Competitive Credit Key to Triggering Purchasing DecisionsBy Alejandro Salas | Fri, 02/21/2020 - 09:59
Q: What is fueling the domestic market’s ongoing sales downturn?
A: All vehicle markets have a natural size but anticipated vehicle purchasing decisions pushed the elasticity of Mexico’s new-vehicle market to its limit. Tampering with market elasticity is common in all markets but when this variable is pushed too far, maintaining a positive sales momentum becomes difficult for brands. JATO Dynamics believes that the main driver for sales in all vehicle markets will be financing. Leasing, self-financing, traditional car loans and other financing schemes that trigger purchasing decisions will weigh on the recovery of the Mexican market. JATO Dynamics projects that the Mexican vehicle market will recover and start growing again at some point between 2023 and 2024.
Q: What are the most important challenges for Mexico’s vehicle financing market?
A: Longer maturation periods and lower down payments demonstrate that buyers look for the most affordable options available. People would rather make smaller down payments even if that means extending their loans. In 2014, the longest credit available was 48 months while in 2019 credits of up to 60 to 72 months are taking the lion’s share of credit sales.
Q: Why are long-term loans a burden for financing companies?
A: Nobody wins when financial commitments are extended because it introduces more risks and increases financial costs, while consumers demand low monthly instalments. This trend has enticed financing companies to start experimenting with new products to both increase sales volumes and take advantage of balloon payments. The goal is to refinance debt for a profit and reduce loan periods to 36 or 48 months to mitigate risks. Still, long-term car loans are here to stay because the Mexican vehicle market is adapting to this offering. These loans will allow financing companies to capture customers in new population segments that had been traditionally underserved.
Not all financing companies have the same appetite for risk, though. Financing institutions aim to maintain a healthy debt portfolio to include buyers with quality credit records and low risks. Companies take advantage of mechanisms such as the credit bureau to assess risks based on credit records. However, commercial banks’ participation in the vehicle financing market puts pressure on OEM financing branches. Because banks have a stronger capacity to absorb risk, it is easier for them to offer credit to more potential car buyers. This has led banks to increase their share in this sector at the expense of the financing arms of OEMs and will eventually entice banks to start purchasing debt portfolios from each other by offering more competitive interest rates.
Q: What opportunities does the used-vehicle segment offer in a low new-vehicle sales scenario?
A: Financial products usually target only the new vehicle segment but used vehicles generally offer better profit margins for dealers. Lower new-vehicle sales mean growth in the used-vehicle sector, which offers new opportunities for players in this segment. While traditionally the used-car business is riskier for buyers because most transactions are done between individuals, conducting transactions through intermediaries such as Mercado Libre or Soloautos can help mitigate these risks. Additionally, the used-car segment offers huge opportunities for financing companies to use their digital credit approvals.
Q: How can dealership groups, financing institutions and OEMs help the Mexican market recover from the sales slump?
A: All players involved in vehicle sales must continue offering conditions that incentivize better results. They need to remain creative and offer new and interesting experiences that attract potential buyers. Mexico faces the challenge of low financial literacy, which sometimes causes people to lose sight of interest rates and end up paying high financial costs. This offers many opportunities for financing companies to create innovative products that help companies grow in new market segments while also making better profits.
Q: What is the best strategy for Mexico to play an important role in the electrification revolution?
A: Mexico will continue to be a world-class vehicle producer and exporter, but the country needs to start developing a supply chain for electrified vehicles. As more markets bet on EV production, Mexico could fall behind competitors should it fail to adapt. OEMs like Audi, BMW, Ford and FCA Group have plans to assemble hybrids and EVs in Mexico but the country needs suppliers that can develop advanced components for those cars. The country must also get involved in design and engineering operations to stop being considered as a low-cost destination for manufacturing operations.
Q: What are JATO Dynamics’s sales projections for the domestic market in 2019?
A: We project sales in Mexico will be around 1.35 million vehicles in 2019. The compact and subcompact segments will experience minimal contractions because these vehicles represent the bulk of financing products. We also have positive sales projections for the SUV and crossover segments, although we expect the luxury segment to start flatlining. To fight market limitations, luxury brands have changed their lineups to compete with volume brands in some segments. They are also offering added-value features, such as free maintenance for up to three years, to allure potential customers.
Q: What is the best way for companies to make the best out of a contracting market without compromising revenues?
A: Players in the Mexican vehicle-financing market are offering the right type of financing products to trigger new-vehicle sales but they should avoid taking too many risks. It is a good time to explore leasing schemes as new generations lose interest in ownership and prefer end-to-end mobility solutions. While older generations used to see cars as a source of pride and status, young people now focus on mobility and customer experiences. This should entice large OEMs to start offering new schemes in which users can experience everything that their lineup has to offer without having to purchase the vehicle.
JATO Dynamics is a business intelligence provider specialized in the automotive industry. The company has created special consulting solutions for vehicle and component manufacturers, distributors and fleet managers.