Guillermo Prieto Treviño
Mexican Association of Automotive Distributors (AMDA)
Expert Contributor

Automotive Sector Transforms Itself to Face the Post-COVID-19 Era

By Guillermo Prieto | Tue, 06/02/2020 - 09:21

The Mexican market is one of the most competitive and complex in the world. In the light-vehicle sector alone, the Mexican market is served by more than 2,400 distribution companies from 43 automotive brands and employs around 140,000 people.

Likewise, the commercialization of vehicles is directly linked to the purchasing power of consumers and the growth of the economy. However, in the Mexican case, we must add to these conditions the existence of two limiting factors that widen the gap between potential demand and vehicle sales: a high percentage of economic informality and low quality of the rule of law.

Some data illustrate the significance of these factors. In 2018, the measurement of the informal economy carried out by INEGI showed that for every MX$100 (US$4.48) generated from the country's Gross Domestic Product (GDP), MX$78 (US$3.50) came from 43 percent of formal workers, while MX$22 (US$0.99) corresponded to 57 percent of informal workers. These figures demonstrate that more than half of the employed population has low productivity and is unable to have sufficient income to demand high-value consumer goods such as vehicles.

In line with the above is the low financial inclusion in the country. The Annual Panorama of Financial Inclusion 2019 prepared by CNBV indicates that in an international comparison in 2017, Mexico reached 12 percent of adults with credit, falling below Chile (31 percent), Brazil (26 percent) and Colombia (21 percent). 

On the other hand, the 2018 “Hallazgos” study, carried out by México Evalúa presents the results of the Impunity Index of the criminal justice system. The Federal Impunity Index, that is, the proportion of cases that are known but are not satisfactorily resolved by the FGR and the Federal Judiciary, was 94.6 percent. On the other hand, the State Impunity Index was 96.1 percent.

Likewise, the poor performance of the Mexican economy has contributed to the Mexican automotive market being in recession since 2017. In Mexico, GDP had a real contraction of -0.4 percent in 4Q19 in relation to the same period of 2018, while the US economy grew by 2.3 percent in the same period, which is evidence of the internal origin of poor economic performance in our country. If things were complicated under these circumstances, the onset of the COVID-19 pandemic would increasingly aggravate the situation.

The health crisis is plunging us into an economic crisis that is deepening in the face of the inaction of the Mexican government, which has an erroneous conceptualization of the situation and of what is required to reduce job losses. Therefore, companies will have to manage the crisis alone and face the general lack of liquidity. That is why solidarity between economic chains is required to support micro and small businesses.

This is the case of vehicle distribution companies and their relationship with automotive manufacturers. It is essential to overcome the crisis that at the end of 1Q20 had caused a 23 percent decrease (almost 1,000 light vehicles less) compared to the previous year, especially when it is contemplated that the recovery of the automotive market will be slow and conditioned by the decrease in income and increase in unemployment and credit risk. In this sense, I consider that the crisis derived from COVID-19 will deepen the trends that were previously present.

These include low-profit margins on new vehicles and extreme competition between manufacturers and their dealer networks. Likewise, the use of digital channels for the sale of vehicles will be deepened. In these days of social isolation to face the health contingency, many people have changed their consumption habits and this includes using the internet to interact with vehicle dealers. Also, this trend requires a radical change in attitude to serve the customer, generating empathy in the care process, even in distance care.

The expression "the new normal" is increasingly accepted, understanding with it that social behavior will be modified by COVID-19 and that we will not carry out our daily activities as we did before the arrival of the pandemic. In addition, vehicle sales are also adapting to change and we will do so with the experience of a sector that has the capacity to rapidly transform and strengthen itself in the face of crises.

Photo by:   Guillermo Prieto