The Rental Planet: El Salvador

In El Salvador, the stiffest competition is an old concept - the belief that money spent renting equipment is money thrown away. The competition is the lack of awareness that spending money on renting equipment reduces the considerable expense of maintaining equipment, of investment in tools and mechanics and security and storage facilities, and the cost of capital to buy machinery. The competition is a tendency for constructors to measure their companies' worth in the amount of machines they own rather than the amount of money they have in the bank.

Most Salvadoran customers have not done business with a rental company that provides the kinds of services that contractors in more mature markets have come to expect and regard as standard. In fact, in El Salvador, where a protracted civil war recently left the economy in shambles, tourism is so minimal that even car rental is relatively rare. So the challenge for the staff of RentaCentro, El Salvador's largest rental company, is to convince customers to try something new, like a doctor trying to convince a disbelieving patient to try a new medicine.

The challenge is to educate a customer base that sees rental only as an emergency option in case of short-term need. If there's a major project, contractors figure, buy the equipment. If they plan to use a piece of equipment more than once, buy it.

"Here, the contractor thinks it's a mistake to rent because he believes he is throwing away his money," says Gabriel Siman, executive director of ConstruMarket, which founded RentaCentro as a division four years ago. "It's not like in the United States, where they see rental as a smart financial exercise. Here, they usually don't calculate the costs of their mechanics, their shops, the security they need for their facilities to protect their inventory. Contractors already have fleets, so it's difficult to tell them to get rid of their equipment and infrastructure. But for so many of these companies, at the end of the year the results are in machines rather than the pockets of their shareholders. And often they don't get the return they should out of those machines because they don't care for and maintain them as well as they should."

Another obstacle is that in El Salvador, many projects are tied to loans from the World Bank or other international lending institutions. When contractors bid on those kinds of jobs, or any other government-related projects, they must demonstrate the technical capacity to do the job - that they own the required equipment and that it is in condition to do the job. The concept of rental is not accepted enough for constructors to say they plan to rent the equipment, even if the rental company can document its ability to provide the required machinery. So contractors need a stable of owned inventory to qualify for much of the available work, and in an unstable economy given to far more dramatic peaks and valleys than in developed markets, they need every job they can get.

The strength of El Salvador's banking system, one of the strongest financing networks in Central America, presents another challenge to the development of a rental culture. A lot of financial options are available for the acquisition of new equipment, making it practical for Salvadoran businesses to purchase equipment.

Historically, the used equipment market in El Salvador - because of many contractors' tendency to use machinery until it falls apart - has consisted of very old and battered equipment. Therefore, financing for used equipment purchases has not been available, and the practice of buying new equipment for all needs is reinforced by the strong banking system. Although the growth of RentaCentro and the strength of major dealerships such as ConstruMarket and the local Caterpillar dealership have contributed to the growth and viability of a used equipment aftermarket in recent years, the financial system still favors new equipment purchases. And in a poor country where capital is at a premium, equipment users favor the line of least resistance.

Despite these challenges, 4-year-old RentaCentro is a growing rental force, already grossing more than $1 million per year in rental volume in El Salvador alone. RentaCentro now operates as a separate company in El Salvador, while the growing locations in Guatemala and Nicaragua operate as divisions of the ConstruMarket dealership.

The dealer ConstruMarket is part of the Fratel Group of Companies, led by the Siman family. The group includes a construction firm, an asphalt-paving company and an architectural services company. ConstruMarket, the largest multiline distributor in El Salvador and one of the largest in Central America, represents Komatsu, Ingersoll-Rand, Bobcat, Benford, JLG, Wacker, Geneco, Felker, Lincoln Electric, APT, Diamond Products and others.

The Siman family saw the growing tendency toward rentals in more developed countries and knew that the time would come for rentals to play a major role in the developing economies of the region. They recognized that by laying the groundwork and educating their clientele about the advantages of rental, they could be positioned well as the demand for rental services grows.

"As a dealer with 18 lines, we cover so many aspects of the construction project," says Ernesto Iraheta, general manager of RentaCentro. "From that came the idea of offering rental, because we need to offer integrated services from our group of companies. And our customers have the expectation to buy, to rent, and obtain parts, service and technical support on all the products we offer. That's what the group of companies has been working on the past few years."

Gabriel Siman says: "We are trying to develop a cluster in the construction sector, offering a package of products to projects. If our construction company gets the job, that's excellent. If not, to the same client we can sell prefabricated housing, we can sell equipment, we can rent equipment, or we can do the concrete work."

Personal relations Each day, RentaCentro's two sales reps - Jorge Moreno and Jesus Alvaro Ramirez - head out across El Salvador, visiting job sites and projects. El Salvador is roughly the size of Massachusetts, so the reps can reach almost any point in the country within two or three hours. Although headquarters for most companies is in the capital, San Salvador, Moreno and Ramirez travel the entire country to see where the work is and talk to local contacts to assess their needs. In the process, they educate customers and potential customers about how rentals can save them money.

A big part of their job is developing relationships. In a small economy such as El Salvador's, business relationships often evolve along with personal relationships, developing over long periods of time. Many businesses are family-owned, and relationships date back decades. And educating equipment users about a relatively new process involves a lot of trust.

"Relationships are everything here, especially in rentals," says Siman. "It's not like going to buy a hamburger where you don't know the person who serves it to you. In rentals, the customer's project depends on the rental house. In Central American culture, the customer needs to know the people who are providing the service."

