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Tuesday, August 16, 2016

Visit to Fox Recycling

Prof Mike Smitka

composite of student blog posts

In May 2016 I led students to Detroit, where we visited a wide array of auto-related businesses, as well as seeing something of the city and talking to residents (Tyree Guyton of the Heidelberg Project) and Martin Lavelle of the Detroit Branch of the Federal Reserve Bank of Chicago. This is the first of several posts that will convey student observations made in their online journals and blog posts. All the underlying material can be found at the W&L WordPress site for Economics 244. I've cut-and-pasted pieces, with prose to smooth the flow, but tried to maintain the voices of my students so am deliberately leaving it a bit choppy.

This post combines material from Barrett Snyder, Michael Adams, Elizabeth Platt, David Hochstadt, plus snippets and photos from others. Due to cutting and pasting, I've not attributed everything. Particular thanks are due Barrett Snyder, who set up our visit.

Class began the morning of Thursday, May 12th by traveling from our base at the Best Western Greenfield to Belleville, Michigan, about halfway to Ann Arbor. There we visited Fox Auto Parts, which has been in business since 1973. Here we met with Bill Fox, one of two brothers, who own both an automotive recycling facility and a self service “pick and pull” style yard. Mr. Fox explained to us the process of purchasing totaled vehicles from two main auction companies, Insurance Auto Auctions and Copart, and how cars are dismantled and parts are sold to body and mechanics shops. Mr. Fox stressed the importance of purchasing the correct number of vehicles and of the correct type in order to turn a profit in a business model with such slim margins and high overhead. Auctioned vehicles run between $1,000 and $10,000, depending on the model and the condition; the average acquisition price is about $1,800. Each day Mr. Fox checks out insurance auctions online and bids on several different cars electronically. If a vehicle is not from the 40+ acre IAA facility that is located adjacent to their property, then then have to pay shipping costs as well. The focus is on relatively new vehicles; the average car is less than 10 years old. After that demand falls off, both because there are fewer vehicles left on the road, and because fewer people are willing to pay the cost of installing a "new" engine in a car that age.

Elizabeth Platt added notes on the process. The first stop was where the cars are brought in and the major parts are removed to be sold. While software helps Mr. Fox estimate of what the car is worth, until they actually get the vehicle they cannot know exactly which parts are salvageable. We watched them go through some of that process, as they inventoried a newly arrived vehicle for what sections of it seemed to have no damage – which lights appeared good and so on. They we visited the area where a power train was being dissembled and checked for leaks and other signs that it might not be good. There was also a bay where everything had been stripped all the way down to the frame of a F-150. Anyway, each pulled part is categorized with a tag to be easily accessible to be sold in the future. But once they've assessed the extent of the damage to the car and categorize all the parts from the car which they can sell, they then leave most of them on and use a forklift to put it in their yard. Then if they get an inquiry, their computer will let them know if they have a car where that part is undamaged out in their yard. That's a lot easier than pulling, categorizing and storing parts that might never sell.

The software used to purchase vehicles is called “Bid Buddy” and helps to generate a maximum bid for a vehicle by using a formula that accounts for part sales, activity, and current inventory. We also discussed the cooperation between independently owned salvage facilities. The greatest example of this was the PRP trailer system that runs across a good portion of the nation, used to transport brokered parts between recycling facilities to fulfill each others needs and help say “yes” to the customer more and more often. The network is run jointly by 80-odd recyclers, ranging from the Snyder family business in Texas at the southern extreme, through the midwest and into the northeast. Depending on locus a recycler gets a truck twice a day that can transport a body panel from Texas (no salt on the roads so no rust!) to Fox to sell to one of their customers. Fox in turn has a copious supply of Fords, including F-150s, and they may be sending a transmission from Michigan to Texas.

