Guillermo Rosales
Director General
View from the Top

Domestic Market Getting Greener but Costs a Hurdle

Fri, 09/01/2017 - 12:23

Q: What are the main barriers to growth in the electric and hybrid vehicle segment and how can the government boost sales?

A: Hybrid and electric models remain a very small percentage of all new vehicle sales, totaling 8,260 units at the end of 2016, which barely represents 0.5 percent of Mexico’s sales. Growth will continue but the main restriction to the success of hybrid and electric vehicles remains price. The cost of electric technology has restricted these vehicles to medium and high-end models because most of the Mexican population has low purchasing power. The average price of cars sold in the country is MX$280,000 (US$15,300). While 10 years ago the price difference between a combustion engine model and its hybrid counterpart was approximately 40 percent, today that gap has narrowed to 20-25 percent.

Q: How is volatility in the dollar-peso exchange rate impacting the revenue margins of OEMs and distributors?

A: Some of the reasons behind currency fluctuations originate in external factors such as speculation and uncertainty, so neither the industry nor the government have much control over them. Mexico has experienced exchange rate instability since 2014 and the situation was aggravated due to imbalanced public finances.

A weak peso favors the operations of local manufacturers with export activities. Labor and certain parts are sourced locally, while other parts are imported from regions with currencies that have also lost ground against the dollar. However, volatility and a price-sensitive environment have forced the Mexican market to detach from price-fixation standards set by the global industry. Companies set prices in dollars but these have to adapt to the reality of the domestic market. As a result, vehicle prices in Mexico may be different to prices in the US. Between 2007 and 2016, car prices have increased below the average inflation rate and as the peso weakens against the dollar, the effect becomes more substantial for OEMs and distributors. The industry started increasing prices more substantially in March 2016. Since then, prices have increased monthly above the average inflation rate, rising 8 percent between April 2017 and April 2016. These price surges do not compensate for the extreme devaluation the peso suffered of almost 20 percent. OEMs are doing everything they can to keep consumers from feeling the devaluation, which has helped the market maintain its momentum. But preventing prices from moving naturally is also affecting distributors’ revenue margins.

Q: How can OEMs minimize the negative effects of currency volatility?

A: Prices are set by automakers but profit cuts are divided between the OEM and the distributor. Both players must also sacrifice part of their earnings to offer deals and special promotions to keep attracting new clients. For OEMs, the situation is not as serious because they can dilute their losses with cost-reduction strategies and other financial instruments. But dealerships see a direct impact on their profit. Their only possible countermeasure is to increase sales volume. This, however, has not been an option for some industry participants. The gradual price increase above the inflation rate has softened the blow for some distributors. But the measures have been slow because companies do not want to jeopardize their position in the market.

Q: How ready are Mexican clients to discard their negative perception of Chinese vehicles?

 A: Any company wanting to participate in the local market must bring products that are superior to the standard available. Chinese companies suffer a handicap due to the negative perception many Mexicans have of Chinese products. Their challenge is to build an individual reputation. BAIC, JAC and any other brand wanting to come to Mexico will find market niches to compete in but they will have to build brand awareness among potential consumers. Vehicles coming from China are no longer cheap products — their price difference with Italian or German models is only 10 percent. The Chinese industry’s product-development process can compete with that of any other brand in the market.