At the same time, the rental company/distributor needs to know the customer base very well to swim in these uncharted waters. "We know who the winners and losers are," says Siman. "We know who you can give financing to and who we should avoid giving financing to because they might be going through a bad time. Here, you need to know the people very well or they can give you a big surprise when it comes to recouping your money. To do this business here, you have to understand how our financial system works and how our legal system works, because it is very different than in the United States."

A large part of the RentaCentro sales reps' work involves introducing products to potential customers. For example, aerial work platforms are not well-known in El Salvador, and many contractors are unfamiliar with them. Progress in that market involves a lot of demos and explanations, requiring patience on top of a significant financial investment.

"Developing the aerial market will take years of work," Iraheta says. "One of the problems is that federal or municipal governments don't encourage companies to use this type of product. In more advanced countries, there are federal regulations that demand certain safety practices on job sites. Here, these laws don't exist. So we have to communicate the need for this type of product and show how it can benefit the user."

Regional power Even as it sows the seeds of rentals, RentaCentro is on the road to expansion, with branches in Guatemala and Nicaragua and a rental presence in Honduras through the ConstruMarket dealership. The need to expand regionally is driven by its customers, many of whom do projects in those other countries. By having branches in neighboring countries, RentaCentro can free customers from the complex problems involved with shipping equipment across borders. Siman hopes to develop alliances that will facilitate the company's growth in the southern countries of Central America - Costa Rica and Panama - and on into the Caribbean.

But, as Siman says, "first things first, step by step."

Step one is the continuing challenge of educating people about the benefits of rentals. The RentaCentro staff members - general manager Iraheta and the sales, counter and service staffs - have proved that, with good equipment and strong support from the dealer, rentals can catch on and change the business culture in a small country with an inconsistent economy, struggling to overcome the ravages of war.

El Salvador is a small country where business is dominated by personal relationships, and the Siman (pronounced See-MAHN) family is one of the country's most prominent business clans. Roberto Siman Jacir founded what became the Fratel Group of Companies, which includes the construction company Constructora Siman, the ConstruMarket dealership and RentaCentro. Now removed from day-to-day operations, he remains an adviser, and despite spending much of his time abroad as El Salvador's ambassador to the Vatican, he also remains a formidable figure in Salvadoran business. Patriarch of a traditionally large Catholic family, Siman has 11 children, seven of whom are directly involved in running the family-owned businesses.

His eldest son, Roberto Jr., is president of the Fratel Group and of the Banco Multi-Sectorial de Inversion (Multi-Sectorial Investment Bank), which channels international loans to various Salvadoran banking institutions.

El Salvador is best-known internationally for the fierce civil war that raged there from the early 1980s until peace accords were signed in 1991. Although people unfamiliar with the country tend to view it as an old-fashioned "banana republic" ruled by an oligarchy, the Simans are bullish about recent changes.

"There are a lot of new ideas here now," Roberto Jr. says. "There is a desire to do things differently. For so many years, everything was frozen and unable to function. But we obtained peace, politically speaking, and people are a lot more receptive to new ideas. We have a young president, 39 years old, and democratic institutions have been strengthened. After all the suffering people went through during the war, people are much more open to struggling to find new ways of doing things."

While the Siman family operates its diverse group of construction-related businesses, which also include architectural and petroleum-related services and products and an asphalt-paving division, the group of companies is far from being a mom-and-pop outfit. The companies are managed professionally with boards of directors that include nonfamily members. And the family members place a high value on professional ethics.

"That is very important because we are well-known for how we run our businesses," says Siman Sr. "Here, there are no dirty deals, nothing under the table, everything is very clear and out in the open."

Siman is referring to what son Gabriel calls a strict separation between the companies. "We are sister companies, but we operate as completely separate divisions," Gabriel says. "We treat one another like we would treat a very good customer, and we have other customers that also receive preferential treatment. At ConstruMarket, for example, we have customers that compete with our construction company. So we don't want to get involved in internal details of those firms or do anything to degrade our relationship with those clients."

Gabriel says the companies do help each other by sharing information about the market. "We can learn what projects are coming, and we might learn what companies are doing well and what companies might be risky. But it is not a subsidiary relationship."

As for the emerging emphasis on rentals, all the family members support the effort, even though they know, as Roberto Jr. says, it will be "a long process" to prepare the groundwork.

"We believe in education and preparation, morally as much as professionally," he says. "We look for the best people, the best engineers, the best sales people, the best architects, the best mechanics. And when it comes to equipment, we look for the best lines."-MR

RentaCentro San Salvador, El Salvador History: in the 1940s, Roberto Siman founded Constructora Siman, a construction company and the first of what is now the Fratel Group of Companies, all of which are related to the construction industry. In 1965, Siman began ConstruMarket, now one of the largest multiline distributors in Central America and the largest in the northern triangle of Central America, which consists of Guatemala, Honduras and El Salvador.

In 1996, ConstruMarket began RentaCentro, a rent-to-rent division, which became an independent company early last year.

Key executives: Roberto Siman, founder and honorary president of the Fratel Group; Roberto Siman Jr., president of the Fratel Group and executive director of Constructora Siman (general contracting firm); Gabriel Siman, executive director of ConstruMarket; Pablo Siman, president of ConstruMarket in Guatemala; Ernesto Iraheta, general manager of RentaCentro.

Key equipment lines: Bobcat skid-steer loaders and mini-excavators; Komatsu front-end loaders, bulldozers and industrial forklifts; Benford dumpers; Wacker hammers, concrete products and compactors; American Pneumatic Tool products.

Rental revenue: More than $1 million in 1999 rental volume.

Employees: RentaCentro has 11 employees in El Salvador; four each in Guatemala and Nicaragua. ConstruMarket in El Salvador has 115 employees.

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