CAR REFINISHES

(This case is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Wim P.Smit) Introduction This case is situated at the end of the 1970s in the coatings industry. Akzo Coatings, a major player in this field is facing a strategic question: Should Akzo Coatings enter the USA market for car refinishes? In this paper the most relevant issues are discussed, but more details will be elucidated during the seminar. The coatings industry; a short overview. At the end of the 1970s the coatings industry has an estimated sales value of some EUR 25-35 billion world wide with over 20.000 paint manufacturers. Volume growth is moderate and is particularly in the industrialized world slightly below GDP growth. The market is highly segmented. About half is architectural paint for the building industry, professional painters and consumers (do-it-yourself). The other half consists of a large variety of industrial applications ranging from the automotive industry (OEM), car refinishes (car repair), marine, protective, aircraft to many other industrial applications. There is also a range of technologies available to apply the coating on the substrate. The main trends are Ongoing concentration of paint manufacturers, customers/ distributors and raw material suppliers, An increase of scale and geo scope, Increasing pressure of legislation, e.g. environmental regulations. As a result the following tendencies can be observed Increasing product and service differentiation, A shift from product to service, Increased efficiency: less organic solvents, waste and number of paint layers Technology evolution from solvent borne to water borne paint, high solids, powder coatings and radiation curing systems.

The degree of concentration in the coatings industry is dependent of the characteristics and the critical success factors of the different market segments. For instance automotive coatings is a world market in which only a few big players are active. This has to do with the extreme high requirements as to paint quality in combination with the complex application technology. Moreover the automotive industry the customers is a concentrated industry itself, consists of big companies, most of them operating worldwide. The aircraft and marine have to a certain extent the same characteristics. On the other end of the spectrum the architectural paint market is highly fragmented. This market has many characteristics of a consumer market, which is organized regionally or locally. The segment of car refinishes (CR) At the end of the 1970s the market is not yet a real world market but still divided into major areas. The markets in W-Europe and the USA are each dominated by a limited number of large players ,mostly part of big chemical companies. The remainder is shared by small competitors operating at local level. The required technical capabilities are high. Automotive coatings should meet the highest level of technical requirements, such as durability, gloss, flexibility etc. Moreover, particularly in the case of car repair coatings color match precision is of utmost importance as well as access to all car color formulas (more than 10,000). Moreover there are different coating technologies in use. To secure a competitive position, patents, brands, reputation and market coverage through a wide distribution network are important. The West European market is not a uniform market. Countries are within different stages of economic development; market sizes differ due to a large number of factors (e.g. car park, accidents, insurance practices, weather, population, general economic conditions) and differences in environmental legislation exist, restricting the allowed

Wim P.Smit

Coaching in Strategy

Akzo Car Refinishes

emissions of volatile organic compounds (voc). The end users Car refinish paints are sold to so-called body shops (car repair shops) mostly via wholesalers. The car repair and body shop business is a relatively easy and inexpensive business to enter. Therefore, many of these operations are small in size and inadequately equipped. A body shop with a turnover of EUR 700,000.- and 12 employees has already an above average size. The proprietors and workers in body shops tend to be poorly educated. Generally these workers cannot be considered professionals. The training they receive must be considered on-the-job training. Labor cost is the largest part of the total cost of a refinishing job. The cost of paint is a relatively small portion. The non-professional nature of this sector has certain implications for marketing. From a technical point of view, the body shop is totally dependent on the knowledge and service of the wholesales and paint companies. Once a worker has learned how to use a certain brand of paint or equipment, he tends to continue using it and is reluctant to switch. Future trends are virtually unrecognized by body shop owners and personnel. They have little insight in the direction the industry is taking, the effect of technological developments and how government can impinge on their daily business operations. Although the above profile holds for a large part of the body shop sector, there are body shops that have the ambition to improve their performance and increase their professional level by investing in equipment and training. This high-end segment is expected to grow above average among others due to environmental regulations and technological developments. Other parties involved in the car repair market are customers ok the body shop, insurance companies who mostly pay the bill, dealers, car manufacturers and suppliers of equipment such as spraying booths.

Akzo Coatings and its position in the car refinishes market. Akzo Coatings (Acoat) is the coatings division of Akzo, a diversified chemical company active in the field of synthetic fibers, basic and specialty chemicals, coatings and pharmaceuticals. The coatings division is active in almost every segment of the coatings industry. During the late 1960s and early 1970s Acoat has grown to a large extent through acquisitions. The original operating companies remained relatively independent during the early 1970s. In 1974 the three main operating companies i.e. Sikkens (NL), Lesonal (D) and Astral (Fr) were merged. In car refinishing paints the total turnover was about EUR 45 million. Although these companies were not yet integrated and which had been competitors for decades, the following objective was formulated: We want to become leading world wide, technologically as well as commercially with one assortment of products, colors and tools. To that end, a technically oriented marketing concept, first developed in The Netherlands, was successfully introduced in Belgium, Germany and the UK. (see ANNEX) Due to successful innovations, technically as well as commercially, Acoat belongs to the top-4 CR suppliers in W-Europe at the end of the 1970s. Around 1978 the question is raised whether Acoat should enter the CR market in the USA. Some other European coatings suppliers with more or less comparable products have made an attempt to build up on their own strength, without acquisitions a position in the USA, but failed. On the other hand some big USA based coatings suppliers are making inroads in W. Europe, and it looks like they will succeed.

The CR market in the USA. The size of the market is estimated at about USD 900 million, based on selling prices to body shops. Volume growth is estimated at 2% annually. Due to differences in car density (cars/ sq. Mile), this potential is unevenly distributed over the USA.

