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Aug 26 2010

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Saudi Arabia: Automotive Report

Automotive report:

(Forecast closing date: August 26th 2010)

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Automotive report: Overview

Saudi Arabia has the largest automotive market among the states of the Gulf Co-operation Council (GCC, a six-nation economic bloc). Domestic automotive demand is largely met through imports, and automotive imports comprise a substantial share of imported goods. In 2009 motor vehicles accounted for 16% of all imports financed through commercial banks, according to data on new letters of credit—an indicator of demand from wholesalers—compiled by the Saudi Arabian Monetary Agency (SAMA, the central bank). The value of motor vehicle imports financed through commercial banks was SR19.4bn (US$5.2bn) in 2009 having fallen by 9% in line with global trends. In the first half of 2010 this figure was SR12.9bn, suggesting a strong recovery.

According to a market research firm, companiesandmarkets.com, total vehicle sales between April and November 2009 were 374,173, 7% lower than the same period of the previous year. In November 2009 alone sales fell 11% on the same period a year earlier. However, Ali Alireza, the managing director of Haji Hussein Alireza, a large automobile distributor in Saudi Arabia, asserted in June that the automobile market was recovering strongly with a high number of orders being placed for 2011 models.

The culture of car ownership is strongly entrenched in Saudi Arabia, where there is little public transport and fuel is heavily subsidised. As such, continued strong population growth, coupled with rising GDP per head, is expected to underpin further growth in demand for cars and commercial vehicles in the medium term. Driving will remain the dominant form of transport, although investment in some passenger rail projects is planned. Driving in the desert is also an important leisure activity. Saudi Arabia is the only country in the world where women are legally banned from driving. Nonetheless, some better-off women own a car and employ a driver. Any change to the law on women driving could boost demand further. The possibility of a change to this law has grown, although it remains unlikely in the forecast period (2010-14).

Large cars and multi-utility vehicles (MUVs) will remain popular owing to the large size of the average family and to low fuel prices—both factors that are expected to persist over the forecast period. However, sales of some smaller models of car have been rising, and it is likely that the economic slowdown and the growing youth population will support further growth in demand for compact, lower-cost cars. A market for second-hand cars expanded during previous economic slowdowns, but this does not appear to have been repeated in the recent global economic slowdown. The large population of expatriate workers, most of whom earn far lower salaries than Saudi nationals, also supports demand for cheap and second-hand cars.

The automotive production base is small and comprises only a few companies, which serve as assemblers for foreign commercial vehicle manufacturers. Nonetheless, it is the largest by far in the GCC. Saudi Arabia serves as a hub for automotive re-exports to other countries in the region.

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Automotive report: Passenger vehicles

No data are published on passenger car registrations, but demand is estimated to have grown strongly in recent years, based on sales reports from individual firms and data on consumer credit. Local supply is limited to vehicle assembly, although some car parts manufacturing is planned.

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Demand. Saudi Arabia is by far the most populous country within the GCC and has the largest automotive market. Large fuel subsidies and very limited public transport options also contribute to high demand for cars. Domestic automotive demand is almost entirely met from imports, although there is some local vehicle assembly. There is a dearth of official data on the number of passenger car exports, although statistics on the value and even the weight of car imports are available. The Saudi automotive market is estimated to have been worth around SR40bn (US$11bn) in 2009. The latest data available from the Central Department of Statistics and Information is from 2006 and puts passenger car imports at SR69bn and exports at SR8.6bn. However, evidence suggests that the market size is not as large as these figures suggest and that there was probably a considerable build-up of stocks in 2006.

The Economist Intelligence Unit estimates that new passenger car registrations rose by an average of 3.4% a year in 2005-08, although growth was volatile. We estimate that new car registrations plummeted by 17% in 2009 as the economic climate deteriorated, consumer credit became harder to obtain and expectations for price reductions set in. Historical demand growth has been supported by a favourable macroeconomic climate—based on continued annual increases in oil export revenue and government spending—and rising GDP per head. Demand was also supported by large reductions in tariffs in preparation for Saudi entry to the World Trade Organisation in 2005—further cuts are not expected.

