Consequences of “Chocolate” Vehicle Regularization

As the automotive industry goes through one of its most critical crises in the recent years, President Andrés Manuel López Obrador decided to signed a regularization decree for the so-called “chocolate” cars, which could severely damage the sector, according to industry experts.

“Chocolate” cars are illegally imported vehicles from brands or models not commercialized in Mexico that were imported from North or Central America. According to the Federal Income Law of 2020, there are at least 18 million illegal cars in Mexico, representing 25 percent of the country’s total vehicle fleet. The issue is not new. For many years, millions of vehicles have crossed the border from the US to Mexico. However, after NAFTA was signed, imports of these cars increased dramatically. From 2005 to 2011, 6 million used vehicles were imported, mainly from the US to Mexico, reported BBC. Chocolate cars are usually between 10 and 20-years-old and cause different safety and environmental issues.

The COVID-19 pandemic hit the auto industry particularly hard. In 2020, more than 64,000 jobs were lost in the sector, although it quickly recovered 49,000 of them by January 2021, reported El Financiero. Still, vehicle production across the world has suffered from inflation, high raw material costs, semiconductors shortages and supply chain disruption. While exports are advancing toward recovery, light vehicle sales in Mexico in 2021 had their worst September since September 2011 (when they amounted to 73,998 units), hitting the lowest level for any month since July 2020 with 76,930 units sold during the month. September represented the third contraction in sales of 2021. “The results of September reflect the deterioration of the market. These results show restrictions faced by the lack of inventory linked to the shortage of semiconductors that impacts various industries globally,” said Guillermo Rosales, Director General, AMDA.

It is in this context that President López Obrador, as others have tried in the past, announced his intentions to regularize chocolate cars. From a social standpoint, these vehicles represent an affordable option for thousands of families that do not have the economic possibilities to purchase a new car nor access to financing plans. “We are going to legalize all of them. We are going to give them a permit and we are going to legally recognize owners of these vehicles, as there are a lot of people who use these cars because they do not have the money to buy a new car. With these (chocolate) cars, people take their children to school and carry out their daily activities,” said López Obrador.

The Mexican government aims to “pull these vehicles out from anonymity” due to security matters. “One of the objectives is to avoid criminal activity carried out with vehicles of foreign origin, which lack proper documentation ... Regularizing these cars contributes to the security of the area," said Rosa Icela Rodríguez, Head of the Ministry of Security and Civil Protection (SSPC) during a trip to Baja California.

National Industry Condemns the Initiative

OEMs and associations like AMDA and AMIA have condemned both current and previous intentions to regularize chocolate cars. "The introduction and commercialization of used vehicles coming from the US that do not comply with all customs formalities is a felony that has unsuccessfully being addressed through 19 legislative and executive measures between 1979 and 2011," wrote AMDA on a statement. “The regularization of contraband vehicles will only allow ‘garbage cars' to continue circulating in our country and will favor the introduction of even more vehicles than those currently circulating illegally, generating an environmental and safety impact,” warned José Zozaya, President, AMIA.

Messages coming from the government do not offer peace of mind, said Luz Elena del Castillo, CEO, Ford de México, during AMDA’s Automotive Forum. “In countries where used cars imports are allowed without restrictions, new vehicles sales represent just a quarter of used vehicles sales. This could happen in Mexico, which is why we need a healthy, transparent and solid market,” said del Castillo. She was named head of the company back in August, following her experience in Central America and the Caribbean.

What Does the Signed Decree Mean?

The decree signed by President López Obrador on Oct. 16, 2021 will allow owners of chocolate vehicles in Baja California, Baja California Sur, Sonora, Coahuila, Chihuahua, Nuevo Leon and Tamaulipas to legalize them for MX$2,500 (US$125). Only in Baja California, for instance, there are 500,000 chocolate cars, and the decree will allow the state to collect MX$1.3 billion (US$65 million) that will be allocated to local infrastructure, such as paving streets in border municipalities, said López Obrador.

In 2005, former President Vicente Fox signed a decree that established the conditions for the definitive importation of used vehicles from the US. That year, 776,077 of these vehicles were imported, a figure equivalent to 70 percent of new vehicle sales, which in 2005 amounted to 1.13 million units, reported Expansión. In 2008, imports surpassed new vehicle sales. By 2014, with new requirements imposed by the Ministry of the Finance and Public Credit, imports decreased by 30 percent to represent 40 percent of total new vehicle sales. In 1H21, legally-imported cars equated to 15 percent of new vehicle sales.

With this new decree, new vehicle sales could drop by 30 percent in the next three years, said Rosales, impacting tax collection (IVA, ISAN and ISR). In 2019, total new vehicle sales amounted to MX$55 billion (US$2.75 billion) in IVA and MX$12 billion (US$600 million) in ISAN. “These figures will be reduced if chocolate cars are regularized,” said Rosales, adding that the national used vehicle park value could decrease by 20 percent due to the oversupply caused by imported cars.

Chocolate Cars Are Not the Only Problem

Recently, executives from Nissan Mexicana and Volkswagen de México agreed that the government must define a sustainable mobility plan jointly with the auto industry to integrate a competitive business model that enables players to work under fair and legal conditions.

“We have to make a plan together with the government; the automotive industry is very capable of developing mobility in the country. With the country’s potential, we should sell more cars per capita and we are almost at half our capacity. We could sell 2 million units per year, considering that there are over 120 million inhabitants. (It is also important) to address the issue of fuel efficiency and the kind of gasoline that should be used to reduce pollution,” said José Román, President, Nissan Mexicana.

Electric mobility is growing across the world, especially in the more developed economies. However, Mexico is lagging regarding regulations and incentives, pointed Edgar Estrada, Director General, Volkswagen de México: “We see that the market evolves and we need to be faster and innovative to plan the immediate future of mobility. It is important to take action now to have sustainable development in the coming years.”