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Mexican Dealerships Hit by Market Contraction

Guillermo Prieto - AMDA
Chairman

STORY INLINE POST

Wed, 01/22/2020 - 09:25

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Q: What factors are preventing the country from bouncing back from its sales downturn?

A: The sales downturn, now over two years, is a consequence of both internal and external factors putting pressure on the Mexican vehicle market. While international geopolitical events such as USCMA’s negotiation have impacted Mexican consumer behavior, internal issues such as economic contractions and lower consumer confidence are also worthy of consideration. Macroeconomic factors such as inflation, exchange rate volatility and high interest rates are creating uncertainty among consumers. People are becoming much more cautious when making purchases of durable goods such as vehicles.

To reverse this situation, we need economic growth as well as more certainty regarding USMCA, which will have a positive impact on consumer confidence. Mexicans must also increase their purchasing power. While inflation has been controlled, real salaries have lost ground. Additionally, several austerity policies from the federal government have had a direct impact on vehicle sales, including the postponement of new vehicle fleets.

If economic variables improve, we could sell above projections. Segments such as luxury and sports have identified a mature population niche. However, the biggest potential for growth is in the compact and subcompact segments as these vehicles are generally more affordable and designed for in-city commutes.

Q: How can the government participate in the development of the national automotive industry?

A: Players in the Mexican automotive industry must be attentive to government decisions. Automotive is already an overly regulated sector in which dealerships must report to and meet regulations of Mexico’s Tax Administration Service, the Ministry of Communications and Transport, the Federal Consumer Protection Office, the Ministry of the Interior, the Ministry for the Environment and the Ministry of Labor, among others. This means regulatory changes could pose new difficulties for the entire market.

AMDA is working to establish communication channels with the new federal government to raise awareness of the importance of the automotive industry for Mexico’s economy. The country’s dealership sector, which AMDA represents, includes close to 2,300 dealerships. All players in this sector are family-owned Mexican companies. They are a key source of tax revenue and employment and constantly invest in the country.

Overall, the Mexican automotive industry accounts for 2 million jobs, around 3 percent of Mexico’s GDP, 20 percent of the country’s manufacturing GDP and is the main export-related currency generator with a positive trade balance of over US$70 billion.

Q: What have depressed vehicle sales meant for Mexico’s vehicle-financing sector?

A: A drop in vehicle sales necessarily means a contraction in the automotive financing market as approximately 66 percent of all car sales in Mexico are on credit. There are, however, other factors hampering the vehicle financing market. High interest rates make car loans more expensive, while overly elongated credit periods mean greater risks for the companies that offer them. Despite this situation, past-due portfolios in the vehicle market are usually less than 2 percent of all loans, which has enticed commercial banks to offer more of these financing products and win ground against financial branches and self-financing companies.

Q: How is digitalization impacting dealerships’ business models?

A: Digitalization is changing vehicle sales at a global level. Owning and operating dealerships is a capital-intensive, highly demanding business because OEMs require dealership groups to constantly invest in their showrooms, thus reducing the profitability of the business.

The market is moving toward online vehicle sales, which puts pressure on dealership groups to increase efficiency and productivity and improve customer service. At the same time, vehicle ownership is no longer as alluring given the new mobility schemes that are arising thanks to digitalization. Shared ownership and the rise of ride-hailing services are changing the game worldwide. In Mexico, however, the lack of competitive public transportation entices vehicle ownership among local consumers.

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