Demand for cars is highly responsive to trends in the availability of consumer credit. Some of the decline in car sales can be attributed to increased credit risk aversion from banks in the aftermath of the global financial crisis and following the default of two major Saudi conglomerates and the Dubai World debt standstill in 2009. For both consumers and wholesalers, credit is now more difficult to obtain, although the situation appears to be improving as credit to the private sector has returned to positive growth. Consumer credit for cars and equipment was 6.3% higher in the second quarter of 2010 compared with the second quarter of 2009 and amounted to SR40.7bn. However, consumer credit growth is likely to be slower than in the historical period as many Saudi consumers are now close to the borrowing limit imposed by the Saudi Arabian Monetary Agency (the central bank), which limits loan repayments relative to monthly salary. Since wage growth is likely to slow compared with the historical period, consumers' ability to borrow money for cars or other purchases is likely to be constrained. Sales of cars are typically highly responsive to changes in confidence and this is thought to be recovering, having weakened in 2009. A forecast fall in oil prices could dent confidence in 2011 and overall demand growth may slow in that year once pent-up demand following the global economic slowdown is depleted.

In 2012-14 demand for cars will increase, but at a slowing rate of growth. Strong population growth, the limited provision of public transport and the preference of Saudi consumers for taxis or chauffeured cars rather than buses should all help to support demand for cars in the medium term. Fuel subsidies also contribute to strong demand for, and usage of, passenger cars. Petrol in Saudi Arabia is among the cheapest in the world, and this situation is unlikely to change given the country's natural energy advantage as well as a widespread public expectation that fuel should be subsidised (which would be politically difficult to change). Fuel subsidies were increased in 2006, and in 2008 the government announced that it would waive 50% of the costs of licensing a new vehicle. Both measures were attempts to shore up consumer purchasing power after it had been eroded following a 2006 stockmarket crash and high inflation in 2008.

Nevertheless, the rate of growth in demand for cars is likely to slow relative to the historical period as the market matures. Most Saudi families already own at least two cars, one of which is usually a large vehicle meant to accommodate the traditionally large families. As far as consumer preferences are concerned, vans and MUVs are popular with Saudi families, as are four-wheel drive recreational vehicles. Saudi households often use large nine-passenger sports-utility vehicles (SUVs). The vast size of the country and the large distances between major cities underpin heavy car use. Luxury models are relatively popular, given the fairly large number of affluent Saudis as well as a general preference for opulent design and high-end branding. Smaller cars may become increasingly popular—particularly in the under-25 age bracket—as economic growth slows. According to Mr Alireza, the managing director of Haji Hussein Alireza, one of the largest car distributors in Saudi Arabia, demand for small cars has increased significantly, driven by students and expatriates who are attracted by their fuel efficiency and lower maintenance costs.

There have been some less positive indications in the used-car sector. A report from Arab News, a daily English-language newspaper, in May stated that the used-car market was in crisis owing to a lack of liquidity among Saudis and expatriates. Demand for used cars in developed countries during the global economic slowdown has driven up international prices of used cars, causing demand in the kingdom to drop. Saudi distributors have been forced to be more competitive and have lowered their prices. There are therefore fewer used cars being sold at narrower margins. According to figures supplied by the customs authorities, the number of imported cars more than five years old stood at 140,444 in 2008, with a total cost of SR17.5bn, accounting for 24% of imported cars in the same period. The second-hand market is likely to recover. It is supported by the existence of sizeable low-income groups. In particular, the incomes of the country's expatriate workers, who accounted for an estimated 8.4m people or 31% of the population in 2010, tend to be considerably lower than those of Saudi nationals (although there are exceptions, particularly in highly skilled sectors such as finance). No data on household income are published, but there are also many low-income Saudi nationals.

