Illinois Supreme Court's Recent Ruling Opens A Bigger Market for Taiwan-made AM Auto-Parts

On Aug. 18, the Illinois Supreme Court reversed a $1 billion judgment against State Farm Insurance Co. stemming from a national class-action lawsuit. In rendering its decision, the high court held that a trial court had earlier erred in giving the suit class-action status.

Major suppliers of aftermarket (AM) auto body parts in Taiwan together supply more than 80% of the demand in the U.S. market for the parts. The ruling is expected to encourage more auto insurance companies in the U.S. to adopt AM parts to repair their policyholders' vehicles, primarily because the long-pending (six years) lawsuit has had the effect of showing the benefits of AM parts to consumers and auto insurance companies.

Lee Mao-yuan is chairman of Gordon Auto Body Parts Co., Ltd., a major sheet-metal AM body parts supplier in Taiwan that has a big share of the U.S. market. Lee points out that six years ago, AM parts were virtually unknown to American consumers. At that time, transactions between Taiwan AM parts suppliers and State Farm, the No. 1 auto-insurance firm in the U.S., were low in number. After the exposure that resulted from the State Farm case, Lee adds, AM parts have become much more well known.

On the other hand, the chairman continues, the quality of Taiwan-made AM auto parts has been greatly upgraded over the past few years, and all the major AM body-parts suppliers on the island have been actively pursuing mainstream certifications supported by major auto insurance companies in the U.S., such as the Certified Automotive Parts Association (CAPA) and the Manufacturers' Qualification and Validation Program (MQVP), further strengthening their competitiveness.

According to Lee, about 60% of Gordon's sheet-metal body parts are CAPA-certified items. Gordon supplies about 36% of the total amount of all CAPA-approved AM body parts in the U.S. If plastic parts are excluded, Gordon¡¦s ratio goes up to 59%. The high ratio of its CAPA-certified items has helped Gordon gain a very solid foothold in North America's AM sheet-metal body-parts market, the chairman stresses.

Because of the very positive effects generated by the final ruling in the State Farm case on future sales to auto-insurance and parts-distribution markets, Lee says, Taiwan AM parts makers' survival space is expanding and their chances to cooperate with big international auto makers and tier-one parts suppliers are increasing. Now that major American and European tier-one auto-parts makers are facing unprecedented challenges, which have led to worsening financial performances at major players such as Delphi, Visteon, Tower Automotive, and Lear, Lee suggests that Taiwan auto-parts makers should seek more product certifications and technical upgrading in order to win more business opportunities and profits.

Raymond Wu, president of the Tong Yang Group, the largest AM auto-parts conglomerate in Taiwan, also comments that the State Farm final ruling is expected to trigger a domino effect that encourages more and more auto-insurance companies to adopt AM parts to repair insured vehicles.

"Taiwan's AM body-parts makers' production lines will be running at full capacity, " Wu points out, "if the current 5% adoption ratio of the island's AM parts increases in the U.S. market."

When the ruling was publicized, industry sources say, the stock price of Keystone Automotive Industries Inc., the leading American distributor of replacement collision parts, climbed immediately by 8%, and the company has placed a two-month emergency order for AM plastic and sheet-metal body parts and AM auto-lamps. The emergency order from Keystone, according to some local industry insiders, has moved up the peak sales period for AM parts to September from their traditional high in the fourth quarter.

According to Keystone's recent announcement, "The Illinois Supreme Court decision overturning a lower court ruling in a national class action case involving aftermarket crash parts-Avery vs. State Farm Insurance Co.-represents a significant victory for consumers, as aftermarket collision replacement parts are a high quality, cost-saving alternative to original equipment."

Richard L. Keister, president and CEO of Keystone, points out that "The collision repair market is a US$16 billion industry that is 76% controlled by automobile manufacturers. With an estimated 20% to 40% savings over those parts supplied by the automobile manufacturers, the utilization of aftermarket generic collision replacement parts by the collision repair industry represents an important alternative for consumers-analogous to benefits to the healthcare industry from generic brands."

Industry sources point out that six years ago, when the State Farm case began, almost all of Taiwan's major AM body parts suppliers suffered at least a 40% decrease in annual revenues, and the case's influence on their sales continued for about three to four years. Most AM collision parts suppliers began turning profitable two to three years ago as the affects of the case gradually decreased.

(Sept. 2005)