The National Commercial Bank (NCB) report titled "Automotive Sector to Resume Expansion in the Medium Term" discusses the shifting trends and auto market drivers.
It also covers how the sector recovered its growth after the economic crisis in 2009, the dynamic of differing automotive segments – passenger cars, SUVs and commercial vehicles – and evaluation of auto-lease segment. It expects as well that the auto sector will achieve strong positive growth over the next three-year period.
In particular, the report has focused on explaining the operating context, consumers, and competitors in the auto market. Different aspects of the operating context were analyzed, namely: economic, legal, sociological and environmental aspects.
Financial stability, strong economic growth, asset appreciation and liberal consumer credit policies have all resulted in increasing demand on auto sector. The consumer credit facilitating for car purchasing and equipment is expected to rise to SR56.3 billion by 2013 due to the undergoing aggressive campaigns to cover wider range of durable goods. More importantly, high oil revenues have further improved the economic context in which automakers operate. It has led to rising income level, expansionary fiscal policy and increased liquidity in banking sector. It is the latter that will enhance the risk appetite of commercial banks and will allow greater flexibility on pricing of auto financing when competing with dominating captive auto-lease. It is expected that new and settled letters of credit will increase at a four-year rate of 6.9 percent and 5.6 percent respectively to reach SR 34.1 billion and SR 45.8 billion.
Indeed, over the period 2005-2009, Saudi banks' credit facilities to cars and equipment grew at a rate 7.1 percent which is more than 0.4 percent of the household credit over the same period. However, the auto lease potential has not been largely exploited. According to NCB estimates, the potential leasing market has been increased from 24.1 percent to 41.4 percent over the period 2005 to 2011. Although the actual leasing market is growing during this period, it still constitutes a minor proportion from 7.9 percent in 2011 to 9.7 percent in 2015.
Although large declines in bank credit and private consumption existed in 2009 due to the global economic crisis in this year, GDP per capita has been steadily rising at 8.89 percent at SR76, 638 over the period 2005-2011. Looking ahead, the auto sector, including the auto-lease segment, is expected to continue its growth in spite of the current 10 percent unemployment rate among Saudi labor force. Besides the high personal wealth at individual level, the government grants unemployment benefits equal to SR 3,000 in public sector and subsidies,
Saudi Arabia is the largest importer of vehicles and automotive parts in the Middle East. Over the period 2007-2011, the imports have largely fluctuated from 600,000 to about 850,000 vehicles. In 2009, the imports level has decreased due to reduction in private consumption and credit facilities brought by global financial crisis. However, in 2010, imports level has increased by 13.75 percent to approximately 703,000 vehicles. Shortage in global supplies has later, in 2011, contributed in reducing imports level with import volume climbing a mere 0.11 percent.
Increasing population, young demographic structure and improving social and physical infrastructure are all in favor of the auto market growth. The latter has particular positive impact on demand of commercial vehicles including the purchase of buses and construction oriented trucks. For example, Volvo signed a SR 200 million deal with Al-Ayuni Investment & Contracting and Zahid Tractor's commercial vehicles division to supply 510 trucks to Saudi Arabia. Similarly, Autocare and Transport Arabia 2010 trade show resulted in deals with Chinese brands targeting the Saudi commercial vehicle segment.
As for the population, it has grown at 3.15 percent over the period 2004-2010, and is expected to reach 31 million by 2015. The growing youth segment, which is the 16-31 age group, increases by 125,000 per annum of which about 80 percent go on to purchase vehicles. Many of these prefer to switch from gas-guzzling sports utility vehicles (SUVs) to smaller fuel efficient passenger cars. This can simulate demand on Chinese and Malaysian automakers since they specialize in producing and marketing small vehicles.
Earthquake in Japan and heavy flooding in Thailand disrupted the supply chain of many auto makers, for instance: Nissan, Toyota and Izuzo. This has caused a decline in sales by 0.7 percent to 687,000 vehicles. These natural disasters have also decreased imported commercial vehicles by 12.3 percent. Fifty percent of Saudi Arabia's commercial vehicles are imported from Japan and Thailand. As a result, the commercial vehicles share of total imports decreased from 21.2 percent to 18.6 percent.
