OEM Perspectives on the Domestic Market for Heavy Vehicles

Moderator: Miguel Elizalde Lizárraga, President of ANPACT
Panelist: Gustavo Garcia, Director of Operations of Kenworth
Panelist: Arnaud Dordilly, Managing Director of Scania
Panelist: Ignacio Garcia, VP of Cummins
Panelist: Carlos Pardo, Director General of Navistar

Moderator Miguel Elizalde Lizárraga, President of ANPACT, kicked off the panel by recapping the essential data of heavy vehicles in Mexico, contrasting its strong production but poor domestic sales. Mexico is the seventh largest producer of heavy vehicles in the world, and third largest in Latin America. However, he believes Mexico has the potential to rise far higher and surpass Brazil and the US in terms of production. This production potential stands opposite to sales though since these are currently in a downturn. From January to August 2015, sales in Mexico dropped for the third year in a row, and now stands 35.1% below its best year, 2007.

A number of factors has led to this poor sales performance, including the tax reform and the fallout from the 2008 economic crisis. However, by doubling down on its commitment in the North and Latin American markets, Elizalde Lizárraga says the industry remains profitable as a whole, despite the domestic slowdown. The sad reality is that despite being a heavy vehicle production juggernaut, Mexico continues to import old heavy vehicles from the US. In August, for every 10 new heavy vehicles sold, 50 old ones came across the border, meaning that 2015 risks being the worst year yet for “chocolate” heavy vehicles entering Mexico. “The national legal structure is being reformed to deal with this threat to new vehicle sales. For example, Mexico’s environmental regulations for heavy vehicles are being slowly increased to match those in the US, which will make it more difficult to import old vehicles from the US,” stated Elizalde Lizárraga. This would set the tone of the panel, which revolved largely around what Mexico needed to do to spur its domestic market while maintaining its production advantages.

Gustavo Garcia, Director of Operations of Kenworth, picked up on the complementarities between the US and Mexican markets and regulation. “The main reason that we relocated our plants in Mexico was to have access to the advantages the country presents. Being next door to the biggest heavy vehicle market in the world, the US, was obviously a major plus,” he said. Gustavo Garcia also addressed the proximity of regulations between Mexico and the US, saying that the regulatory model EPA has provided for Mexico is a major reason why heavy vehicle trade. Ignacio Garcia, Vice-President of Cummins, sought to divide the issue into two sections: the FTAs Mexico has with many countries and the cost of its own labor. Dwelling on the latter, Cummins has seen an increase in productivity among its staff, engineers, technicians and operators that has not been replicated in other destinations. This makes it far easier for heavy vehicle OEMs and suppliers to start projects here than in other destinations.

Arnaud Dordilly, Managing Director of Scania, took a different tack. He explained that while Scania does not produce in Mexico, selling vehicles here requires adapting to the country’s very specific domestic market. Despite the downturn in local sales, Dordilly is confident that the situation will recover. He spoke of investments at the federal level that drive the creation of new projects and increased sales of new vehicles. He added, that although Scania is a Swedish group, the continued import of used vehicles hurt European OEMs as bad as American ones, both for new vehicle sales and for spare parts.

Carlos Pardo, Director General of Navistar, was asked by Elizalde Lizárraga as to what the consequences would be if Mexico passed specific regulations to prevent old vehicles from crossing the border. Pardo agreed that fleet renewal was crucial to the health of the national vehicle park, but said the best way to do so would be to provide credits and fiscal incentives that will encourage small owner-operators and companies to reduce their fleets. If not, issues of competitiveness or of access to financing mean that most small operators will not do so on their own. Gustavo Garcia added that Mexico was now the largest Latin American market for Paccar, Kenworth’s owner. Despite this evident confidence, Gustavo Garcia would like to see the federal government organize better enforcement of the rule that all vehicles have the right permits and meet environmental standards. This enforcement would essentially force many operators into compliance and make them seek to replace their aging trucks.

Pardo stepped in to say that this compliance was all the more needed because the presence of junk vehicles essentially provided unfair competition. Dordilly and Pardo teamed up to say that the heavy vehicle OEMs had to unite and pressure the government to enforce the rules, since fleets with newer vehicles had major difficulty competing with those companies that used old vehicles. “Competition is healthy,” stated Pardo, “as long as competitors comply with environmental regulations, with vehicle age requirements, and with labor laws. If we all do this, then this market will expand in a healthy way.”