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Analysis

Choices Defined by Preference

Sat, 09/01/2018 - 10:38

2016 was the year the Big Three peaked in the Mexican market. Although their market share was compromised by newcomers from Japan and Korea, Ford, GM and FCA were still enjoying continuous growth. By the end of 2017, that trend had turned for the worse. Ford ended the year with total sales of 81,698 units, representing a decrease of 17.7 percent against the numbers from 2016, the largest percentage fall of all three automakers. FCA was the least hit, with sales totaling 100,846 units and decreasing 2.9 percent against 2016. Meanwhile, GM ended with 258,523 units and a decline of 16.2 percent. That was slightly less than Ford’s contraction but in terms of units it was much more significant.
The situation did not improve in the first half of 2018 and all three brands maintained a downward performance. Between January and July, Ford sold 12.1 percent less than in 2017 with a total of 41,194 units. FCA has seen sales decline by 10.5 percent, amounting to 50,887 units. Finally, GM suffered a fall of 13.2 percent in its sales numbers for a total of 124,045 units. Meanwhile, brands such as Kia, Hyundai and Mazda continue growing and winning a larger market share in a contracting market.
Considering the numbers from July 2018: Ford held a market share of 5.2 percent, down from the 10.2 percent it had in 2010. FCA had a market share of 6.4 percent down from the 9.3 percent it enjoyed in 2010. Finally, GM’s share has fallen to 15.6 percent from its previous position with 19 percent of the total market.
Although they are a significant part of the region’s automotive heritage and three of the brands with the oldest manufacturing presence in the country, Ford, GM and FCA have lost their grip on the Mexican market. “In an extremely competitive environment, clients can choose what best suits their needs,” says Guillermo Rosales, Director General of AMDA. “Contrary to other Latin American markets, Mexican consumers are much more sophisticated in their evaluation before purchasing a new vehicle.” European brands have bet on the premium and high-end market. Meanwhile, Japanese and Korean brands have become standards for compact-car cost-competitiveness. American brands, however, have stagnated in terms of design and innovation. That has cost them their position not only in Mexico but around the world.
When President Trump was bickering about unfairness toward the US in terms of trade and tariffs, one of his comments was that the US bought many German cars while Germany did not give much importance to American production. He said this was because of Europe’s high tariffs against US exports. However, the reality is that European markets just do not find American cars attractive due to their large size and poor fuel economy.
That is not the case in the US, which is the second-largest automotive market in the world and where American consumers are increasingly showing preference for larger vehicles. Therefore, it is logical that companies choose to favor their domestic market before the rest of the world. This vision was further enabled after the Environmental Protection Agency announced a revision on the fuel-efficiency goals it had implemented during President Barack Obama’s administration of 15km/L.
Due to its average purchasing power, Mexico is a compact-car oriented market. According to Rosales, the average price of a vehicle in the domestic market is MX$300,000 (US$15,000), which means that only brands capable of participating in this segment will succeed. It is no surprise then that the American share in the market is decreasing. Ford, at least, sees an opportunity in this trend.
“Ford wants to reduce its presence in the market to have fewer distributors with better profits,” says Carlos López de Nava, Director General of Grupo Alden. “The brand wants dealerships to sell fewer but better models to improve margins. I think it is a smart move and the objective I think is to have better dealerships and better businesses in accordance with the times.”
The domestic market, however, is not the problem. The issue is the imbalance between what Mexico produces and what its top export market, the US, wants. “Growth in Mexican production over the past five years has been easy due to the growth in the US market of approximately 1 million units per year,” says Guido Vildozo, Senior Manager, Americas Light Vehicle Sales Forecasting of IHS Markit. “The US market is becoming light-truck intensive, while Mexico is a passenger-car intensive manufacturer.” This puts the country in a difficult situation because if its main export destination is the US and American companies do not see the point in continue manufacturing light vehicles, there is no place for Mexico.
“Production will move according to international demand and we will most likely see a reduction in our vehicle output,” says Gerardo San Román, Head of Latin America at JATO Dynamics. “OEMs are making decisions on their product lineups based on the profitability of each product segment. This is a pragmatic view, especially considering that competition in the compact and subcompact segment is becoming fiercer.”
FORD LEADING THE WAY?
In April 2018, Ford announced its decision to refocus its business toward SUVs, crossovers and pickup trucks. As a result, Mexico’s position in the company’s manufacturing network was left adrift. The country manufactures Ford's Focus and Fiesta models, both of which will be cut from the company lineup in favor of larger models. “We are committed to taking the appropriate actions to drive profitable growth and maximize the returns of our business over the long term,” said Jim Hackett, President and CEO of Ford Motor Company in the corporation’s 1Q18 financial statement. “If appropriate returns are not on the horizon, we will shift that capital to where we can play and win.”
One of the measures implemented was an entire overhaul of Ford’s portfolio, giving up on the compact segment. The final result was the elimination of all of the company’s sedan and hatchback models except for the Mustang and the upcoming Focus Active that the company will ship from China. This latter model was previously projected for the company’s new plant in San Luis Potosi until the project was canceled. Prior to this, the company had already announced in December 2017 a shift in production of the Ford Fusion manufactured in Hermosillo also to China.
Ford expects that by 2020, 90 percent of its sales in North America will be in the light-truck segment. Since Mexico is solely focused on production of the very models that Ford decided to cut, the industry is waiting to hear whether production will be refocused at its four plants in the country or if further divestment should be expected. Only the future for the production of the Lincoln MKZ  manufactured in Mexico remains unclear since the company made no comments regarding this brand.
“We are going to be allocating even more capital to that (the light-truck segment) to make it even larger and more positive for us and that will take capital away from those parts of the business that we think we do not have a path forward to appropriate returns,” said Bob Shank, CFO of Ford Motor Company in an interview with Bloomberg.
Although there is a risk in making the decision to ditch compact models should gas prices increase or fuel-efficiency measures are reinstated after Trump’s time in the White House ends, most opinions favor Hackett’s decision to revamp Ford’s business. “The passenger car rationalization plan is just the sort of bold and decisive action we believe investors have been waiting for,” said Ryan Brinkman, auto analyst at JP Morgan Chase & Co.