Industry Trend Analysis - Vehicle Sales Riding Wave of Economic Recovery - NOV 2017

BMI View: Accelerating economic growth in South America, particularly in Brazil, Argentina, and Colombia will provide the strongest support to new vehicle sales in Latin America in 2018. This will outweigh the slower growth being experienced in Mexico's new vehicle market after seven consecutive years of strong growth.

A comparison of our regional vehicle sales forecasts for 2017 and 2018 shows that Latin America will remain the fastest growing regional autos market globally for two consecutive years as it emerges from the sales slump of 2016 ( see chart below). We forecast vehicle sales in the region to expand 5.6% in 2017 to almost 6.2mn units followed by an acceleration to 9.7% growth in 2018, reaching more than 6.8mn units. Over our full forecast period to 2021, we project annual average growth of 6.4% for the Latin American region. Highlighting the strength of the regional recovery, we forecast five out of the 17 Latin American vehicle markets we track to grow at double-digit rates in 2018, with only Venezuela and Bolivia's new vehicle markets projected to post contractions that year.

Latin America: From Laggard To Leader
Vehicle Sales Forecasts, % chg y-o-y
e/f = BMI estimate/forecast. Source: BMI

Breaking this forecast down, we anticipate passenger car sales to rise 5.5% and 10.7% in 2017 and 2018 respectively while averaging 6.8% annual average growth for the full forecast period to 2021. Commercial vehicles will follow closely behind with a forecasted 6.6% and 8.2% growth in 2017 and 2018 respectively and will average annual growth of 5.9% through to 2021.

Passenger Cars Taking The Lead
Latin America (Region) - Vehicle Sales By Segment, Units & % chg y-o-y
e/f = BMI estimate/forecast. Source: National Sources, BMI

The drivers of Latin America's market into positive growth territory in 2017 revolve around four dominant trends:

  • The broader macroeconomic recovery in 2017 and its acceleration in 2018 will spur demand growth across all segments.

  • Traffic policy and taxation changes for both passenger cars and commercial vehicles will provide a generally positive stimulus to sales in 2018.

  • Government relaxation of electric vehicle tariffs and restrictions across the region are improving the prospects of a nascent EV market developing.

Improving Macroeconomic Fundamentals At The Heart Of Recovery

Following a rough three years of regional declines from 2014 to end-2016, vehicle sales across Latin America will begin to benefit from a turnaround in the regional economy, particularly for major national economies like Brazil, Argentina and Colombia. Our Country Risk team forecast real economic growth in the region to accelerate to 1.6% in 2017, 2.3% in 2018 followed by a gradual rise to 2.7% by 2021 ( see chart below).

Economic Growth Returning To Embattled Region
Latin America (Region) - Real GDP, % chg y-o-y
e/f = BMI estimate/forecast. Source: BMI

In particular, Latin America's largest vehicle markets look to be shaping up towards a moderate recovery in consumer and business demand for light vehicles. In Brazil, Latin America's largest new vehicle market, we've highlighted that the recession and subsequent economic rebalancing that characterized the market between 2014 to 2017 is set to shift into an economic upswing in 2018 as unemployment levels stabilise, household average earnings turn positive and businesses begin expanding their activities and raising capital expenditures once again. This will lead to a strong 17.0% rise in vehicle sales as pent-up demand is satisfied after years of historically low sales volumes. We also see similar dynamics of recovery at play in 2018 across a number of other key South American markets including Argentina, Colombia, Ecuador and Chile.

Mexican Real Wages Stuttering
Mexico - Real Wage Growth, %
Source: INEGI, BMI

A key exception to this positive consumer and overall economic outlook, however, is Mexico - Latin America's second largest new vehicle market. Here, we see consumer demand for new vehicles being hit by a combination of weakening real wage growth, rising fuel costs and more expensive auto loan rates ( see ' Shifting Consumer Tastes Reshaping Sales Outlook', August 17 2017) as well as buyer fatigue after more than seven years of consecutive growth averaging 11.8% annually. All this is combining to slow down the sales outlook for the market which is forecast to decline 0.5% in 2017 and rise only 2.4% in 2018.

Another exception is Panama where we have revised down the vehicle sales forecast to a decline of 9.1% in 2017 and an average annual decline of 2.7% over the remainder of our forecast period to 2021. Here, a broad deceleration in economic growth will weigh on consumer sentiment in the country, leading to a slowdown in spending on new car purchases in 2017 and 2018. At the same time, the deceleration of construction sector activity following the completion of the Panama Canal expansion will dampen demand for commercial vehicles in the country.

