2022 was a year of relief and reform for the automotive industry. Although the shortage of microprocessors began to be corrected, problems of logistics and distribution persisted, adding to a difficult economic environment with progressive increases in interest rates as well as inflationary levels.
To learn more about the events affecting the automotive sector, I spoke to Mr. Spiros Philippas, who takes over as CEO of BMW Group Financial Services at the end of 2021.
BMW Group remains the premium segment leader in Latin America in 2022, selling 44,463 units of its BMW and MINI brands; Only BMW fielded 37,726 cars, of which 20% are electric, while Mini fielded 6,737 cars, of which 24% are electric. The motorcycle division, BMW Motorrad, made a total of 25,480 units available to its customers.
In Mexico, BMW Group Financial Services financed 4 out of 10 cars and motorcycles marketed by BMW Group brands, representing approximately 30,000 units financed in 2022. German group in Mexico.
—How has the BMW Group reacted to the negative economic environment since 2020?
– “I think BMW has handled this storm very well, very satisfactorily. The company came out of this crisis very strong, and it is clear that when the pandemic and Covid started, it was everyone’s It was very disturbing for us, we were in a state of panic. We feared the worst, but as a company that always wants to react quickly to things happening, we took action; I was not in the area at the time, But it was in the Midwest. We immediately tried to acclimatize ourselves to the new situation, which was obviously very close to the unknown. Many of us at the time had no idea how big this crisis would be, if it were to last. continued and what would be the effects. So we had to manage in a crisis situation which was a first for everyone, it was like being in uncharted waters. We were sailing without any information and without any kind of radar.
From a financial perspective, we try to help our clients by protecting their trading portfolios as much as possible. We extended credit, we gave loans, we gave them grace period, we also showed them that we are there for them. I think it’s very important, and largely why we exist. We exist as the BMW Group because we want to ensure that we provide the best possible support and service for our customers. We did things to protect our customers, our business and our distributors.
Also it was very difficult situation for our distributors because they had to close their sales floor, they had no business, so we had to extend their loan, their credit. I think all the support we gave to the dealers and customers paid off in the end. We came out of this crisis very strong, customers appreciate it and we have received very positive feedback from our consumers, that we support them in this difficult time. After a few months when we realized how to live with the crisis, things got better. We accelerated our digital initiatives like most of the companies, in the end covid was the best way for all companies to boost them.
—Banco de Mexico has adopted a policy of increasing interest rates. The reference rate is at 10% level, how does it affect automotive loans and financing?
– “The economy is a very complex system, so there are many factors, many things that affect the economic decisions of central banks. Their main concern or one of the economies main concerns is inflation.
So inflation and price stability are very important, because if we don’t have price stability, the purchasing power of the consumers will fall and then the economy is not really growing. They are trying to control inflation, and the only tool they have is interest rates. Of course, the interest rates don’t go to the customers immediately, they go through the banks to the customers. What is relevant now is that when central banks raise rates, commercial banks also raise rates for customers. That’s what the central bank wants. But they cannot control the commercial banks as they are independent private companies. All they can do is increase these rates, which means it will be a little costlier for banks to lend money. They also try to inject liquidity into the system, reducing credit and making access to money more expensive. So they reduce credit and make it more expensive. So it cools down the economy and eventually reduces inflation. I think this mechanism is easy to say, but it takes time. As long as central banks aren’t raising rates, that just takes time and that drags down the economy. It always takes time, months or maybe years.
So now we see rates go up and when we see the effect, central banks may stop raising rates or start cutting rates. It depends on how quickly the economy assimilates these changes. It definitely affects our rates, because we’re dealing in local currency, we’re dealing in pesos, we’re using the peso rate to get liquidity and then with that liquidity we Also appraising your loans. So we pass it on to the customers as well. What we do is that we don’t move that 100%. Last year Banksico raised the rate to 11% from 5.5% earlier this year. Our rates for customers increase by only 250 basis points; Banksico raises the rate by 5.5%, we only raise by 2.5%. That means we absorbed half of the increase and we did it because we want to make it a little easier for customers and dealers.
