LATAM Car Markets and Industries in Coronavirus-Induced Sell-OffBy Guillermo Prieto | Fri, 06/26/2020 - 09:42
An unprecedented global pandemic caused by the COVID-19 virus has led to a deterioration of the global car market and Latin America is no exception. The specific economic factors of the region, such as a lower GDP per capita, higher rates of informal economy, corruption and a fragile rule of law, will certainly represent a greater challenge for the region’s auto industry.
The restrictions on economic activity by governments to limit the spread of the virus locally as well as the weakening global economic growth will result in an adverse external environment for the region’s economies, thereby debilitating business and consumer confidence.
These factors have not only hampered the car market but also almost all of the commerce in the region.
Auto production has been wounded as well. In pre-pandemic times, the combined production between Mexico and Brazil, Latin America’s top producers, was above a million cars per month. That fell more than 90 percent in May; car exports from Mexico, which are more dependent on exports to the United States, fell by 95 percent compared with May 2019, to just 15,000 units. Brazil is more focused on its domestic market but it is a significant exporter to Argentina. Exports from Brazil fell 77 percent, to 7,200 units.
The Latin American auto parts industry has affected other regions as well. The most iconic example is the US. With about 40 percent of imported auto parts coming from south of the border and parts made in the US being exported to Mexico for vehicle production there, the interdependency between the two countries cannot be overstated, leading to an unlikelihood of restarting production in the US without first restarting auto part production in Mexico ,where the pandemic curve has yet to hit its highest point.
In Mexico, the government has not released any policy on how they will support the auto industry, but it has given the green light to reopen most of the production facilities in almost all of Mexico’s states but one.
The auto industry in Latin America represents several percentage points of their respective country’s GDPs and hundreds of thousands of jobs, if not millions. Associations representing this industry across the region have stated the importance of the industry in hopes of winning a government rescue package. But in most cases, these please have not been heard.
While the extent of the outbreak varies by country, it is expected that all vehicle markets in the region will be negatively impacted by this historic pandemic.
And the outlook does not look promising: most of the region’s currencies continued to lose ground against the U.S. dollar as well as the euro, with the Brazilian real and the Mexican peso particularly hard hit. This factor, combined with higher costs for manufacturers due to the need to comply with health and safety regulations to lower the risk of infection, as well as the costs of closing down production facilities and the lack of auto parts, will unquestionably translate into a higher rate of car inflation, further hurting car markets. Prices are expected to rise as much as 15 percent in the next couple of months.
There is risk of a wider or prolonged coronavirus outbreak in the region, which will see demand for new cars and economic debilitation remain weaker for longer than was previously anticipated.
However, there are some factors that might contribute to a faster recovery. First, demand will build up over the time when consumers and businesses have not been able to shop for a vehicle. Second, there is a higher risk of infection while using public transport, which might lead to a higher consumption of entry-level cars for safety and sanitary reasons.
Indeed, in March huge declines were registered for most of the markets in the region, and there is still uncertainty regarding the depth and duration of the crisis. It is certain that some dealers will have to close but the number will be, in a high proportion, determined by each country’s policy to tackle this crisis.