By Vitali Bielski, Senior Consultant, Mobility Practice (Automotive & Transportation), Frost & Sullivan
As GCC (Gulf Cooperation Council) economies end the second year of low oil prices, Frost & Sullivan analysed the year 2016 for the automotive market and what can be expected in 2017.
The year 2016 has certainly been tough for the automotive industry across virtually all of the countries in the GCC. New vehicle sales dropped by double-digit number, overstocking of parts by distributors, lack of clarity for the near future – these were the main causes for a volatile year.
Despite that, one thing remains clear: the automotive industry will only grow in the region. There are several reasons for it. The market is characterised by relatively low price elasticity in demand.
The still-underdeveloped public transportation network (with the exception of urban areas such as Dubai and Riyadh) and lack of alternative fuels means that recent fuel price increases are not likely to have a significant impact on the industry in 2017.
But as new vehicle sales are expected to remain moderately positive in the medium term, automotive companies will look for alternative profit sources. There are still several untapped areas, which offer significant profit margins but will require more effort in order to reap them. Such opportunities include used car sales, F&I (finance and insurance) as well as car accessories.
Here are the top eight predictions for the automotive industry in the GCC:
1. Pre-VAT sales rush
After an unstable 2016 resulting in a drop in new vehicle sales (reaching 1.35-1.40 million units) across the GCC, the market is expected to stabilise and show a moderate growth in 2017 (up to 1.48-1.50 million units) due to several key factors.
Firstly, the region’s macroeconomic situation is improving (non-oil Gross Domestic Product in the GCC is set to accelerate to 3 per cent in 2017 from 1.8 per cent in 2016 IMF, 2016) and new vehicle sales in 2017 are likely to be uplifted by a planned VAT (Value Added Tax) introduction by most GCC states in 2018.
Although for majority of businesses it means additional complexity, VAT is ultimately paid by the customer. Customers previously planning a vehicle purchase in the next two years from now are likely to purchase vehicles before a 5 per cent tax (most likely rate to be adopted) is levied in 2018.
2. Far Eastern brands on the rise
As the GCC markets move closer to maturity, competition is expected to intensify. That means pricing wars will drive transaction prices down (although the region already offers prices below global average based on entry price of Corolla base trim) as well as constant re-adjustment of after-sales package prices (regular maintenance and servicing, parts etc.) in line with competition.
Another impact will be shift in market share, and some brands are ready to use the situation to their advantage with agile pricing strategies and attractive after-sales offers.
We estimate that Hyundai and Kia will cross a 20 per cent threshold of the GCC market in 2017 (up from around 18.5 per cent in 2016). At the same time, Chinese brands are establishing themselves in niche budget sedans, SUVs and pickups and are likely to see significant positive effects in the medium to long term due to volatility of economies.
3. Businesses to become leaner
2017 is expected to be the year of change for many market participants. Importers, distributors, new and used vehicle dealers, independent part resellers and workshops are likely to change the way they do business.
Although the process has already started in 2016, it will only become clearer in 2017. Lower government spending on new vehicles and selecting rental or leasing options instead of outright purchase will hurt some but will support others such as rental companies (for example, smaller construction companies cannot afford buying construction equipment if the payment schedule is delayed by the government so rental becomes the only option).
Sweating existing assets is definitely the first quick win for most given the current market sentiment. That means using every square metre of existing floor space, renting out unused capacity and increasing volumes without significant investments in fixed assets. Despite that, further investments might still be required.
Those however, will be low-capital investments with long-term results. Using online tools to reach new customers and retaining existing ones, scaling existing successful business models are a few examples of smart investments, which will happen in 2017.
4. Diversification policies to finally have a measurable impact
There have been a lot of discussions about Middle East governments’ initiatives to promote diversification in the region as a response to volatile oil prices, but so far results have been extremely limited.
However, this year we have witnessed several critical decisions taken by GCC governments, such as approval of Saudi Vision 2030, kick-off of Tanfeedh plan of Oman as a part of Oman 2040 strategy.
These indicate that government support is actually going to boost industries, and automotive sector is among the first to benefit. It is expected to have moderate impact on private sector initiatives including automotive parts manufacturing.
We expect to see new automotive component manufacturing set up in the region as a backbone for the future automotive industry. Key support is expected to come through subsidised loans and land allocations.
5. Dealers to step up after-sales and CRM efforts
Growing competition, development of independent aftermarket solutions (dial-a-battery, tyre replacement) and moderate future growth rates for new car sales mean that it will be even harder to retain existing and future customers for automotive car dealers. There are, however, several tools available to car dealers, which can help them increase retention rates of their customers.
In today’s lives customers expect instant communication with car dealers using a channel they prefer and as the number of channels available to them increase (phone, e-mails, internet messengers, the list goes on), building a strong relationship with customers becomes even trickier.
Another point is that despite a number of CRM (Customer Relationship Management) tools available in the market; nothing can replace human contact with customers, even in the form of follow up phone calls.
For example, sending customer a short video about using a smartphone messenger to show which part of the vehicle needs replacement, or walking the customer through check points during a regular servicing etc. can make a difference.
6. Centre of profitability for car dealers shifts towards after-sales: service, parts and F&I
As the market matures, profitability centres are shifting from conventional areas such as new vehicle sales to parts, service, accessories, F&I (Finance & insurance) and used vehicles. Although Middle Eastern car dealers still enjoy typically higher margins than their global counterparts (~4 per cent net profit margins vs. the UK net profit margins of ~1.5-2 per cent), the year 2017 is set to put additional pressure on their profitability.
As a result, dealers will put additional emphasis on more profitable business segments such as service, parts, accessories, F&I and used vehicles. A few of these areas do not require a lot of effort (accessories, parts – e.g. selling parts online is a perfect example of digitalization of automotive business, service), development of these was started by dealers across the Middle East in 2016, but some like used car business and F&I, would require time and a proper strategy to move forward. We expect such developments in 2017.
7. More regulations to come
New regulations are not always welcome by companies as they typically mean additional complexity to the way they do business. And even those regulations which are clearly needed can prove to be difficult to introduce effectively.
For instance, the recent anti-counterfeit check at Saudi Arabia border led to long queues, which also affected companies operating transparently and resulted in extra logistics costs. However, we do believe that such regulations as CAFE (Corporate Average Fuel Economy Standards), which were introduced in the KSA in January 2016, are going to lead to higher competitiveness of the Saudi automotive market through aligning its powertrain sales trends with global trends.
Classification and categorisation of auto workshops in the UAE, which is currently under development is another example of creating transparent boundaries not only for end users (vehicle owners) but auto workshop suppliers as well.
An anti-dumping investigation against Korean battery manufacturers could lead to a short-term distortion of competition in the GCC, but most importantly, it shows that local production is likely to be supported to a higher extent than before.
8. Shift from transport to mobility
Following the global trend, the GCC has quickly jumped on ride sharing. The region has been using new mobility platforms since 2012 when Uber was launched in Dubai, but only now two of the largest players in the region, Uber and Careem started receiving full attention.
Soon after the Public Investment Fund announced buying a stake in Uber in June 2016, Saudi Telecom announced purchasing a 10 per cent stake at Careem. We expect these moves not only to help the KSA Government diversify economy, but also allow ride-sharing mobility solution providers to expand their solutions in the Middle East.
The views expressed here are solely those of the author and do not in any way represent the views of Gulf Marketing Review