OBG talks to Ernesto Mariano Hernández, President and Managing Director, General Motors de México

Interview: Ernesto Mariano Hernández

What are the advantages and disadvantages of the auto market’s reliance on the US?

ERNESTO MARIANO HERNÁNDEZ: The ratification of the North American Free Trade Agreement (NAFTA) marked an important turning point in manufacturing and exports, where Mexico became an attractive location for car manufacturers to establish themselves and, subsequently, supply a portion of NAFTA demand. The US has been, is and will remain Mexico’s best trading partner, as 70% of our industry exports go to our northern neighbour. As with any symbiotic relationship, Mexico feels the direct impact of fluctuations in the US economy, whether negative or positive.

The global financial crisis proved that Mexico is crucial to the restructuring of the US, which, as a result, is now significantly increasing its competitiveness. Consequently, US car manufacturers are now regaining levels of competitiveness. The automotive industry in Mexico, and its original equipment manufacturers, must remain competitive if we want to keep playing in the US market.

What are the most important characteristics of the domestic automobile market?

HERNÁNDEZ: The Mexican consumer is knowledgeable and very demanding in terms of quality and style, similar to US customers. However, we cannot compare the US domestic market with the Mexican market. The sector’s growth will underachieve in relation to its potential, at around 8%, because GDP per capita remains stagnant. Income inequality plagues Mexico, and it is reflected in automotives. High-income families have numerous vehicles per household and no longer need a new car. The middle class, deemed the driver of the economy, barely exists, and much of the lower-income population has other necessities to cover before buying a car.

Indeed, low income levels and low credit penetration make it difficult for the average person to buy a new car and, as a consequence, growth in the domestic market is minimal. These factors give rise to a consumer that demands the highest quality vehicle, but with price affordability, resulting in a vehicular production for the internal market with a great challenge to profitability for manufacturers, as the margins become quite thin.

In what ways can unauthorised imports affect the automotive market in Mexico?

HERNÁNDEZ: Mexico has an ageing vehicular fleet, with a significant population of vehicles with more than 20 years in circulation. The environmental implications of having such vehicles circulating daily are dramatic and the effects are palpable in the big cities. The government can establish programmes for incentivising the scrapping of older vehicles for a fiscal incentive to buy a new car. However, based on the experiences of other countries, the probability of this working well is quite low.

Unauthorised used cars have an undeniable negative impact on the entire automotive sector. They impact the used vehicle market and derail the consumer’s natural tendency to migrate from a used vehicle to a new vehicle. Given the low purchasing power and limited access to credit of a large proportion of our population, a used car becomes an alternative for some Mexican consumers. If the domestic market currently absorbs 1.1m new units every year, and has the potential to sell 1.4m-1.7m, there is still room for improvement. A substantial part of this shortfall is related to the continual entry of used vehicles, legal and illegal, from the US.

When Mexico entered NAFTA, the regulation of used cars was not necessarily discussed or approved. Used cars have become attractive for some buyers. They tend to be very cheap, as the pressure of selling new cars in the US depresses the value of used cars, and these cheaper used imports erode the value of cars in Mexico. In border towns, many people who own a vehicle did not purchase it in Mexico.