Mexico Auto Sales Profitability Drops Amid Rising Competition

The automotive industry in Mexico has faced challenging times, with increased competition from foreign brands, particularly Chinese manufacturers, leading to a significant decline in distributor profitability. Guillermo Rosales, president, Mexican Association of Automotive Distributors (AMDA), pointed out that dealers are under pressure to offer more competitive pricing and financing options to capture market share, resulting in a sharp drop in profits.

"In the United States, preliminary figures for 2024 indicate a decrease in distributor profitability exceeding 20%. In Mexico, although we do not have formal statistical analysis, discussions with some of our members provide a general view of the situation. These estimates show a decline in distributor profitability of more than 50% in 2024 compared to 2023," Rosales said.

While vehicle sales in Mexico reached a record of 1,496,806 units in 2024, a 9.8% increase from the previous year, heightened competition has eroded the profitability of vehicle sales.

In Mexico, car dealerships are adjusting their expenses and improving operational efficiency to cope with declining profits. However, Rosales emphasized that layoffs are not a primary consideration, as the industry faces growing challenges in generating and retaining talent due to the increasing number of brands, particularly from China.

"Over the past four years, 500 new dealerships have opened for new brands, increasing the demand for skilled personnel," he explained.

Despite the pressures on profitability, 2024 saw record levels of vehicle production and exports from Mexico. The National Institute of Statistics and Geography (INEGI) reported that 3,478,086 units were exported, a 5.4% increase from the previous year. However, the percentage increase was lower than the 14% growth seen in 2023.

In the United States, the situation is not better. According to a report by Bain & Company, US car dealers are struggling to make electric vehicles (EVs) profitable. Despite EVs having an initial sale price about 35% higher than equivalent combustion engine models, the costs of the drivetrains for electric vehicles are nearly 2.5 times more expensive.

"The low volume of sales for most current models exacerbates the profitability issue. This presents a significant challenge regarding the scale and timing of investment in electric vehicles," the Bain & Company report stated.

Bain & Company’s report highlights the difficulties that US manufacturers face in achieving profitability with electric vehicles. In a comparative profitability analysis, electric vehicles, despite their higher retail prices, incur substantial costs in electric propulsion systems, which are much more expensive than those in combustion engine vehicles.

"Electric vehicles face a negative margin of US$4,000, representing a 12% loss under current conditions. In contrast, combustion engine vehicles have a positive margin of US$2,000, or a 7% profit,” the report states.

The report also notes that Chinese manufacturers have overcome profitability challenges in the electric vehicle sector, achieving price parity between combustion and electric vehicles, which has helped expand their market share.