Vehicle distribution in Mexico - domestic and export demands

Guillermo Rosales Zárate (above), Director General, Asociación Mexicana de Distribuidores de Automotores (AMDA), and Guillermo Prieto Treviño, current president of ALADDA and AMDA, tell Simon Duval Smith about the challenges facing OEMs and carriers shipping vehicles in and out of Mexico and the impact of changing legislation and practices on the dealer networks

I started out by asking Guillermo Prieto Treviño, current president of ALADDA and AMDA about the current state of finished vehicle logistics in the region. He says that as a result of technological progress in vehicles, including the rapid progress of electric and hybrid models, extreme competition between vehicle manufacturers, and increasing government regulation in all countries of the region, automotive distributors in Mexico and Latin America generally are seeking to renew their prevailing legal framework with their main logistics suppliers to try to guarantee the sustainability of their investments. "Given this scenario, the automotive distribution business requires a legal framework that regulates the relationship with manufacturers and importers, in order to balance the unequal positions of power and ensure optimum conditions to recover investments," he says. 

A declaration of intent for vehicle distribution

This was mainly what the Declaration of Sao Paulo, recently signed in Brazil by the member countries of the Latin American Association of Automotive Distributors (ALADDA), which includes Mexico, stated. The countries of the region, recommended the agency, need to legislate on the relationship that distributors, importers and shipowners have to protect the most vulnerable elements of this relationship, guaranteeing contracts, with clauses that grant the operation of the business and the safeguard of its future.

Where Mexico appears particularly vulnerable, given its dependence on trade with the US, the declaration signed by ALADDA recalled that only Brazil is the only nation that has a regulation in this area, known as the Renato Ferrari Act of 1979 whose last renewal was in 1990, and participants in the meeting observed that this also requires a new update.

Direct sales hurting dealers in Mexico

Finally, the Declaration of Sao Paulo stated that dealers in all regions, and not limited Latin America, need to be protected against the unilateral cancellation of distribution contracts, the direct sale of vehicles by manufacturers and importers with price and conditions of sale better than those granted to distributors. Inventory allocation was another key topic discussed; subjects such as the unilateral allocation of vehicle inventories and their preparation, as well as the omission of liability in the liquidation of liabilities before an unjustified termination - simply put, the power of the OEMs to put dealers under pressure by changing the allocation of vehicles within the region, and for export, through the OEMs’ own, or other favourable [to the OEM] channels.

Distribution and dealers

As an important representative of the dealer networks, I turned to Guillermo Rosales Zárate to find out about the challenges facing AMDA members in specifying, receiving and retailing vehicles. He says that the current sales profile for the dealer is heavily dependent on financing, customising and aftersales service for adding profit. “As the final link in the automotive value chain, automotive dealers have always the challenge of being the final face to the consumer. This means having strong and specific strategies that position the quality both at the time of sale and at the time the maintenance service is required. Many of our dealers report that they often make a further 50% on top of the cost of a vehicle sold in Mexico from financing and other aftersales activities.” These include accessories, finance, insurance, extended warranties and after-sales service. Indeed, finance is an issue, as he says: “The banks and the finance houses are not offering very good terms and so the buyers are not confident of being able to buy the models they want, and the consumer is becoming increasingly sophisticated, they look on the Internet and see the models available in other territories but they often cannot afford the particular models they want and so they keep their existing cars for longer.” I ask him about OEMs’ own finance houses and are they thriving? 

Rosales Zárate also talks of the effects of the market on export and Mexico dealer business. “Likewise, with a global and national economic perspective that points towards deterioration, dealers face the challenge of competing in a difficult economic environment in which new vehicle sales will fall for the third consecutive year in 2019. So in this context, two crucial topics have to be taken into consideration: boost financing and stop the entrance of used vehicles imported from the US.”

EVs and hybrid - not significant in the domestic market yet

As the nature of the global vehicle fleet is changing - from petrol and diesel-engined power to more electric and hybrid, I was interested to find out if this has yet led to changes in the sales profiles and figures at dealers. Rosales Zárate says that while there is a move towards new mobility power, it is in its infancy. “Actually, the 2018 figures are 17,807 hybrid and electric vehicles sold, representing just 1.25% of Mexican market. Even if we think it is a low participation, it has increased over the years, as in 2010 there were only 414 hybrid and electric vehicles sold, which was only 0.05% of the total market. With these numbers, we can clearly see the positive trend of alternative technologies among vehicles sold in Mexico, even though still not having a significant share of total sales. Some of the issues that are holding these sales back are the prices of the vehicles, cost associated with some parts (batteries) and infrastructure availability.”

