Posted on: Thursday 21 June, 2012 4:53
|Saudi car sector to accelerate
Strong fundamentals coupled with a rapidly growing young population made Saudi Arabia the largest importer of vehicles and automotive parts in the Middle East in 2011, with the pace seen accelerating in the medium term, the National Commercial Bank said in its report on the Kingdom's automotive sector released Wednesday, a copy of which was sent to the Saudi Gazette.
It noted that rising income levels, greater government spending and increased liquidity in the banking sector are boosting the demand for automobiles and improving the underlying confidence in the market.
The expanding young demographic structure are also boosting demand for automotive vehicles; particularly small, fuel-efficient passenger cars.
Against the backdrop, NCB study forecast that the Saudi automobile sector is expected to resume expansion in the medium term. "Its growth will be driven by a growing population and rising income per capita, forecasted to reach 31 million people and SR87,000, respectively, by 2015. Thus, total vehicle sales are projected to increase at a 4-year CAGR of 6.7 percent over the forecast period to reach 884,000, amounting to a market value of SR77.2 billion."
Strong demand is also expected across all three automotive segments. Growth of small passenger cars is anticipated to be more robust moving forward as the youth population cohort continues to expand and rising inflation levels result in a more price sensitive consumers.
However, brand consciousness in the Kingdom kept the premium segment afloat during the crisis, and will most likely ensure the strong performance of the SUVs in coming years. Meanwhile, commercial vehicle sales are expected to continue booming due to the increased demand for trucks and buses from the expanding nonoil sector. The Kingdom's automotive imports are forecast to grow at a CAGR of 9.6 percent over the next 4 years, reaching over one million vehicles by 2015. The ratio of private to commercial vehicles is expected to shift slightly further in the favor of commercial vehicles following the developments in commercial demand mentioned above.
Volvo signed a SR200 million deal with Al-Ayuni Investment & Contracting and Zahid Tractor's commercial vehicles division to supply roughly 510 trucks to Saudi Arabia.
Meanwhile, the Autocare & Transport Arabia 2010 trade show resulted in a number of deals being forged with Chinese brands targeting the Saudi commercial vehicle segment. The competitive pricing of their vehicles will ensure that China expands its presence in Saudi Arabia.
Commercial banks financing of automotive imports is expected to accelerate in support of rising supply levels. New and settled letters of credit are expected to increase at a 4 year CAGR of 6.9 percent and 5.6 percent, respectively, to reach SR34.1 billion and SR45.8 billion.
The study assumed that if all sales of private vehicles are transacted via borrowing, forecasting the share of private vehicles sold for individual use will ultimately be equivalent to the size of the greater leasing market. The volume of individual cars sold is expected to reach slightly over 683,000 by 2015, it noted.
In terms of value, the full potential of the autolease market will grow at a 4 year CAGR of 19.8 percent to reach SR41.4 billion.
Assuming that the share of vehicles leased (versus those financed or paid for in cash) remains constant throughout the forecast period at the historical average of 20.29 percent of total passenger cars, the projected value of the actual auto-lease market will be SR9.7 billion in 2015, the NCB study pointed out.
Another factor that will continue to contribute to the expansion of the auto-lease industry is the set of royal decrees announced by King Abdullah, Custodian of the Two Holy Mosques, aimed at providing financial provisions to Saudi citizens.These provisions included unemployment benefits, minimum wage of SR3,000 in the public sector, and inclusion of the cost of living allowance in the salaries of the public sector employees.
On the other hand, the effect of the 2-month salary bonus for employees in the public sector, and some in the private sector whose companies were motivated by the royal decrees, has faded out.
The recurrent measures will not only raise income levels in all brackets, but will also increase the size of the Kingdom's bankable population. The rise in purchasing power of consumers will have an impact on the retail sector, particularly the leasing of automobiles. Although domestic banks' market share of auto financing is likely to decelerate in the short term, their portfolio of cars loans is expected to increase in absolute terms.
Consumer credit facilities for the purchase of cars and equipment is projected to rise to SR56.3 billion by 2013. The expected rise is due to the aggressive strategies aimed at broadening marketing campaigns to cover a wider-range of durable goods.
Although the future of the Saudi auto industry is bright, auto dealers still face a number of challenges, NCB study noted.
Exchange rate movements may have a direct negative impact on the dealers' margins and therefore the overall market value. For example, an appreciation of the yen would increase the costs of Japanese brands and put upward pressure on end-user prices.
However, auto dealers attempt to offset this effect by (1) multi-sourcing - importing vehicles from dollar based countries; (2) hedging with banks; and (3) sharing the burden with the brand's mother corporation.
The automotive sector is expected to resume expansion in the medium term. Total vehicle sales are projected to increase by 6.7 percent annually to reach 884,271 units in 2015, valued at SR77.2 billion.
Despite the slight slump of 2011, strong growth has been witnessed across all three automotive segments over the past 2 years: demand for small passenger cars, SUVs and commercial vehicles inclined by 30 percent, 4 percent and 39.8 percent, respectively.
The growth of the passenger segment is expected to continue over the forecast period as the youth demographic widens. Shifting preferences of this population, alongside rising inflationary pressures, will result in greater price sensitivity among the new youth consumers.
Meanwhile, government investments in large infrastructure projects and the growth of the credit market will sustain auto firms' and leasing companies' confidence in the commercial vehicle segment. Import volume is estimated to have reached 704,000 vehicles in 2011, at a market value of SR46.7 billion.
Imports are forecast to grow at a CAGR of 9.6 percent over the next 4 years, reaching roughly one million vehicles by 2015. The ratio of private to commercial vehicles is expected to shift slightly further in the favor of commercial vehicles following the developments in private sector demand.
Commercial banks financing of automotive imports is expected to accelerate in response to rising demand levels. New and settled letters of credit are expected to increase at a 4-year CAGR of 6.9 percent and 5.6 percent, respectively, to reach SR34.1 billion and SR44.7 billion.
The actual value of the auto-lease market in 2011 was SR7.9 billion.
Commercial banks and independent financing companies face heavy competition from dominating captive firms, UIS and ACIT. Captives' control of the supply chain enables them to negotiate on pricing and capture consumers at the point of sale.
The auto lease market is projected to reach roughly SR9.7 billion in 2015 as the financial provisions of the recent royal decrees will continue to supplement the growth of private consumption.
Potential long-term growth prospects for the automotive sector will be influenced by the long awaited lift of the ban on female drivers. However, a great deal of debate surrounds female drivers, particularly as logistical and safety concerns may deter this market's expansion.
In recent years, volatility in exchange markets has been a key challenge for auto-dealers. Exchange rate movements may cause upward pressure on end-user prices of certain brands versus others, and generally require dealers to implement offsetting mechanisms, including squeezed margins.