Wim P.Smit

Coaching in Strategy

Akzo Car Refinishes

An estimated 80% of the total consumption is channeled through wholesalers (called jobbers in the USA); the remainder is direct sales particularly to the larger body shops. The most important factor impacting on market position is market coverage, that is the extent of the distribution network. The jobber a store front business is the main supplier to the end users. It is a paint manufacturers quest to have as many jobbers located in the prime markets. Therefore the selling & distribution cost is a substantial part of the total cost of the paint: some 30%. Two types of jobbers can be identified: specialty paint jobbers and general automotive part jobbers. The specialty jobber typically handles paint, spray equipment and other associated products required by the body shops. This type of jobber is more specialized and is capable of providing on-the-spot technical advise. For the individual refinisher, the jobber is the primary source of information. The jobber also is dependent upon as the short lead time supplier of small or large quantities of paint in a wide range of jobbermixed colors. These services make the specialty jobber indispensable to many body shops, especially the smaller ones. However most jobbers are rather passive and only simple distributors. The CR market in the USA is dominated by 4 established competitors, viz. Du Pont, PPG, Sherwin Williams and Inmont. These 4 players together have a market share of 80%. Du Pont and PPG are operating worldwide. The opinion in the market is that their paint quality is good but that these companies are not very customer-oriented as to service and support. They are considered to be rather complacent. By and large, the market characteristics in the USA are more or less comparable with those of the European market. However there are some differences. Body shops in the USA are generally lagging behind with respect to quality, equipment, working conditions, productivity and management, but a high-end segment is emerging: there is an increasing demand for top quality repair work among others induced by increasing imports of European

cars. These imports cause also the number of colors to increase. Environmental requirements for body shops are becoming more stringent. On federal level, the Occupational Safety and Health Administration (OSHA) is the prime factor. This agency is responsible for establishing and enforcing safety and health standards relate to workers and their work place. The impact on the body shops will be substantial because toxicity levels will have to be minimized. To meet these levels, spray booths are the only feasible solution. Only a minority of the body shops has such equipment.

Wim P.Smit

Coaching in Strategy

Akzo Car Refinishes

Annex
The Car Refinishes Service Concept (from: Akzo Nobel Car Refinishes:We are different published in 2002) The 1970s was a time of economic uncertainty and stagnation. Two oil crises hit hard. especially in Europe. Hard times were a problem not only for Sikkens, but also for Sikkens customers the body shops. And if body shops couldnt turn a profit. they might either go out of business, or they might choose a cheaper brand of paint. Sikkens decided to take a pro-active approach by setting up a partner program. Paul van Klaveren, who took responsibility for the project, explains. The idea was that, next to the technology of the products and technical services we provided, we could give them more on the business side. We considered the body shop owner an entrepreneur, so we offered services like economics, marketing, financial planning, advertising, and sales promotion, to get them through the hard times and give them the opportunity to really flourish in the good times. The program was launched in the Netherlands, Belgium and Germany at first, but it was later expanded to the UK, and now, under the name Acoat selected the partner program has spread around the world. Acoat selected partners are the cream of the crop the biggest and highest quality body shops.

CarInfo system as a body shop management program. CarInfo was a comprehensive management software package which included typical enterprise management components like bookkeeping and work floor administration, but the heart of the program, and by far the most complicated part, was the estimating module. Nothing like it existed at the time. In those days even a skilled body shop manager often had a very difficult time estimating the cost of a job and that put him at a serious disadvantage when negotiating with his best customers, the insurance agencies. The Carinfo system was offered for sale to Acoat Selected members at first in the Nether and Germany, and later throughout Europe. Towards the end of the eighties. Car Refinishes introduced another inspired application of computer technology-- Mixit. In effect, Mixit was a way to link the well-developed color database to the highly successful mixing machine. By connecting an electronic scale to a computerized database of the color formulations, it was possible to have the scale steer the mixing process, and even to make corrections if there was a mistake. And because Mixit was very precise,. it also helped to reduce paint usage. Even though that meant lower volumes sold, it was an important selling point. Mixit has been a major success for Car Refinishes. Another element in increasing profitability was training. During those early marketing initiatives with customers coming to Sassenheim for demonstrations and training on the application of Autocryl, they often said that a one-day program wasnt enough. The head of applications Kees Heshof, and his assistant Roy Wijdh, realized that there was a great deal more that they could do, especially, with the introduction of the color mixing machines. in mixing and tinting. They approached Henk van Prooyen with a proposal to expand the training program, and he enthusiastically gave the green light. And so, in 1974, Heshof and Wijdh established the first Car Refinishes Instruction Center CRIC for short in Sassenheim. From that modest beginning the program has grown and grown. By 2002, there were 63 CRICs worldwide, and the training has come to include courses in management as well as applications. I firmly believe that the training program and the CRICs have been very important for building up market share says Wijdh. The crucial thing in training is to listen to the customers.

We always tried to be a step ahead of the others, and I think we were quite successful at it, notes Van Klaveren. If we hadnt launched the Acoat selected program, we would not have been so successful with the big enterprises and big body shops. The innovative idea of making business services a central element of the Sikkens approach developed progressively throughout the seventies and eighties, It became an important competitive advantage as Akzo Car Refinishes launched a whole range of innovative services for customers. Once again, the company led the way and changed the face of the industry as competitors struggled to catch up. The basic idea. says Henk Groen, was that the price of paint in a painting job is perhaps 5 percent of the entire cost. So if a body shop is going to be profitable, then the other 95 percent has to be done well. And if we could help the body shop owner to improve his results, then he would be more likely to choose us. So that, for example, was the basis for introducing our Wim P.Smit

Coaching in Strategy

Akzo Car Refinishes