Kingdom’s auto sales heading toward critical mass of 1m units

Aggregate 2014 auto sales in the Saudi market are expected to reach 815,000 units, which represents a rate of growth of 5.4 percent for the fourth quarter of 2014 and 19 percent year on year, according to research by Business Monitor International. There are of course many other statistics and predictions about the Saudi market but BMI figures seem the most credible in view of other speculative figures and lack of official government figures.
At this rate the Saudi auto market is likely to hit the critical mass of one million units of sales sometime in 2016. This is backed by current Saudi GDP growth of 4.3 percent this year and 3.6 percent next year. Most researchers predict Saudi Arabia's economic performance remaining strong heading into 2015, owing to elevated domestic demand and accelerating progress on the country's substantial infrastructure projects.
Saudi Arabia is now the 20th largest car market in the world and the largest in the Middle East for new car registrations. While demand has historically fixated on high-end models, the Saudi market is experiencing a growing demand for smaller, lower priced cars resulting from a burgeoning middle class.
Saudi Arabia is currently the largest importer of vehicles and auto parts in the Middle East, accounting for nearly 40 percent of all vehicle sales in the region. Driving this demand for automobiles is the Kingdom’s growing youth population, rising levels of disposable income, and greater public and private sector investment.

Incentives to investors
The Saudi Government aims to meet this demand by attracting original equipment manufacturers (OEMs) to open facilities in the country while simultaneously developing an automotive industry of its own. The Saudi government aims to foster a pro-business tax and regulatory environment in order to attract foreign investment.
Saudi officials confirm government’s commitment to liberalization of the sector by allowing foreign operators to own 60 percent of new projects and to establish local distribution agencies. The Saudi government is also developing auto-supporting industries such as steel, plastics, aluminum, copper and other alloys. Foreign manufacturers can also make use of low priced utilities, lower labor costs, available raw materials and plentiful land.
There are Saudi government agencies involved in supporting the automotive sector, including the Saudi Arabian General Investment Authority (SAGIA) and the Saudi Industrial Property Authority. There is also the National Industrial Clusters Development Program (NICDP) which aims to leverage Saudi Arabia’s considerable energy, petrochemicals and mineral resources to attract foreign investors to the automotive sector. Saudi officials believe they have a globally competitive advantage in the auto sector.
The Automotive Cluster would allow Saudi Arabia to produce cars and parts domestically, export manufactured parts to the Middle East, North Africa, Europe and Asia and stimulate the growth of local components suppliers. Automotive Cluster development is located in Yanbu Industrial City, established in 1975 on the Red Sea approximately 300 kilometers north of Jeddah. The city’s proximity to major international trade routes positions it as a strategic trading post for vehicle and parts manufacturers. Saudi membership in the Gulf Cooperation Council (GCC) allows manufacturers to re-export vehicles and auto parts to gulf countries tariff free.
Jaguar Land Rover is reported to have signed a letter of intent with NICDP to build a manufacturing facility at Yanbu with a potential to produce up to 50,000 vehicles a year by 2017. There is also an Isuzu assembly facility in Dammam Industrial City II. Isuzu produced 600 units with a potential to increase production to 25,000 trucks by 2017, of which 40 percent will be exported to countries of the region.
Other involved manufacturers include Daimler AG in cooperation with E. A. Juffali & Brothers who jointly operate a truck assembly facility in Jeddah.
More incentive for car companies is provided by Saudi Basic Industries Corp. (SABIC) which is cooperating with specialist companies to develop a carbon-fiber plant.
Toyota, followed by Hyundai, dominates the Saudi market. It is reported that the latest project in the pipeline is a joint Saudi-South Korean plan to build low-cost vehicles for the local market.

Open market
Despite Saudi efforts to jump-start a local auto industry, the Saudi market remains relatively free of barriers. This has been the case since American companies dominated the market in the 1960s and 1970s. In the 1980s Japanese companies moved in and Toyota now holds a remarkable 40 percent market share.
This wave was followed by the South Koreans, mainly Hyundai and its sister company Kia, both having a reputation of value for money. They captured market shares and are now thought to be the second largest exporters of cars and trucks to the Saudi market.
The third wave to come to the Saudi market has been by Chinese companies which compete on price are gaining substantially rising sales. Middle class, expats and new buyers find Chinese cars good value especially as second-hand cars over five years old are banned from being imported.
Most prominent of the Chinese company is Geely which selected an experienced dealer, Haji Hussein & Alireza Group. The group has also secured the dealership of commercial vehicles’ company Maxus which offers a 15-seate passenger van and a commercial van, both running on 2.5 liter diesel turbocharged engines with direct injection systems.
Another Chinese company is Great Wall which is distributed by al-Jedaie Motors. The leading company, Geely, is thought to be aiming for a two percent share of the market this year.
It is predicted that the next wave of companies would be joint ventures with Saudi companies to produce cars locally. There is one such venture to build low-cost cars in Saudi Arabia in cooperation with the Koreans. Companies that take advantage of the benefits of joint-ventures in Saudi Arabia stand to gain grounds in the market in the long run. They would benefit from lower costs, easy access to the regional markets and higher demand by Saudi consumers who are increasingly price-sensitive and happy to support a local brand that provides immediate access to spare-parts and service.