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Saudi Arabia: Automotive forecast

Saudi Arabia will remain the largest market for automotives in the Middle East, reflecting its relative wealth, rapidly growing population, limited public transport services and the low cost of fuel. Since 2003, large annual increases in government spending have supported strong real GDP growth at a sufficiently high level to ensure continued rises in GDP per capita (whereas real GDP per head contracted in four out of the five years from 1998 to 2002, when oil prices were less favourable and population growth higher). Over the forecast period, continued increases in government spending, facilitated by persistently high oil export receipts, and rising investment-driven growth in the private sector, should underpin strong annual growth in private consumption. This is expected to translate into rising demand for cars, given the high rate of household formation and the paucity of other transport options. Moreover, the high oil-fuelled liquidity in the economy and the banking sector is likely to continue to feed through into rising consumer credit, a substantial part of which is channelled into buying and leasing cars.

In 2006 the Economist Intelligence Unit estimates that new passenger car registrations rose by 6%, lower than estimated real private consumption growth. This reflects our expectation that expansion in second-quarter passenger car registrations suffered from the negative effects of the downturn in the local stockmarket on consumer confidence. (High-cost durable items such as cars tend to be among the first to suffer from lower consumer confidence.) This view is supported by data from the Saudi Arabian Monetary Agency (the central bank), which show that the value of automotive imports financed by commercial banks rose by a robust 61% year on year in the first quarter, but declined by 21% year on year in the second quarter. However, loans for car imports picked up again in the second half, particularly in the fourth quarter. For the year as a whole, the total value of new loans for car imports (extended to wholesalers) fell by 11% in year-on-year terms, to SR16.4bn (US$4.4bn), although this was from a very high base in 2005, when new loans for car imports surged by 53% year on year.

Several key companies report growth in 2006

General Motors (GM) of the US, the world's largest carmaker, reported that its sales of new vehicles in the kingdom rose by 17% in 2006, to 87,719 units, of which 59% were sold in the second half of the year. This was lower than GM's sales growth in the UAE (61%), but higher than that in Kuwait (5%). In the first quarter of 2007, GM sales in Saudi Arabia rose by 12% year on year to 40,396 units, accounting for 61% of all its Middle Eastern sales. GM product lines include Cadillac, Chevrolet, Saab and Hummer.

Hyundai Motor, South Korea's largest carmaker, reported that its sales grew by 11.3% year on year, to 40,000, and said that it aimed to increase sales by 50% in 2007 by focusing on marketing its sports utility vehicles (SUVs) and other high-value lines. The German-US carmaker, DaimlerChrysler, said that its sales of Mercedes vehicles in Saudi Arabia rose by 75% in 2006, to 3,685 units (compared with a 12.8% year-on-year increase in sales in the Middle East region as a whole). DaimlerChrysler marques are exclusively sold by the Juffali Automotive Company, headquartered in Jeddah. Chrysler, Jeep and Dodge vehicles accounted for the vast majority of sales, at 3,537 units. Surprisingly, however, the Germany-based BMW Group's sales in Saudi Arabia fell slightly in 2006, to 2,671 units, compared with 2,743 units in 2005. BMW marques in Saudi Arabia include Mini and Rolls Royce as well as BMW, and are exclusively imported by Mohammed Yusuf Naghi Motors.

The construction boom boosts commercial vehicles salesCommercial-vehicle purchases appear to be growing strongly, although comprehensive data are lacking.

The boom in construction in the kingdom, which is set to persist throughout the forecast period as large-scale investments in infrastructure and industry are made, will underpin strong growth in demand for trucks. Suzuki Saudia, the sole Saudi distributor of vehicles made by Japan's Suzuki Motor, said that sales of its Also model were up by 157% year on year, with the majority of its sales made to private companies or to g0vernment agencies such as the Post Office and the Ministry of Health. In 2006, Suzuki Saudia reported that its sales of SUVs rose by 187% year on year in the first half, largely driven by booming demand from firms purchasing cars for their hospitality fleets, which accounted for 42% of sales.