—Is there a risk that these actions by central banks could turn dangerous and lead us into a recessionary environment?
—“Interest rates are not the only thing that matters to customers while buying a car. The rate and its cost are not the biggest part of the loan amount, the car is because it is an asset. That’s why we strive to offer power-enhancing tools to our clients.
We have equipment like Select that is close to leasing, so it has value in the end and customers have three options: return the car or finance or pay for it, and with this product we halve the monthly payment . If you look at a typical 36-month loan, let’s say, you have a monthly payment of about 26,000 pesos more or less, but if you take out the same 36-month loan from Select, you have about 11,000 pesos. is paid. Which means it’s more affordable for the customers, so if we offer these instruments now, the impact of the duty isn’t really going to make much of a difference, because if we increase the duty by 1%, Fees increase by only 2%, amounting to half a basis point, so it’s not a big difference.
So it doesn’t drive customer decision making, so we have to adjust our rates because that’s where we get our money, we get our liquidity from the market, so we have to adjust rates, but At the same time, we are offering tools to customers to make our product selection as comfortable as possible, even with campaigns in which we subsidize rates, we reduce rates for specific models, we offer months without interest are offered; We currently have eighteen months no interest, twenty four months no interest, or we have low rates so we do as low as 16.49%, which in some cases is the 9.9% customer rate. So we are spending money to make the product affordable and we are doing this because we also want to support our customers.
Lastly, to answer your question, if this accelerates the recession, I don’t think we’re there yet. We are seeing that inflation is high, in March it started coming down a bit, in the first fifteen days it was 7.2%, which is a good sign, and we are still away from plus or minus 3 percent, which is the objective of the central bank. So we are not in a recession right now.”
—Do you think there are different circumstances that affect the cost of credit?
—“Of course, there are many factors that affect the final interest rate for the customer. When all banks set the price of their products, they are using the cost of financing, which comes from the market, and in addition their internal factors, such as the rate position or internal costs. Good thing we have our own financial services. So in BMW Group we are not dependent on any external bank, we have our own bank, financial services company and we are very strong and we have liquidity and we have good market access, we are very well rated company because we We can protect our businesses, we can support our distributors because it is important to support them because they are our partners, they need liquidity, they need funding from us and we can provide our customers with products like the Select program can support together.
—How long do you think the level of inflation and interest rates in the Mexican market will be maintained?
-“It’s very difficult to say. We’ve seen over the last three weeks that the economy is a very complex system, so it’s not the only factor. It’s not just the rates, it’s not just the monetary policy of the central bank, it’s the financial system And also has to do with the financial system, as we saw in some of the banks in the United States, it is unstable, it may even accelerate the recession of the economy. It depends on many factors. But if we now look at the past If we look at inflation over a month and a half, since the beginning of the year, we see that it is going down. Banksico is also highly correlated. There is a correlation between Banksico rates and Fed (United States Federal Reserve) rates. So if we take this Whenever we see the Fed slowing down, something tells me Banxico is slowing down, but it depends on a number of factors.”
—How do higher interest rates affect the premium market?
—“There are many customers in the premium segment who can buy their car in cash. Hence, the dependence on finance is less in the premium segment as compared to volume brands. Our dependency is around 50%, for volume brands it can be 80%. This means that we still have some customers who do not need financing. So any movement in customer interest rates is not as difficult or as problematic as it might be on a volume mark.
We also see that some of our clients are definitely a little more understanding, a little more financially aware and also try to use instruments like interest free period, which is very helpful when you have liquidity, So if you do that, you can buy the car in 18 or 24 months with no interest rate, which is a great bang for the buck. Or you can also use a tool like Select, which doesn’t require paying for the entire car, so they only pay, say, 50% of the car, and the other 50% after three years as they decide. can do what they want with the car: sell it, pay it back or refinance it. So we don’t see any major impact in the premium segment.”
