COVID-19 Breaks Dynamics Between Fleet And Aftermarket Growth

 Q: How Important is the aftermarket for ZF’s operations?

A: The aftermarket is vital to ZF as we are suppliers of various systems, components and auto parts for the assembly of new cars that sooner or later will need spare parts. We believe that the aftermarket has different drivers to satisfy installers and end-user requirements. Consequently, ZF Services has developed successful strategies to lead this market. Our focus is on building a complete product portfolio. We have specialized in five areas: suspension, powertrain, chassis, braking systems and steering and suspension. In these systems, our average quality claim is 0.4 percent, which gives our product portfolio a clear advantage over our competitors.

This business unit is very important to ZF and we have defined the structure and factors that will lead us to success in this market. First, we focus on coverage. As OE suppliers, we meet OEMs’ minimum quality standards and in some cases, when we identify certain design deficiencies in the original equipment, we correct them. In this way, we can offer a component that will guarantee a continuous use of the vehicle under normal conditions. Another important factor that we consider is coverage for the vehicle fleet. Our goal is to be able to cover the needs of 95 percent of the vehicle fleet in Mexico. In the case of shock absorbers, we cover 99 percent of the national demand, but there are other areas such as brake systems where we cover 92 percent.

The third factor that we take into account and in which we find ourselves successful is customer service. We can deliver an order within 24 hours. One area in which we have worked and in which we have a lot of experience is pricing. At ZF Services, we always make sure that the price for the end-user is appropriate, based on the current value of the vehicle. All these factors have allowed us to position in the mind of not only of the installer and the distributor, but also of the end-user.

Q: How is e-commerce influencing aftermarket strategies?

A: At the moment, 93 percent of our sales are done through traditional channels, such as a dealer network, while the rest come from our website, Mercado Libre and Amazon. The crisis generated by COVID-19 has given us the opportunity to grow in this segment – sales through e-commerce increased 74 percent in April and May. However, this is not sustainable over the long term because once we return to the new normal, the growth of e-commerce is going to slow down. It is not going to fall into negative levels, because people have already realized that they can order their auto parts through digital channels.

The scenario that we consider most likely is that we will be living in a new normal during July, August and September. In 4Q20, our perspective is that all economic activities will resume at 80 percent of their capacity. This will mean an 18 percent drop in our sales from 2019 and I do not think we will be able to make up for volumes and days lost. The coming economic crisis in Mexico also complicates the situation.

Q: Is the drop in consumption of new vehicles an opportunity for the aftermarket?

A: It is an opportunity but a very limited one. New vehicle sales have been falling since 2016 and that trend will continue. According to AMDA, car sales will drop more than 20 percent in 2020 compared to 2019 due to the pandemic. Although it is true that this drop will not generate growth in the vehicle fleet, there are two factors that must be taken into consideration: most components and auto parts are manufactured in China and the peso has devaluated by up to 26 percent this year, while these types of products are bought in dollars. This has caused auto parts made in China to increase in price from 10 to 15 percent. Having said that, with the decrease in people's purchasing power and unemployment, it is difficult for the auto parts sector to benefit from this crisis. Gone are the times when less growth in the vehicle fleet meant more growth in the aftermarket. That correlation no longer exists. Our estimates are that the aftermarket will decrease between 20 and 25 percent by the end of 2020.

However, every crisis brings an opportunity. Mexico's ability to enhance its position as an exporter of auto parts is one opportunity. Due to the devaluation of the peso, labor costs are going to drop and we will be more competitive. This will open the door for us to export auto parts to countries where the vehicles manufactured here are purchased.

ZF Friedrichshafen is a German manufacturer of drivetrain and chassis components for light and heavy vehicles and motorcycles. Its aftermarket operations are managed by the ZF Services subsidiary