Inflection Point in the Mexican Automotive Market

The Mexican automotive market posted mixed results in the first quarter of 2021. On one side, light vehicle sales in the quarter remained in negative territory compared to the same period last year, falling 12.7 percent. But a turning point is finally in sight after an increase of 9.1 percent in March, year over year.

Without a doubt, the COVID-19 pandemic has affected all areas of human life on the entire planet and our country has been one of those that has suffered the most, both in economic terms (an 8.5 percent contraction in GDP in 2020) and in human losses (Mexico has the third-highest number of COVID-19 deaths).

In the short term, the economic crisis caused unemployment, a decrease in family income and, consequently, a weakness in their debt capacity, resulting in weaker consumer confidence because of their economic situation and fewer possibilities to purchase durable goods.

In this context, it was not surprising that the Mexican market saw a 28 percent decrease in sales of new light vehicles in 2020, at 949,353 units — the same levels registered in 2011 and 2012. Likewise, this level of contraction was greater than that registered for global sales during 2020, which according to OICA data, dropped 14 percent.

At the end of March 2021, annual sales (the last 12 months) were below the level at the end of 2020, with 911,661 light vehicles sold. However, March posted an increase of 0.88 percent in annualized sales compared to the previous month, which was the first positive data since the arrival of COVID-19. It is very likely that the inflection point has occurred and with it the start of the recovery stage.

The latter is likely to occur due to the fact that future comparisons will be to periods of low results; just in the two-month April-May 2020 period, the fall in vehicle sales was higher than 60 percent. If the March trend is confirmed, we will end the year with an increase of more than 10 percent versus 2020.

Even if annual sales of 1.05 million units or slightly higher materialize, as most analysts seem to agree, it will not be enough to reverse the COVID-19 effect. That is estimated to occur in 2024, or 2023 if our economy registers a better performance linked to the growth of the US, our main trading and investor partner.

The conditions, however, seem to be in place to start the recovery. The main variable that boosts the automotive market is financing and, in this crisis, unlike previous economic disasters, the financial system (banks and specialized finance companies) is solid, with liquidity and with the intention to compete. Although unemployment caused an increase in the overdue portfolio for automotive credit (3.38 percent at the end of February from 1.7 percent last September), this indicator is still at a level that does not represent a risk of bankruptcy or suspension of automotive credit.

To have a better overview of the Mexican automotive market, it is useful to pay attention to the fact that the negative impact has been general across all vehicle segments. From the highest priced vehicles (luxury and sports cars, as well as premium, multipurpose vehicles) to the most accessible vehicles (subcompact and compact cars), the numbers were negative during the first quarter of the year. Sports cars fell 35.2 percent, luxury cars declined 22.6 percent, subcompacts decreased 22.1 percent and compact cars dropped 15.8 percent.

In this context, it is noteworthy that multipurpose vehicles fell just 3.1 percent and light commercial vehicles (pickups and vans) decreased 2.2 percent.

In this regard, it is important to highlight that the multipurpose segment now posts the highest total sales in Mexico, with a share of 29.9 percent among consumers, surpassing subcompact cars (historical leaders in our market) that register 29.6 percent of total sales.

This trend will increase in the short term due to strong competition among manufacturers to respond to consumer preferences and the opportunity to obtain better profit margins on these products.

A factor that will help reaffirm the good performance of multipurpose vehicles is the situation faced by the world automotive industry due to the insufficient supply of semiconductor chips. This crisis will lead the industry to lose more than half a million production units on a global scale in the first quarter of 2021, according to the latest study by the Association of European Vehicle Logistics (ECG).

Faced with the dilemma of choosing which models to stop producing or decrease in number, it is natural that the manufacturing of higher priced vehicles will be prioritized. In that case, subcompact cars will lose their share in our market.

In the case of the Mexican market, this will generate mixed conditions, which will have a differentiated impact on the brands and their dealership networks.

On the one hand, it is favorable to improve the profit margin on the products sold; however, the decrease in the sale of subcompact cars (even when the unit margin is minimal) will represent a reduced vehicle fleet subject to after-sales services (workshops and spare parts) and related products (insurance, credit, extended warranty), pressuring the finances of dealers that in recent years have seen profit margins steadily shrink.

In addition to the immediate impact on companies in the automotive sector, this trend may extend to other areas. The automotive industry is constantly incorporating technological advances, including the incorporation of components and safety systems, as well as advances related to improving emissions, which result in an increase in the cost of vehicles, both to comply with official regulations and to satisfy consumers and achieve competitive advantages.

In general, this situation is favorable for economic and social development; however, in countries like ours (low income, institutional weakness, social inequality, poor governance), the absence of public policies that support efficient and responsible mobility acts as an obstacle.

The low investment in public transport, where the participation of the business sector is blocked, and putting aside public investment, together with equipment improvement and vehicle prices, leads to an aging of the vehicle fleet.

The absence of a universal, technical vehicle inspection system, lax regulation related to the importation of used vehicles from the US, the lack of a national vehicle control system and the obsolescence of public transportation are old challenges alongside those that are emerging that highlight a new reality that forces us to live with the COVID-19 pandemic and its consequences for the economy and social behavior.

Faced with these challenges, the response requires innovation and the political will to address them.