Oct 1, 2006 12:00 PM, BY RICK WEBER
IN THE rudimentary days of Amparts International Inc, Rudy Duemichen would fly from his home in Vancouver, Washington, to Mexico City, where he would take orders for heavy-duty truck parts.
Then he'd fly back to Vancouver, place the orders, deal with the freight forwarders, and try to convince the customer that the products were at the border, and therefore payment should be rendered so that the goods could be released. There was an inherent risk: He was in Vancouver, while the customer was in Mexico City. How could he ensure he got paid for the goods?
These days, the company — now known as Amparts LP — is a slick, sophisticated operation based in the Texas border city of Laredo, with a 30,000-square-foot warehouse full of $2.5 million in inventory, and a wholly owned Mexican corporation called Promare SA de CV that operates 11 wholesale-retail outlets in Mexico staffed with 100 employees and carries over $6 million in inventory. In addition, the company services the Central and South American markets through an office in Miami, Florida.
“The industry is exciting when you blend the Mexican and South American components to our business,” chief financial officer Jerry Gonzalez says. “It is exciting to see the market expand, and it's challenging to deal with different cultures and exchange rates. The exchange-rate risks that we face on a daily basis makes being prepared for the unexpected a requirement to be successful in the export business. It's also exciting to see the heavy-duty truck and trailer business develop as the countries expand their economies.”
Says chief operations officer Mario Rodriguez, “Every day, we find ourselves dealing with different challenges. Each sector of the industry demands service and assistance in different ways. Anticipating market fluctuations has to be the most challenging of all. Our response to inventory demands for the OEM sector has to be almost a just-in-time delivery or else you lose the deal.”
Amparts distributes a wide range of heavy-duty truck, trailer, and bus parts to foreign customers, including hydraulic cylinders, axles, drivetrains, fifthwheels, and power-steering gears. Amparts supplies over 150 product lines and has strategic partnerships with leading manufacturers, including Trailmobile, Accuride Wheels, Custom Hoist, Remy, Drum Industries, Eaton Fuller, Monroe Shocks, Muncie Power Products, and Stemco.
It's big. And it's getting bigger.
Two years ago, trailer parts were 10% of the company's sales. Now, they make up nearly 30%.
“It's been our biggest growth area,” Gonzalez says. “Mexico is experiencing a construction boom. Home construction is booming because the average Mexican is able to get a fixed-interest rate mortgage on a $30,000 home. That was almost unheard of five years ago. In all the big cities, there are huge neighborhoods. You'll see a thousand homes going up in one area.
“They need dump bodies and dry vans like crazy. A lot of the equipment in those industries was old. Not only do they have to retro or fix them, but a lot of them have to be replaced. Very few people were making investments into capital assets because businesses were not profitable, so there weren't profits to re-invest until the last couple of years.
“Infrastructure projects are booming. There are a lot of the highways and major toll roads being built. That helps the trailer business. We got aggressive when we saw these markets open up. That's one of the luxuries of being an independent parts distributor. If you see a market demand something, it's easy to refocus energy on those types of parts.”
Gonzalez says the market for trailer parts will level out in a few years, but the trucking industry is going to continue to be a major factor in the Mexican economy.
“They're not set up like we are here with UPS, FedEx, and DHL, where everything is flown in airplanes,” he says. “Fortunately for us in this industry, Mexico is still behind. The trucking industry will continue to be a major player, unless there's a major currency or a significant US economic slowdown.”
How it began
Amparts was born in 1983 out of the need to supply heavy-duty truck parts to the Mexican end user that had US-spec'd trucks.
As the business grew, it got bogged down by bottlenecks with freight forwarders, who didn't have enough incentive.
“If he was really busy, and $20,000 worth of parts arrived, he might say, ‘Yeah, I think they're here, but I can't tell you for sure,’ ” Gonzalez says. “A lot of times, the shipment was waiting around, and we wanted the money to get the next deal.”