Chinese commercial vehicle imports will rise furtherThe Saudi automotive market will continue to be dominated by imports throughout the forecast period.

The rate of increase in sales should be healthy as long as oil earnings remain high. However, a sharp and sustained downturn in oil prices, or another severe slump in the stockmarket, would pose significant downside risks to our forecasts.

Japan is the primary source market for passenger cars, followed by the US. The Ministry of Economy and Planning's statistics for vehicles of all types, however, show that China now accounts for the vast majority of vehicle imports into Saudi Arabia, at 65% of the total in 2005, a 45% year-on-year increase. Great Wall Motors, a Chinese carmaker that specialises in pick-up trucks, said that Saudi Arabia is one of its top five markets. The kingdom was also one of the top ten markets for Chinese buses in 2005, according to the Chinese Automotive Technology and Research Centre. Imports of commercial vehicles from China are likely to continue expanding as Saudi Arabia develops its trade and investment links with China and as the continuing construction boom generates demand for pick-up trucks and other utility vehicles.

Rising demand for passenger cars will be supported by the high rate of population growth and, more particularly, the rate of increase of the working-age population. Large families mean that bigger vehicles including people-carriers and SUVs will continue to perform particularly well. Although women are not legally allowed to drive, the typical Saudi family has two cars and many better-off women employ drivers. The Associated Press reported in December 2006 that almost half the cars in Saudi Arabia are owned by women. In another indicator of the demand from Saudi women for cars, 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.

Cheap fuel will continue to underpin strong demand

The low cost of fuel, which is subsidised, is also a key factor supporting our forecasts for rising demand growth. Fuel subsidies were increased in 2006 following the downturn in the stockmarket. In the event of a substantial slide in oil prices, it is possible that lower revenue would force the government to cut fuel subsidies, which could potentially dampen demand for cars. However, under our core scenario, we expect fiscal surpluses to persist throughout the forecast period. The limited provision of public transport, and the preference of Saudi consumers for taxis rather than buses, will also continue to support demand for passenger cars.

Real GDP per head is forecast to rise by an average of 2.6% over the forecast period as oil-fuelled government spending, coupled with large-scale private investment, underpin strong growth. However, unemployment is unlikely to fall markedly over the forecast period, despite the governments efforts to raise the skill levels of the labour force. Official figures show that unemployment among Saudis actually rose marginally in 2006, to 12% from 11.5% in 2005, despite strong economic growth, which reflects the overwhelming dependence of the private sector on lower-cost expatriate labour.

A rising population of expatriate workers, together with a persistently high number of unemployed Saudi nationals, is likely to support growing demand for second-hand cars. At present, the second-hand market accounts for roughly one in four of all cars sold in the kingdom, but only around 13% of the total automotive market by value, according to the US Commercial Service. The prospect for further rapid growth in consumer finance to buy cars should, however, help to stimulate increasing numbers of car purchases, new and old.

Rising demand for imported cars will also stimulate the growing market in car parts, with some 200 dedicated spares outlets generating an estimated US$2bn worth of business. The sale of counterfeit branded spare parts is reportedly widespread, reflecting the generally weak protection of copyright.

There is potential for more competition in car distribution, as the previous requirement that only Saudi citizens could own distribution networks (for any goods) was removed by the Supreme Economic Council in March 2007. 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.

The accident rate will remain high

The lifespan of cars should gradually increase as the road network is developed further and as paved intercity roads are extended. Nonetheless, 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. Demand for cars with impressive safety features is also likely to be high.

There were an estimated 216,000 car accidents in the kingdom in 2006, according to Hisham al-Sharif, vice-chief executive of the Saudi Arabian Co-operative Insurance Company, quoted in Al-Sharq Al-Awsat, a London-based Arabic daily.

