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AUTOMOTIVE PARTS AND ACCESSORIES A. SUMMARY This report will attempt to describe the Venezuelan automotive parts and accessories market and its effects on the U.S. spare parts demand. B. MARKET OVERVIEW The Venezuelan automotive industry is experiencing a crisis due to a combination of lack of foreign exchange and a precipitous drop in automobile sales during 2003. The currency control has disrupted the importation of inputs, forcing automakers to halt production in several occasions. Recently, labor demands by unions have induced temporary stoppages in different vehicle assemblies. However, the Venezuelan market for automotive parts, components and service equipment will continue to represent an excellent export market for U.S. manufacturers and exporters, since vehicle age is growing and therefore the demand for spare parts is increasing. While there is considerable local competition, this industry produces mainly generic parts and not model-related components. At the same time, service equipment is in considerable demand because of repair shops being busier due to the aging vehicle population. The Venezuelan automotive market closed 2003 with a total of 63,726 vehicles sold. However, 2004 figures seem to indicate a potential increase in sales by 81.95% according to the Automotive Chamber of Venezuela (CAVENEZ). The present U.S. market position for auto parts is excellent, not only because of the predominance of American car assemblers but also because of the belief that U.S. automotive products are superior in quality. Gradually, however, this position of predominance is being eroded because of the influx of automobiles from Europe and Asia, many of which are less expensive and smaller than U.S. models with resulting savings in tire and fuel expenses. Local U.S. assemblers are only now attempting to counter this trend by assembling vehicles, which can compete, some sourced from Brazil. Automobiles sales decreased during 2003 as a result of the unpredictable nature of the Venezuelan auto industry combined with contraction of the Venezuelan economy as a whole. Local car assemblers blamed lack of demand in the auto industry on the loss of purchasing power of the Venezuelan consumer, high interest rates, and a general lack of consumer confidence. The overall economic situation is reflecting very negatively on the entire automotive sector. The parts and components trade and industry have suffered along with this, although imports have not been affected as much as the domestic parts industry whose major clients are the assemblers. The duty-free entry of parts made in Colombia has resulted in that country's growth as a supplier of spare parts and this trend can be expected to increase. C. MARKET TRENDS Venezuela has a motor vehicle population of 2,102,138 million cars, trucks and buses plus an estimated half a million motorcycles. The yearly increase is about 150,000 between locally assembled and imported vehicles. Local assemblers are General Motors, Ford Motors, Daimler-Chrysler, Mitsubishi, Toyota, ENCAVA, IVECO, Mack and several bus builders using locally made or imported chassis and engines. At this time, roughly 30% of the contents of assembled vehicles are locally made components except engines, transmissions and differentials. The estimated average age of motor vehicles in circulation is above 10 years, which makes Venezuela an excellent market for spare parts for older cars. For a number of years in Venezuela there was a local content law, which resulted in the growth of a rather impressive and diversified local components industry. While such a requirement no longer is in force, local assemblers still make use of this industry and manufacturers have also been exporting chassis parts, alternators, steel and aluminum wheels, suspension parts, air conditioners, radiators and many other parts. Many local manufacturers have been able to achieve ISO certification or quality certifications from Ford Motors or General Motors. No statistics are available on the production or sales volume of local manufacturers of auto parts and accessories, nor are there reliable import figures for this year or last year. Trade sources estimate that total imports of automotive components, not counting CKD kits for local assembly, are probably above USD 600 million/year. Older import statistics do not break figures down into parts for automobiles or trucks. There is a good but again undefined market for accessories, performance kits, or such products as sound equipment. In 2003, sales by the automotive parts industry were USD 960 million. The Cámara Venezolana de Fabricantes de Productos Automotores (FAVENPA), the local automotive parts chamber, is concerned with the increase of vehicle imports, which were 22.2% in 2003 of a total market of 63.726 units. The chamber wants to work with the government to find a mechanism to limit the imports and help the local industry. The Chamber demands the following steps by the government to help support the existing parts and assembly industries: * Double the import duties on cars and auto parts. * Prohibit the import of used auto parts. * Prohibit importing of cars and buses by government agencies. * Lower the interest rates. * Increase the drawback rates from the present 3.5% to 10% as in Brazil. * Achieve a competitive exchange rate. FAVENPA realizes that some of these demands are in violation of World Trade Organization (WTO) rules but, according to them, this could be negotiated. FAVENPA even has stated it’s desire for the government to