So Duemichen decided to open a warehouse. He analyzed a map and noticed that Laredo was conveniently situated on the border — with Monterrey being a straight shot of 130 miles southwest on Route 85.
Within a few years, the wholesale business out of Laredo had gotten so big that customers had too much leverage on the ability to make payment or not make payment.
“We were at their mercy,” Gonzalez says. “It was determined to go into Mexico in order to have local presence and be able to sell in the local currency to have an even quicker turnaround on the sales function. The wholesale customer in Mexico didn't believe that a US company would come into Mexico and compete against them. If they had just respected the distribution chain, in essence, and met their obligations in a timely manner, we might never have gone in there.”
After opening stores in Monterrey, Mexico City, and Guadalajara in 1992, Amparts evolved over the next six years, opening more stores and picking up new product lines. Purchased by Transcom, Amparts became part of a publicly traded company and was able to expand faster because it had more capital to tap into. That, however, was short-lived as Transcom filed for bankruptcy and Amparts was purchased by Duemichen and investors Greg Hatton and Pat Kuzmer in 2002.
“Even though our subsidiary wasn't bankrupt, Transcom was bankrupt — and we were a named subsidiary,” Gonzalez says. “Suppliers were not as eager to give us credit, and we had to do all things on a cash basis. It took about a year before everybody was convinced we were a stand-alone. The reputation of Rudy, Greg, and Pat in the marketplace clearly gave us an advantage with our suppliers.”
Gonzalez says Amparts believes it offers an attractive alternative to American manufacturers who want to distribute their parts in Mexico.
“We are a US company under Amparts, so they're selling to a US company, and we take it from there and push their products into Mexico,” he says. “Amparts will sell to Promare. Our success has been the ability to deal with US companies and demonstrate to them that we're a good alternative.
“I think we offer the better alternative in that they're guaranteed a payment from a US company and have some recourse to a US company, whereas when they're going into Mexico and selling to Mexican companies, there are jurisdictional issues. Your ability to collect from a Mexican company is somewhat more cumbersome and legally more challenging than collecting from a US company.
“A Freightliner dealer, let's say, would get upset if we sell locally. We can sell for export because the Freightliner dealer here makes his money from selling trucks here. We move a lot faster than a dealer. If we see a trend in the marketplace where all of a sudden, the 2003 transmission for Kenworth is breaking down, we'll go out and find that transmission. If alternators are going out for a certain model, we can usually find that part faster than anybody and get it into Mexico faster than anybody. Why? Because we have 30,000 square feet of warehouse and 100 employees in Mexico. All they're doing is asking, ‘What does the customer need?’ They're sending orders to us in Laredo, and we're shopping for it throughout the country.
“Trailmobile is a fairly new line for us, and that's something we have begun to stock. We can't stock Eaton-Fuller-Spicer parts heavily anymore because everybody has them. If you go into Mexico and drive down a parts row — where all the parts stores are at — you'll see every store has Eaton-Fuller-Spicer. And so we have to try to stock products that we have exclusivity in order to maximize our margins and be able to give the customer preferred service. We're not always necessarily the best price, but we fulfill the customer's needs and solve his problems. The bread and butter of our business is export with US suppliers. We're trying to find as many US suppliers as we can who want their product distributed in Mexico.”
The Miami office, on the other hand, is still doing business the way it was being done in Laredo in 1985. South American companies come to Miami and place orders, then Amparts buys the parts, receives them, consolidates them, and then puts them all on one container and ships them to South America.
“The amount of US vehicles in Mexico far exceeds any one country in South America,” Gonzalez says. “We sell truck parts. It has to be a Freightliner, Kenworth, Mack, etc. The problem in South America is that you have a lot of European-spec'd vehicles. Miami is concentrated toward servicing trailer manufacturers and focuses toward markets where there are a significant population of US-manufactured trucks.”
Gonzalez says there are many Mexican distributors, but most of them haven't made the investment Amparts has made on the US border — 80% of its products come from the US. Amparts inventories its product in Laredo, while its competitors have their products shipped to a freight broker and then directly into Mexico.
