What Does 2023 Hold for the Leasing Sector?

Is the Mexican automotive market capable of recovering the growth rates prior to the COVID-19 global pandemic? What will happen with leasing and similar financial products next year, will they continue to grow? What is the forecast for this industry in 2023?

The automotive industry has a strategic role in the Mexican economy, both in terms of consumption and in production and manufacturing. Mexico ranks ninth worldwide as a producer of vehicles and is the sixth-largest exporter in the world. This sector contributes 3 percent of the total Gross Domestic Product (GDP) and 17.2 percent of manufacturing GDP. In addition, the sector accounts for 16.4 percent of direct manufacturing employment in the country, which means more than 9 million jobs, according to data from the Ministry of Economy (SE)

In the region, Mexico is the Latin American country that produces the largest number of motor vehicles, according to Statista, and is one of the main poles of attraction for foreign capital. Statista reports that the Mexican automotive and auto parts industry received US$5.3 billion in foreign direct investment (FDI) during 2021.

There are many uncertainties in the sector due to the context that has afflicted this industry for months. From the isolation imposed by the pandemic, to the crisis caused by the shortage of supplies and, therefore, of cars, due to various geopolitical reasons, such as the Russian-Ukrainian conflict, the increase in prices of key raw materials for manufacturing of semiconductors, such as steel and copper, and high inflation with an exponential rise in unit prices, both new and used cars.

Despite this scenario, the second half of 2022 has already shown signs of recovery. For instance, in November, sales grew 15 percent compared to the same month in 2021, although JATO Dynamics analysts and representatives of organizations like the Mexican Association of Vehicle Leasers (AMAVe) do not expect it to reach the same sales levels as in 2016 and 2017 until 2026, or around 1.5 million units sold.

In fact, conditions of high inflation are expected to continue in the medium term, affecting all economic spheres, and the automotive sector is no exception. Data reported by the Mexican Association of Automotive Distributors (AMDA) indicate that in the first half of July, inflation reached a general annual level of 8.16 percent and in the case of vehicles 8.67 percent. In parallel, we have also seen a high cost of capital due to incremental interest rates. These key variables have considerably reduced the chances of accessing a vehicle with traditional financing methods, such as credit.

Throughout 2022, this context opened windows of opportunity and the market has adapted as a result of the demand-supply problem. We have seen how some players in the industry have sought profitability with alternatives, especially in the digital arena, with other types of financial tools, such as leasing and renting in the new and pre-owned car markets, making the tax deductible benefit not the only value proposition offered to customers.

Let us remember that this year, the financing of pre-owned units in Mexico grew 12 percent annually in the first seven months of the year compared to the financing of new cars, which was 1 percent, according to AMDA figures. However, in other countries, such as the US, for every three used cars, one new one is sold, compared with our country, where the ratio is 2:1. 

In the pre-owned segment, we have seen several actors emerge in Mexico, such as the first Mexican u,nicorn Kavak, and some new players such as Caranty or Odetta, all of which are digital platforms or marketplaces for buying and selling pre-owned cars with huge and relative success. In terms of leasing services, the only digital platform that is operating in the Mexican market and a pioneer is BitCar, since neither banks nor brand finance companies offer leasing services for used cars. 

It is important to remember that leased cars allow customers to save up to 35 percent in advance payments and up to 20 percent in monthly payments with respect to traditional credit; regarding pre-owned vehicles, the savings can be up to 60 percent. 

This saved capital can be invested in many ways by the user in order to grow their assets; for example, the acquisition of real estate or the purchase of shares or cryptocurrencies. 

The leasing culture is winning some ground in Mexico as a consequence of the context. There is a clear trend of moving  from “ownership” to “usership.” JATO Dynamics experts explain that post-pandemic growth will be gradual and conservative because the market expanded artificially in previous years and very aggressive financing plans were granted, while now, the market is being reorganized and alternatives like leasing are playing a key role not considered before by consumers. 

Forecasts for 2023 indicate that car sales may approach 1.1 million units; a figure close to that of 2021, where 1.014 million units were sold. Regarding leased cars, it is estimated the figure will remain between 4.8 percent and 5 percent of new units sold.

AMAVe is optimistic and believes that the outlook is encouraging and there are possibilities for growth next year at higher levels than in 2019. The market readjustments will continue and at BitCar, we are ready to offer a great product to the Mexican market, providing value and an alternative way to facilitate access to new and used cars for the Mexican people, not only companies, since more than 99 percent of the leases that occur in the country are for tax purposes. 

Based on our analysis and if inventory availability improves, which we think can happen in the second half of 2023, we can hope that, in four or five years, vehicles leased by individuals will rise up to 5 percent of total car sales in the country due to this usership mindset.