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Mexican light-vehicle sales and production decline in March, exports grow
10 April 2018 Stephanie Brinley, MBAIHS Markit perspective
- Implications: Following a decline in Mexico's light-vehicle (LV) sales in 2017, the first three months of 2018 have also seen in decrease. In March, LV sales dropped 13.4% y/y. While LV production in the first quarter was about even with the first three months of 2017, output dropped 10.9% y/y in March. LV exports remained positive for the month, up 7.5% y/y. Consumer concerns look to be holding back sales in 2018. Among the issues to be watched is the outcome of the ongoing renegotiation of the North American Free Trade Agreement (NAFTA).
- Outlook: IHS Markit forecasts Mexican LV sales will decrease by 5.2% to 1.45 million units in 2018. In 2018, consumers face higher inflation, higher gas prices, and tensions regarding the future of NAFTA negotiations, all feeding into the volatility of the Mexican peso against other currencies and inflation. Additionally, OEMs reduced incentives as currency devaluation eroded profitability. Lastly, financing rates have also crept up, resulting in a tougher environment to lend in. The political impact of the mid-2018 presidential election may also bench consumers until some degree of clarity is in sight. Further out, IHS Markit projects a moderate pace of Mexican LV sales growth to become the trend, with annual increases of between 1.6% and 2.5% through 2025.
At a brand level, Nissan maintained its sales lead in Mexico in March and in the YTD, a lead it has held for some time. Nissan sold 24,462 units in Mexico in March, comprising 17,409 cars and 11,054 LCVs, while Nissan luxury brand Infiniti sold 66 cars and 95 LCVs in March. Nissan saw a 23.4% y/y decline in LV sales during last month, while Infiniti's LV sales declined 14.8% y/y. General Motors (GM) and Volkswagen (VW) vied for second place in Mexican LV sales from month to month over the first half of 2017, but GM closed last year ahead and has held that position so far in 2018. In March, GM sold 19,628 units, down 18.3% y/y, and was ahead of VW (16,164 units, down 21.3% y/y) by a wider margin than in February. Toyota followed VW in the rankings in March, with 8,316 units sold, down 12.9% y/y. Toyota was followed by Honda (7.501 units, up 4.1% y/y) and Kia (7,663 units, up 12.5% y/y). Fiat Chrysler Automobiles (FCA) remained behind Kia, with a 13.7% y/y sales decline in March to 7,280 units. Throughout 2017, Kia supported its new production plant in Mexico with a major effort to broaden sales, and the work is paying off.
Mexico's LV production declined 10.9% y/y in March. However, gains in January (up 19.8%) and February (up 6.2%) mean that the YD figure is nearly even with the first quarter of 2017, with a decline of 0.4% y/y. This followed LV production in 2017 increasing by 8.9% to 3.77 million units. In March 2018, the share of passenger cars in Mexico's LV production was 38.7%, compared with 58.5% in March 2017. The country saw production of 128,125 passenger cars and 202,984 LCVs in March 2018. New sport utility vehicle (SUV) production at FCA and Audi is contributing to the shift. At an automaker level, GM (down 40.8% y/y), Nissan (down 31.9%), VW (down 32.0%), Honda (down 23.1%), and Mazda (down 12.5%) all reported production declines in March. Nissan remained the highest-volume producer in Mexico's market during 2017, despite its output declining. In the YTD, however, Nissan's 18.2% y/y production decline to 186,520 units puts it behind GM (202,450 units, up 9.1% y/y). FCA is in third place in the YTD, with 167,895 units produced, up 17.1% y/y, on the strength of the new Compass. VW is in fourth place in the YTD, with output down 33.5% y/y to 78,219 units. Next in the rankings is Ford, with 78,333 units produced, a decline of 14.1% y/y. Kia's production is still growing, up 65.7% to 66,960 units in the YTD. Following Kia in the YTD are Honda (53,400 units, down 1.5% y/y), Audi (45,897 units, up 97.2%), Toyota (43,855 units, up 5.8%), and Mazda (39,687 units, down 5.5%).
