Mexico's other attraction: Surging small-car market

From left, the Chevy Sonic is made in Mexico and is a top-seller; the Nissan Kicks and March also sell well because of affordability.

MEXICO CITY — It’s not just the wages.

There’s another motivation for automakers flocking to Mexico to build small cars that would be tough to build profitably in high-wage nations like the U.S., Japan and Germany: the booming local market.

Mexico’s auto market is enjoying an 18 percent gain in new-vehicle sales through September, on top of 2015’s sales gain of 19 percent, breaking all volume records.

And the meat of the market is small cars. Mexico is a young country demographically where sales growth is centered on entry-level vehicles available with modest monthly payments.

Indeed, industry officials here argue that Mexico’s rising prominence in the auto industry isn’t just about its role as a low-wage export platform, as many free-trade critics see it. It’s also a growing market for products that are made locally, particularly small sedans that Americans don’t want.

“We have to ignite the internal market. We have to democratize access to a new car.”

Eduardo Solis
president of the Mexican Automotive Industry Association

Subcompact autos — led by products from Nissan, Volkswagen and General Motors — made up 37 percent of sales through September, and compacts account for another 24 percent, according to the Mexican Automobile Distributors Association.

“Basically it’s about price,” said Guillermo Rosales, co-director of the dealer group. “There’s been an increase in first-time buyers of new cars that is tied to more young people finding jobs and gaining access to credit.”

And given the price sensitivity, local production makes a big difference. Most of the 10 top-selling vehicles are made in Mexico. And more choices are coming.

Ford has announced that it is moving small-car production to Mexico to free up capacity in the U.S. for more profitable light trucks. Kia just opened a massive small-car factory in northern Mexico, and Toyota will break ground on a Corolla plant in central Mexico next month.

To be sure, the U.S. is still the most attractive market in North America, with more than 10 times the new-vehicle volume of Mexico’s. And U.S. tastes have shifted broadly to crossovers and SUVs that generate big profit margins for automakers.

But in the segment of the smallest cars — subcompacts and below — the gap between the markets is a lot narrower. Mexicans bought 417,000 of these vehicles through September, compared with 548,000 sold in the U.S. In that way, Mexico is performing more like other emerging markets that will drive global auto sales growth in the decades to come, according to industry analysts.

Diaz: New sales attitude needed

One reason for the spike in small-car sales — and the increased interest in the market among automakers — is the crackdown on imports of older used cars from the U.S. that often had their titles altered to hide damage or even theft, industry officials say. That means consumers are gaining access to safer and more reliable vehicles that are priced below the same models exported abroad. Rosales said he can remember no time in history when Mexicans could buy the same model at a lower price than Americans.

There’s more to the market than small, locally made cars. Sales of crossovers and SUVs rose 18 percent through September and made up a fifth of the market. Most of the top light trucks are imported, like the Chevrolet Equinox, Nissan X-Trail and Kia Sportage.

Rosales said Mexicans are buying more crossovers because more affordable models are arriving. However, these vehicles still can’t compete on pure price with entry-level sedans.

Mexican industry officials are also pushing hard to expand the local market for automakers that set up shop here.

Eduardo Solis, president of the Mexican Automotive Industry Association, said the industry is pushing the government for more tax deductions for car buyers since overall auto penetration is relatively low, even for a Latin American nation.

If sales could be stretched to 2 million vehicles a year, or even 2.2 million, Mexico would likely get auto investments equivalent to two new car plants, Solis said.

“We have to ignite the internal market,” he said. “We have to democratize access to a new car.”

Rosales sees sales as high as 1.6 million cars and light trucks this year, more than double the number sold during the depth of the global recession in 2009.

There are a few danger signs ahead: Mexican consumer confidence is weakening amid government budget cuts; economic growth is slowing; and there is uncertainty over the U.S. presidential election given Donald Trump’s criticism of the North American Free Trade Agreement.

Rosales thinks sales growth will move into the single digits for 2017.

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