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Analysis

Dollar-Dependent Market Needs Incentives to Grow

Fri, 09/01/2017 - 09:49

A plethora of factors combined in 2017 to put the brakes on the country's production growth and domestic sales are also seen lagging the results of the previous year. Currency volatility, nationalistic rhetoric north of the border and slower export markets are among the main culprits hindering the sector

Even though Mexico enjoys a better position in the global ranking of heavy-vehicle manufacturers and exporters than in the light-vehicle industry, conditions have not been favorable for the market in general, leading to a decrease in production volumes. Sales posted relatively strong results in 2016 but growth will not last for long, according to industry insiders.

Total heavy vehicle production accounted for 150,889 vehicles in 2016, which represented a decrease of 21 percent compared to figures from 2015. As a result, exports also took a heavy hit, ending the year down 32.4 percent from the previous period for a total of 106,161 units. Miguel Elizalde, Executive President of ANPACT, links this decrease in operations to a slowing market in Mexico’s main export destinations. “[Demand in] the US, Canada, Colombia, Ecuador, Chile and Peru has decreased significantly,” he says. “Almost 95 percent of Mexico’s heavy vehicles go to the US and we have not yet recovered our presence in the Colombian market, which was our second-main export destination in 2012.”

Early numbers from INEGI show a stable operation for 2017 but Elizalde expects a further reduction in Mexico’s production of 20 percent. Between January and May 2017, 55,468 vehicles were produced while 40,974 of those were exported. Elizalde says that an increased investment in infrastructure in the US could fuel the market once more but the erratic rhetoric of President Donald Trump clouds ANPACT’s vision for the rest of the year. 

Within the domestic market, conditions seemed more favorable until 2016. Though moderate, both retail and wholesale numbers showed an increase compared to 2015. Retail sales totaled 45,339 vehicles while wholesale numbers reached 46,162 units. This represented growth of 11.29 and 10.39 percent respectively. This upward trend will not be as strong in 2017, though. Figures from January to May 2017 show signs of deceleration for both retail and wholesale. INEGI reports 17,700 units sold through retail and 16,033 in wholesale, which represents growth of 7.07 and 8.22 percent compared to the numbers from 2016.

Being an industry mostly valued in US dollars, uncertainty in the dollar-peso exchange rate has greatly impacted sales projections for heavy-vehicle manufacturers. After the peso hit rock bottom at approximately MX$22 in January 2017, makers could no longer hold prices at previous levels, putting pressure on both OEMs and end clients. “We deliver quotes with a certain price and an expected profit margin but these change before we deliver the vehicle,” says Enrique Enrich, Director General of Scania Mexico. To counter these negative effects, companies have adopted different strategies depending on their priorities and areas of expertise. Daimler Buses, for example, chose to change its invoicing to pesos in an effort to provide clients with more certainty. “We know that 80 percent of our clients invoice their operations in pesos and for this reason we changed our own pricing to pesos in March 2015,” says Jan Hegner, CEO of Daimler Buses México. Others, such as Scania, have chosen to grow their focus on service operations, betting on loyalty and a closer relationship with the client.

Price volatility has also limited the evolution of the vehicle market, which is currently stuck at Euro IV environmental regulations when the world is already moving to Euro VI. “We want to implement new engine and emission-control technologies but we need the support of the government, including incentives to cover the 30 percent increase in vehicle costs inherent to these technologies,” says Jaime Jaime, President of CANAPAT. Current conditions do not allow for technology renovation. OEMs and associations agree that without incentives, clients are not willing to invest 15-30 percent more in a new vehicle, while manufacturers refuse to absorb that cost.

The country is still far from reaching its goals of replacing the 180,000 vehicles that according to ANPACT are 21 years of age or older. To boost vehicle renovation, the government has put in place a scrappage scheme but that has its own limitations. Due to budget limitations, regulations from the Ministry of Communications and Transportation dictate that only 6,000 units of over 10 years of age are eligible to be scrapped and receive a remuneration of up to MX$336,000 (US$18,970) per year, 3,000 from large fleet managers and 3,000 from owner-operators. Both the monetary and unit caps are an obstacle, according to Elizalde. “At that pace, it would take us 30 years to replace [all vehicles],” he says. “To reduce the average age of the fleet we should be scrapping up to 20,000 thousand units yearly for the next 10 years.”