Export versus domestic sales - the changing balance

The mix of vehicles produced for domestic and export sales gives AMDA members some particular challenges and I ask Rosales Zárate if there are differences in finished vehicle logistics strategy for the various markets. He puts this into perspective, saying: “Of the total national production in Mexico, 88% of finished vehicles were exported [2018 figures] and 12% remaining stayed to cover national demand.

“This is mainly because the vehicles made in Mexico tend to be quite higher value and cost than the Mexcian consumer wants to or is willing to pay. A Volkswagen made in Puebla is too expensive for most Mexican buyers. Consequently, the Vento model is made in India and imported to Mexico, to meet the low-cost demand of the Mexican consumer.

“In the case of domestic market, we have a configuration in which 65% of domestic sales in 2018 were composed by imported vehicles and the 35% remaining were Mexico-made vehicles. These statistics impose important logistic challenges in terms of efficiency in the different transport modes required, particularly the availability of ports, trucks and rail connections.”

On this topic, I ask Rosales Zárate if the balance of global logistics companies versus local, Mexican-owned logistics companies in delivering vehicles has changed over the years, and how? He says that the model in Mexico is a little different to other regions: “Some dealers own logistic companies which cover their transport requirements. Nevertheless, there are also other Mexican and global companies participating in this market. We are seeing some growth in the numbers of local logistics providers but this growth is slow.”

Challenges on road, rail and sea

In finished vehicle logistics globally, we have seen a constantly shifting emphasis on the various modes, with the emergence of the Silk Road/Belt Road for example. Latin America has the added advantage, or complication, of the Panama Canal and its proximity to the large and profitable US market. Rosales Zárate says that ports are the key to future development of streamlined finished vehicle logistics in Mexico, particularly for the imports that make up some 65% of new vehicle sales in the country. “As we have seen, a major part of domestic sales are composed of imports and this makes it particularly important to have a solid logistic platform that provides all the different modes of transport as we receive the vehicles primarily from Veracruz Port and secondly from Lazaro Cardenas Port,” he says, adding: “Once the vehicles are landed here, we need more efficient and developed rail and road transport. Mexico faces several challenges in these areas; these include more capacity, better use of existing and future IT and communication technologies and security, among others.”

The model of transport of vehicles from plant to preparation centres and thence to dealers might be expected to be difficult, dangerous, due to theft etc, and tortuous given the distances in Mexico. Rosales Zárate says that competition among carriers is quite strong and again, due to the distances involved, has a more localised profile. “There is competition between the OEMs' transport divisions and the finished vehicle transporters owned by the dealers. For example, General Motors' dealer network uses their own transport for finished vehicles to all GM dealers in Mexico. There are global finished vehicle logistics players in the country but they tend to use local companies, and some owner-operated ‘mom and pop’ carriers. I would say that the decisions on truck transport are made locally. Some global companies have invested in local carriers but the control in the country is in the hands of the local companies.”

Security and insurance

Security of finished vehicle loads, and indeed inbound transportation of parts and modules to plants, is often talked of as being a major issue in Mexico. I wanted to know if this was more rumour than fact. Rosales Zárate says that it is a problem, with many ramifications for all parties. “It is an important issue and it is being worked on jointly with the authorities. It is a problem that affects the whole value chain. Some of the problems faced are: road blocks [leading to hijacking of complete or part loads] and theft generally.”

The authorities need to be further involved and Rosales Zárate says that, “Theft would be reduced up to 40% if there was a good vehicle registration system; since the disappearance of the Federal Vehicle Registry in 1989 it has not been possible to specify a single database of motor vehicles that circulate, are marketed as new, resold and destroyed in Mexico.”

Indeed, the general director of the Office of Coordinator of Insured Risks (OCRA) urged the existence of a single updated and efficient database to improve the current Public Vehicle Registry (Repuve) or replace it. This would reduce the economic impact of the location, recovery and return of stolen units to their owners by the 23 insurers that make up the OCRA.

Technology would also seem to be key to this initiative, as Rosales Zárate says: “No more police are required, with technology you can significantly reduce vehicle theft," he says, citing the current complexity and confusion. “Despite the OCRA trying to improve the system, we still have 32 different ways to process the recovery of stolen insured vehicles,'' he says, referring to the existence of 31 states, and Mexico City. 

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Automotive Purchasing and Supply Chain Magazine - Issue 32