Middle East car industry to grow amid global recession

Car production in the Middle East will outpace most of the world by next year as the global industry contracts, a report on the sector's outlook has found.

Surprisingly, the report by the international research firm, Frost and Sullivan, also found that compact cars would be the fastest-growing segment in the UAE and Saudi Arabia next year, overtaking the traditional market for four-wheel-drive vehicles, while there also would be a shift towards environmentally friendly, or green cars.

Middle East car production would see a compound annual growth rate of 3.7 per cent between 2007 and next year, second only to Russia at 5.6 per cent.

The bulk of regional production is in Iran and Egypt , but Jose Paul, a consulting manager at Frost and Sullivan, expects this to change.

“The Middle East automotive market will continue to be import-dependent in the medium term,” said Mr. Paul. “However, in the long run, the industry is likely to see local assembly of cars, and further on to increasing local content. This is the ideal way forward.”

The shift would not happen immediately, he said, as the number of buyers shrank sharply in Europe and North America and opened up capacity in existing plants.

Mr. Paul said that while it might not be cheaper for established vehicle manufacturers to begin large-scale production in the Middle East , there were opportunities for assembly plants and new entrants in the market.

“If someone is looking at the market in a completely new way, like the Chinese and Malaysian car companies, it makes sense for them to look at an assembly plant in the Middle East ,” he said.

Robert Ziegler, the vice president of the consultancy firm AT Kearney in Dubai , said it would make sense for some major car makers to establish assembly plants in the region because non-finished goods were imported duty free into the GCC. Another factor would be a country with low energy costs and proximity to a growing population. Under those criteria, Saudi Arabia and the UAE could fit the profile, he said.

“Those are the ones that have the infrastructure realistically to take on an assembly plant.” However, Ashraf Tamim, the marketing manager for Mercedes-Benz in the Middle East and Levant , said low import duties in the GCC and other countries in the region made it more lucrative to produce the cars elsewhere and ship them in.

“In terms of production, we don't have any plans for our region to have any production here,” Mr Tamim said. “We have production in Cairo and India , and we have production in South Africa . These are the markets that have the highest duties on imports.”

He said the temporary nature of the workforce was also a deterrent to establishing a car manufacturing facility in the region. “You're investing in people and training and everything, and we're such a transient labour force here.”

As the numbers of car buyers in other markets shrink, existing factories would be able to meet overall supply, said Chris Buxton, the regional director at Bentley for the Middle East, Africa and India.

“The biggest factor is the expertise we have in our employees,” he said. “There is a level of experience back at the factory, which is difficult to duplicate. And there is enough capacity to satisfy world demand at the moment.”

As for car sales, Mr Paul said there would be a surge in regional demand for compact cars.

“The segmentation is not expected to change significantly by 2010,” he said. “However, small cars are expected to increase in market share at a regional level. The popularity of small cars is expected to increase in some of the key growth markets like the UAE and Saudi Arabia.”

Mr. Tamim said Mercedes-Benz had already seen this trend emerging. “The demographics is part of the reason, the high cost of living is another part. This makes the smaller cars more attractive.”

This shift, however, seems at odds with the other growth market for the region, which is environmentally friendly, though initially more expensive, green cars.

Mr. Paul said he was confident that hybrid and electric vehicles would become popular in the Middle East.

“The pilot project of hybrid taxis in Dubai and launch of hybrid cars by the likes of Mercedes-Benz in the Middle East is a clear sign of the same. Also, specific future energy projects like Masdar City will help in increasing awareness among end-users,” he said.

“But the dynamics of this market is the most different in the Middle East than any other region. Low fuel prices and very low awareness about environmental issues among car buyers are key deterrents to the growth of the clean-cars market.”

Mr. Tamim said as more people continued to move to the UAE from countries such as the US and the UK , they would bring environmentally conscious attitudes and buying patterns with them. “In the next couple of years, there will be a shift in terms of mindset – not because gas is cheaper, but a conscious mindset change.”

Mr. Paul said he believed the UAE's initiatives in the coming years would set the bar for the region. “The UAE will be a trendsetter in the market and GCC countries are expected to follow. This is because of the proactiveness of the key agencies and the demographic profile of the population here.”

Source: www.thenational.ae