Gulf 4 x 4 wars

Spearheading the auto industry's regional growth is one category of vehicle - the sports utility vehicle (SUV) or four-wheel drive (4WD).

Almost all major carmakers have launched or are about to launch 4WD vehicles in the Gulf market. The year began with German automaker BMW's introduction of the X-5, a luxury model. The X-5's regional success has caught even the manufacturers by surprise. The first 500 units shipped to the Gulf were sold within just a few days. There are now waiting lists all over the region for the X-5, and BMW's German factories are unable to produce enough cars to meet the demand. BMW expects that the X-5 could soon account for a third of its regional sales and hopes to sell over 1,700 units in the region this year, putting it on a par with its perennial rival Mercedes Benz.

Nissan, Mitsubishi and Cadillac have all followed BMW in launching new or upgraded models this year. Several other conventional passenger carmakers, such as Porsche and Volvo, are also preparing to enter the lucrative 4WD segment. Unlike in Europe or North America, where the 4WD craze began barely five years ago, this segment has always been strong in the Gulf as four-wheel-drive vehicles are particularly suited to the region's desert terrain and hot temperatures.

"The first 4WD came to this market nearly 60 years ago," says Michel Ayat, the general manager of Nissan's main dealer in the Gulf, "and soon became the most popular mode of transport because it was conceived for the region, which did not have paved roads and where people have big families. For several years, the 4WD dominated the scene."

Although increasing prosperity in the Gulf has seen sales of passenger cars increase - according to the US Department of Commerce, 60,000 cars a year are sold in the UAE alone - the 4WD dominates the market. Four-wheel-drive vehicles account for over a quarter of all car sales in the region - nearly three times as much as in Europe or the United States. Last year, 4WD sales in the Gulf totaled over 110,000 units, with the Saudi Arabia and the United Arab Emirates being the two largest markets, accounting for over 70 percent of the market between them. The UAE is the largest 4WD market outside the rugged territory of Australia and has one of the largest ratios of state-of-the-art automobiles to population size in the world.

Global challengers. Japanese manufacturers currently dominate the Gulf 4WD market. Toyota alone has 40 percent of the market, selling 40,000 units in the region last year. One UAE Toyota dealer alone sells 10,000 4WDs a year. Nissan and Mitsubishi hold another 30 percent. The rest of the market is evenly split between American and European manufacturers. American carmakers, led by General Motors, have 10 percent of the UAE automobile market share and the volume of US-made 4WDs imported into the region is growing.

Toyota and Nissan dominate all categories of four-wheel-drive vehicles - large, medium and compact, as defined by engine capacity. The two Japanese carmakers' combined sales make up over 60 percent of Gulf 4WD sales in each of these categories. Toyota and Nissan have both launched models that have been very successful in the region. Toyota's Landcruiser is the regional bestseller in its category. Nissan's winning 4WD model is the Patrol. Both vehicles are big, with powerful engines, sufficient ground clearance, good handling and off-road capability - just right for the region where the families are large and powerful engines are needed to tackle the largely unpaved roads.

A decade ago, the competition between Nissan and Toyota was much keener. Nissan has since been hard hit by its domestic troubles - the company almost went bankrupt three years ago and had to be bailed out by the French carmaker Renault. In the mid-1990s, Nissan, with its Patrol model, was the market leader in the Gulf 4WD market, but management instability and financial difficulties meant that Nissan was slow to react to market changes. The Japanese carmaker did not introduce any new models and its marketing and advertising campaigns failed to attract customers. As other manufacturers launched more powerful models, Nissan lost ground rapidly - most of it to its rival Toyota.

Learning from its mistakes, Nissan launched a new version of the Patrol with a much more powerful engine. Nissan has also boosted its presence across all the segments of the 4WD market by introducing new large, medium and compact models. Nissan hopes it will now be in a position to increase its market share. The company sold 20,000 4WDs in the Gulf last year. "We feel very confident about the new Patrol and the other launches that are following," says Michel Ayat of Nissan.

Nissan will soon launch the X-Trail model in the Gulf. The car, already launched in Japan, has been very well received and Nissan hopes to reproduce its success in the Gulf. "We have a complete range of new or recent launches: Patrol, Pathfinder, Terrano and X-Trail," says Ayat. Nissan says it is also trying to improve its marketing efforts, distribution network and advertising. "These steps, we hope, will help us climb back to the number one spot," he adds.

