Jeep is a popular used vehicle import in Mexico

Jeep is a popular used vehicle import in Mexico

In 2005, Mexico's car dealers were fighting to get rid of a hated visitor from north of the border: the 'chocolate car'.

The term refers to used or semi-junked vehicles originating from the US and Canada which were, five years ago, stealing as much as MXN50bn ($US3.9bn) in sales from new vehicle manufacturers with some 500,000 chugging along Mexico's streets.

But luckily for the industry, the government bowed to pressure to curb their uncontrolled influx last year. It enacted a new used car import decree which cut the cars' entry by 80%, dismissing opposition requests that chocolate car imports be legalised.

"We've won the war and this is very good news for us," said Gillermo Rosales, institutional relations director for Mexican new car dealers' association Amda.

"There is still more to be done, however."

Last year's import fallout was partly triggered by a falling peso and the global recession but the new law would have depressed imports anyway, he said.

Overall, imports fell to 240,000 units, up from roughly 1m annually since 2005.

Eager to win the popular vote, Mexico's centre-left government in 2005 enacated a law that allowed chocolate cars to enter the country paying just one-third sales tax. It also allowed importers to pay duties on the price they estimated the car cost them - versus the actual market price.

The new decree forces importers to pay the full sales tax and charges 10% import duty on the estimated (rather than claimed) market price. The margin drop for the importer is therefore huge, Rosales noted.

"A used Jeep can cost as much as $4,500 in the US and roughly the same in Mexico," he said. 

"These guys buy them at junk auctions for $500-$600, spend a bit to tune them up and sell them here for as much as $1,500."

The cars are usually in a very poor state, usually junked or semi-junked, Rosales pointed out, adding that Amda is now pressuring the state to introduce a third measure to further curb their arrival.

"We need an inspection system to ensure the cars are actually fit to be sold in Mexico," he says, adding that this would also squeeze importers' margins as "manicuring" expenses would rise.

"We are negotiating this with the government but it may take a couple of years for it to be approved."

With the global economy improving and Mexican consumption on the rise, Amda forecast chocolate car imports could double this year to 450,000 units. Still, that's a lot less than 1m, Rosales insisted.

In other good news, Mexican new car sales are on the rebound with Amda forecasting 810,000 unit sales in 2010, up from 755,000 last year though still under the 1m peak reached in 2006.

Mexico's economy is expected to expand 5% this year, boosting consumption in Latin America's second-largest economy.

"We have reached bottom," Rosales said, adding that he hopes the industry should be able to repeat the 2006 performance in five years.