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INSIGHT Inside this month's issue...

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Letter to the Editor

Articles

State Farm Vows to Continue Fight in Non-OE Parts Case

NABC Announces President’s Award and PRIDE Awards

NOF Corporation and BASF Coatings Form Coatings Joint Venture in Japan

PA Court Throws Out Diminished Value Suit

GM Introduces Performance-based Refinish Technician Certification

Caldwell NACE Keynote Focuses on Achievements and the Achievable

Canada’s Competition Bureau Finds Insurer Preferred Shops Have Not Hurt Competition

INDUSTRY UPDATE

The presiding judge on November 19 denied State Farm’s post-trial motion in the company’s $1.2 billion auto parts class-action case. State Farm said the judge’s ruling was not unexpected and will now file its appeal with the state appellate court.

In oral arguments, State Farm urged the judge to either throw out the judgments, decertify the case as a class action or order a new trial.

The nation’s largest auto insurer said it took the legal step in an effort to overcome the trial decisions that State Farm described as "a major setback for State Farm policyholders and all consumers." The company pledged to continue its fight.

As part of the oral arguments before the Williamson County, IL., judge, the insurer said that none of the plaintiffs named in the suit had proved they were injured in any way when State Farm specified generic crash parts for the repair of their vehicles.

The company cited hundreds of other evidence and procedure errors in the trial, among them:

• State Farm’s guarantee that policyholders will be satisfied with the generic parts for as long as they own the vehicle should have barred all of the plaintiffs’ claims.
• In seeking class-action status, the plaintiffs’ attorneys said they would prove all generic parts are inferior to brand-name parts. They failed to do so.
• State Farm should have been allowed to present evidence about how the very existence of generic parts promotes competition and helps lower repair costs and promote quality improvements of all parts to the ultimate benefit of all consumers.
• State Farm should have been allowed to present evidence that savings generated by the disputed parts are passed to policyholders because of State Farm’s status as a mutual company. As evidence of this, State Farm cites that in the past two years, they have returned $1.5 billion to policyholders in dividends and reduced premiums by $2.5 billion. Of course, the company does not contend this savings is the result of non-OE parts usage.

A State Farm spokesman pointed out that the case was certified as a national class action in the southern Illinois court even before the insurance company was served with the court papers. The spokesman also said the plaintiff attorneys ultimately dropped one of the original plaintiffs from the case because no generic part was used to repair her vehicle.    o

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Ed Dollar, president of the National Auto Body Council (NABC) and Chuck Sulkala, a past president of the NABC, presented this year’s NABC President’s Award and PRIDE awards on Wednesday, December 1, 1999 during the Collision Industry Conference in Atlanta, GA.

The NABC President’s Award was presented to Marco Grossi, a collision repair facility owner from Michigan. Grossi, an NABC board member has been very active promoting the NABC’s PRIDE month festivities. In each of the last two years, Grossi has held an open-house event to promote a positive industry image in his community.

The first PRIDE award announced went to Don Peers, a shop owner from Omaha, NE for his involvement with the Soapbox Derby. For the past 20 years, Peers has volunteered with the Soapbox Derby.

In accepting the award, Don, 54 years old, credited his dad for getting him involved when he was young. Don stated, "I just want to go back to about 1960. My father ran a service station 12 hours a day, seven days a week by himself. But he found the time to get involved and help me with Soapbox Derby. This one’s for my dad."

The second PRIDE Award announced went to Kelly Roe, a California shop owner, for her on-going involvement with the Hollywood Education and Literacy Program (HELP) literacy program in Hollywood, CA.

Roe urged attendees to "Shut off the TV and push the envelope a little further. Read to your children... Or, have them read to you. And, donate at least a couple of hours a week to help those around you."

The third 1999 PRIDE award presented went to Phil Cunningham of Motor Publications for his involvement helping homeless people through his church.

The fourth PRIDE Award was presented, Tim Trimbach, an Ohio repair facility owner who is involved with a children’s car seat safety awareness program called Jail ’n Bail for MDA.