“It gives us the advantage of buying in large quantities and then shipping as needed to stores,” he says. “I think we're unique in that we started as an exporter. So the investment it took to create a border presence on the US side is financed by export sales. So it's a zero-cost benefit to our company that exporters still help, in essence, our ability to have inventory at the border, ready for purchase in Mexico. Everybody else does it the other way around.”
Rodriguez says that in the Mexican market, the company tries to work as closely as it can with the OEM industry to plan ahead.
“Tailoring a financial agreement for different OEMs is a major challenge,” he says. “A lot of these OEMs still do business on a handshake, so we find ourselves constantly adjusting to the cultural ways of doing business in Mexico without getting burned. In the trucking sector, you deal with different size fleets. The demands of the major ones are different from the owner truck operators. So we must adapt and be flexible to try and accommodate each of their requests. Some need help with their preventive maintenance programs, others need help with technical support. We teach them how to install and operate their special equipment, and they all demand just-in-time service at a very low price. I've been in this business for 20 years, and I have yet to hear a customer tell me our price is reasonable. This industry is notorius for demanding extraordinary service at a low price. We try very hard to align ourselves with this way of doing business.
“We also service major wholesalers. Responding rapidly to their request is the key to keeping abreast of market fluctuations. So we must stay on top of this. They are usually the first ones to notify us of a shift in the market through their request of different products or lack of.”
Just some of the many challenges they face in this environment:
- The importation process.
“The Mexican customer has to pay up to 15% in duties and the value-added tax,” Gonzalez says. “So you make a 30% investment in the value of the product as it crosses into Mexico. If it's a NAFTA product, it's as low as a total of 15%. That's one of the things that Promare offers the Mexican customer. Promare becomes the warehouse for that Mexican customer. A lot of Mexican customers used to be Amparts customers. But we've convinced them that if they're not willing to buy a truckload worth of product, it's better they buy locally from a Promare store. The only way to be a successful importer to Mexico is to buy truckload quantities. It reduces your dollars per unit of freight and dollars per unit on customs and broker fees.”
“We've given our Mexican customers the luxury of buying in pesos,” Gonzalez says. “So now Amparts and Promore assume the exchange-rate risk for the Mexican customer, who doesn't have to worry about fluctuating currency.
“A US company selling into Mexico has the risk that the Mexican customer may not be able to pay him back if there's a major devaluation. We suffered and lived through that in '94. It's a challenge when it occurs, because that's probably what causes business to slow down, if not come to a complete halt. There are more mechanisms now than there were in '94.
“You also have to know how to adjust your prices as the currency fluctuates. That's where some companies have trouble. We've been able to adjust our prices accordingly, and we try not to get out of the market in case there's too big of a swing. And sometimes the currency fluctuation helps us in that weaker competitors sometimes go by the wayside — especially when there's a large devaluation. The weak competitor doesn't adjust his prices on inventory, and when he goes back to repurchase products he just sold, he realizes he has to pay twice as much.”
- Unfair competition.
“People are not paying duties on certain products,” Gonzalez says. “People will import a product from a foreign jurisdiction and claim it's US, and avoid the country-of-origin duties. It happens a lot with Chinese products. It's a 15-18% differential.”
Says Rodriguez, “We run our business 100% the way it's supposed to be. We pay our taxes. When people don't pay their taxes and sneak in merchandise, it makes it that much tougher for us. That's the way business is in Mexico. If you want to deal with Mexico, that's part of the game. You have to be able to handle those situations and move on if you want to be in business long term like we are.”
He says the situation is a lot better than it was 20 years ago, but there's still a “large black market — a cash market that all smuggled products thrive on. Some people say it's as high as 30% of the market. Others say 10%.”
Amparts has learned that the horror stories are not myth.