Sam Wilson noted that this cooperation was not just at the institutional level but also at the individual level. Not only did the owner of this yard know the father of Barrett Snyder, a member of our class whose family has owned and operated its own Auto parts yard for a long time in Texas. Barrett’s father had actually helped this owner expand into a secondary line of revenue, a You-Pull-It yard. The YPI yard was set up with many rows of cars by the same manufacturer and individuals could pay two dollars to enter the lot, search the cars and pull off/out whatever pieces that they needed. They paid a discounted price at the end for whatever they wanted to take home. From what Barrett explained, this is really becoming the larger end of the market down in Texas. This market is mainly made up of individuals who have some auto background and either: 1) are rebuilding for fun and need specific pieces for as a weekend hobby, or 2) their car broke down and rather than spend lots of money to take it to a repair shop will come to the yard and get the piece they need to be able to get to work on Monday.

They also have to judge how long to keep a car in inventory, as it uses both working capital and physical space – they keep their lot, which holds a bit over 900 vehicles, relatively full. We were all impressed that despite the outward appearance of the business as dirty and labor-extensive, it relies on a lot of technology. In addition to using a packaged computer program to assess the value of a car before bidding, Fox uses algorithms to track how often customers request certain parts based on inquiries and customer feedback; their sales staff do a lot more than just answer the phone. This information allows Fox to be sure to have high demand parts in stock at all times. The owner stressed to us during our visit that Fox is not competing directly with other salvage yards but is instead competing against auto parts stores such as Advance and NAPA, and even the OEMs. (For example, OEConnection uses their database of repair parts as the foundation for software systems that they sell to OEMs such as Ford, to help their dealers sell parts to independent repair shops including the in-house ones run by cities and other "fleet" operators.) Anyway, these national chains of parts shops and new car dealerships are the big players, along with a few large, publicly traded companies like LKQ that Fox and Snyder fee offer you poor service and a poor product because they lack the family touch.

Henry Schwartz noted that the cars are placed outside for an average of six months during which time Fox sells every part off the car that they possibly can. They can pull wires (copper), catalytic converters and other items of value. The car will be crushed and sold for scrap steel. (The don't have a shredder – for that stage of the recycling process see this blog post on the Prof's visit to one in Japan.) After six months Fox will only scrap a car after they have broken even on it by selling parts to customers. As Mr. Fox pointed out, more that 80% of the overall vehicle that comes into a facility is recycled, making it the “greenest” portion of the auto industry. Many people don’t realize that the shops that do insurance repairs for the public often use recycled parts. After receiving their vehicle back, most would assume that the parts used were brand new. All the while, that fender or windshield wiper motor that was installed is now living its life again in a vehicle instead of residing in a land-fill.

Platt was fascinated by the YPI yard. That business model illustrates how a company can make profit on items that would otherwise be discarded. By cutting out the cost of labor, the part can be sold for less and also attracts consumers seem to truly enjoy the process of finding parts and fixing their own cars. What however are the legal liabilities of this process? The customer must sign a release form and pay an admission fee, and bring their own tools, but the potential for accidents is still there. The owner did not go into detail about this. Nate Frank, another student, wondered if the ROI wasn't a lot higher in the YPI yard, as the 900+ cars in their main yard (plus the warehouse and so on) represents $8-$10 million.

David Hochstadt noted that there has been a decline in mid-sized salvage companies, many of which have been bought by larger, publicly traded companies. The smaller, family operated firms are left to fend for themselves and face the dilemma of either expanding or risking going under. Fox currently purchases around 100 cars per month whereas a firm like Barrett’s family will buy closer to 200 per month. The business is very fixed cost driven, building structures around items and engaging in capex intensive purchases like construction equipment and warehouse space, in order to move things around and store parts. In order to continue operating an expand, Fox needs to make shrewd decisions in terms of the price they pay at auctions as this will increase their margins and allow them to hire more employees, purchase more vehicles and expand their operations. It was amazing to see how much of a car can be reused even after it has been in a wreck and deemed totaled by insurance companies: everything from transmissions and engines to things like wire harnesses (as they have the highest concentration of copper in a car) and steering columns. He asked about the future of the car industry and how it would affect salvage companies as the average model year has been getting younger. Will they be able to salvage things like rear-camera systems, safety-critical parts where they would find it hard to judge whether they are truly without damage? In the next couple decades, won't the biggest threat to salvage companies be the shift to autonomous cars, as this would lower the number of accidents, hurting both how they obtain cars – supply – and demand for parts?