The recovery of automotive businesses margins has slowed down
In H1 of 2021, Mexican car production recovered, mainly due to robust demand from the US market, which accounts for more than 80% of Mexican vehicle and vehicle parts sales. However, the global semiconductor shortage has slowed down the rebound, and while income, margins and credit cycles of businesses have improved after the 2020 slump, they have not yet reached pre-pandemic levels. Due to lower production in Q3 of 2021 and higher prices for raw materials and logistics, the recovery of margins and cash flow has slowed down. Semiconductor shortage and high input prices are expected to affect the sector's performance until H1 of 2022.
Production of electric vehicles has recently started in Mexico. So far, the government has not provided any schemes to support suppliers or Original Equipment Manufacturers (OEMs) in their transition towards e-mobility. However, Mexican suppliers are expected to adapt in time to the specifications and quality standards required by OEMs with the shift towards increased electric vehicles production.
Manufacturers of car parts and assemblers are mainly subsidiaries of global groups, and support through intercompany loans allows them to maintain a low level of bank debts. At the same time, banks are generally open to provide credit to the automotive industry if needed. Payments take 60 - 90 days on average, and the payment behaviour in the sector has been good over the past two years, while the level of insolvencies remained low. Both payment delays and business failures are expected to level off in the coming 12 months.
Our current sector assessment is “Fair”, and our underwriting stance remains open to neutral for large car producers and suppliers. However, we are restrictive in the car dealers segment, as the impact of the coronavirus pandemic on the Mexican economy has exacerbated negative sales trends in the domestic market.