Demand for passenger cars could rise significantly if the government lifted the ban on women driving. However, the issue remains highly divisive within Saudi society and many influential clerics are fiercely opposed to women driving. In practice, there is some tolerance of women driving in isolated areas, but women are still unable to obtain driving licences from the Saudi authorities. It is possible that the restrictions will begin to be eased towards the end of the forecast period, and this is supported by the fact that there is some debate on the issue in the media, which practices extensive self-censorship. However, the ban is unlikely to be lifted suddenly and would probably be preceded by other moves, such as the introduction of female traffic police. In the meantime, some of the more affluent Saudi women already purchase cars, which are then driven by a chauffeur.

Pricing. The affordability of new cars, relative to average monthly disposable income, is ranked medium to low by world standards. However, the average monthly income data conceal large disparities in income and most Saudi households are able to afford a car (expatriate workers are less likely to own cars). Petrol remains very cheap, as does car insurance, making the running costs of large cars relatively low. Third-party liability insurance is compulsory. The availability of credit financing has improved in recent years, as secure financing by banks and the leasing system have ended the reliance on sellers' instalment arrangements.

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Supply. Automotive demand is largely met through imports, which are subject to a 5% customs tariff. The car import market is tightly regulated by the authorities. Most imported cars are sold through local distributors that have sole rights to a particular marque. They operate their own storage facilities and provide after-sales servicing. Local car distributors will not recognise a service warranty in a car purchased from an agent for the same brand in another GCC country (or vice versa). There is greater competition, however, in the market for spare parts. Sizeable volumes of automotive imports are re-exported to neighbouring countries such as Sudan, Yemen, Djibouti, Ethiopia and Eritrea. Second-hand cars imported into the country must be less than five years old, and second-hand heavy vehicles can only be imported if they are less than ten years old, according to new government directives issued in June 2009.

The automotive market will continue to be dominated by imports throughout the forecast period, although there will be gradual growth in the domestic component-manufacturing and vehicle-assembly industries. The Saudi automotive production base is limited to a few firms that assemble commercial vehicles under contract with foreign carmakers. A UAE-based firm, the Gulf Automobile Manufacturing Corporation, has signed an agreement with Modon (the Saudi Authority for Industrial Cities and Technological Regions) to build a car manufacturing plant in Dammam, which would be the first in Saudi Arabia. When the agreement was signed in February 2008, it envisaged that 15,000 cars a year would be produced in Dammam in the first stage. Ultimately, the ambitious objective is to move the plant to a planned economic city at Sudair and produce 300,000 cars a year. The timeline for the project is unclear.

The government is also seeking investors for a project to begin producing a SUV. A prototype for the vehicle was built by students at King Saud University in Riyadh. The students received technical support from Western car firms. The vehicle is currently called the Ghazal-1 and is specifically designed to cope with the local dry and dusty climate and rocky desert terrain.

Local agents typically have their own storage facilities, retail outlets, showrooms and internal distribution operations in major cities. The main Saudi dealers for foreign cars include Abdul Latif Jameel (Toyota, Japan's largest carmaker, and Daihatsu Motor, also of Japan), Al Hamrani Group (Nissan Motor, Japan), Al Jazeera Group (Ford and Lincoln, both of the US), Al Jomaih Company (GM and Chevrolet, both of the US), Alesayi Motors (Mitsubishi Motors, Japan), Bamarouf Group (Suzuki, Japan), Juffali Automotive Company (Daimler, Germany) and Mohammed Yusuf Naghi Motors (BMW, Germany).

Local distribution was opened to foreign investment in 2007. As of 2008 foreign companies are able to own 60% of a car importation and distribution service in Saudi Arabia, up from 51%. This opens up the possibility that foreign car firms could establish their own distribution networks. In practice, however, many may choose not to compete with established local agents who already have local contacts and knowledge. At least one women-only car showroom has been established, staffed entirely by women, to cater to women who want to buy cars without mixing with men.

