Challenges facing auto salvage firms

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The recession has devastated the worldwide car market, but it’s also affecting other firms in all aspects of the auto business, from auto parts salvage to auto insurance.

The idea of making money from used auto parts conjures up images of thugs in chop shops tearing apart fancy stolen cars. But auto salvage is a perfectly respectable business, and Chicago-based LKQ has turned scavenging into a science. Since 1998 a group of former Waste Management executives have been revolutionizing a mom-and-pop industry by rolling up dozens of scrap yards that turn junkers into usable parts, and convincing insurance companies and body shops that recycled parts are just as good as ones straight from the manufacturer. After the company went public in 2003 the stock returned better than 500% through its peak early last year, landing LKQ (the name stands for Like Kind and Quality) at No. 58 on our 2008 Fastest-Growing Companies list. “Basically, they’ve got thousands of acres with a bunch of cars lying around,” says analyst John R. Henderson of Morgan Keegan. “But there’s a lot of money in ripping them apart.”

LKQ (LKQX) hit the skids last year. As commodity prices tumbled in the second half, the company was getting dramatically less for the material sold to scrap-metal dealers. Earnings fell about 40% in the fourth quarter. The company also suffered from a little-known side effect of recessions: falling insurance claims. People were driving less (3.4% fewer miles in 2008, according to the Federal Highway Administration), and many cash-strapped drivers chose to go without repairs rather than pay the deductible. Auto claims were down about 4.5% industrywide last year. Overall, LKQ’s growth (not counting acquisitions) slowed to just 0.7% in the fourth quarter. Its share price tumbled 60% from its peak, to under $10.

Yet analysts have not given up on the company, and many believe it’s a bargain. Nine rate it a buy, against five holds. At its core, harvesting scrapped cars is still a very profitable business. With a national feed of daily pricing information, LKQ’s buyers know exactly how much to pay for a vehicle (the company bought nearly 150,000 of them last year). And with a broad customer base, they’re assured of selling whatever parts they can find. That’s not the case for a local or regional operation, which isn’t as sure of its supply of wrecks or demand for parts. Typically, a junker LKQ buys for $1,700 yields at least $3,600 in revenue, according to Henderson.

Over time a recessionary environment may actually be good for LKQ. Insurance companies are cutting premiums, and have had huge losses in their investment portfolios. They’re looking to save money, and one way is to put more pressure on the body shops they work with to use cheaper recycled and generic parts. In the past a big worry that insurance companies had about such parts was the reliability of supply. Typically, scrap yards and generic suppliers could offer only about 45% of the parts insurers ordered. But LKQ, with a national footprint, plus its 2007 acquisition of generic-parts importer Keystone, fills 65% of orders, according to analyst Nate Brochmann at William Blair.

As the article points out, the auto insurance business is being affected in many different ways. Claims are down, but they are also cutting premiums. It’s probably a great time to go shopping for auto insurance.

  

History of the Corvette Z06

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Here’s a great photo of a sexy girl with a killer red Corvette, although as a couple of our readers pointed out, it’s not of the Z06. (We’re amazed that they even saw a car with her standing in front of it!)

Nevertheless, here’s a history lesson on the Z06:

Corvette’s legendary Zora Duntov first brought forth the concept of Z06. Though the Automobile Manufacturers Association had encouraged a ban on racing in 1957, which the GM chairman strongly supported, Duntov knew customers would continue to race Corvettes. In the midst of planning for Sting Ray production, Duntov suggested it was in Chevrolet’s best interest to continue with parts development to benefit racers. Thus, Duntov and colleagues created “RPO Z06” as a special performance equipment package.

The RPO Z06 package first offered on ’63 models included a 20 percent larger diameter front antiroll bar, a vacuum brake booster, a dual master cylinder, sintered-metallic brake linings within power-assisted Al-Fin drums cooled by front air scoops and vented backing plates, larger diameter shocks and springs nearly twice as stiff as standard.

These Corvettes came to be known as known as the “Big Tanks” because the package initially had a 36.5-gallon gas tank versus the standard 20-gallon for races such as Sebring and Daytona. At first, the package was only available on coupes because the oversized tank would not fit in the convertible.

The Z06 was resurrected in 2000 and has been around ever since. The photo above has a recent model, and a beautiful model to go along with it!

  

Hummer might move to Tennessee

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Fritz Henderson said today that the deal to sell the Hummer brand is proceeding.

“The purchaser for Hummer is going through the approval processes in China,” Henderson said. “We’re cooperating with them. The purchaser is professional, well-advised and has done a huge amount of work. We’re supporting the process. Our expectation is that this deal can get done.”

Sichuan-based Tengzhong, a Chinese firm that builds heavy-duty commercial vehicles, is in the process of buying Hummer. Earlier, in a live Web chat on the GM FastLane blog in early June, Henderson said Tengzhong “offered the best overall alternative, and we did not have (a) broad portfolio of other buyers.”

Meanwhile, Hummer is checking out locations for its new headquarters.

Hummer, the sport utility vehicle manufacturer in the process of being spun off by General Motors, has had early discussions with Williamson County officials about relocating the company’s headquarters here, officials said.

In late June, Hummer Chief Executive Officer Jim Taylor said in an interview the company was examining the areas around Detroit as well as Nashville for the possible site of its new corporate headquarters.

Nick Richards, Hummer spokesman, confirmed this week that the automaker has had preliminary discussions with Williamson County economic development officials.

“We’ve had some initial discussion with folks in Williamson County but it’s too early to say what our plans are,” Richards said. “Right now we’re looking at all viable options for the future Hummer headquarters.”

Matt Largen, county economic development director, confirmed the recent discussions though he declined to provide details.

Chinese manufacturer Sichuan Tengzhong Heavy Industrial Machinery Co. is slated to buy the General Motors unit in a deal some expected to be finalized later this year. That deal still needs a final sign-off from the Chinese government and recent reports say China’s state planning agency might reject the deal because Hummer doesn’t fit Beijing’s gas-conservation goals for vehicles.

Moving away from GM means Hummer must find separate corporate offices.

It will be interesting to see what happens to this once-hot brand that represents many of the problems facing the U.S. auto industry which focused too much on gas-guzzling vehicles. In an era of higher gas prices and a major recession, do vehicles like the Hummer H3T pictured above have a future? Of course it can possibly survive as a niche brand, but it will be interesting to see how the brand evolves under new ownership in this new environment.

  

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