An economical analysis of the car market in Saudi Arabia - Essay Example

An Economical Analysis of the Car Market in Saudi Arabia Introduction The car industry in Saudi Arabia consists of over 300 firms that manufacture accessories and stoking parts. The 2009 financial crises affected the industry. The rising demands of the new automobiles are underpinned by economic growth and fluctuating oil prices. The fall in inflation has supported the increased demand. The political stability in Saudi Arabia has been cited as a positive factor to the growth of the automobile sector. The region has been affected by the Arab uprising causing many economies to strain. The move by the government of Saudi Arabia to inject US$37 billion into the economic social initiatives is likely to improve the consumer purchasing power (Hutchison and Davies 42). This has increased the sales and revenues in the motor vehicle sector. Most retailers and importers in the country have started dealership expansion programs. This paper gives an economic analysis of the car market in Saudi Arabia. The car market in the country has been bent towards high-end models. However, there is a propensity towards purchases in the lower-priced family cars. The cars to small and their running cost are economical. The demand for family cars is expected to rise with increase in population (IMF, 2008). In 2010, the market for ultra-luxury cars grew by 39 percent. Porsche and Lexus have opened high-end servicing centers in anticipation for rising demand. Commercial vehicles are responsible for 20 percent of the demand for auto mobile products in Saudi Arabia. The increasing spending in government infrastructure and the demand created by visiting pilgrims continues to be a major boost in the sector. Literature review Saudi Arabia remains the largest importer of vehicles in Middle East (Hutchison and Davies 42). Increased liquidity from banking sector and rising incomes has enhanced the purchasing power of the potential clients (Ahmed, 103). The market confidence has been rising steadily (Aljarallah, 63). The population in the kingdom has been growing rapidly (Abushakra, 19). A growing number of citizens are attracted to fuel-efficient vehicles (Hakes, 51). The population growth has resulted to an expansion of demographic structure. This has affected the car industry positively (IMF, 2008). In 2009, about 600,000 units were purchased. This represented a sales rise of 1 percent. However, the demand for vehicles grew by 12 percent in the following year (Ahmed, 103). The flood situation in Thailand and the tsunami in Japan affected the supply chains in the Saudi market (Hutchison and Davies 42). This resulted to 0.7 percent decline. The growth in demand for private vehicles was inversely proportional to the commercial vehicles in 2011 (IMF, 2008). The automobile industry is dominated by Japanese brands (Abushakra, 19). This accounts for over 60 percent. Increased competition from Korean brands is making the automobile industry favorable to the customers (Hutchison and Davies 42). The Korean brands are low priced and offer improved quality (Abushakra, 19). The trends in the automobile market share are changing as new market entrants gain momentum in the local market (Hutchison and Davies 42). The young generation is getting draw to small cars causing a shift of preference. The expansion in the private sector is responsible for the surge in demand for small cars (Hakes, 51). The automotive sector in the Saudi market is expected to grow by about 7 percent in the next two years. The imports are might grow to over one million cars (IMF, 2008). The financial support for the importation of cars is on the increase as banks offer increased credit to support supply levels (Hakes, 51). The oil revenues continue to support the fiscal position of the government. Increased spending on the infrastructure is causing the demand for vehicles to remain high (Ahmed, 103). The modernizing of transport facilities in the kingdom will result in sustainable development (Hutchison and Davies 42). The commercial use of fleet vehicles plays a significant role in the stimulation of automotive sector (Aljarallah, 63). Saudi Arabian government has engaged the manufacturers competitively (IMF, 2008). The age group between 15 -30 forms 28 percent of the population (Abushakra, 19). The emergent youth segment has caused manufacturers to rethink the sales strategies (Hutchison and Davies 42). Youth friend vehicles and sports cars are set to increase brand variety (Hakes, 51). New markets entrants from Malaysia and China have are introducing youthful and cost effective vehicle products. The accession to world trade organization is expected to redefine the market structure in Saudi Arabia. Vehicle market is set to become liberal. The foreign competitors are likely to set local distribution centers. Economic framework Saudi Arabia imports vehicles into the domestic market. However, the country imports spare parts and uses assembly plants to develop cars for re-export to the GCC countries (IMF, 2008). Toyota controls about 40 percent of the market share followed by 9 percent from Nissan. European car market is responsible for 18 percent to the motor vehicles in the kingdom. Toyota offers competitive prices and a credible supply chain and network. This has given the brand a high reputation in the domestic market (Hutchison and Davies 42). New entrants are offering value-added services thereby giving Toyota stiff competition (Ahmed, 103). The motor vehicle sector in Saudi is classified into commercial, passenger and SUV vehicles (Hakes, 51). There has been an average increase in the sales for passenger cars (Hutchison and Davies 42). This has been attributed to a shift of preferences by the youthful market segment. Competition from Korean products has pushed the demand for passenger vehicles high (IMF, 2008). Hyundai has altered the designs for automobiles and increased the resale value. This has made Korean carmakers competitive and successful