The battle between Nissan and Toyota is not the only one going on in the market. In fact, competition is most intense at the very top end of the 4WD market. Germany's Mercedes, Britain's Range Rover and Japan's Lexus dominated the high end of the 4WD market until BMW launched the X-5. Attracted by the fat margins of the luxury 4WD category - especially in a region where customers are willing to pay a premium for status-enhancing extras - several other carmakers entered this segment. Porsche is currently developing its first 4WD, and Volvo will launch a 4WD by the end of the year.

The high end. BMW's success has rattled the players in the high-end segment. For its part, Mercedes is underplaying the success of the X-5, saying that its own sales have been growing. Mercedes has also benefited from the weak euro, which has allowed the company to drop the price of its ML55 by 20 percent over the last three years. Today, at 140,000 dirhams ($40,000), the ML55 is thought to be very competitively priced - an important factor in the highly price-conscious markets of the Gulf. For prospective Gulf car buyers, price is much more important than quality in purchasing decisions.

Mercedes says that it is confident about its prospects in the region. "The ML55 itself has been accepted but it takes time to build up the brand image," explains Chari Lazaridis of Mercedes Benz. "Three years ago, we were new players in this segment and saw that the market was dominated by the Japanese. Even though we have been increasing our sales each year, we feel we still haven't reached our peak."

In the long run, Mercedes can also hope to benefit from its alliance with Mitsubishi, in which it has a 40 percent stake. Mitsubishi's star offering, the compact Pajero, will help the German company cover all segments of the market. The two companies are also discussing sharing platforms and technology as well as joint marketing strategies, which could provide cost savings and other benefits to Mercedes, helping steel the company for its battle with BMW.

Another development in the segment has been the introduction of compact 4WD models with engine capacities of less than three liters. The Japanese pioneered this market a decade ago with the introduction of the Toyota RAV4 and Prado, the Nissan Pathfinder and the Mitsubishi Pajero.

"This is a new market," says Mitsubishi's Mark Llewellyn-Jones. "It has attracted not only male drivers but also female drivers. Women don't use the vehicle to go deep into the sands on a safari or to push the vehicle to its limits. They buy it for the leisure drive during the weekend, to drop the children off at school and for their shopping. And they feel safer in a bigger vehicle than a normal car. With a high population of expatriates, this is a very lucrative market."

According to Robert Bailey-McEwan of BMW, "The trend in the 4x4 market is now towards lighter and smaller cars." Four-wheel-drive vehicles consistently sell well, even during the troubled years of 1998-2000, when automobile sales in the region fell sharply after oil prices dipped below the $10 mark. Now that oil prices have stabilized, 4WDs have once again become the catalyst for growth in the Gulf car market with sales rising as much as 20 percent. This is particularly significant in the light of the fact that global car sales are expected to drop by as much as 20 percent from the highs of 2000.

Good times. "The feel-good factor brought on by steady oil prices, relatively buoyant economies, large government orders and the spate of new models have all helped the four-wheel-drive segment," says a senior manager with a US automaker. "Saudi Aramco has come out with a major tender, and obviously such developments will have a huge beneficial impact - all the way up to the second quarter of next year."

There are two spurs to the current growth in the Gulf 4WD market: the region's growing population and purchasing power, and the decreasing market share of regular passenger cars. "There is a definite migration from the passenger cars to the 4WDs," says an auto expert. "It is not towards the larger 4WDs, but to the smaller ones like the Rav4, Range Rover or X-5. Carmakers must take note that while their 4WD sales may be growing, it is often at the expense of their own passenger cars."

While the Gulf 4WD market seems to be growing steadily, it has not been able to absorb the large number of new players. As a result, competition is fierce and many dealers have been forced to offer huge discounts, interest-free financing and free insurance to attract buyers. "It has been the fastest growing segment in the automobile industry," says a Japanese automobile executive, "and has come to our aid even during the relatively barren years of 1999 and 2000. But when you have certain manufacturers and dealers shaving sticker prices by 20 percent and more to raise market share, one has to wonder where all this is leading to."

The competition for customers in the 4WD market is also fiercer because traditional luxury carmakers - once reluctant to be associated with the utilitarian four-wheel-drive vehicles - have joined the fray. According to one Japanese automaker, "The market is really competitive now. In the past, there were few carmakers in this market. Now, even the traditional luxury car manufacturers like Mercedes and BMW have started manufacturing 4WDs. BMW, for instance, has until recently classified their 4WDs as commercial vehicles or trucks. Now the premium segment is a class by itself."

In 2002, even more new players are set to enter the market. Increasing supply will lead to plunging margins and even more desperate sellers. Carmakers will be forced to offer more and more frills and special deals to lure customers. In the increasingly competitive Gulf 4WD market, the buyer is well and truly in the driver's seat.