The Middle East Fleet Market: A Tale of Three Regions

When discussing the Middle East fleet market it should not be viewed as a single region, but, rather, it should be viewed as three separate regions.

One region is the Gulf Cooperation Council (GCC), which is a regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf, except Iraq. The GCC member states include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

The second region in the Middle East is known as the Levant, which includes Syria, Lebanon, and Jordan.

The third region includes the “Rest of the Middle East” or ROM category designation, which are Yemen, Iraq, and Iran.

The economies in the Middle East are coping with the impact of lower oil prices by instituting austerity measures and investigating ways to make their economies less oil-dependent. While these factors are impacting the fleet market in the Middle East, it is difficult to quantify the impact across the entire region. “It is difficult to gauge the size of the total fleet market in the Middle East because vehicle registration data is not available in the Middle East,” said Seyar Shunnar, regional manager – Fleet & CPOV for General Motors, who is based in Dubai.

The Fleet Market in Jordan

With record high unemployment and sluggish growth, the economy of Jordan continues to be dragged down by the repercussions from the Syrian crisis, especially the presence of more than 655,000 registered Syrian refugees.

Jordan’s economy remains sluggish as growth slowed down in 2017 for the third year in a row. This is largely due to a weaker mining and quarrying sector, partly related to downward pressures on global potash prices, and other factors related to the Syria crisis, notably the closure of export routes to Iraq and Syria and lower tourism.

Despite these economic headwinds, the outlook for the automotive market in Jordan, in particular, fleet, is much better. “Jordan has a healthy fleet market environment for rent-a-car companies (RAC) and government fleet sales,” said Seyar Shunnar, regional manager – Fleet & CPOV for General Motors, who is based in Dubai.

The Kingdom of Saudi Arabia (KSA) is where 50% of the region’s automotive sales are generated. This is true for General Motors and all other car manufacturers that are selling vehicles in the region.

Low oil prices continue to challenge growth and fiscal sustainability in the Kingdom of Saudi Arabia (KSA). For first half of 2017, vehicles sales in Saudi Arabia declined double digits.

“Saudi Arabia has an unhealthy fleet market environment for small to mid-size enterprises (SME), due to the declining economy,” said Shunnar.

The decline in oil prices has resulted in the Kingdom’s worst economic slowdown since the global financial crisis of 2009-2010. The downturn in oil prices impacted many small and medium enterprises, along with larger corporations that were contracting with the oil industry, due to pending payments and large payables owed by governmental entities, which cause projected completion dates to lengthen, which required some companies to extend lease terms. This forced fleets to keep vehicles in service longer, extending the vehicle’s lifecycle costs. In addition, the government decreased fleet purchases for governmental entities.

In addition, earlier austerity measures dampened consumer sentiments deferring automotive purchases. However, these austerity programs have since been somewhat relaxed. One recent development that may spur future sales is that, for the first-time ever, women will be allowed to drive in Saudi Arabia starting in June 2018.

The outlook for future sales of commercial vehicles in Saudi Arabia is positive. Anticipated stabilization of crude oil prices, implementation of favorable government initiatives, growing infrastructure construction and logistics industry to drive sales of trucks, buses, and vans in the Kingdom. In order to accommodate growing vehicle demand of the Kingdom, Saudi Arabia General Investment Authority (SAGIA) plans to increase investments toward strengthening and expanding the country’s road infrastructure. The Kingdom’s Ministry of Economy and Planning is increasing overall spending of about USD$27 billion to improve and expand the country’s road infrastructure. These infrastructure projects are anticipated to boost the sales of commercial vehicles.

Austerity measures were announced in September 2016 as part of an ambitious plan (Vision 2030) to repair public finances and revamp the oil-dependent economy of Saudi Arabia. Two noteworthy aspects of Vision 2020 are:

Ministers will take a pay cut of 20% and 15% to Shura council members, with bonuses canceled for the financial year.

