Gerardo San Román
Head of Latin America
JATO Dynamics
View from the Top

How Long Can Mexico Maintain Its Sales Growth?

Fri, 09/01/2017 - 11:50

Q: How do OEMs now view the domestic market?

A: The domestic market has undoubtedly become more attractive and the perfect example is the entrance of two new Chinese brands to the country. It seems that BAIC will play with a more moderate strategy but JAC will face the industry head-on. These companies, alongside Korean manufacturers, installing facilities in Mexico is no accident. Perhaps Hyundai and Kia arrived when there was less uncertainty but OEMs make their investment plans following long-term strategies. Many things can happen in short periods of time, which means companies must be patient and consistent in their plans. Companies might experience losses but those will be compensated once the market stabilizes and their investment consolidates.

Uncertainty has made projections difficult but new investors consider the worst-case scenario right from the start. Investors are probably calculating their profit according to a 10- or even 15-year strategy. Companies like BAIC and JAC are betting on the domestic market and eventually they will take advantage of Mexico’s relationships to target the North and Latin American regions.

Q: What will the government’s role be in the development of the domestic market?

A: Mobility strategies implemented by the government will be crucial for the evolution of the domestic market. Initiatives like the Mexico-Toluca Interurban Train are helping suburban areas evolve, and are not distracting travelers from the automotive industry. Trains will help distribute the growth of domestic sales. Dealership networks in regions like Mexico City are decelerating growth but there are many other regions that are becoming stronger.

Q: What do you see as the main challenges that could hinder the continuous evolution of the domestic market?

A: I am more worried about internal than external challenges. The country needs to address security and transparency concerns to remain positive in the eyes of potential investors, both national and international. National companies are the first to feel the impact of unclear regulations and a faulty rule of law.

Secondly, I see a challenge in how companies are managing their marketing and financing strategies. OEMs have accelerated the purchase process and this will affect future sales. Clients who planned to buy their car in 2017 may have already acquired it in 2016 and will no longer buy one now. Aggressive strategies have resulted in financing contracts offering long-term plans of up 72 months. When the industry’s average for contracts was 48 months, companies could manage their development cycles accordingly and renew their platforms every two years. Now, sales cycles are elongating and eventually companies will lose the clarity needed to know how to develop processes.

There is currently no harmony between manufacturing, sales and the aftersales process. If financing moves the entire market and clients are choosing the longest plans, companies need to adapt to clients having less purchasing power. Both OEMs and clients must take the car’s total cost of ownership into consideration, not only the loan’s monthly payment. If these costs start pressuring a client’s purchasing power, the overdue portfolio is bound to increase.

Q: How will new trends such as increasing gasoline prices impact technology integration in Mexico?

A: All brands are pushing to downsize their engines and incorporate fuel-efficient technologies. This is a good trend because it is helping companies amortize the costs related to technology development. Eco-friendly technologies were previously only available in high-end vehicles but now clients are requesting these features in volume models. Paradigms are breaking and brands whose signature engines were six or eight cylinders are now moving to a four-cylinder turbocharged engine platform. Even sports brands are betting on fuel efficiency and the incorporation of hybrid technologies. The only thing that could have driven this change was a direct impact on final customers’ pockets. The increase in gasoline prices was inevitable and in the end, this will be beneficial for incorporating new technologies.

Gasoline prices will have a definite impact on the market’s development and it is already starting to show. Companies will also incorporate it in their development and planning process. The real impact will come when companies like Tesla roll out vehicles like the Model 3 at only US$35,000. The Mexican government needs to stop subsidizing everything and people need to understand the real costs of what they consume. People are already buying more efficient home appliances and gadgets, so why not do the same with cars?

Q: What role will leasing play in the market’s consolidation?

A: Leasing is a great alternative for the Mexican market and it could also contribute to the amortization of technology costs. The US market would have never reached its current numbers without embracing leasing as an alternative. Mexico’s domestic market could easily grow to 4 million vehicles per year thanks to leasing but we still have many legal and fiscal issues to address before this can happen. Right now, this service is restricted to people with corporate activities.

Leasing companies are present in the market and they are willing to enter the private client market. Once the government implements clear policies that allow companies to have more strength and credibility in their legal processes, the leasing market will boom. This will also help Mexico in its technology integration process, as fleet managers favor cheaper and lower-maintenance vehicles.

Q: What pushed Mexico’s domestic market to grow 18 percent in 2016?

A: No one knows for sure what spurred so much growth in 2016 because most industry participants had more conservative projections. My original forecast was that the market would grow approximately 5 percent but it ended up at 18 percent. Uncertainty in the second half of 2016 due to the presidential elections in the US did not deter the market’s momentum which maintained pace all the way to the end of the year. Anticipated purchase plans from many clients who wanted to take advantage of aggressive financing offering contributed to growth. By the end of the year, 66.5 percent of the vehicles in Mexico were sold through credit. But maintaining such a price-elastic market is not easy and we have noticed signs of deceleration in 2017’s sales.

Q: How will the dollar-peso exchange rate impact automakers and the industry in general?

A: The effects of volatility in the dollar-peso exchange rate have already passed. The market has maintained its development trend. OEMs endured the worst months at the end of 2016 although some players have been late to implement price adjustments. Some brands are probably losing money in the hopes of maintaining their market share. Each company has its own strategy but this is not the most viable alternative considering the market’s dynamics.

Exchange rate volatility has been more of a macroeconomic challenge than a microeconomic obstacle. The domestic market has developed enough to remain strong amid complications and many vehicles sold in the country are produced locally, minimizing the potential impact a strong dollar could have.

Prices were adjusted but in volume brands the difference was minimal. Furthermore, the variation was practically eliminated by aggressive marketing and financing strategies from most brands. In the end, the panic was far greater than the actual effect on the industry. Uncertainty has receded and it seems that the dollar and the peso have found a balancing point. This is certainly not ideal but it has also brought other advantages. The weak peso makes Mexico more attractive for foreign investment, attracting countries like China.

Q: What is your view on Mexico’s relationship with the US and potential changes to the NAFTA agreement?

A: While Mexico depends heavily on the US, as long as demand exists in the US and Mexico remains capable of supplying those vehicles, we have nothing to fear. President Trump has proposed several measures to block crossborder trade but the only possible outcome is that any extra taxes will be passed on to consumers in the US.

The US stance switched to making only cosmetic alterations to NAFTA, which is probably the wisest thing to do. Changing or even removing an agreement so intricately ingrained within the Canadian, Mexican and US economies will only cause problems for all involved, and not only in the automotive sector. People need to be more pragmatic about decisions on trade policies, as no single person is responsible for decisions.

Nonetheless, Mexico has the advantage of having commercial relationships with 45 countries, in addition to NAFTA. We are also enjoying a domestic market capable of supporting the country’s development. In previous years, we talked about a recuperation phase after the crises of 1995 and 2008, but now we are seeing true growth. Financing has become the engine behind the domestic market and the only question now is how long we will maintain the same growth levels without putting the market at risk.