The laws require that Amparts uses a Mexican driver and a Mexican truck to cross the border from Laredo into Mexico. Those are short-term haulers called mulas (donkeys) because all they do is cross the bridge to Nuevo Laredo. Then a long-haul Mexican-based carrier takes it from there to Monterrey. There's never a problem with the mulas. When there is a problem, it comes between Nuevo Laredo and Monterrey.
In one instance last year, thieves left the sealed locks completely intact, instead unscrewing the door hinges and removing the doors.
“They cherry-picked what they thought were fast-moving products,” Gonzalez says. “Some people say the thieves who are hitting trucks know what's in them. They'll say, ‘OK, we know that company exports hydraulic cylinders. We need 30 hydraulic cylinders.’ ”
Compounding the problem for Promare was its insurance carrier, which maintained that the policy had a clause that said that “the mysterious disappearance of inventory without a violent act” was not covered.
“So we were stuck with the theft,” Gonzalez says.
Several years ago, a truck with a Promare shipment was waiting for a store to open at 7:30 am when the driver was kidnapped. Some of the merchandise ultimately was recovered.
Gonzalez says Promare has installed an iron gate and surveillance cameras at the Mexico City branch because it has been robbed at gunpoint “more than once.” The gate prevents anyone from entering until an employee pushes a button. And even then, the visitor has only reached a waiting area.
- Political volatility.
Gonzalez says the company was concerned during the election controversy in July, when the loser — leftist Andres Manuel Lopez Obrador of the Democratic Revolution Party (PRD) — claimed the margin of less than 1% was tainted with fraud, demanded a full recount of all 42 million ballots cast, and reportedly subsidized the gridlock-inducing presence of 100,000 supporters in Mexico City's central square, the Zocalo, and key downtown streets for over two months.
On September 5, a seven-judge electoral court voted unanimously that conservative Felipe Calderon of the National Action Party (PAN) — the former energy minister under president Vicente Fox — had legally defeated Lopez Obrador.
Lopez Obrador, saying Mexico needs a “radical transformation,” has promised to set up a shadow government in a bid to topple Calderon, but Gonzalez and Rodriguez aren't worried. They're ecstatic that Calderon is the new president and feel that pro-business policies will continue in Mexico.
“We did get concerned when there were 100,000 people on the Reforma, the busiest street in Mexico City, because that impacts our business,” Gonzalez says. “There was the threat that somebody would change the way truck parts are sold in Mexico.”
Says Rodriguez, “It caused uncertainty in the major projects. Large investors bidding for government contracts stopped. Everything was wait-and-see. The country didn't stop. Roads continued to be built, trucks continued to run. But a certain sector of the market said, ‘Let's see what happens.’ All that's over now.
“Wall Street loves Calderon, and US business loves him. He'll continue the current administration's policies, which would probably cause no major changes. PAN won't win the majority of Congress, so you have classic gridlock — which is good. It'll be similar to having a Republican president and a Democratic Congress.”
Inside the Laredo warehouse, it's all hustle and bustle. They're either loading or unloading at all times.
They bring in the goods, count them, prepare them for shipment, tag them, and prepare the certificate of origin.
“Where does it come from? What does it weigh? What's it made of?” Rodriguez says. “We do that in case we do get stopped at the border. It's a random system at the border. A truck could be delayed two to three days, and you don't want that, because you have $150,000 to $200,000 worth of goods. We make sure we comply with all the prerequisites of the Mexican government.”
Rodriguez walks over to a section of hydraulic cylinders — a major part of the company's business.
In another aisle, he stops at a section of boxes labeled Ampro — the company's product line.
“We developed it because a lot of people in Mexico and China are dumping products on a day-to-day basis in Mexico,” he says. “Ampro parts are not the cheapest, and we don't want to be. That's a key to our success — to offer a quality product with extraordinary service and give some value-added to our company. We've been successful with that.”
They sure have. There's hardly a spare inch in the warehouse, which is why they are investigating the possibility of buying some space from a neighboring building.
But that's a story for another day.
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