Steady fundamentals drive growth of GCC auto industry despite some pressure

Dubai - Region continues to offer immense opportunities in manufacturing, aftermarket and new tech

The GCC automobile sector is dynamic and one of the faster growing sectors, primarily owing to factors such as growing population, high disposable income, significant upcoming infrastructure developments and availability of attractive financing options in the region. The sector, however, is currently facing a slowdown amid a weak economic environment and low oil prices as consumers scale back on new car purchases. Passenger car sales remained under pressure in 2016 and 2017 but are likely to rebound in 2018 and thereon grow at a stable pace with the recovery in oil prices.
Despite this slowdown in demand for automobiles, the GCC region continues to offer immense opportunities in the areas of automotive manufacturing, aftermarket and new technology development. Government investments to boost domestic manufacturing is likely to drive demand for vehicles in the region over a long term and lead to a steady growth in the GCC automobile sector.
The number of passenger cars in use in the GCC is expected to grow at a five per cent compound annual growth rate (CAGR) to 13.2 million in 2020 from an estimated 10.3 million in 2015.
New passenger car sales are projected at 1.4 million in 2020, compared to 1.2 million in 2015. Although new sales declined in 2016 and have been under pressure in 2017, we expect to see steady growth starting 2018 as the economic environment stabilises and creates pent-up demand. The anticipated growth is slower compared to that during last five years in view of the near-term softness in economic activity, as consumers tighten discretionary spending and delay buying new cars.
Passenger cars in use in the GCC countries is anticipated to register an annual average growth rate ranging from 3.6 per cent to 5.4 per cent between 2015 and 2020. Saudi Arabia, the UAE and Kuwait collectively are expected to continue holding more than 75 per cent of the region's passenger car fleet in 2020.
New car sales in the UAE are projected to grow at an annualised rate of 4.5 per cent to over 267,000 in 2020 from an estimated 214,000 in 2015.
Sales of new cars in Saudi Arabia is likely to reach nearly 743,000 in 2020, suggesting a suggesting a CAGR of two per cent from 2015. The remaining GCC countries will register a CAGR ranging from 1.8 per cent to 2.1 per cent.
 
Trends
Presently there are a limited number of vehicle manufacturers in the GCC. However, the situation is possibly going to change in the future, as Saudi Arabia, the UAE and Oman are receiving investments to set up automotive manufacturing plants. The governments are also providing incentives and devising plans to establish themselves as regional automobile manufacturing hubs.
The increasing number of vehicles coupled with hot climatic conditions and a rugged terrain, which affects the lifespan of tires and batteries, has created a thriving automotive aftermarket in the region. An already ageing vehicle fleet, with the tendency of owners holding on to their cars for a longer duration amid the challenging economy is likely to accelerate demand for automotive parts and services.
While Japanese brands of vehicles remain popular in the GCC and the high-end market continues to be dominated by European makes, Chinese brands are fast closing the gap with low pricing and less maintenance cost. Buyers as well as dealers are also increasingly pleased with the performance of these brands in terms of technology, quality, and safety. Chinese vehicle sales in the UAE are forecasted to rise by 100 per cent annually to capture a double-digit market share by 2020.
The UAE is witnessing a growing trend of vehicle customisation, as can be seen by the growing number of car accessory outlets across the country. Additionally, a persistent demand for car wrapping from companies for advertorial purpose is likely to support the trend in vehicle customisation.
The rising number of tech-savvy people and use of social media for reviews and recommendations have encouraged the automobile dealers to establish online presence. On the other hand, internet combined with new technologies is revolutionizing the automobile industry, with the advent of connected vehicles.
Mobile application-based taxi-hailing service providers are gaining presence in the GCC. Uber, which entered the GCC market in 2013 by launching its services in Dubai, has now grown its presence in other major cities in the region.
 
Challenges
The persistent softness in oil prices has disrupted the largely oil-dependent GCC economies and widened their fiscal deficits to an all-time high. The challenging macroeconomic environment is having an adverse impact on automobile sales. Fuel price reforms are a part of the broader program of the GCC governments on subsidy cuts. The increase in prices of petrol amid a sluggish economic environment is likely to negatively impact the demand for vehicles.
The presence of several dealers makes the GCC automobile market highly competitive, resulting in price sensitivity and low brand loyalty among consumers. Existence of a thriving used-car market is also adding to the competitive pressures on new automobile dealers in the region.
The recall of vehicles owing to certain manufacturing issues has a negative influence on the brand loyalty and reputation of automakers, thereby affecting sales.
Authorised UAE car dealers are facing the heat from grey imports, which in certain cases affects the dealer's volumes by around 20 per cent. In the GCC automobile sector, government regulations such as the law of one dealer per automobile manufacturer in the UAE act as barriers to entry.
A limited pool of local talent, alongside the increasing emphasis on nationalisation of jobs, is posing a challenge for the region's automobile industry. The increased regulatory oversight on emissions, in view of rising environmental concerns over global warming, is adding to the compliance and technology costs for the automobile manufacturers, ultimately making the vehicles more expensive.
Although vehicle sales in the GCC have remained subdued in 2017, the GCC automobile sector is poised for growth in the coming years to 2020 as the region adds nearly four million potential buyers, reinstates economic growth, and invests in new manufacturing units and infrastructure development.
The writer is executive director at Alpen Capital. Views expressed are his own and do not reflect the newspaper's policy.