consider prohibiting all imports of automobiles. The import of used cars, trucks, buses and tires is already prohibited. Analysts do not believe that FAVENPA will be successful in their demands. The Venezuelan automotive market closed 2003 with a total of 63,726 vehicles sold. However, 2004 figures seem to indicate a potential increase in sales by 81.95% according to the Automotive Chamber of Venezuela (CAVENEZ). Faced with decreases in sales, companies are updating their inventory level to be ready for a projected market of 120,000 units for 2004. The industry depends this year on new drops in interest rates, lower inflation rates and the currency stabilization, to offer stable and accessible prices. No one seems to have a clear vision of what is going to happen, but industry believes that if the interest rates fall, and the exchange control continues, automobiles sales will raise. FAVENPA, whose principal customers are the local assembly plants, has informed the Ministry of Production and Commerce (MPC) of an estimated drop of 50% in automobile production for calendar year 2003 and a drop of employment in the automotive industry of about 20%. Imports of new automobiles in 2003 were 14,146 units (22.2%) of total car sales, which 3,257 units (5.11%) were imported from the Andean Region, and 10,889 units (17.09%) were imported from other regions. The overall decrease in car sales during 2003 is attributed mainly to the loss of purchasing power of the Venezuelan consumer, high interest rates, and a general lack of consumer confidence. The automobile industry reports that over 70% of cars are bought with cash. Some concessionaires have drastically dropped their prices and others offer fixed reduced interest rates of 26-29% for the first six months, after that, the rate rises. The general economic condition of the country combined with extremely high interest rates, gradual devaluation of the currency, exchange control and political uncertainties have led to a sharp decrease in the sale of new automobiles. Assemblers are showing an increase of 50.34% in sales for the first three months of 2004 in comparison to 2003. The principal clients for local manufacturers of parts and components are the 13 assembly operations in the country. On the other hand, vehicle population has not decreased but vehicle age is increasing now estimated at over 10 years. Thus, local production and imports of spare parts have not decreased as much as could be expected under the circumstances. The trade, while somewhat pessimistic, reports that sales continue at an acceptable level but do report that imports from Colombia and Brazil appear to be increasing, partly because of somewhat lower prices than from the U.S. and partly because of the increasing sales of Brazilian-made cars and cars made in Colombia and Ecuador which enter the country duty-free under Andean Common Market regulations. The sale of service equipment to individual repair shops has shown decreases due to high costs and devaluation but needs are high. However, four years ago there was an aggressive program by domestic and foreign companies consisting in the construction of new gasoline service stations and the upgrading and modernization of existing ones. The U.S. is the principal supplier of such equipment. The U.S. is the major supplier of auto parts but U.S. export figures include parts for Japanese, Korean and European (except Fiat) cars, most of which are counted as U.S. exports since they are bought from the U.S. subsidiaries of the foreign manufacturers or from exporters of these components. U.S. companies are also the major local manufacturers of auto parts, either through local subsidiaries, through licensees, or contract manufacturers. However, inroads into the U.S. market position can be expected because of the increasing popularity of small Asian or European cars and due to the sourcing of U.S. models from plants in Brazil, Colombia and Mexico. Since most of these cars are hybrids, it can be expected that many of the spare parts will come from these countries as well. With the average age of the cars in circulation now over 12 years, U.S. exporters might wish to explore the sale and search of parts for old model vehicles for which a serious shortage exists. However, there is some resistance against used and rebuilt components. Otherwise, the U.S. market position for "generic" parts will continue to be excellent since there is a definite customer preference for U.S. products. D. IMPORT MARKET AUTOPARTS MARKET Market Data (USD Millions) 2002 2003 2004 A. Total Market Size 1,412 960 B. Total Local Production* 606 490 745 C. Total Exports* 234 250 259 D. Total Imports** 1,040 E. Imports from the U.S.*** 405 280 *Source: FAVEMPA - Association of Automotive Parts Manufacturers **Source: CANIDRA - Association of Auto Parts Importers ***Source: U.S. Department of Commerce Excluding kits for local assembly of cars (CKD) E. COMPETITION ANALYSIS DOMESTIC PRODUCTION The Venezuelan government in the early l960s established an automotive industry policy, which, among other clauses, prohibited the assemblers from manufacturing their own components and replacement parts. This was done partially to protect the small existing parts industry but mainly to stimulate the establishment of supporting industry and to generate new jobs, thus forcing the assemblers into outsourcing all parts which were not components of the assembly kits (CKD kits). At the same time, a timetable establishing yearly quotas forced the assemblers to incorporate more and more local components. These quotas were