By Sheila Loftus

State Farm is jumping into the parts purchasing business.

The insurer has negotiated a deal with some of the original equipment manufacturers (OEMs), including GM, Ford, Chrysler, Toyota, Honda, and Nissan, to reduce the manufacturer’s suggested retail price (MSRP) by three percent.

The savings is passed along through the parts departments and State Farm’s Select Service shops, both of which keep their margins the same.

In the end, it is the car manufacturers who have given up the three percent. “And, of course, what they are getting is business from a big company,” said Dick Luedke, a State Farm spokesman.

State Farm is piloting this program in San Diego, Calif., and Indianapolis, Indiana, beginning in the fourth quarter.

In a press release, the insurance giant said it would be testing “repairers’ use of electronic parts-ordering systems that provide access to vehicle information and help increase order accuracy and efficiency. We believe this new approach will improve the repair and estimating process.”

Added State Farm claim consultant George Avery: “While we recognize that this will represent change for the repair industry, it is important to continuously look for ways to create efficiency in the process and provide value for our policyholders and shared customers.”

Luedke said State Farm would neither reveal which car manufactures nor which electronic parts ordering systems are participating in the pilot. However, this reporter has been told by several industry insiders that for all but Toyota, OEConnection® will be used. Toyota has its own electronic parts system.

Just to be clear about how the program will work:

1. Parts margins will stay the same for the Select Service body shops and the parts department; however, the car manufacturers will push through a three percent discount on the MSRP (manufacturers suggested retail price).

2. This represents a three percent savings on the parts for State Farm, which has an overall market share in auto insurance of 17.6 percent. (State Farm is not getting a three percent rebate from the parts department or the car manufacturers—just three percent off on the MSRP).

3. Select Service repairers give State Farm the parts discount that they would give any other insurer as required by the Select Service Agreement. Repairers don't have to give the additional three percent, as it is already given to State Farm in terms of the reduced MSRP.

Tony Lombardozzi, a New Hampshire repairer, is disappointed with the OEMs who have signed on to this program. He said the repairers went to bat for the OEMs in the Avery case in Illinois. In addition, he said, repairers showed up at some of the National Conference of Insurance Legislators to defend the OEMs against a model aftermarket parts bill being pushed by the Certified Automotive Parts Association. “We did all their inside dirty work and now they have sold us down the river for three percent,” said Lombardozzi.

In the press release, State Farm also announced that it was continuing to evaluate its position regarding the specification of aftermarket crash parts. Although it will maintain its current policy of not specifying aftermarket crash parts during the test phase of its new policy, the insurer “believes that policyholders benefit when repairers have access to all sources of quality collision repair parts.”

State Farm’s press release didn’t mention the program it has in which repair facilities are using a State Farm bank credit card to purchase parts. A Select Service shops that has been testing that program talked with this reporter.

State Farm’s Select Service shops will be offered State Farm credit cards, which will give them a one percent credit on the next bill on the amount paid. With the card, shops can charge their purchases of parts and paint.

A repairer who tested the credit card called it a win-win-win situation—beneficial for shops, vendors, and State Farm.

“It allows the shop to have the benefit of postponing the payment and get the one percent rebate,” the shop owner said. “The benefit for the parts vendor is that it is a guaranteed fund. I have heard it from our vendors that accounts receivable are worse than ever. We are in a challenging market, and times are tough for shops. To be able to know that payment is guaranteed and not have to worry about a check bouncing comes with some value.”

At some of the parts departments where the shop owner had negotiated a deep discount, the parts manager wanted to renegotiate their deal, as the parts department has to pay a service charge in order to accept credit cards. In some cases, the repairer said, he and the parts manager compromised. It was still worth it to the repairer to have use of the money until he paid the bill a month later. He is also using the State Farm credit card to buy his paint.

“Part of it depends on what you can negotiate with your parts vendors,” the shop owner said. “Because with any card, I don’t care if it’s American Express or Capital One or whatever, there is a fee the business pays to use it. We have the same thing. When a customer pays a deductible with a credit card, we pay a fee, and the fees are not consistent. American Express [fee] is quite a bit higher. Visa [fee] is lower. Your vendor has to be receptive to this.”

Added the shop owner: “We even had a couple of situations were they said, ‘Jeez, you negotiated a strong discount with us. We can’t afford to pass on another couple of percent on this.’ So there were a couple of them we negotiated some middle ground. I am thinking that the benefit with one percent and the opportunity to do something else with the money for a month is greater than [the drawbacks].”

State Farm wins in this scenario because it collects the service fee from the merchant who accepts the credit card, although it isn’t State Farm the insurer that wins, but State Farm the banking entity, said the shop owner.

“This does nothing for the claims end of State Farm,” the shop owner said. “Where State Farm benefits is through State Farm banking. They make the fee on it just like Capital One would. That is the only benefit to State Farm. But it is still a benefit because it is a lot of dollars.”

No matter what the credit card holder buys with the card—whether it be automotive parts or toilet paper—he or she receives a one percent rebate, the shop owner said.

One concern collision repairers have raised about the credit card and the electronic parts ordering pilot is the possibility of State Farm using records of shops’ purchasing habits to its advantage.

© 2007 Sheila’s Information Network Inc.

Sheila Loftus (sheilaloftus@yahoo.com), publisher of the CRASH Network, has written about the auto collision repair industry for 32 years. She lives in Washington, D.C.