The Car and Truck Fleet and Leasing Management Magazine

Mexico Fleet Market Resilient in Face of Uncertainty

June 2017, by Mike Antich - Also by this author

Courtesy of General Motors.
Courtesy of General Motors.

Auto sales in Mexico increased 19% in calendar-year 2016 to a record 1,603,672 light vehicles. General Motors Mexico produced 20% of these units. That marked two consecutive years of double-digit gains for the domestic market fueled by strong auto financing and a stable economy, as well as more rigorous enforcement to curb illegal imports of used cars from the United States, which cannibalize new-vehicle sales.

Today, Mexico is the world’s seventh largest automotive producer and the world’s fourth largest exporter of assembled automobiles. The total Mexican automotive industry employs 1.7 million people, which includes direct and indirect employees.

In addition to the North American Free Trade Agreement (NAFTA) with the U.S. and Canada, Mexico has signed nine other free trade agreements with other countries. These 10 agreements, cumulatively, over the past decade, have stimulated a surge in international investment to build new factories to export or sell vehicles in the local market.

The Mexican economy continues to grow, fueled by an economic expansion in the agricultural sector and services industry.

In addition, the weakness of the peso, along with the ongoing improvement in global demand, have positively affected Mexico’s merchandise exports in the first two months of 2017.

Mexico Retail & Fleet Markets

Total auto sales in Mexico have been stimulated in recent years by a sharp growth in automaker financing, low interest rates, and aggressive retail pricing as newer brands began to expand their sales in the Mexican market, such as Kia and Hyundai, which captured about 6 percent of the market between them last year.

Nissan Motor Co. continues to be the leader in total Mexico automotive sales with a 25% market share at just over 400,000 unit sales, according to the Mexican Automobile Distributors Association and the Mexico Automotive Industry Association.

General Motors is in second place, with a 19% share, representing 309,000 units sold. Last December was GM Mexico’s best month in its history.

“For the second consecutive year, the Chevrolet Aveo and Chevrolet Spark finished in the top-five fleet vehicles sold in Mexico,” said Miguel Gonzalez, director of GM Mexico fleet department, a position he assumed July 2016, succeeding Gerardo Fernandez who was promoted to Chevrolet sales director.

Courtesy of General Motors.
Courtesy of General Motors.

Volkswagen is the third best-selling brand in Mexico with a 15% share, representing 247,000 units sold.

Toyota was the OEM with the largest increases in 2016 with a 24% increase in sales over 2015 to about 105,000 cars and light trucks. Toyota is fourth best-selling brand in Mexico with a 6.5% share of the local market.

As with most automotive markets around the world, Mexican auto sales are being stimulated by the growing retail demand for compact and mid-size SUVs.

“The highest growth has been seen in low-end segments such as small and medium SUVs, small and medium pickups, and small and compact cars,” said Gonzalez.

Other factors stimulating new-vehicle sales in Mexico has been the decrease of used-vehicle imports from the U.S., as well as a higher credit availability in the domestic market for auto loans.

Exports represent 69.1% of GM Mexico’s total production, with the majority of them earmarked for sale in the U.S. Canada is the second largest automotive export destination for GM Mexico, primarily exporting Mexico-assembled Silverado, Sierra, and Trax models to Canadian dealers. “The third most important market for GM Mexico is Argentina, but we only export Trax to them,” said Gonzalez.

One headwind on the horizon is the risk of higher interest rates in the Mexican economy as inflation is expected to run above government forecasts in 2017, according to Banco Bilbao Vizcaya Argentaria SA, Grupo Financiero Banorte SAB, and JPMorgan Chase & Co. One reason for inflation concerns has been triggered by the government’s decision to raise the price of gasoline by an average of 20% in January 2017.

Banco de Mexico is the central bank of Mexico and its policy is to maintain a stable interest-rate spread to the U.S. to prevent currency outflows, which could also trigger higher interest rates in Mexico. Another concern about currency outflow are the signals from the U.S. Federal Reserve that there will be a faster pace of increasing interest rates in the U.S.

