Trouble lies ahead for auto parts manufacturers in the European market, and they had better prepare for it. The European Union’s revised regulations for new-car distribution¹ are scheduled to take full effect by 2010. They could drain €10 billion in annual operating profits from the parts industry over the next six years, leaving just €3 billion to €4 billion to be shared annually among the original-equipment suppliers, which furnish parts to the carmakers; the carmakers themselves; and the copy manufacturers, which duplicate highly standardized, large-volume car parts, such as exhausts, filters, and headlights (Exhibit 1). Original-equipment suppliers, which will bear the brunt of the impact, could see their turnover and operating profits fall by as much as 20 and 80 percent, respectively. But though they can’t avoid the sting entirely, they can mitigate the pain.

Spare parts and service account for about half of the European automotive industry’s profits, compared with 26 percent for new-car sales and 18 percent for car manufacturing. In the parts and service after-market, turnover has increased to about €63 billion and operating profits to €13 billion to €16 billion a year. But all that is now threatened.

The first and most...