The Fleet Market in Bahrain

Bahrain is the most economically vulnerable country in the Gulf Cooperation Council (GCC), which is a regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf, except Iraq. The GCC member states include Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia.

Bahrain faces economic uncertainty due to low oil and bauxite prices, compounded by its limited savings and high debt levels, leaving it exposed to financing risks.

Cheap oil continues to test Bahrain’s economic resilience. Bahrain maintained an expansionary fiscal policy since 2009 resulting in government budget deficits. The deficit spending helped maintain economic growth at 2.9%, but it brought currency reserves down to a low level at 2.6 months of imports and increased public debt to 62% of GDP.

Economic growth is expected to decline in 2017. Real GDP growth projections have been revised downward to 1.9% in 2017 and 2018, as continuing low oil prices depress private and government consumption.

Some infrastructure investments are also likely to be put on hold, which will impact fleet sales to the local construction industry.

In addition to pay cuts, government-sponsored cars will be discontinued.

Decreases in automotive sales have been noticeable due to lower consumer sentiment and lower internal/national tourism impacting the RAC industry. Small- and medium-sized businesses, along with large corporations contracting with the oil industry, are being affected due to reduced purchases and extended project completion dates. In terms of fleet vehicles, there are pressures to extend vehicle lifecycles at fleet operations. Austerity measures have decreased government fleet purchases. 

Other fiscal and political pressures are mounting within the region due to the economic and diplomatic blockade against Qatar that Saudi Arabia and its allies
implemented on June 5, 2017. While the economic impact of the embargo on the Saudi economy is expected to be limited, a potential escalation of the crisis is a concern.

In other recent automotive news, SsangYong agreed to license CKD assembly to (SNAM) Saudi National Automobile Manufacturing Company. The agreement allows SNAM to “localize” key components and provide training and other technical support. SNAM aims initially to build mid-size pickup truck with production capacity of 25,000 units annually by 2020.

The Fleet Market in Kuwait 

The Kuwait gross domestic product (GDP) contracted in calendar-year 2017. OPEC-related oil production cuts have weighed on growth, with GDP shrinking by 1% in 2017, following a 3.6% increase in 2016 that was supported by higher oil production and implementation of its economic development plan.

Despite the economic contraction, the forecast is for a partial recovery in oil prices, which will partially ease the recent fiscal pressures. In addition, major infrastructure projects will continue to support the economy’s growth in the near to medium term, which will positively affect fleet sales. Also, the government plans to invest USD$115 billion in the oil sector over the next five years, which should boost oil production in 2018.

“Kuwait has a healthy fleet market environment for fleet sales to rent-a-car (RAC) companies and government fleet sales. Small to medium enterprises (SMEs) are still growing,” said Shunnar.

But, key challenges will continue, which include hydrocarbon dependence and parliamentary opposition to deep structural reforms.

With additional support coming from public-investment spending, growth is anticipated to rise to about 3.2% over the medium term.

A VAT was introduced in 2018, which will put upward pressure on fleet total cost of ownership by increasing vehicle acquisition prices.

Fleet Activity and Tenders

In 2017, General Motors won some major fleet contracts in the Middle East. One of the biggest fleet contracts was winning the Saudi Electric Company tender, which comprised around 2,500 units, mostly Silverado pickups and full-size utilities.

GM has also been successful in Kuwait with the Ministry of Interior and the Kuwait oil company, which will acquire more than 1,000 units of full-size utilities.

Looking at the future fleet business opportunities, one of GM’s main focuses is to improve its passenger car business.

GM has consummated fleet agreements in the sedan segment, such as police departments, and several high-exposure hotel contracts with GM sedans being used for guest pickup services that are provided by hotels in the Middle East.

Another fleet focus is on airport VIP services. This is a door to immigration VIP service, where vehicles will come to the plane, pick you up, and take you to the immigration offices. This is a very popular service in the Middle East.

“GM recently concluded a deal with the Dubai Police on the back of which we are building some strategic deals across the region, with volumes that might go up to around 1,000 Bolt EVs within the next 18 months,” said Shunnar.

