Hidden realities of the auto boom

By RIFFAT AL-AHMADI DUBAI
Zero percent financing. In the United States, the world's single largest auto market, that's the explanation for the surge in new and used car sales in the past few months. While the numbers from America look good, there is clearly a catch for dealers: offering interest-free loans may stimulate sales, but it also cuts into the bottom line. Across the world, it's the same story. The industry appears robust, yet profits are slumping.

In the Gulf's normally high-margin auto market, financing deals don't do much to boost sales. Instead, Gulf car buyers want the extras thrown in for free: power windows, leather seats, global positioning, CD players. And that's just for starters.

Oil wealth. Regional auto dealers, worried about the impact of lower oil prices and post-September 11th jitters, have gotten the message. "While promotions may be good for buyers, it is certainly not for the dealer," says a senior marketing manager at a leading UAE dealership for a Japanese make. "Personally, I think this is totally unnecessary. The demand is there and there is enough business for everyone."

In the past few months, profit margins on new vehicle sales in the Gulf have dipped well below five percent. (Ten percent is generally considered a "comfortable" margin by regional dealers.) Sticker prices, too, have fallen in recent years. Factor in the cost of promotions, and margins begin to look very thin indeed.

"New car prices have come down appreciably in the last three or four years," points out the UAE marketing manager. "In most cases, any move to have a higher mark-up has backfired. Add to that the higher operating costs and showroom rentals, and suddenly you have a situation where being an automobile dealership is not all that great."

Gulf markets have been hurt by these various tactics to push up the numbers. "In any ostensibly 'good' year, you have instances of dealers having something on every second quarter," says the marketing manager. "And it's just not good for the auto industry here."

Car dealers in the Gulf are increasingly losing profits as they struggle to move inventory from the showroom floor. Recently, one prominent German luxury mark slashed prices for its top-of-the-line model from $60,000 to just under $40,000. In another promotion, this time for a popular Japanese model, the dealership is offering a flat insurance rate of just under four percent against the standard industry average of six to eight percent. This package comes through against the backdrop of persistent reports that insurers are not willing to underwrite the particular model because of a high incidence of accidents.

"You are dead if you do not have any sort of promotion for the brands you represent," says a marketing manager for a prominent Kuwaiti dealership of a German make. "The consumer sees you as a pariah."

Across the Gulf, there are real concerns that the robust demand for new models that was so apparent in the first half of 2001 has finally tapered off and that sales will drop in 2002. The last quarter of 2001 saw sales stalling, a trend that has been carried into the first three months of this year.

"The best result this year would be if overall Gulf sales remain level to that of last year," a senior manager for DaimlerChrysler's Middle East operations said in mid-February. "But in the last few weeks, we have noticed a definite drop in consumer confidence in key markets like Saudi Arabia and Kuwait." In 2001, the Gulf markets accounted for about 500,000 unit sales, with Saudi Arabia, not surprisingly, taking up the major share with 250,000 units. The UAE accounted for another 80,000 sales.

Fleet sales have come down hard, partially in response to reduced tourist traffic in the region since September 11th. In a good year, fleet sales account for up to 40 percent of overall sales in the sector. "I have not seen the fleet operators hitting the markets as they usually do at this time of the year," says the marketing manager for the Japanese car dealer in the Gulf. "Many have rescinded on placed orders. We estimate that we may have to sit out the year without the usual heavy backup from fleet sales."

Clearly, automobiles is not the only sector feeling the pinch. Overall retail sentiments have taken a jolt from factors such as lower oil revenues, shrinking job prospects for expatriates and general concerns about the short- and medium-term future of the region. As a result, Gulf car owners are holding onto their older models for longer than they - or the manufacturers and dealerships - would like.

For their part, some American carmakers say that they have detected a new undercurrent of resentment against US goods in certain markets. While not significant in overall terms, this trend is nevertheless worrying. "The anti-American sentiment has not been overt, but we have had reports about its rise from our local dealers based on their own market feedback," says a manager with a major US automaker.

A senior manager at a Japanese brand insists that, politics aside, the Americans simply do not have a strong presence in the regional market. "In the Middle East, it is certainly not the US makes that are in control of the industry. Japanese brands easily make up 50 percent or more of each of the individual Gulf markets. And even with tight market conditions, Japanese manufacturers are in line to increase their market share on the back of strong model offerings and a very good yen-dollar situation."

Japanese, American, German or Korean - all of the world's automakers face real challenges in the Gulf. And there's no road map for success. In their bid to increase sales, one option is promotions and lower prices. But if profits matter most, then Gulf consumers may find, sooner rather than later, that regional car dealers are ready to drive a very hard bargain.