Volkswagen fails to strike UAE deal (page 1 of 2)

After months of tortuous negotiations, by early fall the Abu Dhabi government's push for a broad alliance with Volkswagen appeared to be stuck in neutral. And with each passing day, the chances of the two partners striking a large-scale alliance become more remote.

If the deal does ultimately fall apart, it will leave the German automaker in a more precarious position than ever. Just days after word got out that Abu Dhabi would not be seeking a 10 percent stake in Volkswagen - after the two sides could not agree on a price for the shares - came news that an 18-member VW delegation would be in the UAE to consider possible joint-manufacturing initiatives.

While the specifics were not available in mid-October, the team was to look at the feasibility of setting up an automotive assembly plant in Abu Dhabi. Another option was to base a spare parts facility in the emirate, which would make the most of the local energy and aluminum resources to make the project viable.

"There are many facets to our prospective partnership with Abu Dhabi," said a senior spokesperson with Volkswagen in October. "If one is ruled out, that does not automatically mean that other possible areas of cooperation will be disregarded as well."

The UAE market accounts for an estimated 100,000 new vehicle sales annually, plus another 5,000 or so in the commercial vehicle category. Together, the six Gulf Cooperation Council (GCC) states represent annual new car sales of around 500,000 units.

Abu Dhabi plant nonsense

According to industry analysts, the numbers just don't add up; they say that creating a manufacturing facility in Abu Dhabi simply doesn't make economic sense.

"One needs to realise that, even in a market such as China, some of the biggest names in the automotive industry have yet to report a profit from their operations there," said a top official with a rival German carmaker. "Cheap energy availability cannot be the only basis to take a decision on setting up a plant in Abu Dhabi. That's just not a good enough reason."

Despite some gains in the last two years, especially with its Polo and Golf models, Volkswagen is still a very marginal player in the region. The Middle East probably represents less than two percent of overall new vehicle sales for the company. And the region was never central to Volkswagen's plans in the past.

Rivals like DaimlerChrysler and BMW have built up a strong regional network from their offices in Dubai. Volkswagen, however, has still not set up a direct base here. Until very recently, VW distributors in the region often complained about not getting enough shipments. For the company to suddenly consider a manufacturing base in the UAE is indeed a leap of faith.

There are other reasons, equally compelling, why such a project may not be feasible. Import duties in the GCC markets are a flat five percent, following the creation of the customs union on January 1, 2003.

Given that fact, it generally makes more economic sense to import vehicles and parts to the region. Within the Middle East and North Africa region, some of the world's leading carmakers - including BMW and Nissan - do have assembly facilities in Egypt. But these are meant primarily for the domestic market; and one has to keep in mind that import duties in Egypt are in the three-digit territory, depending on the make.