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NOF Corporation and BASF Coatings AG have agreed to conduct a feasibility study for joining their entire coatings business in Japan and have signed a Letter of Intent. The partners intend to complete the feasibility study by March 2000.

NOF and BASF are currently operating two joint ventures in Japan: BASF Nichiyu Coatings R&D Co., Ltd., specialized in research and development of automotive OEM coatings, and Nippon R-M Co., Ltd., specialized in sales and marketing of automotive refinish paints.

NOF and BASF intend to optimize these two joint ventures and include them together with industrial coatings in a new joint venture that would cover the entire coatings business of NOF and BASF in Japan. It will carry out production, marketing and R&D.

Also, in a press conference in Münster, Germany, BASF coatings announced that the Coatings Division of the BASF Group achieved the best earnings result ever already in 1998. In 1999, the division will again exceed that all-time record in its business operations.

In total, BASF Coatings is forecasting sales of close to four billion deutschmarks (around E2 billion) for 1999.

According to Klaus Peter Löbbe, head of the BASF Group’s Coatings Division, "There will be significant improvements in our sales in Europe and in the NAFTA region, so largely compensating for the fall in sales in South America, which is a result of currency devaluation.

"This success is testimony to the correctness of our decision to concentrate on the core product lines of automotive OE coatings, automotive refinish coatings and future-oriented industrial coatings," Löbbe continued.

The automotive OE coatings business continues to dominate, at about 40 percent of net sales, followed by automotive refinishes at 25 percent, with the industrial coatings segment and the South American decorative paints representing 20 and 15 percent, respectively.

These figures put BASF’s refinish business at roughly DM 1 billion (E500 million), given the 25 percent share for refinish.

Within its core product lines BASF Coatings will expand its market position in 1999, "both by means of improved market excellence and through acquisitions and cooperative ventures," said Löbbe. "In doing so, we are focusing on innovative, high value added products."

Over the next five years BASF will continue vigorously to pursue this strategy, with an impressive program of capital investments totaling DM 670 million (about E340 million), a figure which does not take into account some promising and potentially high-earnings acquisitions.

Is something in the wind for refinish? If the answer is yes, BASF is keeping their cards close to the vest. In an interview with INSIGHT, Al Winterman, group vice president for BASF Automotive Refinish in Southfield, MI stated BASF’s view that an acquisition is not necessary for the growth of BASF’s refinish business.    o

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The National Association of Independent Insurers (NAII) reports that the Philadelphia County Court of Common Pleas recently joined state trial courts in other states in rejecting a class action suit that would require insurers to pay for both the repair and the alleged diminished value of cars involved in accidents.

The court stated the plaintiff’s expectation to be paid for diminished value was unreasonable and that the defendant had fulfilled its contractual obligation by repairing the car.

The Pennsylvania case of Munoz v. Allstate Insurance Company involved a plaintiff whose car was repaired following an accident. The plaintiff argued the car’s fair market value had declined as a result of the accident and the defendant should pay the difference. The court ruled in favor of Allstate stating that the plaintiff’s expectation of reimbursement for diminished value was unreasonable and that the defendant had not breached its contract.

According to Robert Hurns, associate counsel for the NAII, "Unfortunately, the growing number of questionable class action suits being filed against insurance companies costs the industry and ultimately the consumer, for the benefit of a handful of lawyers. The occasional class action victory such as the State Farm case in Illinois is a tremendous incentive and inspires lawyers to seek the pot of gold with frivolous lawsuits. These types of cases illustrate how greedy trial lawyers are abusing a mechanism originally intended to redress wrongs, and points to the need for class action reform."    o

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General Motors, working with leading paint suppliers, has developed a performance-based certification process for their dealership refinishing technicians. The new program was designed from the ground up to help ensure consistent refinish quality on GM vehicles.

Brian Dotterer of GM’s Collision Repair Tech Center explained the new program to INSIGHT during the NACE show in Atlanta.

According to Dotterer, GM and paint company research showed that most refinish application problems can be prevented through increased technician training, coupled with performance-based evaluations that demonstrate technicians’ mastery of critical skills.

Requirements for the initial assessment to qualify for certification are:

• A minimum of one year professional experience;
• Completion of GM’s refinish curriculum or current ASE certification.

