Listening to Customers Key to Escaping Financial CrisisMon, 09/01/2014 - 12:39
Back in the 1980s, the automotive distribution network in Mexico was concentrated around five OEMs that wanted their distributors to work exclusively for their brands: Ford, Chrysler, GM, Nissan, and Volkswagen. Each group of dealers focused on one brand and grew along with it. J. Arturo Zapata (JAZ), Executive President of Corporación Zapata (Zapata), recalls that as new OEMs started coming into the market, a lot of emerging dynamics began playing out. Newcomers did not want to find investors in other fields and teach them everything they needed to know about the business. Instead, they approached established dealers who knew the business and worked with the five original brands. The five OEMs, which had been the only players in Mexico for more than 40 years, clearly did not welcome this move. “What started happening was that there was an opportunity for dealers to grow, resulting in a back-and-forth loyalty struggle,” recounts JAZ. At the same time, there was an unfortunate turn of events: Mexico’s 1995 macroeconomic crisis caught all dealers by surprise, just as they were starting to expand. The outcome was enormous damage to the dealer network.
Additionally, most of the dealers found themselves overextended as banks had been happy to provide them with almost unlimited funding so that they could finance their customers. Yet, neither the banks nor the dealers paid much attention to matching the financial terms of one another. As a result, when the crisis unfolded, it revealed amongst other imbalances that while funding was provided by the banks at variable rates, financing to customers by the dealers was offered at fixed rates. “Inflation skyrocketed along with interest rates, and hundreds of dealers went under. It was a disaster.” To provide a perspective, JAZ says that Zapata lost all of the capital it had built over 40 years in a period of 12 months, with annual sales dropping more than 75% year-on-year. Although aftersales income dropped substantially less, very few vehicles were being sold. JAZ gives the example of one of Zapata’s dealerships, which sold 400 cars in May of 1994, and then sold just seven cars in May of 1995. Zapata clearly could not keep its staff and make sense of it financially. However, laying people off was never an option. The company survived the crisis without firing a single person. Those dealerships that survived the crisis eventually started buying others, and what ensued almost naturally were dealer groups with multiple brands. This business strategy had two basic strengths: the more stores and brands a dealer group owned, the more efficient it could become. This multiple brand strategy also allowed dealer groups to diversify risk and minimize exposure to the cycles that every OEM faces. “There has been consolidation in the industry. Before everyone made a little bit of money but after the crisis, things became much tighter and much more competitive, just as in many other markets. Efficiency and diversification became the name of the game,” recalls JAZ.
However, Zapata opted for a different route. “We defined our global competitive strategy as one where we would grow organically, hand-in-hand with our customers, providing ever more integrated solutions and an extraordinary customer experience.” In order to achieve this, Zapata established limited yet very strong partnerships with a few OEMs and other industry leaders. “People see Zapata growing and expanding into new markets, assuming that we represent multiple brands when in fact we do not. Over time, we tend to become an important partner for those OEMs that we represent, not only in terms of volume, but also and most importantly, in terms of customer satisfaction. One of our key strengths is our ability to stay close to and listen to our customers,” comments JAZ. For example, Zapata noticed that customers such as leading beverage manufacturers and large pharmaceutical companies were having a hard time managing their fleets. This led Zapata to search for the ideal business partner which it found in the Holman family, owners of Automotive Resources International (ARI), who were already considering entering the Mexican market. Eventually, through a 50- 50 joint venture, Ariza de México was founded. Today, Ariza is the market leader in fleet management and leasing in Mexico. Another example was when Zapata realized that most of its heavy truck customers required much stronger support in some of the key geographical regions in Mexico. While geographical expansion was not initially contemplated in the company’s strategy, Zapata decided to provide the required support to its customers. Today it has even expanded to several markets in South America with the sole objective of supporting key customers. A similar process took place while listening to individual car customers. As the number of brands expanded exponentially in the late 1990s, car owners felt that it was becoming impossible to search for the car that best suited their needs. Hence, Zapata looked for the right partners and then launched autocosmos. com. Today, autocosmos.com is the leading automotive portal in Latin America and the US Hispanic market. More recently, Zapata created an automotive auction company called V4B, with the objective of supporting its customers to dispose of old vehicles in a transparent, effective, and efficient way, and one that could fulfill all of their compliance requirements.
JAZ says that while most of its subsidiaries are wholly owned, Zapata prefers to find the right partner rather than starting a new enterprise from scratch. “Selecting a partner and then managing the partnership so that it can be successful and rewarding over the long term is clearly more complicated than running a wholly owned subsidiary. However, when you do it right, one plus one can add up to much more than two,” says JAZ. Regarding partnerships and joint ventures, JAZ claims three elements have proven essential: choosing a partner who shares the same values, running the company adhering to the best business practices in terms of transparency and compliance, and keeping your partner’s interests in mind, at least as much as your own. “Twenty years ago when we first implemented this innovative strategy, it seemed rather risky. However, it has turned out to be a very rewarding experience in every possible way for our customers, business partners, employees, and stockholders.” JAZ asserts.