Light And Heavy Vehicle Sales Adapting To Policy Changes

A number of Latin American vehicle markets will also be adapting to recent, or upcoming, shifts in traffic and taxation policies in 2017 and 2018. For the light vehicle segment, we highlight Chile as the most affected market. In Chile, we anticipate light vehicle sales to gain a positive boost from the Santiago Metropolitan region's new traffic restrictions, coming into force in May 2018. The new policy limits the use of light vehicles manufactured before 2012 and should, therefore, encourage consumers and businesses within the Metropolitan region to purchase newer cars. Given that the Santiago market is already a large component of the national new vehicle market and that the Metropolitan area also accounts for more than 40% of the country's vehicle fleet ( see chart below), the policy will have a strong impact on overall national sales volumes leading to an 8.6% rise in vehicle sales in 2018.

Santiago Has Big Impact On National Market
New Light Vehicle Sales By Region (LHS) & Vehicle Fleet By Region (RHS), % of Total
Source: ANAC, INE, BMI

In Colombia, both the passenger car and commercial vehicle segments will be impacted by policy changes. For passenger cars and other light commercial vehicles, the rise in Value-Added Tax (VAT) and the introduction of tougher safety standards such as compulsory anti-lock brake systems, airbags and head restraints, will all add to the prices of new vehicles in 2017. However, we believe the shock effect of the sudden rise in vehicle prices will have largely dissipated by 2018, making room for a broader recovery in demand. Similarly, for heavier commercial vehicles, 2017 will also be a year of underperformance due to the breakdown of the country's '1 to 1' heavy truck registration arrangement ( see ' Heavy Trucks Hitting Regulatory Roadblock In 2017 ' , July 19). However, by 2018 we anticipate this issue to have subsided as we expect a new registration system to be implemented soon.

Regulation Challenges Forcing Truck Sales Lower
Heavy Truck Sales, % chg y-o-y
Source: ANDI, BMI

EVs A Future Bright Spot?

Although the market for electric vehicles (EVs) in Latin America remains in an embryonic stage, there have been a number of positive developments that should help spur its development over our five year forecast period, starting in 2017. More specifically, over 2016 and 2017, EV-friendly industrial policies have been introduced across the region that should help lower the end prices of EVs. In particular, we highlight promising markets like:

  • Mexico: where the government scrapped tariffs on EV imports as well as chassis, bodywork and electric motor components for EVs. The move is an additional support for the EV market introduced alongside the government's 2016 plan to increase the tax deductible allowance for EVs to MXN250,000 (USD12,292), up from the normal allowance of MXN175,000 (USD8,604) applied to any conventionally fuelled vehicle ( see 'Tariff Removal To Heat Up EV Competition', February 15).

  • Brazil: where the government lowered the Industrial Products Tax (IPI) on EVs. The tax rate on electrified vehicles will fall from 35% to between 0% and 7% depending on the extent of their fuel efficiency, with fully-electrified battery electric vehicles (BEVs) receiving a lower tax rate when compared to milder electrified vehicles such as plug-in hybrid EVs or traditional hybrid vehicles ( see ' Bright Spot Emerges In Desolate LatAm EV Market ' , January 18 2016).

  • Colombia : where the government issued a decree lowering tariffs on imported BEVs to 0% and lowering tariffs on all types of hybrids to 5%. These moves complement the 5% VAT benefit that these vehicles already receive.

  • Argentina: where the government lowered import duties on BEVs, hybrid electric vehicles - including plug-in and conventional hybrids - and fuel cell electric vehicles. Import tariffs will fall from 35% previously, to a tariff range of 0% to 5% depending on the vehicle's powertrain and whether it is imported as completely built units or as semi-knocked down, or completely knocked-down kits ( see 'Tariff Reductions To Benefit Chinese EV Makers', August 1 2017).

While problems of limited public charging infrastructure for EVs and a mismatch between prices of EVs and the lower incomes of Latin American households still restrict the growth potential for EV sales in the region, the introduction of these policies is still a step towards developing a regional EV market. As evidence of this, the policies are already helping to attract new EV assembly investments by major Chinese companies such as Dongfeng, BYD and JAC Motors, which all announced EV related projects in the region over the last 12 months ( see ' The New Unconventional Chinese Strategy: EVs in LatAm ' , August 4 2017).