Kingdom's accession to WTO has direct effects on market structure and import tariffs. The automotive sector was partially liberalized, and foreign operators were allowed 60 percent ownership and establishment of local distribution agencies in Kingdom. Moreover, the custom duties on car were reduced from 12 percent to 5 percent in 2005. This has resulted in removing the 15 percent profit margin cap imposed on auto dealers.
Moreover, increased stimulus through royal decrees has contributed in a further increase in economic growth. As for the used car market, the Saudi customs department set a maximum age for imported used vehicles at five years making this market an underdeveloped one compared to its counterpart in the developed countries. Indeed, one used car is sold for every 15-20 new cars whereas in Europe 1 used car is sold for every 2 new cars.
The flat growth rate of 1 percent in total vehicles sales in 2009 was due to purchasing constraints of consumers and diminishing economic growth brought by the global crisis. This has not affected SUV segment demand because of strong brand consciousness. Fortunately, the overall automotive sector has also quickly recovered and achieved a sales value increase equal to 6.5 percent to reach SR 42.8 billion. In 2010 as the GDP rose by 3.76 percent, automotive sales rose by 12 percent to reach 692,437, whereas the value of sales increased by 17.5 percent to SR 50.3 billion. It is expected that total vehicle sales will increase at a 4-year cumulative annual growth rate of 6.7 percent to reach to 884,000 vehicles. Growth is expected for the three market segments: Commercial vehicles, SUVs and passenger fleets at 9.6 percent over the next 4 years to reach over 1 million vehicles by 2015. Indeed, demand on commercial vehicles is expected to rise by the expanding nonoil sector that demands trucks and buses.
It is also worthwhile to mention that demand on used cars has soared due to improved road conditions to reach nearly 30 percent of the total sales. However, credit restrictions, the growing popularity of new small cars and new customs' regulations have a negative impact on the demand.
The Saudi auto market is highly diversified in terms of brands imported and sold. There are currently three top countries exporting private vehicles which are: Japan, US and South Korea. Their cumulative imports are equal to 500,000 vehicles. On the other hand, commercial vehicles are mainly imported from Thailand.
Purchase of passenger cars has increased substantially by 30 percent in the last two years because of shifting preferences of young generation and increased competition from Korean markets. The latter has substantially improved its quality, imposed competitive prices, improved resale value and renewed automobile's design. Demand for SUVs has increased by 17 percent over the same period with the largest winners: Toyota and Ford.
After a bitter 38.5 percent contraction in 2009 because of global economic crisis, commercial vehicles' purchases have increased by 20.5 percent in 2010. This recovery was attributed to government spending in infrastructure projects and overall credit confidence rating.
Lifting the ban on woman's driving represents a long term market growth opportunity for auto sector. This consumer segment will prefer driving cross over vehicles and luxury minivans. Yet, logistical issues must be considered first, including: Improved infrastructure, induction of female officers and new traffic police facilities. The actual number of women willing to drive also remains highly controversial with some polls showing that only 20 percent of female population would be willing to drive because of poor behavior of some young men, poor road conditions and availability of family drivers
The Kingdom has two assembly plants: national automotive industry and Aljomaih Company which assembles buses for General Motors Company.
The market leader is Toyota with total market share equal to 40 percent, followed by Nissan with market share equal to 9.5 percent. Indeed, the Japanese market leader enjoys a number of competitive advantages over its rivals, like: Being No. 1 in terms of repair and after sale service equipment, competitive prices, extensive network of distributors, and the vast availability of spare parts.
European brands including BMW, Mercedes and Volkswagen make up 18 percent of the total market. Whereas Korean brands are gaining acceptance and popularity, the US brands of Ford and General Motors make up about 6.5 percent of total sales.
In conclusion, the NCB report said auto market in Saudi Arabia has recovered relatively quickly from the global economic crisis in 2009 mainly because of solid economic ground and favorable demographic changes. The report also expects that growth in auto sector will be sustained in the intermediate term, as well as acceleration of commercial banks' financing of automotive imports.