As in other areas of the world, there is an increasing penetration of Chinese products that are slowly infiltrating these local markets. “They haven’t gained traction yet; however, we foresee that there will be a future for the GM products that are manufactured in China,” said Shunnar. “We are researching at this point in time how to take advantage of this.”

In terms of challenges in the Middle East fleet businesses is that there is strong competition from the Korean products. “They are very aggressive when it comes to pricing, and we’ll see why with the next point. Our Japanese competition, Toyota does very well with the residual value and that stands as well with the leasing and rent a car companies,” said Shunnar.

In the Middle East fleet market, OEMs generally have no direct relationships with their customers since all the business dealings are through dealers. “However, that does not mean that OEMs do not focus on relationship management. Our relationship with our customers is through managing the relationships, making sure we do our needed PR, but anything over and above that is considered a business transaction. We do not directly transact with our customers,” said Shunnar.

The Fleet Market in Qatar

The number of passenger cars in use in Qatar is expected to reach about 912,000 units by 2020, registering the highest annualized growth of 5.4% in the Gulf Cooperation Council (GCC) region.

“Qatar has a healthy fleet market environment for rent-a-car (RAC) companies and government fleet sales. Small and medium enterprises (SME) are still growing,” said Shunnar.

A high urbanization rate and increasing number of affluent consumers have been propelling demand for different types of passenger cars. Qatar is likely to see a net addition of around 213,000 cars by 2020.

The number of passenger cars in use in Qatar is projected to account for about 7% of the GCC car fleet in 2020.

According to the International Monetary Fund, Qatar’s population is forecast to grow at 3.1% between 2015 and 2020. The increasing population base is expected to further stimulate demand for automobiles in the country.

During 2010-2015, Bahrain, Qatar, and the UAE recorded the fastest increase in new-vehicle sales in the range of 8.8% to 10.7%.

The growth is attributed to the strong domestic economy and growing population. The country’s population has grown by more than 8% during the five-year period, as migrants are attracted to the job opportunities being generated by the country‘s substantial economic development projects. Passenger cars represented 80% of the total new vehicles sold in the country.

As low oil prices have persisted, fiscal and current account balances in Qatar have shifted to deficits. As a consequence, the government has pared back current spending and undertaken subsidy reform.

The forecast is that the fiscal deficit will narrow, helped by savings in current expenditures, subsidy reforms, and the introduction of a value-added tax (VAT) on Jan. 1, 2018. Prior to the VAT introduction, there was a trend of increased purchases in Q4 2017 to pull sales from Q1 2018 to avoid the tax, especially for big ticket purchases.

Many of these purchases have now shifted to leasing as consumers now prefer it over purchase new vehicles.

GM is also looking to improve its remarketing channels by introducing strategic buyback initiatives with the focus of improving residual values.

Another focus is GM’s fleet aftersales program. “We have specific fleet or aftersales offerings and go-to markets within each sector. We’ve got a fleet offer or a package that goes to our small-to-medium businesses, and then we’ve got fleet aftersales packages that go to our rent a car, and so on,” said Shunnar. “We’re being very surgical in how to go about the market and offer our aftersales package. This is all in the interest of completing the circle of taking care of our customers.”

GM is focused on addressing regional and government tenders. Currently, Aramco, the biggest oil industry company or semi-government entity within the Middle East is out to bid for a fleet contract. In addition, the U.S. Army and Kuwait Oil Company have conducted fleet tenders. “These represent north of around 4,000 vehicles for 2018 delivery, with some sales starting as early as December 2017,” said Shunnar.

The big fleet management companies in the Kingdom of Saudi Arabia are GM’s dealer leasing arms. “We’ve got two dealers in the Kingdom, and two of them combined would create the biggest entity, probably in KSA and the Middle East that handles leasing within this region. Otherwise, a lot of banks get involved with leasing, but leasing is still not very popular in the region,” added Shunnar

SUVs are very popular in the Middle East, especially in the GCC. “For example, in the UAE, you’ve got 60% of full-size utility sales in the Middle East are the Tahoe Denali and LT,” said Shunnar. “Small cars and low-displacement engines are popular in the Levant.”