Toyota is the leading market brand in Saudi Arabia, followed by Nissan. According to a report in 2007 by the National Commercial Bank, the country's largest bank, the vast service network and favourable financing deals offered by Abdul Latif Jameel (ALJ), which is the sole importer of Toyota cars, helps to explain the Japanese firm's continued market lead. ALJ also distributes Toyota cars in 11 other markets, including Turkey. Toyota has recently recalled 8m cars worldwide after accelerator pedals were found to be faulty on the company's Avalon and Sequoia models. ALJ said in February that it would invite owners of these models to get their cars checked after the Saudi Consumer Protection Agency asked the government to force ALJ to recall and check the faulty cars that it had sold locally.

In an attempt to gain market share, Nissan formed a joint venture, Nissan Gulf, with the Al Dahana Group (a Dubai-based firm chaired by a Saudi businessman) in October 2008; the firm will offer combined finance and insurance packages and aims to more than double Nissan's total sales in the Gulf by 2012.

In 2007 the dominant suppliers in the market for private cars between 1,501 and 3,000 CC were Japan, Australia and South Korea with 33%, 23% and 15% of the market by value respectively. Roughly three-quarters of this market is for passenger cars, with buses and trucks accounting for most of the remainder. The available data may be slightly misleading as Australian exports to Saudi Arabia are mainly Japanese and US models. Saudi Arabia, as part of the GCC, is negotiating free-trade agreements with a number of countries, which could help to reduce tariffs for the GCC states. However, the impact on demand will be limited as tariffs are already low.

Saudi Ministry of Transport: www.mot.gov.sa

Automotive report: Environmental pressures

The cheap cost of fuel means that energy efficiency has generally not been a big concern for Saudi buyers. The government is unlikely to make a significant reduction in its fuel subsidies over the forecast period, and in any case the country's natural energy advantage means that the cost of fuel would remain low. However, there is considerable congestion and pollution in Saudi Arabia's major cities and the government has promised to promote rail and air links to help reduce the country's overwhelming dependence on road transport.

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Nevertheless, consumer awareness of environmental issues will increase gradually. In particular, awareness of climate change as a global issue is rising among the large young population. Eventually these trends should stimulate growth in demand for energy-efficient and hybrid cars. Governments elsewhere in the Gulf have begun to take some steps to increase awareness of fuel efficiency and environmental issues. In 2009 Mercedes-Benz (Germany) launched the first luxury hybrid car to be sold in the Arab world, the S-400 BlueHybrid, after initial market testing in Dubai. Saudi consumers tend to have an appetite for the latest new technologies, which may help, but this subsector is likely to remain a niche market over the forecast period.

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Automotive report: Commercial and other vehicles

Demand. Data on commercial vehicle purchases are lacking but demand is believed to have expanded strongly during the historical period, on the back of strong growth in the construction and services sectors. The latest data from the Central Department of Statistics and Information from 2006 put imports of industrial and commercial vehicles at SR16bn (US$4.1bn) and exports at SR3.5bn implying an approximate market size of SR12bn, although some of this may have been accounted for by stockbuilding. This market is likely to have grown slightly since then.

New sales are forecast to rise slightly in 2010 as investment is supported by government spending, overall economic growth picks up and business confidence begins to recover. Notably, business demand for delivery vehicles, and for cars to form part of hospitality fleets, is expected to remain subdued. Some new sales of trucks will be driven by a number of ongoing construction projects that have government strong backing. Price cuts could potentially stimulate some additional demand. By end-2010 to 2011, demand should begin to recover in line with broader economic growth. Government agencies, including the Post Office and the Ministry of Health, will also contribute to demand for new commercial vehicles.

Supply. Japan is the main source market for commercial vehicles. The latest economy and planning ministry data on imports show that Japan provided 57% of all imports of goods transport vehicles and just over one-half of public transport vehicles in 2006. A Japanese firm, Nissan, reported that Saudi Arabia accounted for 48% of all Gulf sales of its pick-up commercial vehicle in April-October 2008. Suzuki Saudia, the sole Saudi distributor of vehicles made by Suzuki (Japan), has noted rising sales of its budget Alto model, to a clientele of mostly private companies, notably fast-food firms, and some government agencies such as the Post Office and the health ministry.