in the Saudi vehicle market. The commercial vehicles are experienced increased sales (Hakes, 51). Banks in the kingdom have been increasing credit to equipment and cars by over 10 percent. The government has attempted to protect the sector from external competition. The government is using the tax structure and regulation to ensure that income taxes and sales lead to economic growth (Parker, 59). This includes coming up with favorable policies that boost trade within the GCC countries. Saudi kingdom believes that increase local production is likely to favor the economy and domestic market (Ahmed, 103). Saudi market tends to over depend on the foreign manufacturers in terms of design and style (Parker, 59). This means that the profitability of the sector is dictated by external forces (Ahmed, 103). The luxury brands seem to have stagnated or declined because of global economic uncertainty. The two motor vehicle assembly plants are likely to make the domestic pricing competitive (Abushakra, 19). The Saudi government is not maximizing the opportunities offered by the gulf cooperation council market (Hakes, 51). The common market offers liberal market that can attract substantial capital flow in motor vehicle sector. The government has been investing in robust macro-economic measures. This entails high per capita income. Saudi has relatively low inflation and high standards of living (Parker, 59). This has raised the business confidence and increased disposable income. This favors the automotive sector (Abushakra, 19). The motor vehicle sector has been benefiting from increased demand for components and vehicles (Ahmed, 103). This has been attributed to the scarcity of the locally manufactured vehicles. The demand is expected to rise on the coming decade (IMF, 2008). The kingdom has invested in logistic support systems (Hakes, 51). This is coupled by excellent infrastructure. The oil production in the kingdom directly boosted the motor vehicle industry (Parker, 59). The government has been compelled to develop structures that favor the status of the oil production and export. The infrastructure has facilitated the re-export of motor vehicles in GCC market segments (Ahmed, 103). The micro economic factors that affect the industry include the global economic crunch, natural calamities that impact the imports directly and political stability among the trading partners (Abushakra, 19). Economic Analysis The automobile industry is Saudi is liberal. However, the influence of the Japanese brands is almost oligopoly to the market structure. This has been associated with the factors of production in the sector. The entry of robust foreign competitors is likely to further weaken the domestic production (Ahmed, 103). The entry of Kia into the segment has sparked stiff competition and indicated the profitability of the Saudi motor vehicle industry. The behavior of the motor vehicle market has been characterized by price elasticity (Parker, 59). The automobile industry has opportunities for growth (Ahmed, 103). The luxury market is Saudi Arabia is said to be the largest in the Gulf region. The major cities of Jeddah and Riyadh are known to have high-income individuals resulting to the expansion of automobile market (Hutchison and Davies 42). The sector constitutes 3 percent of the GDP. In a bid to diversify the sector, the kingdom has signed a deal with UAE to set up plants that raise revenues from automobile sector. The auto industry is forecasted to make sales worth $25 billion this year (Abushakra, 19). The used cars are known to have the largest returns in the region (Hutchison and Davies 42). This reflects the economy of the kingdom positively. The sector is expected to remain competitive and profitable given the increase in the purchasing power and the rising of Asian economies leading to stiff competition (Parker, 59). The automobile sector is set to expand in the medium term. The three main segments of the Saudi automobile sector are likely to show rising demand (Abushakra, 19). Growing brand awareness is responsible for steady performance. The market dynamics are seen to depend on micro and macro economic factors in the region (Parker, 59). The non-oil sector has been enjoying steady growth (Hutchison and Davies 42). This creates demand for buses and trucks leading to increased sales in commercial vehicles. The commercial demand is also rising (Ahmed, 103). The rising purchasing power means that competing companies have the capacity to capture customers with competitive pricing at the point of sale (Hutchison and Davies 42). Competitors are using superior value chains to increase market share and quality (Parker, 59). The strategy by the kingdom to give unemployment benefits and cost of living allowances is expected to expand the auto-mobile sector. The kingdom is giving salary bonuses to the public sector employees (Ahmed, 103). The overall impact of the royal decree is to increase the bankable population (Hutchison and Davies 42). The leasing of the retail automobiles has been affected positively. Macroeconomic determinants The major aspects that are the force being the success of the increased sales and revenues in the automobile factors include high oil revenues, financial stability, robust economic growth and growing population (Abushakra, 19). The liquidity in the banking sector greater government spending and rising levels of income have been favorable to the automobile sector in the Saudi kingdom (Parker, 59). The consumption of the consumer durable goods has been on the rise because of the economic expansion and rising disposable incomes. Personal wealth is expected to keep demand in the automobile industry high (Parker, 59). The fiscal position of the government has been strengthened the high oil revenues (Ahmed, 103). The market confidence is high because of quality infrastructure and sustainable corporate development. The market forces have been positively affected the by demographics. The large population of young people in the kingdom indicates