Are We Ready for a Market Recovery?By Guillermo Prieto | Thu, 09/03/2020 - 14:14
The Latin America region has had the lowest economic growth in decades, even before the pandemic started, and the fall in economic activity due to this pandemic will result in a level of 2020 GDP per capita in Latin America and the Caribbean similar to that observed in 2010. It is a lost decade.
The coronavirus pandemic has been spreading across the region and the consequences are here: for the first half of the year, car markets in the region have suffered steep falls, with the biggest five markets decreasing over a million cars compared to the previous year.
Taking a closer look into each market, we have Argentina with a 39 percent decrement, selling 95,000 fewer cars compared with the first half of 2019; Chile losing over 45 percent of its market; Brazil, the biggest market in the region, selling almost half a million less than 2019 with a decrease of 39 percent; Peru with the steepest fall, down 48 percent; Uruguay following the pattern with a 38 percent decline; Colombia seeing a 38 percent drop; and Mexico off 32 percent, selling more than 200,000 fewer vehicles than in the same period in 2019.
Latin America is responsible for 7 percent of the world’s new-car market and almost all predictions point to a 37 percent decline in sales in 2020 for the region.
We must remember that the origin of this crisis is not due to financial imbalances but from a health issue; therefore, we are strained due to the restrictions on economic activities from each country's health authorities to limit the spread of the virus.
Slowly, economic activity is recovering; however, the big question is how long is it going to take to reach pre-pandemic market levels? We believe that there are two factors that could fuel the recovery of the markets: the control of the introduction of used cars and financed sales.
The importation of used cars is a fundamental issue for the recovery of the Latin American car markets. Many Latin American countries work as a second market for used cars from bigger markets or, to put it another way, the dumpster for old cars. These cars already completed their life span and are ready to be destroyed; however, selling them in a developing country is far more profitable than recycling them. Normally, the country’s government would ban this type of vehicle but in most of Latin America, buying a car is outside the realm of possibilities for the majority of the population, creating a perverse incentive for authorities to relax the regulations for these types of cars in the quest for popularity and votes. Another way for these car to enter a country is through corruption. The profit generated from the sale of these cars is very high and, therefore, there are millions of dollars on the table to give to the customs authorities to allow their illegal entry into the country. Countries in the region also lack a solid rule of law, allowing these illegal cars to circulate throughout the country without restriction or with a “gratuity” to police officers (more corruption).
The consequences of the introduction of these used cars are massive. First, they have an unfair advantage over the legal used-car market, flooding that market and making it even more difficult for clients to sell their used car to buy a new one. Furthermore, reinforcing the lack of rule of law and increasing and normalizing corruption also damages the car industry across the region, harming formal businesses as well as their entire productive chain. These are businesses that generate employment, taxes and value. Additionally, these illegal cars are in dreadful condition; some of them would not be legal to drive in most countries and they would certainly fail all environmental regulations.
The second factor to recover the market’s previous levels are financed sales. Throughout the region, some markets reach levels of around 70 percent of the sales through finance while other countries can hardly reach 20 percent of financed sales. The economies and governments of each country must promote both the access to finance as well as the conditions in which it is given. This is a major challenge as the informal economy is prevalent over the formal economy, making the access to finance difficult for the majority of the population.
Given the importance of the automotive sector in Latin America, it is certain that the markets will recover; however, the speed of this recovery will be mainly determined by the government's actions. It is imperative for the government administrations to support the industry.