A Rocky Road for Heavy VehiclesFri, 09/01/2017 - 09:49
Q: What is the outlook for Mexico’s heavy-vehicle manufacturing operations?
A: Mexico ranked sixth in heavy-vehicle production in 2016 and the country still maintains its number one position as an exporter of fifth-wheel tractor trailers. Regarding overall vehicle exports, the country was ranked fourth globally. By 2016, production decreased over 20 percent and the preliminary numbers for 2017 indicate a further reduction of 20 percent. Heavy-vehicle exports to our main destinations including the US, Canada, Colombia, Ecuador, Chile and Peru have decreased significantly, negatively impacting the country’s production numbers by a total of 40-50 percent. Almost 95 percent of Mexico’s heavy vehicles go to the US and we have not yet recovered our presence in the Colombian market, which was our second main export destination in 2012.
Q: What do you see as the main opportunity for the heavy vehicle industry after NAFTA is renegotiated?
A: Current regulations have been excellent for promoting our exports so ideally, we would like to keep them that way or improve them for the benefit of both countries. Following US threats to impose border tariffs, Mexico decided to increase local content in production but this would also be a challenge for national industry. The heavy-vehicle sector works with one of the highest rates of regional content in NAFTA, at 60 percent. This percentage is high enough and anything higher would risk making the region uncompetitive.
Q: How have exchange rates affected the domestic market’s development?
A: Against all odds, the domestic market maintained growth in 2015 and 2016, even after challenges related to the dollar-peso exchange rate. Truck sales are currently on the rise, following the economy’s overall development, and we expect them to stabilize later in the year. In contrast, bus sales are much more dependent on government programs and vehicle-renewal cycles. We might be looking at an accelerated purchase effect, fueled by the OEMs’ commercial strategies. Although we grew in the first months of 2017, we do not see this momentum keeping pace throughout 2017. Our projections show that sales could decrease by 16 percent. This is the same growth rate the industry saw in 2016 so in reality, we could go back to the same sales levels posted in 2015.
Mexico has an ideal potential market of between 60,000- 70,000 heavy vehicles per year, if we compare it to countries that have a healthy renovation strategy. The most we have sold is approximately 53,000 and more than 180,000 vehicles are 21 years old or more. We cannot replace 180,000 vehicles in a single year, which is why 60,000 to 70,000 is a more realistic goal.
Q: How will an expensive dollar impact the adoption of stricter environmental technologies?
A: SEMARNAT is in charge of the adoption of Euro V/EPA07 and Euro VI/EPA10 technologies and the application of NOM044. The official rule has not been published yet due to the lack of ultra-low sulfur diesel availability but the adoption of new technologies to comply with stricter environmental regulations can represent an added investment of between 10- 20 percent. With the increase in dollar prices seen in January 2017, that difference has increased over 30 percent, which is why it is important to improve the country’s renewal strategies. We expect regulations to be published in the first half of 2017. These would be gradually implemented from January 2019, which is also the government's timeframe for offering 100 percent availability of ultra-low sulfur diesel (ULSD).
The liberalization of fuel costs is another obstacle, as it also increases the total cost of ownership of the vehicle. Fuel represents 25-35 percent of a company’s operating costs and will imply a revision of either tariffs or subsidies for both transport and logistics operations. The combination of the adoption of new technologies and added fuel expenses will leave operators unable to take on aggressive renovation strategies.