negotiated every year between the government, the assemblers and the parts industry. The system over the years has undergone many changes and variations and finally has evolved to a system where the assemblers have to "replace" a yearly percentage of foreign exchange which they use for importing kits by incorporating locally made components, calculating the other domestic values added and by exporting finished automobiles and trucks. Effective January 1, l995, the Andean Pact Common Automotive Policy established that assemblers must incorporate 30% of the value of a car with parts made in the region, 32% in l996 and 33% in l998. An analysis of the import statistics shows that the Venezuelan auto parts industry has made the country almost self-sufficient in certain areas. Most prominent are safety glass, wheels, auto air conditioners, batteries, belts, hoses, filters, spark plugs, most electrical parts, radiators, brake linings and pads, shock absorbers, leaf and coil springs, seating and exhaust systems. The production of valves and pistons has begun only relatively recently but already is a factor in the market. While there is some resistance among end users against local products because of perceived quality deficiencies, in truth the industry has achieved good standards as evidenced by many companies having received quality certificates from U.S. automobile manufacturers, such as Q1 from Ford, QSP from General Motors and SQA from Chrysler. The industry is now preparing for the QS-9000 unified certification system agreed upon by the "Big Three". In addition, many companies have obtained the ISO quality seal, which has international validity. Venezuela now joins the MERCOSUR (Argentina, Brazil, Paraguay and Uruguay) and is implementing gradually the Andean Common Market automotive industry guidelines and the G3 agreement with Mexico. Thus, the potential export market for the Venezuelan auto parts industry will grow considerably which bodes well for its future. Several of the manufacturers are subsidiaries of U.S. companies and many produce auto parts under license and technical supervision of American manufacturers. In addition, local industry produces a variety of supplies for car production and maintenance such as paints and lacquers, adhesives, waxes and polishes, seating textiles and leather, chrome plating, anticorrosive paint, body fillers, tools, jacks and many others. The three tire manufacturers (Goodyear, Bridgestone-Firestone and Pirelli) supply the assemblers as well as the aftermarket. There are six battery manufacturers, all with local capital, of which one, Duncan, has over 60% of the total market. Their combined production is over 1.9 million units a year. The domestic auto parts industry thus constitutes the most serious competition to imports. While its client base among the assemblers has shrunk and possibly will not revive much during the next two years or so, its export potential seems to be growing. For the replacement market, the industry seems to concentrate on generic components, those which fit almost any car, leaving engine and transmission parts, instruments, headlights, differentials, steering mechanisms and other brand- or model-specific parts to the import market. There is some competition among manufacturers, which seems to imply excess capacity. Advertising is concentrated on the printed media, billboards and commercials during automobile races transmitted by TV. THIRD COUNTRY IMPORTS It is difficult to speak of growth rate for the coming year and it would be more precise to speak of recovery. Provided vehicle sales recover, inflation improves, there are no other devaluation and there are no social upheavals as a result of rising prices, taxes and general living costs, there should be a slight recovery in automobile sales. The vehicle park is getting old (12 years average) and demand for spare parts for older vehicles should rise. These parts, except generic ones, are not being manufactured in Venezuela and probably cannot be produced because there won't be economic scale of production. This should constitute a good prospect for U.S. exports. With the majority of the automobiles in circulation being U.S. models, the U.S. should have the major market share for spare parts for older cars. The sourcing of auto parts from a specific country is not driven by considerations of quality or price but by the source of the vehicle for which the part is destined. Thus, with increasing circulation of small European (mainly Fiat), Korean and Japanese vehicles in circulation and the assembly of "American" cars made in Brazil, it is likely that those countries will gradually increase their market share. Even Fiat sources its imported cars from its Brazilian plant as well as the German Volkswagen. U.S. MARKET POSITION The present U.S. market position is excellent, not only because of the predominance of American car assemblers but also because of the belief that U.S. automotive products are superior in quality. Gradually, however, this position of predominance is being eroded because of the influx of automobiles from Europe and Asia, many of which are less expensive and smaller than U.S. models with resulting savings in tire and fuel expenses. Local U.S. assemblers are only now attempting to counter this trend by assembling vehicles, which can compete. Many of these, however, are not of U.S. manufacture, such as several Chevrolet models. What has contributed to the high price of U.S. cars assembled locally is the fact that only "fully loaded" vehicles are available and that the customer does not have