accelerating demand. A revoke in the female drivers ban indicates that the industry is likely to grow significantly in future (Abushakra, 19). This shall include putting the necessary infrastructure in place (Parker, 59). The exchange rates continue to pose a major threat to the industry (Ahmed, 103). Stakeholders are concerned that if the yen appreciates, the Japanese brands are likely to become expensive. This can pressurize the end-user prices (Parker, 59). This fear has caused the stakeholder to multisource importation of vehicles to countries using dollars. The automobile industry is sharing the burden with the mother corporation of the brand (IMF, 2008). The industry is expected to grow by 6 percent annually. The shifting preferences and priorities of the population have a direct impact on the productivity of the automobile sector (Abushakra, 19). The rising inflationary pressures might slow the projected growth of the sector (IMF, 2008). Passenger segments are growing. Therefore, commercial trucks orders are expected to have a steady increase. The fluctuation of the oil prices might have minimal effects on the revenues from the sector. The pressures lead to price sensitivity especially among the youthful customers (Ahmed, 103). Auto firms is Saudi are sustained by the growing credit market. The banks in the kingdom are increasing funding in the sector giving positive prospects and meeting the rising demands. The automobile sector in the kingdom is dominated by imports (Parker, 59). The stakeholders include distributors, service providers and agents. The international brands have been using competitive pricing and quality services to enhance brand equity. Price uniformity remains fragile and firms from United States, Korea, Japan, Australia and United Kingdom compete for the market. The Saudi automobile market is considered to be growing (Abushakra, 19). This means that more foreign companies are expected to invest in the market (IMF, 2008). The GCC retail industry is the fastest growing in the region (Parker, 59). Saudi is the most populated state in the GCC region. The government has been moving from oil dependency to a diversified economy. Saudi is set to tap in the emerging growth opportunities in the region. According to USSABC, Saudi is the new hub for automobiles in the Middle East. Isuzu has opened an assembling plant in Saudi Arabia (Ahmed, 103). Land Rover and Jaguar are expected to construct manufacturing plants in the kingdom. Most of the automobile multinationals attributed this to low energy cost and pro-business environment (IMF, 2008). Saudi has ready raw materials for component suppliers (Parker, 59). The kingdom is a leader for automotive plastic technology and aluminum. The kingdom has tariff free access of 1.2 million products. The kingdom is empowering the citizenry to use expertise to develop local brands which are competitive. This is set to raise the sales to over 1 million by 2018. However, the manufacturing industry in the kingdom is driven by microeconomic factors and overly boosted by the oil revenues. The kingdom aims to inject finances in the innovation programs for young professionals (Parker, 59). According to NCB estimated the imports from United States constitute 6.9 percent and Europe 18 percent (Abushakra, 19). The rising power of consumers is expected to attract more brands from Asian markets. The government of Saudi Arabia intends to partner with multinationals to raise employment levels through importing the latest technologies in the automobile sector. Conclusion The automobile industry is Saudi Arabia is poised to perform well in the coming decades. However, overdependence on foreign markets is likely to affect the success of the sector. Oil price fluctuations and exchange rates might pose a threat to the stability of vehicle industry in the kingdom. The rise in purchasing power, increased partnership with GCC countries and improved infrastructure are the main success driving force of the automobile industry in the kingdom. The government of Saudi must ensure sustainability and profitability of the sector by encouraging local companies to be competitive. The kingdom needs to lay a stable foundation in the automobile industry to ensure future economic crises do not affect the anticipated growth. Works Cited A Macroeconometric Model of Saudi Arabia for Economic Stabilisation and Forecasting. © Ahmed B.M. Al-Teraiki, 1999. . Abushakra, Eyad. Driving Arabia: A History of the Automobile in the Arab Middle East and the Role and Influence of General Motors. Dubai: General Motors Overseas Distribution Corp, 2006. http://books.google.co.ke/books?id=4qReQwAACAAJ&dq=Driving+Arabia:+A+History+of+the+Automobile+in+the+Arab+Middle+East+and+the+Role+and+Influence+of+General+Motors.&hl=en&sa=X&ei=Hx6KUc69Jen-4QTTtIBI&redir_esc=y. Aljarallah, Abdulaziz M. Analysing the Impact of the World Trade Organisation (wto) on the Sustainability of Competitiveness of the Petrochemical Industry in Saudi Arabia. University of Durham, 2010. . Hakes, Jay E. A Declaration of Energy Independence: How Freedom from Foreign Oil Can Improve National Security, Our Economy, and the Environment. Hoboken, N.J: J. Wiley, 2008. Print. Hutchison, Robert, and Alan Davies. Juggernaut: Trucking to Saudi Arabia. South Yarra, Vic: Louis Braille Productions, 1990 http://books.google.co.ke/books/about/Juggernaut.html?id=kT5nAAAAMAAJ&redir_esc=y Parker, Philip M. 2007-2012 World Outlook for Car Aftermarket Products, the. ICON Group, 2006. http://konoleap.bravesites.com/entries/general/the-2007-2012-world-outlook-for-automotive-aftermarket-parts-read-online. Maher Hasan, Heshan Alogeel. Understanding the Inflationary Process in the Gcc Region: The Case of Saudi Arabia and Kuwait. Washington, D.C: International Monetary Fund, 2008. http://books.google.co.ke/books?id=ZccXjL7Tc_kC&printsec=frontcover&dq=Understanding+the+Inflationary+Process+in+the+Gcc+Region:+The+Case+of+Saudi+Arabia+and+Kuwait&hl=en&sa=X&ei=1BmKUcfoGaKv7AaMtYDgAQ&ved=0CDAQ6AEwAA Read More