Mexico emerges from 'lost decade'

MEXICO CITY -- Month after month, for years, the story was the same at the joint news conference held by the Mexican auto industry association and the dealers' association. 

Auto production had reached another record high. Exports were off the charts, and investment was pouring in. 

Local sales of cars and light trucks, however, remained depressed. 

Mexico, with the second-largest economy in Latin America and more than 110 million people, at times was lucky to sell a million new vehicles a year locally while it exported twice that number. With sales sometimes running lower than they were 10 years earlier, economists spoke of a "lost decade." 

Now, the narrative has flipped. With signs of a plateau in new-vehicle sales in the U.S., Mexico's auto exports were down more than 5 percent in the first half of the year, according to industry data. 

Meanwhile, new-vehicle sales in Mexico are at historic highs. Last year, Mexico posted a sales record of 1.35 million vehicles, a 19 percent gain vs. 2014. The previous record, set in 2006, was 1.14 million.

The record pace continues this year, with sales up 18 percent in the first half, significantly beating industry estimates of more moderate gains and softening the drop in exports, with total production falling just 3.1 percent, according to the Mexican Automotive Industry Association.

About half of all new cars sold in Mexico are made domestically, and the other half are imported, mainly from Asia and North America, industry data show.

Mexico's sales turnaround comes after a decade-long battle against economic and political forces that had tilted the market away from modern vehicles and toward older used cars flowing predominantly from the U.S. for several years at an average of around one million units a year, according to industry data.

"We had years where the flow of used vehicles to Mexico was very similar to the entire market for new vehicles," said Francisco Garza, General Motors' vice president of sales for Mexico, Central America and the Caribbean. Reducing that flow, he said, "opens up the domestic market."

A crush of used cars hurts new-car sales indirectly by depressing the price of all pre-owned cars, industry officials argue. If a customer for a new car can't get a decent price at trade-in, deals fall apart and consumers delay their purchases.

That dynamic has changed. Not only did used-car imports fall to just 180,000 last year from 1.6 million in 2006, according to the industry association, but new laws that encourage lending -- along with stepped-up automaker financing -- led to a 23 percent increase in the number of new-vehicle auto loans last year, a trend that continued through the first five months of 2016, the Mexican Automobile Distributors Association reported.

The glut of freely imported used cars began with a Mexican government decree in 2005 -- much earlier than required by the North American Free Trade Agreement. But it was only one in a series of mistakes that undermined the local market for decades, industry officials say.

In the mid-1990s, the Mexican economy plunged into a crippling recession after the government sharply devalued the peso because of unsustainable economic policies. New-vehicle sales fell to just 227,000 units in 1995. A credit crunch a decade later made the 2008-09 global recession even harder for strapped Mexican consumers, said Guillermo Rosales, co-director of the Mexican Automobile Distributors Association.

Now that sales have reached record levels, industry officials expect some cooling off in the market but still solid numbers.

"We see moderate growth because [sales] growth last year was at a catch-up pace for all the other years that we didn't grow," said Mayra Gonzalez, who just took over as president of Nissan Mexicana. "If we look at the future, I think the market has the potential to grow some 500,000 additional units to reach nearly 2 million if all of the economic factors and the political climate, etc., align." 

Nissan has long been the market leader in Mexico, currently with a 26 percent share and sales of nearly 350,000 units in 2015, including Infiniti. Sales are up 13 percent in the first half. 

With the retail market now starting to look more like it should in a country with a growing economy and low inflation, many in the industry are deeply aware that their big gains could slip away, given the potential for swings in government policy. 

"We have been able to move forward so that the factors that were limiting demand in the internal auto market were resolved, were adjusted, and important laws were changed," Rosales said. 

And yet, he cautioned, "if there is a populist political movement that takes over with the 2018 change in government, and it makes a radical shift and says "yes, cars for the poor' etc., that's going to be a very big blow to the economy," since such a policy could open the used-car floodgates again.

Today's Mexican market is largely a three-way contest, led by Nissan, GM and Volks-wagen, though at least 30 distinct brands are duking it out for a share of the growing market.

For automakers, battling for market share in a country where new brands and models are arriving all the time is a challenge, but it beats the anemic market of the past decade. It also affords them an important outlet for their car offerings at a time when the U.S. market is leaning heavily toward light trucks. In the first half of 2016, nine of the 10 top-selling nameplates in Mexico were compact or subcompact cars, according to the industry association.

"Although the competition is going to multiply, we are going to be skillful enough to maintain our participation and in given time to increase it," GM's Garza said. "We believe that we must take advantage of what the internal market in Mexico offers as well as the opportunity to export to different latitudes."

Nissan doesn't plan on giving up any ground either, Gonzalez said.

And for Mexico, too, it's important to be more than just an export base, since a solid local market tends to draw more investment from automakers looking for growth opportunities, said Eduardo Solis, president of the industry group.

"Having a healthy internal market, a growing internal market for a country that exports 83 percent [of production] is fundamental," he said. "We are sure we can have the same success in the internal market that we have had as a production and export platform."

In the end, consumers may be the big winners.

"The arrival of new brands, new actors, has been fundamental for stronger competition," Rosales said. "No one wants to lose a millimeter of market share as shown by a series of very aggressive promotions by automakers."