Opportunities in the Circular Economy: Recycled Automotive Parts

Automotive parts recycling is one of the most established examples of a scaled and comprehensive closed-loop recycling system. Each year in the U.S., an estimated 85% of materials from vehicles that reach the end of their useful life due to collisions or mechanical failure are recycled in some capacity.¹ This sector provides a crucial source of replacement parts for the collision and mechanical repair channels, automotive rebuilders and remanufacturers, and do-it-yourself (DIY) consumers, in addition to being a reliable source of feedstock for several important recyclable commodity markets.

Recycled parts present a significant value proposition with comparable quality and fitment to original equipment manufacturer parts at a fraction of the cost. In addition, recycled parts often offer superior value and performance relative to aftermarket or remanufactured components where quality can be questionable. In a world where part reliability and availability are paramount, recycled parts are a compelling alternative for industry operators seeking to maximize bay efficiency, keep replacement costs down, and drive profitability.

In this article, senior professionals from our Transportation & Logistics Group and Business Services Group discuss what the recycled automotive parts landscape looks like today, how a handful of scaled operators are outperforming the sector, notable factors related to the customer landscape, and what investors should keep in mind when considering how the space will evolve.

How Does the Recycled Automotive Parts Industry Work Today?

Joe Conner, Managing Director: Automotive parts recycling is an industry in which demand
always outstrips supply, with the need for in-demand replacement parts perpetually exceeding parts availability. The sector is primarily composed of full-service recyclers that purchase vehicles from auction; dismantle, clean, and catalog high-demand parts and components; and then resell that inventory to a broad range of automotive service and repair customers. This creates a circular economy of parts. A significant portion of the value of these parts is recognized within the first several months, as the most sought-after, in-demand parts are quickly removed from salvage vehicles and processed for sale. The remaining parts transition to shelf inventory, and the residual components of the vehicle are crushed and sold on the commodities markets – from post-auction transfer to out-processing of residual scrap, vehicles are often in the yard for under a year. 

Elliott Yousefian, Director: Additionally, increased vehicle cost and quality yield continuous increases in vehicle useful life, which necessitates more part replacements over a longer period. The forces driving increased vehicle useful life also drive the importance of the recycled automotive parts ecosystem. In an industry where part availability and price are top of mind, platforms able to scale operations have a tremendous advantage and drive profitability in a way that smaller operators cannot. Larger players that can leverage robust datasets and industry expertise can optimize their bid pricing on salvage vehicles and provide a network of dismantlers with more vehicles for processing and parts for sale. Consolidated dismantlers also feed interconnected inventory sites and deliver higher fulfillment rates with shorter lead times. 

What Does the Recycled Automotive Parts
Landscape Look Like? 

Conner: To understand today’s landscape, it’s helpful to look at the evolution of the industry. Automotive parts recycling was born of necessity, as the dollar value tied up in vehicles and the amount of disposable material from vehicles pushed consumers to consider cost-effective recycled parts. As automotive service centers proliferated the U.S. landscape, so did automotive parts recyclers. Given the largely business-to-business nature of the market, it’s hard to appreciate how big the market is with the vast majority of scaled recyclers operating outside of the consumer eye. 

Yousefian: Another important element driving growth in the market is the end customer; the U.S. has seen a substantial shift in consumer preferences from DIY to do-it-for-me repair and maintenance in the past 40 years. That change in preference has driven massive growth in the professionalized repair channel and a step-function change in the sophistication of many operators. While there are still many boutique automotive parts recyclers serving DIY customers in niche and rural markets, there are numerous recyclers in the country each turning over annual inventory of thousands of vehicles, most of which are still independently owned and operated. 

What Are Leading Operators in the Sector Doing to Win? 

Graham Gillam, Managing Director: The importance of technology-enabled operations in this space cannot be overstated. Gone are the days of dismantling technicians walking the yard to confirm that a component is in stock. Scaled operators are filling procurement requests across an ecosystem consisting of millions of unique parts, and sophisticated, real-time inventory insight is critical to meeting customer expectations for fulfillment time and order accuracy. The most sophisticated operators in the industry are leveraging technology and real-time data to ensure they’re anticipating inventory needs and aligning with the evolving nature of the vehicle parc as vehicles age out and regional vehicle preferences evolve. 

Conner: Fulfillment time is a vital concept to understand. Mechanical and collision repair providers are hyper-focused on driving bay efficiency to maximize profits and deliver a high-quality customer experience. In instances where a vehicle is waiting in the bay for parts to complete a repair, replacement part availability is measured in hours, not days. The cost of delays is real and measurable, in terms of both the cost of a rental vehicle to the insurance carrier or customer and the loss in overall shop throughput, which can severely impact the bottom line. 