the choice of ordering a car without air conditioning, electric windows, four-speaker stereo system, nor a specific engine. Only very recently did the industry began offering cars with choice of a 1.3 liter or l.6 liter engine and one "stripped-down" model at a considerably lower price. U.S. exporters appear to hold the predominant market position for "gadgets", trim, optional accessories and performance equipment, although this latter market is tiny. There is some Italian performance equipment on the market. Security equipment from the U.S., Italy and Brazil is in high demand due to high theft rates. Insurance companies require the installation of at least three independent systems of which one must be electronic while the others can be mechanical. The projected annual growth rate will depend mainly on economic factors. Recovery to the sales rates of the late 80s and early 90s will take several years. If all factors outside the automotive sector become positive, the sector estimates an annual increase of parts sales of 10%. If not, this market will remain stagnant. As explained earlier, the U.S. position -no matter the economic conditions- will deteriorate somewhat because of the growing market for Japanese, Korean and European vehicles, favored imports from Colombia and Ecuador, now from MERCOSUR and eventually from Mexico. The market position of U.S. exporters may also be affected if the domestic parts industry continues to grow and diversify. This growth will depend not so much on the potential purchases by the assemblers but on export efforts and possibilities. If the industry detects a market abroad for a specific product, it might chose to produce it even if potential domestic sales are low. Once in production, however, the local assemblers and the aftermarket might be interested in buying the product. Major U.S. suppliers are the companies, which not only manufacture in Venezuela but also through these firms or other arrangements sell other products in Venezuela. Other important suppliers are: Federal Mogul, Sealed Power, Elgin, SKF, Perfection Hy-Test, Muskegon, Amsco Valley Forge, Spicer, Bendix, Borg Warner, Raybestos, Autolite, Delco, Moog, Cooper Industries, Wagner and many others. All have sales agents or wholesale distributors in Venezuela and their products are available through many retailers. Some U.S. and third country manufacturers have appointed commission agents who obtain orders from wholesalers or other importers and are paid a commission, normally between 5 and 10%. The exclusivity of agents or of exclusive distributors is relative, however, since parallel sources exist, normally jobbers, exporters or wholesalers in southern Florida. Local importers have told us that frequently they obtain better prices and much speedier delivery from these sources than from the manufacturer. Since no special business license is required to be an importer, many of the larger retailers affect their own imports from these sources, thus avoiding the middleman. Since most local companies attempt to keep their stocks small, and with the frequency of air cargo service between Miami and Caracas by several airlines, the importers are able to place frequent smaller orders and have them filled quickly. We were told that the response speed by exporters in southern Florida is far better than that of the manufacturers who also usually only wish to handle large orders. The exporters around Miami also are willing to put together highly mixed shipments consisting of many different items and brands. F. END USERS ANALYSIS End users may be broken down into four groups: the car owners; the repair shops; the assemblers and the professionals, such as fleet owners which include the military, the police organizations, and trucking, bus and car rental fleets. Since the first two are interrelated, their market can be combined and is estimated to amount to 70% of the total. Military, police and other government fleets are estimated to operate about 8% of the total number of vehicles while trucking; bus and rental car fleets constitute the remainder. Since individually owned bus and taxi operators, the majority of the public transportation system, prefer to do their own work as far as technically feasible, these can be counted among the car owners. The car owners, most of whom are not familiar with vehicle maintenance, usually leave the decision as to what spare parts to buy to the garages but sometimes do insist in the installation of what in Venezuela are called "legitimate" parts, such as those specified for a particular model or replacing the same brand part as that which originally had been installed by the vehicle manufacturer. Increasingly, however, vehicle owners must be satisfied with whatever suitable spare parts the garages are able to obtain. This group of end users also is in the market for the purchase of accessories, trim, gadgets, security systems, fire extinguishers, tool kits and small compressors. All of these items are sold not only through the parts stores but also through such outlets as department stores and even supermarkets along with maintenance products such as polishes and waxes, oil and gasoline additives, carburetor cleaning sprays and windshield cleaning compounds. The repair trade, probably the largest end user of spare parts, normally maintains on stock only consumables, such as gaskets, spark plugs, cables, points, condensers, belts and hoses and orders needed parts by phone from the retailers according to the repairs they have to effect. Muffler, shock absorber and brake shops do maintain a certain