Auto Parts Dealer Transitions to Manufacturing

“Back in 1988, many American automotive suppliers were not very interested in selling their products in Mexico,” says Herman Borda, President of Herko. “They did not see the Mexican market as an opportunity and were not confident about the conditions in the country. This gave Herko an opportunity.” Borda’s company identified characteristics of the Mexican market that could quickly benefit it. “We saw that Mexico had major potential for manufacturing auto parts. We began representing offshore companies in the country and selling components in Mexico as there was a big demand that was not being serviced. In order to fulfill those needs, we had to look for manufacturing facilities not only in the US but also in Brazil, Europe, and Asia. The first step for us, after sourcing the components, was representing manufacturing facilities in Mexico,” says Borda. Once the company evolved from only having a commercial operation to developing its own products, it opened offices to better serve its Mexican consumers. As one of the main distributors in the automotive sector for OEMs and the aftermarket, Herko now operates on five continents. It is divided in divisions that specialize in various vehicle systems. Its first division, focused on fuel pumps, continues to provide products for OEMs and the aftermarket. The Ride America brand distributes hydraulic clutches, prefilled units, complete hydraulic systems, and brake parts, Herlux specializes in ignition systems, ignition coils, controls modules, and spark plug wire set, while Herko Emission Systems provides oxygen sensors, TPS, IAC valves, temperature sensors, and crankshaft and camshaft sensors.

Building up such a varied product portfolio put Herko in a strong position, but getting all these products to its customers required specializing in a new dimension: warehousing. Since Herko did not have this specialty in-house, it looked for the right acquisition. Acquiring warehousing company Alfa (Almacen Latinoamericano de Fábricas Automotrices) allowed Herko to add two levels to its logistics network: big importers as well as second-tier distributors that could move smaller quantities of products. Once the company was selling its parts through Alfa, Herko approached the manufacturing companies that it was representing to convince them to establish their operation in Mexico through a joint venture process. At first, Herko’s partners were concerned about the situation in Mexico, not just about the violence but also about a potential lack of economic security for their investments. “We offered to invest jointly in opening facilities in Mexico since Herko already knew the market, the behavior of its customers, and how to manage a company within the Mexican framework,” explains Borda. The first company to agree on a joint venture with Herko was a ball bearing manufacturer in Brazil called NWO. This led to the opening of Aguascalientes Industrial Autopartes, a manufacturer established in Aguascalientes, a state that is part of the Bajio automotive hub. This success quelled the fears of other companies, leading them to follow the model and enter Mexico in partnership with Herko. With its logistics and partnerships in place, Herko’s goal is to keep growing and start manufacturing. With its joint venture allies interested in bringing their manufacturing lines to the country, the only thing still to be sorted out is the manufacturing cost in Mexico. “The Mexican market was long dominated by Chinese products sold at low prices, but now Mexico is becoming very competitive. As Asian countries are experiencing rising manufacturing costs, companies are seeking other sites to establish their production. It also helps that the quality of Mexican manufacturing is very high. While everybody decided to go to China and buy cheap products to later commercialize them with their own brand, we decided to concentrate on just one manufacturer. For each of our products, we have one supplier, one technology, and one solution so our customers always get the same quality in our boxes. Products that are manufactured by our partners comply with all the quality standards required by high-tech companies,” explains Borda.

As the Mexican automotive sector grows, Herko is aware that companies need to offer added value to their customers. For Herko, that added value is its knowledge of the country and the market, elements that Borda says put his company ahead of its competitors. “Most companies that come to Mexico have their own price lists and catalog, but these do not always match with the Mexican reality. The names of the cars change, the models change, and the most important thing is to adapt the products and tropicalize the business plan to the situation in each country. We make our own Mexican catalog and pursue an independent program. As a result, Herko’s sales have been growing at an average of 40% per year, and the company is being aggressive with new developments to cater to all the different types of cars that Mexico is importing or manufacturing,” expands Borda. With Magneti Marelli, Bocar, Grupo Suma, and Air Team among its customers, Herko has gone from a components distribution company to a parts assembler. It is now aiming to become a manufacturer in the future. To do so, Herko plans on integrating more parts made in Mexico into its catalog and reduce its dependence on offshore operations. “Our main competitor is China and as long as prices keep rising, our business model will become more successful. We are betting on Mexico becoming the most important supplier of automotive parts in the world,” concludes Borda.