Although there is considerable congestion and pollution in Saudi Arabia's major cities, it appears unlikely that the government will take the politically difficult step of introducing policies aimed at curbing car use during the forecast period. Consumer awareness of environmental issues will increase gradually, which will create some niche market opportunities. For example, Holiday Autos, a car-rental company that has a partnership with Sama Airlines, a Saudi budget airline, is offering Saudi customers a "carbon-offsetting" service for US$1.30 per booking (whereby the fee is invested in energy-efficiency or reforestation projects elsewhere).

Currency peg is an advantage for US exporters

We expect the ongoing maintenance of the fixed peg between the riyal and the US dollar to enable US suppliers to continue to benefit in competition with European and Japanese suppliers for most of the forecast period. In 2007-08, we forecast that the dollar will continue to weaken against the euro, which will make imports from Europe more expensive, although we expect the US currency to appreciate gradually against the euro from 2009. The dollar is forecast to continue depreciating against the yen throughout the forecast period, which will make Japanese cars more expensive for Saudi consumers.

However, the weak dollar should reinforce the trend of rising imports of cheaper models and second-hand cars (a market dominated by Japanese and European cars).

Further free-trade agreements may create new opportunities

The customs tariff rate on motor vehicles (which at 5% is comparatively low) may be lowered slightly over the forecast period, but any reduction is likely to be small. Long-standing proposals to create a free-trade area with the EU, officially scheduled for 2010, would, if implemented, reduce tariffs on imports from Europe, boosting the market share of European firms relative to their US and Japanese counterparts.

In addition, the Gulf Co-operation Council (GCC) is likely to further reduce tariffs on imports of vehicles from countries belonging to Mercosur, a Latin American economic organisation, when the two blocs eventually sign a free-trade agreement (FTA). Mercosur members are Brazil, Argentina, Paraguay, Uruguay and Venezuela. Brazil's vehicle exports have been rising stronglyby 26% in the first half of 2007 according to the country's National Association of Vehicle Manufacturersand the country hopes to export more to the GCC once an FTA is signed. Brazilian media reports have suggested that the GCC has agreed to reduce vehicle tariffs as part of the planned FTA.

There are efforts to develop car-part manufacturing

The government is keen to expand the automotive parts industry further as part of its strategy to develop more industrial production in the kingdom. Car parts are one of the five priority sectors

targeted by the Ministry of Commerce and Industry's "industrial clusters strategy". The state-owned petrochemical giant, Saudi Basic Industries Corporation (SABIC) said in November 2006 that it is conducting a feasibility study with the US-based ExxonMobil Chemicals into the possibility of producing rubber and carbon black in the kingdom, with the aim of providing raw materials to make car tyres. An estimated 5m tyres with a value of SR1.5bn are sold in Saudi Arabia each year, according to Al-Sharq Al-Awsat. The government also said in January 2007 that it is developing plans to expand the production of carbon fibres for use in car parts, using its strong cost advantage in petrochemical feedstocks.

An expansion of the domestic manufacture of automotive parts would also support further growth in vehicle assembly. Current vehicle-assembly firms include the National Automobile Industry, which puts together lorries for the Mercedes-Benz brand, the Al Jomaih Company, which assembles buses for GM, and, most recently, the Arabian Trucks and Cars Manufacturing Company. The latter, a joint venture between Volvo of Sweden and its local agent, Zahid Tractors, started assembly of two types of Volvo truck in 2006 and aims to expand its production from 650 units in 2006 to 1,000 in 2007. In addition, Malaysian Centre, a Saudi company owned by the Al Qabba Group, said in June 2007 that it plans to set up a plant to assemble Proton cars in Saudi Arabia. Proton, a Malaysian firm, is seeing new car sales fall in its domestic market and is therefore particularly keen to expand abroad. According to a report in the UAE-based Khaleej Times in June, Malaysian Centre officials aim to begin producing 2,000 units a year and to expand this to 5,000 units a year within three years. Strong demand for cars is likely to attract other entrants into the vehicle-assembly business over the forecast period.

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