stock for their daily needs. They claims that there are over 4,000 such establishments in the country but admits that its membership is much smaller and that a correct estimate is not possible, especially due to the rather recent appearance of numerous individual mechanics in the informal economy, most of whom have no premises but work out of their cars and pickups. While by law repair shops have to provide a three months warranty on the repairs they have done, these "curbside mechanics" of course do not feel bound by this requirement. No repair shop, however, guarantees the spare part they have installed, only their work. To be counted among the repair trade is the estimated 2,000 gasoline service stations. While some have mechanics on their staff and in many cases a separate or associated tire sale, mounting and repair shop, they normally do not provide even emergency repair service other than the installation of a new battery, windshield wiper blade or V-belt. Those, which provide car washing, lubrication and oil change service, also install new gasoline, air and oil filters and usually maintain a good stock of them. Many have small stores where they sell consumables for car care and maintenance, spark plugs, windshield wiper blades, batteries, radiator or gas tank caps and similar articles. The service stations normally buy from wholesalers or directly from local manufacturers through visiting salesmen. Venezuela has no "chain" stores for automotive parts. All are individually owned, which sometimes makes a need for single sourcing difficult for garages, which are required to place orders for a single repair job with a number of retailers since none is able to offer a complete line of parts. There are some specialty dealers such as for brake parts or bearings but again none appears to be able to supply complete lines. The garages of vehicle dealers attempt to maintain a good stock of parts for the brands they sell to be able to effect warranty repairs quickly but these stocks appear to be limited to those parts, which are needed most. Lacking is usually trim, instruments, headlights, tail light glass and the more expensive parts for engines and drive trains. Specialized service shops exist and provide fast, economic and reliable service such as exhaust systems, shock absorbers or brakes. There also are front-end alignment shops, some of which also offer front-end repair service. All are individually owned and there are no franchise operations. Diagnostic services appeared several years ago but failed. They provided a good diagnosis of a car's condition or the reason for failures but did not repair, which caused a two-stop problem for the owner. Most of the better garages have diagnostic equipment anyway. There are numerous body and paint shops as well as upholstery shops. The paint and body shops are rather rudimentary and most have no baking ovens, which causes lengthy delays during the rainy season. Their consumption of body parts and trim is considerable and a lengthy search for such parts really does not affect the car owner who has to wait anyway for the work to be done since a complete paint job can take over three weeks. Practically all of these specialized repair shops purchase their spare parts from retailers with the exception of the muffler and tail pipe shops, which usually buy from the local manufacturers and often have their own pipe bending machines. The do-it-yourself market is small and customers are mainly the individual taxi and mini-bus owners who attempt to effect their own repairs whenever possible. What is becoming more and more available, as mentioned above, are repair services from individuals in the so-called informal economy, normally jobless mechanics with tools in the trunks of their cars doing repair jobs on the curbside or at a car owner's home. They are far less expensive than established repair shops and the work they do is generally quite acceptable. They buy the needed spare parts from retailers and they do not offer any warranties. As inflation and unemployment are high, the number of such curbside mechanics is bound to increase. Employed mechanics moonlighting to make ends meet also boosts their number. No estimates are available regarding the market share of such mechanics vs. established garages but a simple drive through towns would seem to indicate that their market share is growing to be considerable. Engine, clutch, transmission, brake and differential rebuilding plants and shops are available. The import of used parts is small and seems to consist mainly of engine blocks, rebuilt transmissions and heavy truck differentials; truckers are the majority of the end users. There is no import duty or tax advantages for used or rebuilt components. Used parts are available from numerous junkyards and these components find a ready market for the repair of older vehicles for which parts are difficult to obtain. There are a few used parts dealers who specialize in locating and sometimes importing such needed parts. The shortage of parts for older vehicles has led to rampant car theft for the purpose of dismantling them and the police constantly are on the lookout for such chop shops. The average car owner certainly prefers new parts. One-dealer terms the market for used parts a "market of desperation" based on the unavailability of new parts or - in the case of truckers- on cost. Fleets normally install only new parts but at times are in the market for imported engine blocks or 3/4 engines and rebuilt transmissions with warranty. The armed forces, the police organizations, truck