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Rich with Oil, Gulf Provides Oasis for Carmakers - ASHARQ AL-AWSAT English Archive
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TOKYO/DUBAI (Reuters) – Custom-made Rolls-Royces, stretch Hummers and bright red Maseratis line the entrance to Dubai’s Mall of the Emirates, where the spoils from booming oil prices are feeding a buying frenzy among the wealthy.

It’s the other face of what a five-fold spike in crude prices since 2002 has done for car makers, whose sales of big, gas-thirsty vehicles are tanking in the West.

Far from feeling the pinch at the pump, drivers in the Gulf Arab region have been enjoying booming economies and government-subsidized gasoline as low as 12 cents a liter (55 cents a gallon).

No official statistics are available, but automakers expect the combined car and light trucks market of Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, United Arab Emirates (UAE) — collectively known as the Gulf Cooperation Council (GCC) — to grow around 10 percent to 1.2 million vehicles this year.

While that would only make the market equal in size to South Korea or Australia, automakers are increasingly finding the region a haven from their difficulties elsewhere.

With mature markets in Europe, the United States and Japan shrinking, and even China and India not living up to expectations, Morgan Stanley forecasts global car sales to dip 0.3 percent this year.

“The Gulf market is fairly unique and quite attractive — there’s high growth and a rich mix,” said Terry Johnsson, Middle East managing director for General Motors Corp.

Climbing sales are just one of the region’s many attractions.

Because the region has no local auto-making industry, it places few regulatory restrictions and import tariffs of just 5 percent on vehicles. Carmakers can simply ship cars in without worrying about producing a wide range of models or meeting local parts content requirements imposed by many governments. Emissions and safety standards are also low.

In Saudi Arabia, the Gulf’s biggest car market, consumers like their cars and sport utility vehicles as big as they come, in stark contrast to the United States, where $4 a gallon gas is turning consumers to hybrids and small, fuel-efficient models.

“There’s good demand for big SUVs and pickups that people don’t want in the U.S. or Europe,” said Tim Armstrong, director of emerging auto markets at Global Insight, noting growing supply from the United States and Thailand.

Replacement demand is also high because the scorching heat, sand storms and rough driving lead to shorter vehicle lives. Raising product prices to absorb dearer raw materials is easier here, since demand is so strong, executives say.

SMALL CARS IN DEMAND

The oil-rich region is a big market for super-luxury cars with its wealthy locals, but the fastest growth is occurring at the low end.

As the local mass market gets richer with strong economic growth and expatriates flow in to work on development projects, brisk demand for cheap, small cars is what GM and Hyundai Motor Co are counting on to challenge Japanese automakers, which control roughly 70 percent of the market.

Thanks to the popularity of Chevrolet-badged cars built by Seoul-based GM Daewoo, GM was ranked No.2 in GCC sales behind Toyota Motor Corp in 2007, while Hyundai was fifth behind Nissan Motor Co and Mitsubishi Motors Corp, but ahead of Honda Motor Co.

“What we’ll need for the future is a car in the very small segment, below the Tiida (hatchback),” said Atsuo Kosaka, general manager of Nissan’s Middle East department.

“That’s the fastest-growing segment, especially in Saudi Arabia, where a lot of young people are coming of age to buy their first car.”

JAPANESE BRANDS RULE

Japanese automakers’ grip on the market remains firm.

Car purchase decisions are heavily based on family tradition or reputation spread by word of mouth, meaning automakers with a long, successful history in the region, such as Toyota, Nissan and Mitsubishi, have an advantage.

Japanese vehicle exports to the Middle East surged 38 percent last year to 823,000 vehicles, up for a seventh straight year. Mitsubishi Motors now sells more vehicles in the region than it does in the United States, the world’s biggest market.

Reliable products are a must, but solid after-sales servicing is equally key to winning customers over. Breakdowns are not infrequent, with temperatures at 50 degrees (122F) in the summer.

“In the Middle East, air-conditioning is a safety equipment, not a luxury,” said Katsuya Onoda, general manager of Mitsubishi Motors’ Middle East & Africa Department.

Safety is also the reason why SUVs such as Toyota’s Land Cruiser and Mitsubishi’s Pajero do so well.

“I like being up high so I can see what the idiot drivers are up to and plan accordingly,” said Georgia Lewis, an Australian ex-pat residing in the UAE since 2006.

“I’d never have a Pajero back in Sydney but here with cheap fuel, bad drivers and the deserts, it makes more sense.”

Still, the Gulf isn’t without its hazards.

Inflation is driving up the cost of living, outstripping salaries, while roads are already congested. Meanwhile, big pickups and SUVs being dumped from developed markets have ignited a price war that is eating into otherwise healthy profit margins.

And for Japanese executives who have lived through the bubble and burst of their own economy in the 1980s and 90s, the conspicuous spending is somewhat unsettling.

“We’re told that projects are in place to keep the economy going for at least five years,” said Mitsubishi’s Onoda. “But it’s hard not to wonder whether this will really continue.”

Asharq Al-Awsat

Asharq Al-Awsat

Asharq Al-Awsat is the world’s premier pan-Arab daily newspaper, printed simultaneously each day on four continents in 14 cities. Launched in London in 1978, Asharq Al-Awsat has established itself as the decisive publication on pan-Arab and international affairs, offering its readers in-depth analysis and exclusive editorials, as well as the most comprehensive coverage of the entire Arab world.

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