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Steady fundamentals drive the growth of the GCC Automobile sector despite short-term pressure says Alpen Capital’s new report

All GCC locations, 7th December, 2016

Alpen Capital, an investment banking advisory firm, announced the publication of its report on the GCC Automobile Industry. The report provides a perspective of the GCC automobile sector by presenting the current state of the industry, market dynamics, and scope for future growth. It covers the recent trends, growth drivers, and challenges in the industry, along with an outlook until 2020. Lastly, the report profiles some of the prominent automobile companies in the region.

“The GCC automobile sector is dynamic and one of the faster growing sectors in the world, primarily owing to the growing population and high disposable income coupled with significant infrastructure developments in the region. The sector however is currently facing a slowdown amid a weak economic environment and low oil prices as consumers scale back new car purchases. Passenger Car sales will remain under pressure in 2017 but are likely to rebound in 2018 and thereon grow at a stable pace in anticipation of a recovery in oil. Other factors fueling growth include increasing disposable income, growing population and availability of attractive financing options in the country”, says Sameena Ahmad, Managing Director, Alpen Capital (ME) Limited

Industry Outlook

According to Alpen Capital, number of passenger cars in use in the GCC is expected to grow at a 5.0% CAGR from an estimated 10.3 million in 2015 to 13.2 million in 2020.

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 will be under pressure in 2017, we expect to see steady growth starting 2018 as the economic environment stabilizes 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.

Country wise projection

Between 2015 and 2020, passenger cars in use in the GCC countries is anticipated to register an annual average growth rate ranging from 3.6%-5.4%. Saudi Arabia, UAE, and Kuwait collectively are expected to continue holding more than 75% of the region’s passenger car fleet in 2020.

New car sales in the UAE are projected to grow at an annualized rate of 4.5% 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 2.0% from 2015. The remaining GCC countries will register a CAGR ranging from 1.8% to 2.1%.

Growth drivers

The GCC population is expected to increase at a CAGR of 2.4% between 2015 and 2020. An expanding consumer base is likely to translate into higher demand for new as well as used vehicles and related parts in the region.

In addition to the size, the wealth of the population also tends to have a large influence on the demand for vehicles. Despite the projection of a decline in real GDP in 2016, it is forecasted to improve and remain almost steady across the member nations during 2017-2020. A growing economy is likely to translate into increase in disposable income. The wealth of the affluent section in the Middle East is expected to grow at an annualized rate of 6.7% during 2015-2025.

The cost of vehicle ownership in the GCC is lower compared to other countries globally, due to a favorable tax structure. Additionally, attractive insurance and financing options makes it easier to own a car in the GCC.

One of the key drivers of the automotive industry in the GCC is availability of low-cost fuel. Large proven crude oil reserves have enabled the member countries to offer fuel at subsidized rates. Although these oil-based economies have recently resorted to raising energy prices in a bid to reduce subsidies, the cost of fuel is still much below the global average.

Automobile dealers in the Gulf come up with several promotional activities to lure car buyers during annual festivals / events. Such seasonal promotions would continue to boost vehicle sales in the region.

A public transport system still under development phase in the GCC has remained an important driver of vehicle sales. Increasing road congestions are a testament to the dependency on motor vehicles in the region.

As of July 2016, infrastructure projects worth US$ 407.9 billion were in various stages of construction in the region. The UAE and Qatar have many projects under development ahead of their mega events namely, World Expo 2020 and FIFA World Cup 2022, respectively. The ongoing developments are likely to accelerate demand for trucks and other heavy vehicles for use in the construction and logistics activities.

Tourist arrivals in the GCC are anticipated to grow at an annualized rate of 5.7% during 2015-2020. This is likely to stimulate demand for vehicles from car rental and travel companies.

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.

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 Japanese Yen has appreciated nearly 16% against the US Dollar since the beginning of this year. Being the largest source market for vehicle imports, strengthening of Yen is likely to make imports costlier for the GCC countries. Similarly, appreciation of Euro or the Korean Won can have an adverse impact on the GCC vehicle imports.

Recall of vehicles owing to certain manufacturing issues has a negative influence on the brand loyalty and reputation of automakers, thereby affecting sales.

Authorized car dealers in the UAE are facing the heat from grey imports, which in certain cases affects the dealer’s volumes by around 20%.

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 nationalization 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.

Trends

Growing Investments in Vehicle and Component Manufacturing: 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.

A Growing Automotive Aftermarket: 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.

Increasing Popularity of Chinese Brands: While the 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% annually to capture a double-digit market share by 2020.

Vehicle Customization: The UAE is witnessing a growing trend of vehicle customization, 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 customization.

Increasing adoption of Technology: 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.

Entry of Taxi-hailing service providers: 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.

Although vehicle sales in the GCC are have remained subdued during 2016 and will be under pressure in 2017 , the automobile sector is poised for growth in the coming years to 2020 as the region adds nearly 4 million potential, reinstates economic growth, and invests in new manufacturing units and infrastructure development.

Please click here to access the GCC Automobile Industry report online.