and bus fleets and car rental agencies operate their own repair shops. They normally buy their parts from wholesalers. Sometimes, and in case of larger purchases, they open a tender. Taxi lines are cooperatives of individual vehicle owners as there are not taxicab companies in Venezuela. There are lines with radio dispatch service but again the cars are individually owned. All end users except the assemblers at this time appear to be concerned mainly about the availability of parts. Cars have been out of operation for weeks because a certain spare part can't be found. This situation appears to be improving gradually and it is hoped that within a year or so end users again will be able to specify a brand or country of origin instead of telling their mechanics to find any part that fits. An end user, outside the normal distribution channels, is the assembly industry. The assemblers purchase directly from the domestic parts manufacturers but fulfill all their imported needs through their parent companies abroad and thus are not subject to normal sales methods nor do they appear to be free to select brands or designs. Some of the vehicles made in Venezuela are hybrids or not U.S. or other country's original cars at all, such as the very popular Chevrolet Corsa, it is an Opel designed for and made in Brazil; imported Mazdas are made in Colombia; other Suzuki models are made in Ecuador and all VW's are made in Brazil and probably different from the original German version. This method of sourcing of course complicates the search for spare parts. The total number of vehicles in circulation is certainly decreasing at this time. This situation has led to an overall decrease in sales by the auto parts dealers and by the domestic industry. Still, there are now some signs of recovery. The entry into the market of lower priced and smaller vehicles from Korea, Japan and Russia and the initiatives by several car dealers to negotiate lower interest rates with the finance companies might bring about gradually increasing sales. The effects of these attempts of recovery on the spare parts trade and industry will be very gradual, however. G. MARKET ACCESS The overall economic situation is reflecting very negatively on the entire automotive sector. The parts and components trade and industry have suffered along with this, although imports have not been affected as much as the domestic parts industry whose major clients are the assemblers. The duty-free entry of parts made in Colombia has resulted in that country's growth as a supplier of spare parts and this trend can be expected to increase. Ecuador still seems to be a negligible supplier. Outside this group, the entry conditions for all supplying countries are the same. There are no non-tariff barriers. Import duty range from 5% to 15% on parts and accessories and all imports has to pay a 2% customs service charge. Duties and charges are calculated on the CIF cost. Recently, the government has instructed a 15% sales tax (value added tax). Again, this tax is non-discriminatory as far as countries of origin are concerned. One non-tariff barrier has practically been overcome. This was based on obligatory quality and manufacturing standard certificates required for certain imports where the Venezuelan standards office SENCAMER had established standards for Venezuelan products (COVENIN). Since customs demanded to see an "official" certificate to the effect that the imports complied with similar standards in their countries of origin, importers had the problem in cases where either such standards did not exist or no official standards institute was established which could certify adherence to standards. In the case of U.S. products, there was no official institution which could certify adherence, for instance ASTM or ASI standards or similar. However, importers have been able to overcome this and SENCAMER appears to accept a statement by the foreign manufacturer to the effect that established standards have been applied. In cases, where the importers have not been able to provide any type of certification, SENCAMER is now requesting a quality test by a local testing laboratory, a costly and time-consuming procedure that the importers are protesting. COVENIN obligatory standards exist for the following products: batteries, safety belts and safety belt anchors, McPherson struts, brake cylinders, helicoidally springs, steel wheels, brake servos, radiator caps, safety glass, spark plugs, tires, retreating material, rubber belts, mufflers, steering terminals, wheel lugs, water hoses, brake disks and drums and suspension parts. This list is subject to changes as SENCAMER might add other items. There are no labeling, marking or packaging requirements. Since there is some resistance by end users against non-identifiable manufacturers or countries of origin, it is advisable to print on the package or label the name of the manufacturer and his address or at least "Made in the USA". In the case of generic parts, it is helpful to list the automobile brands, model and model years for which the component is applicable. H. MARKET ENTRY The distribution and purchase practices vary. The automobile assemblers purchase locally produced parts directly from the manufacturers and all other acquisitions via their home offices. Assemblers which operate under contract or license also are not free to buy but are being told by their licensors where and what brands to buy. They do have some freedom in buying locally produced components but these are apparently tested and authorized abroad. The car dealers appear to