Guillermo Prieto
Executive President
View from the Top

What the Future Holds for the Domestic Market

Fri, 09/01/2017 - 09:10

Q: What role has financing played in the industry’s development and what are your projections for 2017?

A: Financing has been crucial for the development of the domestic market and will continue to be important for Mexico to reach its true sales potential. Payment terms are becoming longer and interest rates remain competitive despite increased inflation. These conditions have been favorable for the market and OEM financing arms are seeking funds to offer attractive solutions to clients. Carmakers’ financing branches now have a share of approximately 70 percent of the market. At the end of 2016, 67 percent of all new vehicles were sold through financing and early numbers for 2017 show that by March, 71 percent of the cars sold in Mexico were bought with a loan.

Q: What future do you see for the industry, despite economic and political uncertainty between Mexico and the US?

A: Even though companies are gradually increasing their prices, price-tag adjustments have been moderate to maintain competitiveness. Margins for automakers and distributors dropped considerably when the dollar surpassed the MX$20 mark and interest rates skyrocketed after the Interbank Equilibrium Interest Rate (TIIE) increased to 6.8 percent. Both OEMs and distributors had to find a way to reduce costs without risking the relationship with the customer. But price increases have now combined with a 12-13 percent appreciation of the peso against the dollar, giving companies more room to breathe. Although the end of 2016 and the beginning of 2017 were turbulent times for the industry, uncertainty has subsided. Considering the market’s development, we can imagine three possible scenarios for Mexico’s automotive market in the near future.

The most plausible and conservative outcome would be for the market to reach the 1.7-million mark in sales by the end of 2017, which would represent an increase of 6 percent compared to 2016’s figures. This target is contingent on a careful and healthy renegotiation of the NAFTA agreement.

The most optimistic outlook would be 11 percent industry growth. Some brands can barely cope with the high demand for their vehicles and regarding regional development, there  are states growing well above the average of 6 percent, almost at 50 percent. But others are showing negative growth rates, so reaching 11 percent growth would be difficult but not impossible.

The worst situation for the industry would be a decrease in sales of approximately 17 percent. This would be the case if the US pulls out of the NAFTA agreement and refuses to comply with World Trade Organization’s regulations. But if sales dropped, we would simply go back to the results we saw in 2015 of approximately 1.3 million vehicles sold.

Q: Based on 2016’s results and your forecast for 2017, what trends do you expect for the domestic market to 2020?

A: Considering 1.6 million vehicles as the baseline for the industry’s growth, the domestic market might reach around 2.2 million vehicles sold by 2020 if three conditions are met. First, the industry must maintain its momentum so we can reach 85 percent of new vehicle sales with financing, to sell an extra 250,000 units. Second, if used vehicle imports coming from the US remain capped at a limit of 110,00- 115,000 per year, we could add 200,000 more units to the new vehicle sales results. Imports decreased by 18 percent in 2016 and norms regulating vehicle imports keep evolving. Unfortunately, they are not as clear as we would like them to be. But the Tax Administration Service has a positive perspective on the results these changes might bring.

The third condition is related to Mexico’s economic growth. The automotive industry is directly connected to the country’s overall economic performance and in every crisis, the sector has suffered. Since automotive has been identified as a driver for Mexico’s development, the government has taken steps to strengthen its operations. If the structural reforms take effect and the country reaches an annual growth rate of 3 percent starting in 2019, we could sell an extra 200,000 vehicles.