“The Mexico Central Bank has increased the key interest rate 230 basis points, the highest points since 2009. The situation, for sure, will impact the automotive industry, especially since around 80% of the auto sales in Mexico are financed,” said Gonzalez.

There are several other economic indicators influencing Mexico’s current situation and the outlook for the balance of calendar-year 2017. The first is the foreign exchange (FX) rate, in particular the exchange rate between the Mexican peso and the U.S. dollar.

A weaker peso will slow growth in the Mexican economy and will put upward pressure on inflation.

What impact will a weaker peso vis-a-vis the U.S. dollar have on the businesses of automakers in Mexico?

The weakness of the currency has two factors: on the one hand, the price of vehicles in the local retail market will be higher and, on the other hand, it will decrease the value of exports. There is significant upward price due to vehicles equipped with the latest technologies being marketed in the domestic market. A weaker peso also lowers the value of Mexican automotive exports.

“There is certainly additional pressure in the exchange rate for the vehicles we market in the country,” said Gonzalez. “We are adjusting to what the market can offer in terms of pricing and expect to keep a balance just as we have in the past years.”

Since November 2016, Mexico’s central bank has raised interest rates three times and sold U.S. dollars to international investors to buoy the value of the peso. The value of the Mexican peso was down about 11 percent to a near-record low, putting pressure on the Mexican central bank to intervene as inflation expectations rose. But by mid-January, the peso began gaining value again.

The economic forecast is for the gross domestic product of Mexico to expand only 1.7 percent in calendar-year 2017, according to the latest surveys from Banco de Mexico and Citi/Banamex. If this occurs, it will be the slowest growth since 2013, which only witnessed a 1.4% increase in GDP growth.

Impact of Higher Fuel Prices

As mentioned earlier, a key factor impacting the fleet market in Mexico has been the deregulation of fuel prices. The new policy of unsupported fuel prices ends decades of government support and control of fuel prices in Mexico.

On January 1, 2017, Pemex raised the nationwide average price of both grades of gasoline and diesel dramatically by an average of 20%. The price increases varied across Mexico, but universally higher fuel prices impacted all industries in Mexico.

The prices for gasoline and diesel jumped 14-23% across the nation, prompting demonstrations across the country. This is one of the last stages of general opening markets under the ordinances of NAFTA that is designed to benefit American suppliers. But with the falling value of the peso against the dollar and the rising cost of a barrel of oil, Mexico is feeling the impact of free market prices for petroleum products.

Since March 2017, the price of gasoline began changing daily across Mexico to follow the value of the peso and cost of production.

Initiatives to Boost Fleet Sales

Although overall automotive sales in Mexico grew more than 20% in CY-2016, the fleet industry had a lower sales increase at just under 8%. GM Mexico fleet sales in calendar-year 2016 were 7.4% below 2015, primarily due to some extraordinary government sales that were consummated in calendar-year 2015.

GM Mexico initiatives to further increase its volume of local fleet sales include expanding its Fleet Services Program to increase coverage in its dealer network and the re-launching of the Small-Medium Business Program. In addition, GM Mexico is aiming to improve performance in its Supplier and Business Partners Program as well.

Courtesy of General Motors.
Courtesy of General Motors.

“GM dealers in Mexico are playing an important role in supporting the corporation’s fleet sales initiatives. For instance, GM offers the only fleet-certified dealer network in the market,” said Gonzalez. “Dealers are a key factor to success in fleet sales, and we do have the best and most professional dealer network.”

Another reason for GM Mexico’s positive outlook on 2017 sales is the freshening of it new-product portfolio.

“Some important news with our fleet vehicles portfolio is that we updated the Chevrolet Aveo. We have just launched the Aveo model-year with a facelift to the front grille and bumper, and because we know safety is becoming more and more important for our customers, we have added option packages that include airbags,” said Gonzalez. “In the second half of 2017, we will launch the brand-new Chevrolet Spark model-year 2018 that will incorporate airbags and ABS in all its packages, including the cargo model.”

Earlier, the new Chevrolet Sonic was launched with complete exterior redesign, with the addition of airbags and ABS in all packages.

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