How the Mexican Used-Car Market Changed in the Pandemic’s Wake
STORY INLINE POST
Twenty months after we first heard of a virus that was rapidly expanding and causing many deaths in China, we continue to see its effects in a wide variety of markets across the globe. The Mexican used-car market is no exception. While some of the COVID-19 effects in this market are expected to be transitory, others have been disruptive enough that they are most likely to be permanent.
The bulk of the impact from COVID 19 on the used-car market has been indirect, coming mainly from the results in the new vehicle market. New-car sales across the globe (including Mexico) have been impacted not only by the shutdowns of manufacturing facilities during the peak of the mobility restrictions in April/May 2020 but, more importantly, by the drastic supply chain disruptions seen since the end of that year. The global microchip shortage has taken center stage, but there are other disruptions that may extend new-vehicle shortages into the second half of 2022 (like the magnesium shortage in China that is affecting aluminum production, a key input for vehicle manufacturing). This situation has caused not only an increase in prices due to supply and demand imbalances, but also a lack of vehicle inventory for sale at dealerships. Therefore, many potential new-vehicle buyers are turning to the used-car market to meet their needs.
Fear of COVID-19 contagion has been another contributing factor in the increased demand for used cars. Some people who were using public transportation before, switched to private modes of mobility because they felt safer. Those who could not afford a new car, or who could not find one (for the reasons explained above), started looking at second-hand vehicles. As a consequence, the number of used-car transactions in Mexico basically remained flat in 2020 compared to 2019. Frost & Sullivan estimates that in 2020, about 5.5 million used-car transactions were completed compared to 5.6 million in 2019. If we consider that the new-vehicle market dropped by around 28 percent during the same period, we can even say that there was no impact from COVID-19 on the used-car market in Mexico.
But beyond having an impact or not on the number of transactions, I would say that the pandemic had a positive and most likely permanent impact on the used-car market because companies created innovative ways to offer their clients safe and holistic experiences through the purchasing of a car with minimal in-person interaction. In Mexico, companies such as Kavak, a local startup and the first Mexican unicorn, started offering sellers and buyers a safe experience from May 2020, when the mobility restrictions were at their peak in the country. While it is true that this company offered a thorough online solution before the pandemic, some of the steps to sell or buy a vehicle were still completed in person. When the pandemic hit, the company implemented sanitized inspections and vehicle pick-up at the seller’s domicile, as well as complete digital document validation for sellers. In addition, for car buyers, virtual appointments were offered where people could “see” in real time a vehicle’s condition and potential customers could reserve the car digitally with a credit or debit card. Once the transaction was completed online, the buyer received the vehicle at the comfort of his/her home. Some of these solutions set new standards for buying/selling a car, which were later adopted by new-vehicle dealers.
Online transactional companies, such as Kavak and OLX Autos, are increasing their participation in the market, not only because they acted rapidly and were ready to offer safer solutions to clients during the pandemic, but also because they solve two of the main challenges that hinder used-car transactions. In such a market, there is a great deal of uncertainty about the actual state of the vehicle (including not only the physical and mechanical conditions, but also its criminal history, if any) and also many concerns about the security conditions of the deal. These companies purchase the vehicles themselves, assuming many of the risks related to a transaction that happens mainly in the informal market and, therefore, is barely protected by regulations. This simple fact eliminated the security risk in a market that was rife with fraud in the past, giving consumers confidence that the transaction would happen safely and without surprises. After purchasing the vehicle, these companies conduct quality checks (both physical and mechanical) and repair any issue to assure consumers that the assets they are acquiring comply with a reasonable state, providing confidence about the actual value of the transaction.
Despite the fact that the number of transactions in the used-car market in Mexico can be expected to return to healthy growth rates after the effects of COVID-19 evaporate (somewhere in the second half of 2022), I expect this segment to continue changing, becoming a more competitive and safer market that consumers can rely on