GUILLERMO PRIETO
Chairman
AMDA
/
View from the Top

DECELERATION NOT CATASTROPHIC FOR THE INDUSTRY’S FUTURE

Sat, 09/01/2018 - 11:46

Q: Given the renegotiation of NAFTA, what are Mexico’s opportunities to improve its position in the international automotive market?

A: The automotive industry is a pillar of the Mexican economy, representing 3 percent of national GDP and 18 percent of manufacturing GDP. It is also the main currency generator in the country, at over US$60 billion per year. The regional integration between Mexico, Canada and the US is critical and all industry participants are hoping for a fruitful renegotiation. This agreement must be advantageous for all three countries and we do agree that it needs to be updated after 25 years. However, we also know that we cannot measure NAFTA’s success based only on the deficit that the US may have with Mexico. The more trade we have, the more successful our economies can be.

Regardless of these discussions, I think Mexico is in an excellent position in the global automotive industry. We are already the seventh light-vehicle producer and the third exporter and by 2020 I expect the industry will have an output of 5 million light-vehicle units. Our challenge now is to improve our logistics infrastructure to move an extra 1.5 million units from manufacturing plants to the final user. Ports and highways are already showing signs of over-capacity and the situation will only worsen as production increases.

Q: What do you see as the main causes behind the sustained drop in domestic light-vehicle sales?

A: Over the past six years, light-vehicle sales grew at double- digit rates. This growth was significant considering that in 2012 we were selling less than 1 million vehicles per year and we ended 2017 with total sales of over 1.5 million units. It is difficult to sustain such accelerated growth, especially considering the bar was set higher each year. In particular, 2016 was an exceptional year with a growth rate of 18.6 percent compared to 2015, which we think was caused by anticipated sales due to market uncertainty. The election of a new president in the US, coupled with the renegotiation of NAFTA and less than friendly rhetoric from the US toward the Mexican automotive industry were key elements that kept sales from maintaining that aggressive growth.

The presidential elections here were another key factor that increased the level of uncertainty in the domestic market. Between January and April 2018, sales contracted 9.3 percent compared to the same period in 2017. Considering the growth levels seen in previous years, we expected a decrease of 5-6 percent. The added volatility from the dollar-peso exchange rate contributed to the more pronounced fall.

Still, we do not see this 9.3 percent decline as catastrophic for the industry. This is just an adjustment and it is possible that we will see better results in the second half of 2018. The second half of 2017 saw major sales decreases as well so, by comparison, this year’s numbers could be healthier. In the end, it will all come down to the proposals outlined by the new administration and how successful they are in boosting foreign investment and the country’s economic stability, while eradicating corruption and impunity.

Q: How has the sales deceleration impacted dealership groups?

A: Uncertainty has increased not only in the automotive sector but in most economic activities. Prices increased as did interest rates following numerous revisions from Banxico that pushed rates over 7 percent from 3 percent. These increments have an immediate and direct impact on the costs of inventories for dealers because most sales- floor financing plans are linked to the Interbank Interest Rate Balance. Inventories have also increased, although that has been dependent on each brand’s performance. While some brands have shown increments of 100, 200 or even 300 percent, comparing 2017 with 2016, the average has been 25 percent, moving inventories to 70 days from 56 days. Some brands have reached inventories of 180 days, which combined with the increase in interest rates has led to a significant cut in profit margins.