Published On: Mon, Jan 12th, 2015

Production of cars for export is booming in Mexico, but domestic sales have stagnated

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Mexico’s auto industry is stuck in a paradox: Production of cars for export is booming but domestic sales have stagnated. Now, one of the causes of those slack local sales – loopholes that allow used old US cars to be sold cheaply in Mexico – is being eliminated.

Don’t expect a decreased flow of old US cars in the short term, says Guillermo Rosales, director of the Mexican Association of Auto Dealers. Courts in Mexico border cities continue granting injunctions that allow used cars to cross from the United States without the mandatory 10 percent tariff and emissions check, though these injunctions are now being struck down in Mexico’s Supreme Court.

“We won’t see changes in the short term, in two or three months,” Mr. Rosales told Monitor Global Outlook. “But in two years we are going to have a stabilized market for imported cars” once legal loopholes are eliminated.

Rosales says a “healthy” quantity of used imports would be 200,000 a year, filling the demand for vehicles such as small pickup trucks. Roughly 654,000 used cars were imported into Mexico in 2013, and 95 percent of them avoid tariffs, according to the Mexican tax administration.

For the moment, the influx of used American cars is creating an imbalance in Mexico’s auto industry.

“On one hand, we have record production and exports,” says Eduardo Sols, president of the Mexican Automotive Industry Association (AMIA). “On the other hand, we have converted into the vehicular wastebasket of the United States.”

Domestic demand for new cars has exhibited only a slow recovery since the 2009 financial crisis. And light vehicle sales are still 6.4 percent less in 2013 than in 2005, according to the AMIA.

“We’re under 50 percent our potential for sales of new cars,” says Rosales. “There are eight new cars for every 100,000 inhabitants, that’s well below 19 in Argentina and 21 in Brazil, two countries with fairly similar socioeconomic indicators compared to Mexico.”

One big reason, Mr. Rosales says, is that the local car market is “saturated with used cars” from the US, which have no import limits under the North American Free Trade Agreement. Mexico imported 7.3 million used cars from 2005 through February 2014, almost all from the US, compared with sales of 8.3 million new cars in the same period, according to the AMIA.

The cost advantages of used US vehicles are just too enticing for many Mexicans. The average cost of a new car in Mexico is $24,000. Used local cars cost an average of $6,000, according to Rosales, while imported used cars sell for $3,000 on average.

There are other reasons new car sales have stagnated. Low consumer confidence for durable goods and a tight credit market are also crimping car sales, although only 56 percent of new cars are bought with financing in Mexico, according to the World Bank. In Colombia, the figure is 71 percent; in Brazil, 76 percent.

Mexicans still buying US junkers (Photo: AP)

Mexicans still buying US junkers (Photo: AP)

Mexico imports hundreds of thousands of used cars from the United States, hurting the local market for new and used cars, say auto industry representatives. The closing of loopholes this year should eventually stem the flow and raise the price of those cheap used imports. Tight consumer credit and low consumer confidence are also holding back Mexican auto sales.

IMPACTS

Business
Inexpensive compact cars are most popular in Mexico; GM Aveo and Nissan Tsuru led first quarter sales.
Political
Legal injunctions that allowed dealers to import used cars tariff-free are being denied, thus raising import costs.
Social
With sales hampered by weak consumer demand, Mexico’s auto industry is lobbying government to make credit more available for car buyers.

Mexico Travel Care

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