By contrast, the US accounted for just over 1% of goods transport vehicles and 5% of public transport vehicles imported in 2006. China is a more important source of public transport vehicles, accounting for 7% of imports in this subsector in 2006. The kingdom was also one of the top ten markets for Chinese buses in 2005, according to the Chinese Automotive Technology and Research Centre. The main importer of Chinese vehicles is the Al Rassam Company, which has an exclusive distribution agreement with China's Great Wall Motors (which makes Deer light pick-up trucks), Sinotruk (heavy trucks) and Dong Feng (light to medium trucks), and operates 12 showrooms. Imports of commercial vehicles from China are likely to continue to expand as Saudi Arabia develops its trade and investment links with China. Tata (India) also launched a pick-up truck, the Xenon, in the Saudi market in late 2008.

Daimler (Germany) has traditionally been the leading automotive firm in the commercial vehicle market, operating through the Mercedes-Benz brand. India's largest car manufacturer, Maruti Udyog, has entered the Saudi commercial vehicle market, and has also had some success in Kuwait and Qatar.

The local vehicle-assembly industry is heavily focused on commercial vehicles. Producers include the National Automobile Industry, which assembles Mercedes-Benz lorries, the Al Jomaih Company, which assembles General Motors (US) buses, and, since 2006, the Arabian Trucks and Cars Manufacturing Company, which assembles Volvo (Sweden) trucks. In January 2009, a German truck manufacturer, MAN Nutzfahrzeuge, opened a new vehicle-assembly plant in Jeddah to produce 3,000 trucks and tractors a year (to meet local demand).

However, the growth of the vehicle-assembly business will be constrained by the subdued environment for foreign investment, at least during 2010. With demand for cars falling globally, multinational automotive firms will be forced to scale back expansion plans.

Automotive report: Components

Demand. Extensive car ownership, coupled with high levels of usage and a significant accident rate, will stimulate the growing market in car parts. The lifespan of cars should gradually increase as the road network is developed further and as paved intercity roads are extended. Nevertheless, a generally aggressive driving style will continue to contribute to a persistently high accident rate, leading to ongoing high demand for replacement car parts, repairs and new cars. Saudi Arabia imported US$847m worth of car parts and accessories in 2006, according to the latest available data from the Ministry of Economy and Planning.

Supply. The automotive parts industry comprises more than 300 small and medium-sized firms stocking parts and accessories. Most of these firms have small capacities, with the exception of the two or three large companies that dominate the market. The sale of counterfeit branded spare parts is reportedly widespread, reflecting the generally weak protection of copyright.

A number of joint manufacturing ventures have been established in recent years providing high-volume, fast-moving car components, especially filters, oils and fluids, batteries and brakes. The government aims to encourage further development of components manufacturing as part of its strategy to develop more industrial production in Saudi Arabia. Car parts are one of the five priority sectors targeted by the Ministry of Commerce and Industry's "industrial clusters strategy", drawing on the country's natural cost advantage in producing petrochemicals and plastics. In November 2008 the state-owned petrochemicals giant, Saudi Basic Industries Corporation (SABIC), signed a heads of agreement with US-based ExxonMobil Chemicals for an elastomers project that would produce rubber and carbon black—raw materials for car tyres—at two existing joint-venture petrochemicals factories in the industrial cities of Jubail and Yanbu. The project has been under consideration for at least two years.

The government's plans received a further boost with the announcement in 2008 that UK-based Lotus Engineering, owned by Proton of Malaysia, plans to launch a co-operation programme with the King Abdel-Aziz City for Science and Technology, based in the capital, Riyadh. The idea is that this will become a research and development (R&D) and test centre for the automotive sector, which would also be open to use by other manufacturers. Levels of R&D in Saudi Arabia are currently very low and the government is keen to expand the domestic technology and skills base. Companies offering training programmes will be particularly welcomed. However, new investments are expected to be minimal, at least in the early part of the forecast period, as car manufacturers around the world are likely to adopt defensive strategies in the face of a slump in global demand.