A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd. network

VOL 16, Issue 3 July 2014

UAE AUTOMOBILE UPDATE

‘The car has become the carapace, the protective and aggressive shell, of urban and suburban man.’
– Herbert Marshall McLuhan

And rightly so, the auto industry has become a key sector of the economy for every major country in the world. The industry continues to grow, registering a 30% increase over the past decade (1995-2005). The world’s automotive industry makes 60 to 70 million cars, vans, trucks annually. This level of output is equivalent to a global turnover (gross revenue) of about EUR 2 trillion (AED 9.9 trillion).

The global automotive sector is currently being defined by three distinct growth trajectories – while the developing markets such as India, China and Brazil along with the US, are booming, Western Europe and Japan are experiencing a fall in demand and, the rest of the markets are in a state of slow growth. The global automotive sales presently grow by around 1% to 2%, with developing markets contributing over 75% of this growth.

UAE is one of the fastest growing markets 
UAE is one the fastest growing automotive markets in the world, expecting to grow at a rate of over 11% per annum until 2017. The current market size for passenger cars in the UAE is estimated at around AED 23 to 36 billion, which translates to the sale of over 300,000 cars.

Dubai and Abu Dhabi are the major centres of demand. These two emirates have also been figuring amongst the largest markets for premium and luxury cars, driven by the oil-rich consumers with deeper pockets.

Domestic opulence driving demand for luxury
The UAE is the eighth country worldwide for luxury cars, with several dealers being recognized as recording the highest sales in the World.

The UAE has experienced a GDP growth of 4.1% in 2012 and 4.0% in 2013, which has resulted in improved confidence in the business environment. The economic uncertainty in Europe has also driven several companies towards the MENA region. The announcement of major real estate projects in the UAE also reflects this improved optimism.

It is estimated that job opportunities in the UAE are expected to rise by 2%-3% with average salaries projected to rise by 5%-6%. Such increases in income and employment levels will result in higher disposable income, and therefore, affordability for cars.

The UAE is reported to have the world’s 9th highest density of millionaires, with 40 out of every 1,000 households (4%) holding private wealth of at least USD 1 million. Such high opulence levels bode well for the demand of premium and luxury cars in the country.

Low cost of ownership as well as usage, bundled with low fuel prices, excellent road conditionsand easy availability of low interest finance are further driving the demand for cars, making UAE one of the most favourable markets for car owners.

There is more meat in the deal for sellers too. In contrast to other mature markets, where average dealer margins are in the range of 1% -2 %, dealers in the UAE enjoy high margins, often in double digits, making it an attractive market in which to operate. Moreover, since the premium/luxury segment has a larger share of the pie, than the global average of 9.4%, higher profits for both dealers and manufacturers are in the offing.

Consumption is import oriented
The international trade in automobiles is largely import heavy, due to lack of any local production.

Although the economic slowdown had pulled the markets down in 2009, the international trade has steadily grown since, with imports increasing from AED 19 billion in 2009 to nearly AED40 billion and the re-exports increasing from AED12 billion in 2009 to over AED16 billion, translating into local consumption of AED20 billion.

Japanese cars remain the most popular imports, followed by cars manufactured in the US and Germany.

Key Demand Trends
The UAE market is unique when it comes to the demand trends, having its own favourites, different from global markets.

  • Unlike the rest of the World, where electronic and hybrid cars are the hottest products in the sector, the UAE market is still predominantly a petrol/diesel market, primarily due to low cost of fuel, and limitations with run-time of electric cars.
  • Although sedans remain the most popular body types, there is a clear preference for SUVs in the higher brackets with over half of the cars in the premium segment being SUVs.
  • The market loyalty towards economical and fuel-efficient Japanese cars is penetrating into the premium segment, with brands such as Lexus and Infiniti gaining acceptance. However, the high end market still remains dominated by European makes, specifically German cars.
  • Since the market downturn in 2009, focus moved towards providing better after sales service, because that was where the money was during thinning new car sales. Even though markets have recovered now, after sales service remains a key differentiating factor for players.
  • The young and rich consumers in the UAE are driving the demand for sports coupes and super-cars.
  • Toyota, Nissan and Hyundai, remain the top three brands, together commanding more than half of the market share.

Market dynamics
The automotive sector is dominated by a few large players. Many of these top players were established more than 50 years ago and have strong brand equity and gained trust among customers. Dealerships are part of big business groups with strong political affiliations and recognition in the market.

Key success factors

  • Established brand name and reputation
  • Product line-up
  • Quality of after sales service
  • Pricing
  • Location, among others

In today’s market where the consumer is increasingly informed, the players have to be on their toes to continuously differentiate themselves from competition and update their product line with the international trends. Despite the price premium enjoyed by established brands, today’s consumer can see through a strong brand and value a good product, even from a novice brand at the right price. Aggressive marketing and promotional activities to gain attention of the consumer are the order of the day.

With the economic outlook remaining positive and Dubai hosting World Expo 2020, there is enough fuel in the tank to propel the demand for cars over the medium term.

[This article has been contributed by Ms. Sana Khan, an Assistant Manager in our Management Consulting Department.]