How UAE VAT will affect car prices

By Ian Batey, General Manager of Autodata Middle East

The GCC Automotive sector has been experiencing some difficult times over the past two years. New Car sales numbers have been hit hard with the market correction of 2016 and 2017. As a percentage 2016 dropped by 27% compared to 2015 and 2017 Year to Date has dropped by 30% compared to 2016. At Autodata Middle East we forecast a total new car sales volume of around 1,000,000 (GCC) units for 2017 compared to 1,500,000 units in 2016. This market size is the “new normal” so distributors must focus on increasing market share as chasing unrealistic volume is not profitable or sustainable long term. With the introduction of VAT there lies another challenge for retailers of new cars but an opportunity for sellers of used cars, which I will explain later.

The automotive sector is hanging on the year’s new car sales performance on the hope that there will be a significant spike in new car sales during November and December. My opinion is that this will not be the case, and besides, if you see a spike in sales in December, this only negatively impacts January sales volumes so the net result is potentially the same.

Consumer offers are so strong that it is common to see; free Insurance, free 5 Year warranty, free servicing for 3 or 5 years, free tinting, the list is endless! What we will see in January 2018 is a replacement of the “free” offers to “We will pay your VAT” offers.

There is only so much profit in a new car that the dealer can give away, they will just package an offer differently. The dealers will also put some pressure on the Manufacturers to provide them with additional financial support to mitigate the continuing erosion of dealer margins.

How will VAT will be calculated on new cars?

It is not entirely clear as yet whether VAT will be calculated on the RSP (recommended selling price) or show room sticker price as it is known or the final invoiced price (which could reflect a significant discount). My intuition tells me that it will be calculated on the RSP as it is in other markets such as the UK, US and Europe.

A simple example is that a car that has the RSP of AED 100,000 in December 2017 will have a new RSP of AED 105,000 on January 1st 2018.

What dealers should be preparing for is a significant increase in demand for nearly new used cars. I think dealers are missing a huge opportunity to increase new car sales volume now by guaranteeing a buy back with a private consumer or business user in 12 to 18 months. This would guarantee the dealer two things;

– Increase new car sales in the short to medium term and guarantee a returning customer who will change their car much sooner than they normally would. Consumers currently change their car every 42 months as an average.

– Guaranteed quality used cars coming back to be sold through a certified used car program.

The reason for this is that VAT will be calculated significantly different on used cars than it will on new cars.

How will VAT be calculated on used cars?

VAT will create a high demand on nearly new used cars as the dealer only pays VAT on the profit. A simple example is that a consumer could purchase a used car, 6 months old, low mileage and two trim levels higher than the original new car which is now priced at AED 105,000 due to VAT for AED 90,000. If the dealer operates and a 9% margin the VAT element is only AED 400.

Financial Calculation

AED 80,000 (Dealer purchases a used car)

AED 2,000 (Dealer expenses in preparing the car for sale)

AED 82,000 (Total cost of the car the dealer, purchase price plus costs)

AED 90,000 (selling price)

AED 8,000 Profit margin (90,000 – 82,000) VAT AED 400

My advice is: do not panic. The dealer offers will always be around to entice potential car buyers.

 

The views expressed by the author are his own and do not necessarily represent those of Gulf Marketing Review.

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