The first assessment determines if the technician is ready for the new performance-based certification course. If qualified, technicians are admitted to one of the participating paint manufacturer’s certification courses.

Technicians have six months to complete the course and demonstrate their skills to expert instructors from the paint companies.

According to Dotterer, "We knew as General Motors that what we wanted to do was raise the bar - raise the education of our technicians to truly be world class and set a leadership role that nobody else had."

To do so, GM teamed with suppliers with certified products under the GM 4901M specification established for refinish paint. Paint manufacturers providing certification training under the program include, Akzo Nobel, BASF, DuPont, ICI Autocolor, Martin Senour, PPG, Sherwin Williams, Standox and Spies Hecker.

Once certified, technicians must recertify through the program every two years.    o

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Kevin Caldwell, chairman of the 1999 International Autobody Congress and Exposition (NACE), opened the event with a keynote speech December 3 focusing on the industry’s accomplishments during 1999 and reminded the audience what is still left undone.

Caldwell spoke about perceived declines in flat rate labor times and the progress made to recognize costs to all segments of the industry.

According to Caldwell, "The industry has come a long way in recognizing costs to all sides of the industry. Vendors must make a profit when they sell equipment or supplies; insurers must make a profit by retaining customers while holding claims costs to a minimum, and we as collision repairers must be profitable in order to survive in the next millennium. Funny dollars are not going to get us there."

To provide customers with the best possible service, Caldwell asked insurance companies to clarify to their customer what a policy does and does not pay for to eliminate friction.

Caldwell reviewed the recent lawsuit verdict against State Farm for their use of Non-OE parts and asked attendees to support disclosure and written consent laws for these parts.

Cost shifting also came under fire during Caldwell’s keynote.

"Do what you charge for and charge for what you do," said Caldwell. "Too many times we hear the term ‘we do not pay for that or you won’t do it anyway,’ phrases that set the tone for cost shifting to begin. If this industry is to survive in the next millennium, cost shifting has to stop."

To reduce cycle times, Caldwell suggested that shops be able to choose the repair method, parts, vendors and procedures for the collision repair process. "If we can control the scheduling, work flow and sublet vendors, the customer service experience will be maximized, thereby reducing cycle times," he said.

Caldwell complimented the paint companies for working so closely with the repair industry in 1999 but chastised them for continuing giveaways and failing to clearly identify the difference between a recommended procedure and a required procedure.

"I encourage each paint company to publish exactly what procedures are required in order for the industry to stand behind warranties. Additionally, we would ask that you stop the giveaways to increase your market share," said Caldwell.   o

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Canada’s Competition Bureau carried out an examination of the collision repair industry between September 1997 to June 1999 to determine if the Insurance Industry’s practice of directing vehicles to preferred auto repair shops substantially lessens competition.

The Bureau concluded that the practice of directing insured vehicles to preferred auto body repair shops has not resulted in, nor is likely to result in a substantial lessening of competition or an increase in prices in the future, for the following reasons:

• The insurance market is characterized by vigorous competition, which ensures that any cost control or savings, in part by reliance on preferred shops, benefit consumers in the terms of premiums.
• Prices for auto body repair in recent years have been fairly stable with any price increase being marginal.
• Demand for auto body repair, measured by number of claims made by insured vehicle owners for auto body repair services in the market have been declining over the past four years.
• Because of the large number of auto body repair shops competing in the market, even if a number of auto body repair shops were to cease to exist as a direct result of the directing of insured vehicle owners by insurance companies, there would be sufficient competition remaining in the marketplace to prevent price increases.
• Individual insurance companies hold sufficient buying power to prevent suppliers from increasing prices above competitive levels.
• Barriers to entry are sufficiently low in the auto body repair market that there is no likelihood of a sustained price increase in repair costs above competitive price levels.

The Bureau found there were legitimate competitive business reasons for preferred shops:

• It is a service to those customers who demand a list of shops meeting insurance company criteria such as service and quality of repair.
• It is a means of cost control and cost savings.
• Consumers have the final choice in selecting a repair facility. This choice is protected by provincial regulation.

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