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Mexican light-vehicle sales continue to decline in August

11 September 2018 Stephanie Brinley, MBA

IHS Markit perspective

  • Implications: Following a decline in Mexico's LV sales in 2017, sales have continued to drop in the first eight months of 2018, including a 5.3% y/y decrease in August and 7.8% in the YTD. LV production in so far in 2018 is fairly stable y/y and exports are estimated to have increased.
  • Outlook: IHS Markit forecasts that Mexican LV sales in 2018 will decrease by about 6.8% to 1.429 million units. Pressures on affordability are affecting vehicle sales in Mexico, with prices and financing rates increasing. Higher inflation, higher gas prices, and tensions regarding NAFTA negotiations are also feeding into volatility of the Mexican peso against other currencies and inflation.

In August 2018, light-vehicle (LV) sales in Mexico continued the downward trend from last year, according to data from the Mexican Automotive Industry Association (Asociación Mexicana de La Industria Automotriz: AMIA), falling 5.3% year on year (y/y) in the month. In the year to date (YTD; January-August), the market is down 7.8% y/y. Mexican LV sales in 2018 have remained soft, with the seasonally adjusted annual rate (SAAR) at 1.4 million units in both April and May. However, the SAAR perked up to 1.5 million units in June.

At a brand level, Nissan has had no problem maintaining its sales lead in August and in the YTD. Nissan sold 26,010 units in August (down 10.3% y/y), while Nissan's Infiniti luxury brand sold 175 vehicles during the month (up 15.9% y/y). General Motors (GM) earned a sales lead over Volkswagen (VW) in the second half of 2017 and has held this in 2018, selling 20,574 units in August (down 0.4% y/y), compared with VW's 16,321 units (down 11.6%), and including all VW Group brands. These three automakers are the market's key players, as the next highest seller was Toyota, with 8,634 units sold in August (up 4.5% y/y). Toyota was followed by Kia (8,035 units, up 8.5% y/y) and Fiat Chrysler Automobiles (FCA; 7,438 units, down 16.0%). After falling behind FCA in April, Honda has remained there in August (6,297 units, down 17.8%). Honda sales and production have been affected by downtime at the Celaya, Mexico, plant following a flood in July. The plant is not due back fully on line until November 2018; Celaya produces the Fit, HR-V and City.

LV sales growth in Mexico is different from the trends in other global regions, as the market has not shown as drastic a swing to sport utility vehicles (SUVs) from passenger cars, according to AMIA data for January-March, as the association has not reported the split since March, on a lack of detailed information from some automakers. In January-March, passenger car sales were declining and light commercial vehicle (LCV) sales were improving. In 2017, passenger car sales were down by 7.7% compared with 2016, while LCV sales were up 1.6%. In the first quarter of 2018, sales of passenger cars were down 15.6% y/y, while LCV sales were down a modest 1.5% y/y. Passenger cars in March accounted for 63.1% of total LV sales, compared with 70% in March 2017. According to IHS Markit data, passenger car sales January through July 2018 have accounted for 65.6% of sales, compared with 67.8% in the same period of 2018. Although sales in both categories have declined in the YTD, LCV sales are down 2.0% while sales of passenger cars have declined by 11.0%.

Outlook and implications

IHS Markit forecasts that Mexican LV sales in 2018 will decrease by about 6.8% to 1.429 million units. In 2018, higher inflation, higher gas prices, and tensions regarding NAFTA negotiations are all feeding into the volatility of the Mexican peso against other currencies and inflation. The situation is making some consumers choose to hold back from making purchases. Additionally, OEMs have reduced incentives as currency devaluation has eroded profitability, increasing vehicle prices. Lastly, financing rates have also crept up, resulting in a tougher environment to lend in. Further ahead, IHS Markit projects a moderate pace of LV sales growth to become the trend, with increases of between 1.8% and 2.8% through 2025. Investment in LV production continues to come online, and annual output is expected to remain above 4.0 million units for most of the forecast period, despite some contraction in the medium term.

The AMIA reports that the Banco de Mexico, the central bank, in August held an expectation for indicated expectation for economic growth of 2.14% in 2018 and 2.16 in 2019; these are down from 2.25% and 2.17%, respectively. The forecast for inflation has been revised to 4.41% (up from 4.23%) for 2018 and 3.74% in 2019. The AMIA continues to point out that the Mexican economy may see headwinds on concerns over economic issues (including foreign trade policy), domestic political uncertainty, and internal political insecurity. Canada, Mexico, and the US are renegotiating the North American Free Trade Agreement (NAFTA); this has the potential to affect the economy as well as production sourcing, with negotiations ongoing. In September 2018, reports are that Mexico and the US are nearing agreement, with talks to bring Canada onboard continuing. The uncertainty is impacting consumer confidence and corporate investment. The US has also instituted tariffs on steel and aluminium imported from Mexico and Canada, effective 1 June.

The AMIA reported that Mexico's used-car imports continue to remain low, although increasing in 2018 compared with 2017. The slowdown of imported used cars over the past three years provided some breathing room for new cars; with restrictions extended into 2018. In 2013, there were 644,209 used cars sold in Mexico, which fell to 147,829 units in 2016. In 2017, Mexico's used-car imports continued to decline, falling 16.4% to 123,638 units. With the import rate at a more manageable pace, 2018 has been showing increases. In January-July 2018, Mexican used-car imports have increased by 20.8% compared with the first seven months of 2017 - compared with 2014, however, this is a decline of 75%. Overall, the lower rate of imported used cars helps to ease the negative pressures on the domestic market.

Despite possible headwinds from a change in US taxation and difficult South American markets, IHS Markit forecasts that planned investment in production facilities should help Mexican vehicle output grow in the near term. IHS Markit forecasts that Mexico's LV production will break the 4.0-million-unit mark in 2018 and in most years of the forecast will remain around that level, although the next decade will see some contraction, with output in 2021 forecast to be around 3.77 million units, and then a return to growth in 2022. 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, which may affect future production investment. Also adding to the uncertainty is a US investigation into consideration of import tariffs on automobiles and components from all countries, announced in May. The details of when such tariffs will be introduced and how much they will amount to will depend on the results of the investigation, and on the ongoing NAFTA negotiations.

Posted 11 September 2018 by Stephanie Brinley, MBA, Principal Automotive Analyst, IHS Markit

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