources.com) is a software and training system that ensures that automotive recyclers use best practices when extracting, handling, inspecting, and storing nondeployed, recycled air bags from salvaged vehicles. ARAPro air bags—the brand name for recycled air bags that meet the air bag protocol—get a certificate that a state department of motor vehicles can use to verify that a repair shop used a protocol-compliant air bag in a given repair job.

The auto industry has issued a variety of other massive recalls in the past few years. How does this affect the dismantling industry and its ability to resell parts? The National Highway Traffic Safety Administration’s rollout of www.safercar.gov in August 2014 was a watershed event. For the first time, consumers, recyclers, and other stakeholders could type in a vehicle’s 17-digit VIN and see if there were any open recalls for that specific vehicle. Prior to August 2014, such searches were based on a vehicle’s make, model, and year.

ARA is working on a continuous basis to increase awareness of www.safercar.gov within the automotive recycling industry and get information about the historic number of automaker recalls out to its members. Professional automotive recyclers need to constantly check their inventory for recalls, so it’s important for them to have a systematic way to do that. More than 500,000 recycled automotive parts are sold daily in the United States. Given that volume, recyclers need an efficient way to track those parts through each vehicle’s life cycle. If there’s a part-related problem, they must be able to identify if that part was replaced and whether it was replaced with a part that might be under a future recall. That can happen with recycled OEM parts as well as aftermarket, remanufactured, and new original replacement parts. So it’s a big challenge.

The nationwide focus on automaker recalls gives ARA the opportunity to address consumer safety and do a better job of working together with other stakeholders to address that major concern.

The number of hybrid and electric vehicles is growing in the end-of-life vehicle stream. What opportunities and challenges do those vehicles present for automotive dismantlers? On the safety side, professional automotive recyclers must be well-trained on how to dismantle hybrid and electric vehicles, and ARA is seeking additional information from the manufacturers to make sure each step is done properly and safely. To help recyclers, ARA offers a Hybrid Dismantling Guide, and our Technical Advisory Committee currently is updating that document.

Certification has become important in the scrap recycling industry to help distinguish those who aim for the highest standards of safety, efficiency, and environmental protection. Has certification taken hold among automotive dismantlers as well? The automotive recycling industry places the same importance on certification as the scrap recycling industry. Two cornerstones of ARA are our Certified Automotive Recycler and Gold Seal certification programs.

The CAR program—created in 1994—provides a set of standards for general business practices as well as environmental and safety issues and offers guidance for member facilities seeking to adhere to those standards. In general, CAR facilities strive to provide quality service and parts as part of the professional automotive recycling industry.

The Gold Seal program, open to CAR-certified ARA members, ensures excellence in customer satisfaction by requiring recyclers to provide improved customer service, quality parts with accurate descriptions, reliable on-time deliveries, and written product warranties. The program—which the Automotive Service Association (Washington, D.C.) endorses—also includes a customer complaint system, minimum customer satisfaction index score standards, and mechanical parts warranty, and it requires all Gold Seal members to use the ARA parts grading system.

To remain competitive, automotive dismantlers are mining more value from each end-of-life vehicle. What are the best, most current ways to do that? After the removal and sale of reusable parts, the highest value from an end-of-life vehicle comes from the removal and sale of various core parts, generally to be rebuilt. Automotive recyclers continue to go “deeper into the car” to glean more value from each end-of-life vehicle. One way is by selling small parts they previously overlooked or scrapped, such as key fobs. The increased sale of used tires also results in a significant reduction in tires going to shredders and ending up in the shredder fluff. More and better information from automakers regarding the parts on any given vehicle will increase recyclers’ ability to reuse and recycle more metallic and nonmetallic components from each automobile.

Also on the opportunity side, vehicles are pretty much computers on wheels these days, and automotive recyclers must be able to sell those electronic parts. The problem is there are barriers that make it difficult to reuse such parts. Many electronic components, for instance, must be reprogrammed, and the cost and cycle time to do that diminishes the opportunity to sell those parts. In addition, some of the electronic parts are VIN-specific, so they can’t be reused in any other vehicle.
 
