UAE, Gulf Region Not Immune to Global Meltdown

DUBAI – Vehicle sales in the United Arab Emirates are off to a rocky start in 2009, a remarkable change in fortunes from the double-digit growth of recent years, when the country’s $3.6 billion automotive industry was one of the fastest growing in the world.

“Since October, traffic has been different; the roads are noticeably quieter,” says Mike Devereux, president of General Motors Middle East. The end of 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 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.

“The financial crisis has certainly affected automotive sales in the UAE, with banks applying more restrictions on financing,” says Waldo Galan, managing director of Ford Middle East. “Since nearly 80% of the UAE's automotive sales are dependent on financing, this is more evident locally. Overall for 2009, we expect the automotive industry to achieve minimal growth in the UAE.”

In the face of tighter lending, auto makers and dealers are teaming up with banks to offer 0% interest on vehicles 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 here previously ignored as vehicle prices were low and customers preferred to buy.

“Financing is a problem, so schemes have to be more tactically focused,” Devereux says. “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 partnerships with the National Commercial Bank of Saudi Arabia and in the UAE, a car-leasing scheme.”

While enticing customers into showrooms is one concern for auto makers, so is keeping dealerships afloat. Many retailers order vehicles months in advance, and in the current environment many cannot be sold or re-exported elsewhere.

“Credit, wholesale finance and bank loans are difficult for dealers,” Devereux says. “Stock levels for dealers mean reduced working capital, so less money in the inventory. We will winnow down our inventory and import far fewer cars.”

And while there is an excess of unsold cars, auto makers are hesitant to offload vehicles via fleet or government sales.

“We’re trying not to chase unprofitable fleet tenders that we would have done before, as there is little to no margin,” Devereux says. “We are now focusing on the retail business, with 65% retail and 35% fleet.”

As is the case with other global markets, consumer preferences are shifting away from SUVs and trucks to smaller cars and cross/utility vehicles.

Such consumer shifts began last year, with Kia Motors Corp. reporting a 60% jump in sales over 2007. Japanese brands have the lion’s share of the UAE market, at 40%, while European marques control a 30% stake. The remaining 30% of the market is equally divided between U.S. and Korean brands.

Last year, sales of Ford, Lincoln and Mercury models grew 35% in the UAE, compared with 2007.

GM sales in the UAE were a bit more sluggish but still up 19% compared with year-ago. However, the auto maker’s deliveries climbed 30% to an all-time record of 144,485 units in the Middle East (defined as Jordan, Lebanon and the Gulf Cooperation Council countries, which include the UAE).

As sales stall this year, auto makers and dealers are focusing on aftersales to maintain profitability.

The market for auto parts and services in 2008 across the Middle East (Jordan, Syria, Lebanon and the GCC countries but not North Africa), was valued at $11 billion, while the UAE tire trade, alone, was valued at $1.1 billion.

“We don't see a change in after parts, as value has grown,” Devereux says. “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.

“There is a need to invest in new services, as vehicles are coming into prime servicing years after two-three years since purchase.”

While Gulf market auto suppliers continue to monitor the local environment, they are optimistic revenues will go up next year as supply and demand align, although it may not be the double-digit figures of the boom years.