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Analysis

Preparing for the Upturn

Sat, 09/01/2018 - 09:14

Between 2016 and 2017, light-vehicles sales in Mexico fell 4.6 percent according to AMDA data. Close to 75,000 fewer vehicles were sold in 2017, with subcompacts taking the largest hit at 48,597 fewer units than in 2016. While several experts agree the sales downturn is a natural turn in the country’s economic cycle, they point out several areas that must be strengthened to underpin the domestic automotive market.
Guillermo Prieto, Chairman of AMDA, points out that light vehicles sales grew at double-digit rates for six years in a row prior to the drop that started in June 2017. “It was difficult to sustain such accelerated growth, especially considering the bar was set higher each year,” he says. Mayra González, President and Managing Director of Nissan Mexicana, adds that the Mexican market has almost doubled its size since 2009 so it is only natural the market would peak. “This is not a crisis, only an adjustment,” she says. Gerardo San Román, Head of Latin America at JATO Dynamics, agrees, saying the Mexican automotive industry should recognize and harness the economic cycles impacting the industry. “We are coming from a peak in the cycle,” he says. “It is time to prepare for when the industry starts moving up again.”
Several issues still plague the domestic market, which should be addressed for vehicle sales to reach the projected goal of 2 million units. First, regulation of used-vehicle imports from the US must remain a priority for the new administration. “These cars have been a cancer for the national industry that we (AMDA) have worked to exterminate,” says Prieto. Not only is the sale of imported used vehicles under-regulated compared to the strict controls that dealership groups face to market their cars, but they also allow scrap units to enter the country. The entrance of these vehicles to Mexico has dropped since 2006 thanks to stricter regulations and better law enforcement, which is what Prieto and other industry leaders want for the market.
Another challenge the domestic vehicle market faces is access to credit. High interest rates have translated to greater cost of money for people wanting to purchase a car on credit, thus disincentivize vehicle renewal among car buyers. “Prices have gone up, as well as interest rates, and companies have offered lower down payments and longer financing terms as a way to counter this,” says San Román. The main issue with overly elongated credit maturation periods is that they also elongate a greater default risk for the financial branch, commercial bank or SOFOM offering the loan. This has prompted financing companies to come up with innovative financial products to boost sales. BNP Paribas is introducing balloon credits whereby clients only pay for the use of the vehicle. Meanwhile, several other commercial banks, including BBVA Bancomer, Scotiabank and Banorte, are introducing digital-based credit options that ease access to automotive credit. At the same time, SOFOMs such as UNIFIN are increasing their share in Mexico’s leasing market.
The downturn has hit some of the largest players in Mexico by share, which is also impacting dealerships. Nissan, GM, FCA, Ford and Volkswagen are among the volume brands that have seen their sales figures plunge the most both between 2016 and 2017 and in 1H18 compared to 1H17. On the other hand, volume OEMs with a smaller share such as Mazda, Suzuki, Hyundai and Kia as well as premium brands including BMW, Mercedes-Benz, Porsche and INFINITI have grown slightly, while others such as Honda, Toyota or Renault have remained stable. For dealership groups, results are mixed depending on the brands they manage. “Dealership groups that have no brands that are struggling, will see business as usual,” says Carlos López de Nava, Director General of Grupo Alden. Fernando Enciso, Automotive Director of Grupo Surman, underlines that the automotive market always has brand cycles. “Brands have their ups and downs depending on many factors, including product life cycles, facelifts and new product launches,” he says.
Only two segments have experienced sales increments in the face of a contracting market: SUVs and luxury vehicles. However, growth has been modest. Between 2016 and 2017, sales of SUVs increased 6 percent (19,619 units) and although in that same period luxury vehicle sales fell 5.1 percent (4,113 units), the sector recovered in 1H18 with a 13.4 percent sales increase. Several brands have changed their lineups to adapt to these changes. Volkswagen, Hyundai, Nissan and Toyota are among the brands that have introduced more SUVs to their portfolio. Meanwhile, luxury brands such as INFINITI and Mercedes-Benz as well as exotic super-sports car brands such as Lamborghini, Aston Martin, Caterham and Morgan are maintain their positive outlook for Mexico’s premium and luxury segments.