Mexico is an automotive powerhouse. The sector is one the country’s most significant industries, comprising 3.5 percent of the nation’s GDP, 20 percent of the manufacturing GDP, and employing over one million people nationwide. The COVID-19 pandemic hit Mexico’s automotive industry hard and there are concerns of a ‘lost-decade’ but as the recovery gathers pace, some interesting trends are emerging, including a major shift towards leasing.
An executive at an automotive trade organisation in Mexico provided the context, “Mexico is the 14th largest light vehicle market in the world. It is not only an assembly and export powerhouse but also has a large domestic market. Before the pandemic, in 2016, 1.6 million vehicles were sold and although a recovery is underway last year only one million vehicles were sold. To get back to 2016 levels will take a few years, which is why people talk about a lost decade. As an increasing number of price-sensitive consumers look to acquire a new car, ownership models that are new in the Mexican market, such as leasing, are getting a lot of traction.”
“Mexico is the 14th largest light vehicle market in the world. To get back to 2016 levels will take a few years, which is why people talk about a lost decade.”
Executive, automotive trade organisation, Mexico
As of February 2023, 8% of the cars in circulation in Mexico were under a lease contract and the number is poised to grow, with the potential to reach similar levels as the US where 30% of car retail sales are structured through a lease. With monthly lease payments estimated to be 30% cheaper than monthly instalments for the purchase of a vehicle using a loan, drivers are obviously attracted to this arrangement which also allows them to acquire the car after a stipulated time.
The CEO of a national automotive dealership chain explained why the consumer demand for car leases is growing so rapidly, “Leasing is attractive because it allows you to deduct taxes, it includes maintenance, the down payment is lower or zero, contract start-up costs are much lower, financing schemes are simpler. The only major challenge to the further growth of leasing is that asset ownership is embedded in Mexican culture and thinking. This is changing though, even government departments and freight transport companies are moving towards leasing as it frees up liquidity.”
Our sources believed another important driver of new car leases is the growing popularity of electric vehicles. According to the Mexican Association of the Automotive Industry (“AMIA”), Mexico leads the sales of electric vehicles in Latin America. In 2022, Mexico registered 6,000 sales, an increase of 33% compared to 2021. There are no official numbers of registered electric vehicles under lease but the dealership CEO confirmed the growth, “The growth in electric vehicle sales is because of their many advantages in urban areas: exemption from air pollution restrictions, reduced vehicle taxes, exemption from vehicle emissions verification, and preferential electricity rates. But EV’s are still expensive for the domestic market and consumers are worried about battery longevity so leasing gives them the flexibility to try out the vehicle and if it does not suit them they can cancel the contract.”
This boom in Mexico’s leasing market has not gone unnoticed by a growing number of vehicle leasing start-ups and renting digital platforms such as BitCar and Carengo, which directly connect car owners with occasional drivers. Our source from the automotive trade organisation warned that some start-ups faced serious operational challenges, “Many of the new app players do not have the service capability or the decades of knowledge of the business. Even apps that boomed impressively are now in the red with serious consumer complaints to the regulator. Dealers offer market knowledge, service quality, and security so the leasing apps are not a threat, just a new business model which they could easily adopt themselves.”
“Dealers offer market knowledge, service quality and security so the leasing apps are not a threat, just a new business model which they could easily adopt themselves.”
Executive, automotive trade organisation, Mexico
Regardless of the business model, Mexico’s domestic market faces an uphill battle to return to pre-pandemic levels of new car sales, an industry expert explained how consumer demand is shifting toward pre-owned vehicles, “The economic environment isn’t helping the growth of new car sales. In the face of the shortage of automotive inventories, the global logistical difficulty, and the deficit of chips, the pre-owned market is having an enormous boost and distributors are moving rapidly into this niche, which is a great business. People prefer to buy a pre-owned vehicle from a dealer because of the security guarantees and the service to the unit itself. The challenge is that Mexico’s pre-owned car market is not covered by consumer protection law so the dealers still have work to do on the legal certainty side.”