Gillam: Investment in network expansion is an essential lever that operators use to excel in fulfillment capabilities. Proximity is an important factor for repairers that need same-day or next-day delivery, and the ability to source parts within the network quickly and accurately is critical to an automotive parts recycler’s success. While every player in the space leverages brokered sourcing to meet customer demand in their respective markets, the favorable sales and margin impact from higher fill rates can be profound. Further, there’s a compelling scale benefit from network effect inherent in these operators. They can drive improved fill rates as they scale operations and tap into a broader assortment of parts across their operations that can quickly drive sales gains as customer needs are more routinely met. The economic argument for scale in this sector is very compelling. 

What Factors Should be Considered Related to the Recycled Automotive Parts Customer Base?

Yousefian: The recycled automotive parts customer base is broad and fragmented, but the largest channel participants are collision and mechanical repair shops buying recycled parts to complete repairs for insurance carriers and vehicle owners. For these customers, timing and cost are key considerations. The collision repair segment, for instance, is expected to grow 4% annually through 2026.² Within the collision channel, vehicle complexity has caused the average cost of repair to increase 70% over the past 10 years, and insurance companies are focused on mitigating ballooning repair bills.³ 

In the mechanical service channel, technicians and the vehicle owner are the primary decision-makers when selecting replacement parts to complete a repair. With the average age of a vehicle on the road approaching 12.5 years, the need for out-of-warranty repairs continues to grow, and the mechanical service channel is expected to grow 2% annually through 2025.⁴ Recycled parts represent a compelling value proposition for repairers and vehicle owners to get vehicles back on the road with high-quality parts at a more economical price point. 

Conner: Market consolidation is another important factor driving buying behavior in the industry. While the collision and mechanical repair channels remain highly fragmented, several public and private equity-backed platforms have recently accelerated their pace of M&A, and now possess meaningful market share in many of the country’s large MSAs. Although they all utilize recycled parts to varying degrees, one of the commonly noted impediments to shop efficiency is the variability in parts availability, quality, and order accuracy. There’s a significant opportunity to drive growth by serving the large industry players and delivering quality, reliability, and speed at scale. These operators are also focused on managing down the size of their vendor lists to consolidate spend and streamline relationship management. 

What Should Investors Keep in Mind as They Think About the Future of the Space? 

Conner: Investors should take note of the whitespace within the recycled automotive parts ecosystem. The recycled automotive parts ecosystem remains highly fragmented, and there is ample room for numerous regional, super-regional, and national players of scale to grow alongside LKQ, the largest national automotive parts recycler. In response to the emergence of LKQ's national reach, many independent parts recyclers formed trade networks in an effort to capture the benefits of scale. These relationship-driven networks remain intact today and have driven commonality across the sector in terms of network interactions, transportation, and technology. Several growing private equity-backed platforms have effectively leveraged these networks as a medium to generate dialogue with independent operators interested in growing alongside a larger platform. Importantly, the commonality of operations and systems helps ensure seamless and low-risk integration that enables operators to quickly capture the benefits of scale arising from acquisitions. 

Yousefian: Another topic that reinforces my positive long-term outlook for the sector is the long-term proliferation of electric vehicles. While this trend is a long way out from being meaningful to aftermarket players, the role of electric vehicles in automotive parts recycling is beginning to be recognized. Scaled parts recyclers are uniquely positioned to source, consolidate, dismantle, and transport vast amounts of recyclable electric vehicle components. In fact, their expertise within the automotive recycling auction channel, transportation sophistication, and dismantling skillset leads me to believe that they will be one of the key long-term beneficiaries of this trend. 

Gillam: As the recycled automotive parts landscape evolves, so will its investment considerations. Specific to the European automotive parts recycling landscape, we’re seeing more government mandates for recycled content thresholds, adding a regulatory element to this sector. The favorable impact to the U.S. market from the eventual adoption of similar mandates, even if only in select markets, will be significant. The recycled automotive parts space is the starting point for the automotive circular economy, and I would encourage investors to consider the sustainability contribution of automotive recycling in an ESG analysis. 

Notable Recycled Automotive Parts Players

To discuss M&A opportunities related to automotive parts recycling, including companies to watch in the sector, contact our senior professionals. 

1. Automotive Recyclers Association 

2. Auto Care Factbook. Published by Automotive Aftermarket Industry Association in 2023

3. Auto Care Factbook. Published by Automotive Aftermarket Industry Association in 2023

4. Auto Care Factbook. Published by Automotive Aftermarket Industry Association in 2023