buy their spare parts for new vehicles exclusively from the assemblers whose cars they sell but complain that the prices for these parts are excessively high and attempt to obtain them from other sources as soon as they become available. U.S. manufacturers and exporters of automotive spare parts may waste their time if they approach the assemblers directly, and this includes the contract assemblers. They should attempt instead to sell through the assemblers' home offices abroad. This situation could be different for the bus and truck builders who buy the chassis and engines either abroad or from the major assemblers and only build the superstructure. This method of production requires a considerable input in parts and components and these companies could be targets for sales efforts from the U.S. The distribution practices for the replacement trade also vary widely. There are a number of commission agents whose salesmen visit the wholesalers and importing retailers. There are also importing wholesalers, which buy directly from the foreign exporters. Practically all the spare parts dealers have motorcycle deliverymen who deliver to the garages and service stations. Garages normally do not keep stocks but phone retailers for parts needed for a specific repair. At retail level, all sales are on a cash basis. Wholesalers often grant 30-day terms to good clients. Large orders from wholesale importers frequently are financed through irrevocable letters of credit but many companies have told us that U.S. exporters lately require cash in advance of shipping. Venezuelan authorities placed a ban on foreign exchange transactions on January 22, 2003, and created the Commission for the Administration of Foreign Currency (CADIVI). U.S. investors should carefully examine business opportunities on a case-by-case basis and in particular the method of payment. Appointing a local agent or consultant is essential, even if only to stay informed of changes and potential projects. It is also strongly advised to seek appropriate legal advice on how to set up business in Venezuela and to monitor changes in legislation that may affect foreign investment and sales in certain sectors. Since the turmoil caused by the exchange controls has been resolved, the financial relations between local buyers and their foreign suppliers they have dealt with on a regular basis has returned to normal and terms will again depend on the experience had on both sides. Mark-ups of several hundred percent for imported parts are not unknown. Two retailers have told us that their mark-up is about 200%, blaming the costs of doing business. Mark-ups from local manufacturer via wholesaler and retailer to the end user is somewhat less but still is reported to be around 150%. The "dollarization" of prices also has contributed to the end user's cost of operating a vehicle. Local parts manufactured at much lower labor costs than in the U.S. are sold at over 50% above what they would cost in the U.S. In those cases, the local manufacturer states that their production runs are much smaller and that they have to distribute their overheads among smaller numbers of products sold. The mark-ups charged by the garages to the vehicle owners for parts are customarily 30% over the price paid to the parts retailer. Garages normally refuse to install parts brought by the car owner since the mark-up is a major part of the garage's income in addition to the labor costs charged. Regional opportunities exist now because of the automotive agreements between Venezuela, Colombia and Ecuador, which allow for duty-free trade of parts made in any of these countries. This opening could be exploited through the local parts industry but probably not through wholesalers since the three countries require a country of origin certificate. The marketing and distribution practices for U.S. products vary. Promotions are directed mainly towards the repair trade and only to a limited degree towards the end user, the car or truck owner. These promotions to the end user are usually limited to such products as tires, batteries and accessories. Promotions directed to the garages appear to concentrate not on brands as much as completeness of stock, availability of specific specialties, quick delivery and better prices. Thus, and in the absence of any regularly published magazines, newspapers are being used, as well as participation in trade shows, distribution of promotional material (posters, calendars, gifts, etc.), special discounts to regular or larger clients and personal contact. All transactions between parts dealers and garages are on cash basis. Delivery is normally by motorcycle messenger. As it was mention before, Venezuela has no "chain" stores for automotive parts. This lack of horizontal chain stores represents a gap in the local distribution system. This could be filled by a joint venture or franchise operation from a U.S. company interested in establishing a centralized warehouse supplying company-owned or franchised stores with as complete a selection of parts as possible. If this operation establishes a system by which model-specific parts for older vehicles (10 years and older) can be obtained within a reasonable time, such service would have high potential success. The frequency of air service and the availability of international courier systems would make such a service feasible. This market could also be serviced by a well advertised mail order organization from a company specialized in locating brand-specific parts for older vehicles.
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