Further diversities are the result of regulated and unregulated regions and different regulations per region.

GM’s fleet sales organization in the Middle East consists of five fleet development managers. Three GM team members specifically focus on the Kingdom of Saudi Arabia because that’s about 60% of its business in this region. General Motors has two other team members handling the rest of the Middle East, which is sometimes generically called ROM, meaning “rest of the Middle East.”

GM’s best-selling models are full-size utilities, such as the Tahoe and Yukon, which make up over 25% of GM’s sales in the Middle East. This is followed by pickups, whether Silverado or Sierras at 14%, followed by the sedan segment, the Impalas and Malibus, making up around 15%. The remainder of GM’s market share is comprised of the rest of the vehicles in its product portfolio.

“From an overall perspective, we’re looking forward to the new launches. We’re launching the Equinox, the Terrain, and the Traverse,” said Shunnar. “From a fleet perspective, our expectations are high, specifically on the Traverse. We feel that we will have some good business with government and leasing departments.”

The Fleet Market in the UAE

The economies of the United Arab Emirates (UAE) remain in fairly good shape, with the oil sector firms benefitting from solid domestic demand. In addition, the number of tourist arrivals increased significantly in Q1 despite a stronger dirham, the national currency of the United Arab Emirates.

“The UAE continues to have a healthy fleet market environment for rent-a-car (RAC) companies and government. Small and medium enterprises (SME) are still growing,” said Shunnar

The UAE economies have weathered the storm of low oil prices better than its GCC neighbors thanks to a relatively diversified economy and significant fiscal buffers. In addition, the relative ease of doing business in the country is a major draw for foreign investors.

Low oil prices and fiscal austerity continue to weigh on the UAE’s economy. Austerity measures weakened business and consumer confidence. It has slowed growth in credit to the private sector.

The forecast for 2018 is that oil production will rise due to investments in oilfield development. Non-oil growth is projected to rebound as the expected improvement in oil prices; as megaproject implementation ramps up ahead of Dubai’s hosting of Expo 2020; and as the lifting of sanctions on Iran translates into increased trade. Expo 2020 is expected to draw in a large number of visitors to the UAE, boosting private consumption and services exports, and stimulating the car rental industry.

Market Challenges

The population of the Middle East is around 128 million, excluding Iran. It is estimated that around 50% of people in the Middle East are between the ages of 15 and 29.

One challenge is the ongoing political unrest in the Middle East. It is a politically volatile region. Some ongoing conflicts include the Syrian Civil War, internal conflict in Yemen, Isis in Iraq and the Qatar embargo. This makes it a very unpredictable market that is very difficult to forecast. “We’ve been through ups and downs the past two years. It’s been literally a roller coaster trying to maintain a solid forecast across two years,” said Shunnar.

Since the region is comprised of 12 different countries, its diversity drives the portfolio complexity for OEMs selling in the region. “There are very large wealth disparities across the region that range from US$3,000 per capita GDP in Yemen to Qatar at US$133,000 per capita,” said Shunnar. “There are generally high living standards for GCC nationals. Having said that, the common misconception here is that every Saudi in the KSA is wealthy. In actual fact, 90% of Saudi wealth goes to the top 20%. The majority of Saudis are not wealthy, and we can see that from the vehicle preferences, that is skewed to base models.

The region’s economic downturn has resulted in a decline in consumer confidence when it comes to retail sales, which makes for less demand on vehicle purchases from a retail perspective.

In most of the GCC countries, there were value-added tax (VAT) introductions on Jan. 1, 2018, which did not exist before. There are differing opinions on how the new VAT taxes will affect the fleet business in the Middle East.

Click here to view the digital edition of the Global Fleet Market Condition Q4 2017 special report, where this, along with other global fleet market reports, is featured. 

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