Auto Sector in UAE, Gulf Region Not Immune to Global Meltdown

By Paul Cochrane in Dubai
WardsAuto.com, April 13, 2009

While the economic slowdown in the UAE is being felt all over, the country’s auto sector is adopting new financial strategies and a greater focus on services as access to credit tightens.
Vehicles sales in the United Arab Emirates plunged by up to 45% in the first two months of the year compared to 2008, according to Ford, a remarkable change in fortunes from the years of double-digit growth when the $3.6 billion sector was one of the fastest growing in the world.
“Since October, traffic has been different, the roads are noticeably quieter,” said Mike Devereux, President of GM Middle East. “And the end of the third quarter 2008 was vastly different from the fourth for manufacturers. This year we are looking at a decrease overall, with the same daily sales rates since December to now.”
But while the economic slowdown in the Emirates is being felt across the board, the automotive sector is adopting new financial strategies and a greater focus on services to shift units as access to credit tightens.
“The financial crisis has certainly affected automotive sales in the UAE, with banks applying more restrictions on financing. And since nearly 80% of the UAE's automotive sales are dependant on financing, this is more evident locally,” said Waldo Galan, Managing Director of Ford Middle East. “Overall for 2009, we expect the automotive industry to achieve minimal growth in the UAE.”
In the face of tighter lending, manufacturers and dealers are teaming up with banks to offer zero percent interest on vehicle sales and making credit more readily available to customers. The most notable change in sales strategy has been the widespread introduction of leasing, a technique dealers had formerly eschewed as vehicle prices were low and customers preferred to buy.
“Financing is a problem so schemes have to be more tactically focused. Screaming the price from the rooftops is not what it’s about, but customer issues. Lots of people want vehicles but need financing, so we’re focusing on a partnerships with the National Commercial Bank (NCB) of Saudi Arabia and in the UAE a car leasing scheme,” said Devereux.
While enticing customers into showrooms is one concern for the manufacturers, so is keeping dealerships afloat, having ordered vehicles months in advance that can now not be sold or re-exported elsewhere. Furthermore, 2009’s models are now on sale yet dealers have not shifted all of last year’s lines.
“Credit, wholesale finance, and bank loans are difficult for dealers. Stock levels for dealers means reduced working capital so less money in the inventory,” said Devereux. “We will winnow down our inventory and import much less cars.”
And while there is an excess of unsold cars, manufacturers are hesitant to offload vehicles in fleet deals and government tenders.
“We’re trying not to chase unprofitable fleet tenders that we would have done before, as there is little to no margin. Price is important, and if flooding the market with 2-3 year old vehicles, too much value at a low price,” said Devereux. “We are now focusing on the retail business, with 65% retail and 35% fleet.”
Consumer preferences are also expected to shift towards more competitive fuel efficiency, fewer SUVs and trucks, and more crossovers, such as GM’s Chevrolet Cruise.
“While demand for luxury vehicles would possibly see a reduction, quality and value would still remain on top of the consumer's list,” said Galan. “We believe that consumers will act more out of a rational mindset and look for quality and value for money rather than the emotional drive.”
Such consumer shifts were taking shape last year with Kia reporting a 60% jump in sales over 2007. Japanese brands, which have the lion’s share of the market, at 40%, are also focusing on more efficient models. European brands cater more to the luxury sector with 30% market share, while the remaining 30% is equally divided between American and Korean brands.
Some 180,000 units were sold last year in the UAE, according to Ford. Last year, Ford, Lincoln and Mercury sales grew 35%, while GM sales were up 19%, and up 30% in the Middle East, with an all time record of 144,485 units sold.
After sales is a further area manufacturers and dealers are focusing on as sales stagnate, a sector valued in the Middle East at some $11 billion, while the UAE tire trade is valued at AED 4.15 billion and slated to grow this year.
“We don't see a change in after parts as value has grown. There is a big focus now on services, which will be a stable haven in a downturn. Most dealers here are under invested in service capacity, and the number of vehicles has increased so quickly,” said Devereux. “There is a need to invest in new services as vehicles are coming into prime servicing years after 2-3 years since purchase.”
While manufacturers continue to monitor the local environment, they are optimistic that revenues will go up next year as supply and demand aligns, even though it might not be the double-digit figures of the boom years.