How have today’s low scrap commodity prices and low demand affected auto dismantlers? The lower prices of steel and nonferrous metals have had a huge impact on the industry. Many of our members say they are holding onto their scrap, waiting for prices to go up. Unfortunately, the dramatically lower steel prices have forced some operations to close their doors, as scrap was a considerable part of their business platform.

The weak U.S. dollar has been another area of concern. It has given out-of-country buyers a market advantage in the bidding process at salvage auctions, leading to a significant increase in the number of these vehicles being exported. The stronger euro in recent years, for example, has allowed European buyers to offer higher bids in terms of U.S. dollars than American automotive recyclers. Such currency differences make it much more difficult for our members to successfuly purchase late-model vehicles at auction.

How are counterfeit auto parts affecting automotive dismantlers? ARA has long cautioned the automotive repair industry and consumers about the dangers of counterfeit automotive parts, in particular counterfeit air bags. We have had several meetings with National Highway Traffic Safety Administration representatives to discuss this issue and that agency’s October 2012 consumer advisory warning about the prevalence of counterfeit air bags and the proven role nondeployed, recycled OEM air bags have played as a viable alternative to new OEM air bags in repairs. Additionally, Obama administration officials invited ARA representatives last year to meet with White House policy staff responsible for coordinating the federal government’s efforts on intellectual property enforcement issues. The meeting focused on counterfeit automotive safety parts and included an in-depth discussion of automotive recyclers’ important environmental and economic role in the automotive supply chain.

The administration’s intellectual property team currently is in what it calls the “exploratory phases of a potential initiative aimed at securing the automotive supply chain against counterfeit safety parts,” with a focus on safety parts that have explosive charges such as air bags and seat belt pre-tensioners. The group’s stated goal is to create a “series of best practices to strengthen the supply chain.”

Competition from illegal operators is another market challenge. When did this problem develop, and how is it hurting legitimate automotive dismantlers? Access to large quantities of quality salvage vehicles is critical to the professional automotive recycling industry. The flow of salvage vehicles has moved into the Internet age and across international borders, however, which has made it easier for illegal and/or unlicensed businesses to gain access to these vehicles. This creates an unlevel competitive playing field that is extremely harmful to our industry. Unlicensed and unregulated operators also can help perpetuate fraud and other illicit activities that put automotive consumers and the general public at risk. The key problems are insufficient oversight and the lack of uniform standards for online Internet auctions of salvage vehicles as well as a lack of uniform vehicle titling in the United States.

ARA maintains that licensed businesses are best qualified and equipped to acquire and dismantle salvage or end-of-life vehicles and sell the recycled OEM parts in accordance with federal, state, and local laws and regulations.

Will the proliferation of self-serve used auto parts facilities eventually be the death knell for full-service parts operations? The increase in the self-serve sector is resulting in an overall expansion of the industry as it provides another alternative to customers, often at a greatly reduced cost, thanks to the do-it-yourself component. But when customers can’t find the desired part in a self-serve yard, they generally will turn to a full-service parts operation. The two sectors are complementary rather than competitive.

Do you expect the automotive dismantling industry to continue consolidating and vertically integrating with scrap recycling companies? We continue to see consolidation within, and between, the scrap and automotive recycling industries. It isn’t a matter of vertical integration, but rather the natural desire to increase efficiencies and reduce costs. There’s no reason to believe those dynamics will change. The one fact that doesn’t change is that the two industries are different and success in one surely does not ensure success in the other.

What’s the automotive dismantling industry’s next big challenge? How can the industry prepare for it? The biggest challenge for professional automotive recyclers, now and in the foreseeable future, is access to OEM parts numbers and build-sheet information. This issue impacts our members at all stages of their businesses, from information used when buying cars at auctions to inventory management to customer sales. Access to OEM parts numbers and build-sheet information would allow recyclers to harvest more parts from each vehicle, allowing them to potentially bid more for vehicles at auction and, in the end, giving them a higher return on their investment. To reach this goal, recyclers would need a one-to-one connection between the OEM parts data and the Hollander interchange numbers. Given today’s historic number of safety recalls, it’s critical for recyclers to have this information so they can track parts through their entire life cycle.