Lorena Isla
Director, Mobility Latin America
Frost & Sullivan
/
Expert Contributor

After Rebounding in 2021, What’s Next for Mexico’s Auto Sector?

By Lorena Isla | Fri, 01/28/2022 - 12:49

Since achieving record sales in 2016, the Mexican automotive market has not been able to replicate that performance in subsequent years. In fact, the local market had been facing several challenges that finally delivered a knockout in 2020 with the effects of the COVID-19 pandemic. Additional factors, such as the deep semiconductor crisis in 2021 and expected inflation in 2022, lead us to believe the local market may not see recovery to the levels of 2019 until probably 2024. The question is, how long might it take to again witness record sales levels in Mexico?

In 2021, sales of passenger cars again crossed the 1 million mark after dropping almost 28 percent in 2020. Car dealership and plant closures due to the COVID-19 outbreak pushed the market below 1 million, to 950,063 vehicles sold, in 2020. Overall sentiment in the second half of 2020 was that the market should recover in 2021, as economic activity levels were somehow returning to “normal” and an announced vaccination program in place was aggressive enough to assure a good percentage of the population would be (as we are talking abt the sentiment in 2020) protected against the virus in 2021. However, an additional, unpredictable situation came into play early that year: a global semiconductor shortage that deeply affected the automotive industry.

During the course of the pandemic, many automotive manufacturers expected vehicle sales to nosedive and canceled or significantly reduced microchip orders, especially during the months of March and April when companies had to shut down manufacturing operations due to mobility restrictions across the world and the need to protect employees. At the same time, lockdowns generated a higher demand for computers, tablets, game consoles and any household appliances that could help navigate the strict confinements (including having to work and attend school from home) in many countries, including Mexico. Microchip supply went to satisfy this demand growth in highly profitable segments that had nothing to do with cars and SUVs.

In early 2021, the impact of the semiconductor shortage was estimated to be around 400,000 less vehicles produced for the year. Majority of OEMs believed this shortage could be made up in the second half of the year. However, this was not the case and, according to AutoForecast Solutions, at the end of 2021, the impact was calculated to be 11.3 million fewer vehicles produced. This, in combination with increasing demand for vehicles, caused a shortage of cars and SUVs available in the market to meet demand for new cars. In Mexico, this situation, combined with lack of countercyclical measures against COVID-19’s impact, increasing prices and uncertainty about the overall economic scenario caused the vehicle market to grow at a very modest rate of 6.8 percent. During 2021, a total of 1,014,680 new vehicles were sold in the Mexican market. That is still far from the 1,317,931 sold in 2019.

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New Vehicles Sales, Mexico, 2006-2025. Source: Frost & Sullivan based on INEGI (chart provided by the expert)

Throughout 2022, the semiconductor shortage is expected to slightly improve but global vehicle production, and therefore vehicle manufacturing in Mexico, most likely will not return to pre-COVID levels until 2023. Other supply shortages are expected in vehicle components, such as steel and some plastics that can also affect vehicle supply. More than that, the Mexican automotive market may face additional challenges.

As a general economic rule, tight product supply combined with increasing demand translates into rising prices. In 2021, the general inflation rate in Mexico reached 7.4 percent, and according to AMDA (Mexican Vehicle Dealerships Association), inflation in the automotive sector was even higher, closing the year at 8.7 percent. Overall, this is also a global phenomenon that every central bank is facing and trying to mitigate. However, since it is caused by global supply chain disruptions as well as unstable commodities prices, inflation is expected to continue to be over target for the rest of the year. Rising vehicle prices in Mexico are likely to deter demand but the overall increase in prices of other products and services also constrains disposable income for purchasing vehicles or other durable goods. Both market disruptions are expected to ease toward the second half of the year.

For 2022, Frost & Sullivan expects new vehicle sales to reach 1.15 million vehicles, which represents 14 percent growth compared to 2021. But that is still below 2019 levels and very far from 2016’s record sales. It seems the Mexican automotive market will have to wait a few more years to return to levels seen in 2016 as it continues its path to achieving its long-term growth potential.

Photo by:   Lorena Isla