EDUARDO SOLIS – Urgent Actions Are Needed to Reactivate the Domestic Market

Executive President Mexico’s Automotive Industry Association (AMIA)

MEXICONOW Staff Interview

HOW DO YOU SEE THE AUTOMOTIVE SECTOR IN MEXICO IN 2010? FROM THE AMIA WEBSITE WE GATHER THAT PRODUCTION INCREASED IN JANUARY BUT THE MEXICAN MARKET HAS NOT IMPROVED.

It is difficult to infer the whole year from only one month’s data, what happens in one month does not necessarily mark a tendency for the rest of the year.

We are past 2009, the most complicated year in the automotive industry, in Mexico as well as in the world. The economic and financial crisis was responsible for affecting the confidence index of consumers worldwide, which made them react by postponing the purchase of durable goods. Vehicle sales in the United States and in most countries were off about 30%. Due to the global auto crisis, several countries reacted by creating initiatives in order to save their domestic markets.

The United States, for example created the “Cash for Clunkers” program which attracted over 950,000 new car buyers. In Germany, they established the “Scrap Incentives” program and in Brazil, they reacted by pumping almost US$1 billion for loans, which gave the market liquidity. They reacted as well by eliminating federal taxes for the purchase of new vehicles. The result of the aggressive internal measures taken by Brazil was a 12% increase in sales, and in contrast, the Mexican market fell by 26%.

WHY IS THERE SUCH A DRAMATIC DIFFERENCE BETWEEN THE BEHAVIOR OF THE MARKET IN BRAZIL AND MEXICO’S?

In the process of becoming the 10th largest light vehicle producer in the world, the domestic market was neglected. For example, because of the Decree that was published in 2005 that permitted the definitive importation of used vehicles originating from NAFTA territory flooded Mexico with U.S. scraps. Consequently, this caused that the vehicular inventory in Mexico be filled with old vehicles thereby reducing the demand for new vehicles.

The Decree published on December 24, 2008 was necessary to curb and regulate the somewhat indiscriminate importation. The new regulations helped to maintain the ordinance of the definitive importation of used vehicles.

In 5 years, over 5 million cars had been imported into Mexico, but in 2009, thanks to the new Decree, only 200,000 were imported.

In Mexico, for every one thousand residents there are only seven new vehicles sold per year. This is modest when compared to Brazil’s twenty one new vehicles per one thousand residents and Argentina’s twelve per one thousand. This is in spite of Mexico’s larger per capita income than its Latin counterparts.

Also the tax matter in Mexico is not helping the automotive industry and the sale of new autos. It is necessary to create tax incentives so that consumers do not postpone the purchase of durable goods.

ARE THERE ANY FAVORABLE CONDITIONS TO WORK WITH THE MEXICAN GOVERNMENT IN ORDER TO HELP THE AUTOMOTIVE INDUSTRY RECOVER?

Yes, there are conditions to work hand in hand with the Mexican government.

For example with the legislative branch a Special Commission of the Automotive Industry was just established in the House of Representatives. Such Commission will attend important subjects for the automotive industry, such as the search for new mechanisms that will help reactivate the market. The Commission is led by Representative Melchor Sanchez de la Fuente from the state of Coahuila.

With the executive branch, we created an Automotive Industry Board presided by the Minister of the Economy, Gerardo Ruiz Mateos. We have held various meetings. In such meetings we discuss subjects that are of extreme importance for the automotive industry, such as regulations and the agenda focused in the domestic market.

WILL THE INDUSTRY MAKE NEW INVESTMENTS IN 2010?

In this matter it all depends on the car brands, each of the OEM’s and their suppliers. The launching of new models and vehicle platforms usually lead to substantial investments. For 2010, some of these opportunities might result in new investments.

Also the improvement of the market is of great importance. The problem here is not a problem of supply or installed capacity, the problem is on the demand side. The good thing is that Mexico’s auto industry is highly competitive in the global markets, which provide an important support for production.

DO YOU THINK THAT IN THE LONG RUN, THE AUTO CRISIS WILL BENEFIT MEXICO?

No one wants to go through a deep crisis to eventually reap a benefit. Mexico lost 130,000 jobs and production collapsed; the 2009 auto industry results and statistics take us back to the industry levels of the late 90´s, there is a lot of ground to make up from here on to get back to our levels of only two years ago.

Mexico will benefit by looking for new world markets. For example, by mid 2011 new markets shall open for Mexico through Mercosur. Also, in 2011 the import quota restrictions in Colombia for Mexico will be eliminated.

Looking at our domestic market, the economic conditions in Mexico are adequate for sales of 18 vehicles per thousand residents. That by itself would bring annual sales in Mexico to 1,800,000 units, well above the 2009 level of 750,000.

If the proper actions are taken to reactivate the domestic market and if we continue to be competitive in export markets, Mexico will undoubtedly emerge as a stronger player in the global auto industry.