In 2017, Mexico's LV exports ended the year up 12.1% and reached 3.10 million units. The results through March 2018 indicate continued export growth, with March returning an increase of 7.5% y/y. While in the third month of 2018, exports reached 327,955 units, up 7.5% y/y, in the YTD results from AMIA show 835,023 units exported, an increase of 8.1% y /y. In the YTD, GM's exports (201,592 units, up 42.7% y/y) exceed FCA's exports, as the volume of the GMC Terrain has increased. FCA is second in the rankings in the YTD with exports of 148,771 units, up 12.3% y/y, fed by the latest Jeep Compass. Nissan's LV exports have decreased so far in 2018, down 12.6% y/y to 122,543 units. AMIA now reports the exports of VW and Audi separately; in January-March, Audi's exports increased 101% y/y to 44,529 units, while VW's exports contracted 20.0% y/y to 68,224 units. Mexico is the sole production source for the latest generation of the Audi Q5. Mazda saw exports fall 24.0% to 36,366 units in the first three months. In the YTD, Ford's LV exports decreased by 13.8% y/y to 74,772 units. Honda exported 1.2% y/y fewer cars in the first quarter of 2018. Mexico's largest export markets continue to be the United States and Canada; those two countries have received 75% of exports during the YTD. However, European countries are seeing increased exports from Mexico, particularly Germany with the Audi Q5. Germany remains in third place, but its participation in the Mexican export market increased to 4.9% in the first quarter, compared with 4.2% in the same quarter of 2017.
Outlook and implications
IHS Markit forecasts Mexico's LV sales will decrease by 5.2% to 1.45 million units in 2018. In 2018, consumers face higher inflation, higher gas prices, and tensions regarding the future of the NAFTA negotiations, all feeding into the volatility of the Mexican peso against other currencies and inflation. Additionally, OEMs reduced incentives as currency devaluation eroded profitability. Lastly, financing rates have also crept it, resulting in a tougher environment to lend in. The political impact of the mid-2018 presidential election may also bench consumers until some degree of clarity is in sight. Further out, IHS Markit projects a moderate pace of annual sales growth to become the trend, with increases of between 1.6% and 2.5% through 2025. LV production is expected to continue to grow on new investment, as well as improving export figures, although in the medium term, output will also see some contractionary years.
The AMIA reports that the Banco de Mexico, the central bank, in March 2018 indicated an expectation of economic growth of 2.21% in 2018 (down from a prior estimate of 2.28%) and 2.34% in 2019. The forecast for inflation has been revised to 4.07% for 2018 and 3.67% in 2019. The AMIA continues to point out that the Mexican economy may see headwinds on concerns over foreign trade policy, domestic political uncertainty, and public insecurity. Canada, Mexico, and the US have begun the process of renegotiating the North American Free Trade Agreement (NAFTA); this has the potential to impact on the economy as well as production sourcing with the negotiations not yet settled as of 9 April. After the January round of talks ended, it was indicated that it could take until 2019 to resolve the negotiations and the uncertainty is impacting on consumer confidence and corporate investment. While in early March, US President Donald Trump said that he would implement new tariffs on steel and aluminum, Canada and Mexico are to be exempt from these, depending on the outcome of the NAFTA talks. At the time of writing, the situation remains fluid, although some media reports suggest a conclusion may be near.
The AMIA reports that Mexico's used-car imports continue to remain relatively low. The slowdown of imported used cars over the past three years has provided some breathing room for new cars; the policy has also been extended into 2018 (see Mexico: 29 December 2017: Mexico extends restrictions on imports of used vehicles - report). In 2013, there were 644,209 used cars sold in Mexico, falling to 147,829 units in 2016. In 2017, used-car imports continued to decline, falling 16.4% to 123,638 units, despite increases in the months of July, September, October, and November. With the import rate at a more manageable pace, we expect some months in 2018 will show increases. Both January and February showed increases, and used-car imports are up 16.8% to 21,730 units in the YTD. Overall, the lower rate of imported used cars helps to keep the negative pressures on the domestic market down. Absent the government slowdown, the AMIA expects that an influx of used vehicles from the US would affect the renewal of the vehicle parc.
Despite possible headwinds from a change in US taxation and difficult South American markets, IHS Markit forecasts planned investment in production facilities should help Mexican output grow in the near term. Toyota indicated in 2017 that its Mexican plant, under construction, will build the Tacoma instead of the Corolla and the change in production plans will reduce its plans for total Mexican investment; this came after Toyota and Mazda agreed to a joint-venture plant in the US, which will build the Corolla for Toyota and an SUV for Mazda in 2021. Chinese automaker BAIC has indicated an intention to export completely knocked-down (CKD) production from Mexico to the US as soon as 2018, although the plans are not completely clear at the time of writing.
IHS Markit forecasts that Mexico's LV production will break the 4.0-million-unit mark in 2018, although the next decade will see some contraction, with output in 2021 forecast to be around 3.84 million units. Between 2014 and 2016, Mexico's output grew from 3.21 million units per annum (upa) to 3.47 million upa.
IHS Markit will be watching the progress of the renegotiation of NAFTA. Against this backdrop, announcements of new auto industry investment in Mexico may slow until the situation is resolved. Despite the projection for some market contraction in 2021 and 2022, IHS Markit projects a return to growth in 2023.
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