Risks, Challenges, and the Road Ahead for the Auto IndustryBy Guillermo Prieto | Wed, 09/14/2022 - 13:00
It is no secret that we are facing some turbulent times. Trying to list and explain all the challenges the world is encountering would be quite the endeavor. However, through this short entry, I will attempt to highlight the most pressing issues that impact our daily lives, regardless of borders. I will begin with a global outlook of some of the most relevant issues; then, I will highlight some of the challenges in the Latin-American region, focusing on the Mexican context. Finally, I will point out how these challenges affect the automobile industry.
On the one hand, there is the war in Ukraine. As shocking as it might seem, six months have passed since Vladimir Putin sent his troops across the Ukrainian border. What began as a regional conflict has provoked a worldwide battlefield for products and supplies and has driven governments to reevaluate global politics and international law. The war has taught us that choosing a side is not an option in a globalized world.
On the other hand, the long-standing tensions between China and Taiwan have recently flared up. Some experts anticipated the Ukraine conflict would drive China’s President Xi Jinping's ego to reclaim Taiwan back to its allegedly rightful motherland. Nancy Pelosi's visit to Taiwan also allowed China to show its military power. Another imminent issue that could soon implode is the strained relationship between Saudi Arabia and the US.
While these conflicts might seem isolated to the Eastern Hemisphere, they have had a much more significant impact than expected. China, Russia, Saudi Arabia, and possibly Iran seek to become an anti-democratic coalition, which we should not treat lightly, especially with their shared ideology of ever-greater authoritarian supremacy that could significantly impact the global geopolitical balance.
Meanwhile, the West is as fragile as ever. In recent years, we have learned that the primary danger modern democracies face is polarization, resulting from the rise of populist and demagogic leaders in societies tainted with significant economic disparities and the erosion of the rule of law. The risk of democratic backsliding is no longer the threat of revolution or a military coup but the decision the people make at the ballot box. We can observe this phenomenon in the US, once called the democratic laboratory, where in 2016, a man with no political experience, little commitment to the Constitution, and clear authoritarian tendencies was elected president.
Moreover, Latin America has proven more than ever to be a greenfield for populism. Bypassing inequality, exacerbated by the COVID-19 pandemic, some analysts stress that the structural crisis in the institutionalization of political parties is a common denominator of Latin America's presidential failures. Regardless of the cause, left-wing populism has cursed the region as dictatorships did almost a century ago, undermining already weak political institutions to the people's detriment.
Mexico is no exception; our democratically elected president is leading the country to the dawn of a new authoritarian era by bringing our fragile democracy to its knees. His policy proposals and Constitutional reforms have further deteriorated bureaucratic institutions and public services, affecting the people's overall welfare and fundamental rights. Additionally, but not surprisingly, the Mexico-US relationship has weakened, starting with AMLO's refusal to acknowledge President Joe Biden's victory.
Against this gloomy global outlook, we must address additional components that have arisen due to these crises, as well as other conflicts and problems that I will not be able to elaborate on in this entry. Inflation, interest rates, and the price of commodities (natural gas, corn, oil, steel, and copper, among others) are of great concern since the fluctuation of prices is likely to directly impact the economy and further strain the current turbulent times.
One of the most affected sectors has been the automobile industry. We must recall that this sector provides employment to millions of people worldwide and is a significant driver of the economy's manufacturing sector. Thus, a drop in sales affects not only dealerships but thousands of families who depend on its success. Uncertainty in economic growth, political instability, rising interest rates, and inflation have profoundly affected the sector. 2020 was incredibly volatile and unprecedented for the industry; car sales fell dramatically as the COVID-19 pandemic engulfed the world. Some experts expect sales to return to pre-pandemic levels potentially in 2025. In 2021, we observed some profitability due to the reduction in financial inventory costs but this will not last for long; as inventories recover, financial margins will be reduced. The war in Ukraine has also provoked quite a setback for the sector since Russia and Ukraine are major steel exporters.
Situations that will play a vital role in the industry's future are the current negotiations within the USMCA framework. It may take until November of this year to see the extent of the impact on the regional market. We should also closely follow the policies that states and OEMs are starting to put in place regarding the global tendency toward clean energies through hybrid and electric vehicles. Likewise, there is the growing popularity of mobility as a service that allows consumers to buy short-term mobility, providing an alternative to purchasing owned vehicles. Furthermore, we should keep an eye out for the expansion of the use of digital Sales experiences, which permit consumers the possibility to buy cars by simply clicking a few buttons on their smart devices. These developments will change the industry as we know it; the course will be shaped by the agenda the private sector and governments decide to push forward.
Through this short entry, I hope to demonstrate how different circumstances that affect the world impact us in ways we usually do not imagine. To comprehend the state of a specific sector, in this case, the automobile industry, we must understand the global and regional context in which it develops. What lies ahead will depend on the decisions governments and the private sector take to tackle the diverse problems we currently face. The best possible course of action lies in an interdisciplinary approach that considers all the variables and the potential effects that might occur holistically. While the path to recovery may seem somber, we must approach it with discerning eyes and strive for the opportunity to rebuild a better reality that allows us and future generations to prosper steadily and sustainably.