Job security fears and business spending cuts have seen a drop in car sales in the region by 30% in Q1.  Did Ramadan activity promise better results?

With 2016 new cars sales across the GCC closing circa 27% down on the previous year, the automotive industry was hoping for a better start to 2017. However, this optimism was short lived as the uncertainty over job security that prevailed in the second half of the previous year continued into 2017. There were numerous reports of cost cutting in various organisations and the reductions in headcount continued. Even some of the automotive distributors started to trim their staffing levels due to lower levels of activity. By the end of Q1 we were reporting a 30% drop in new car sales year on year. Bahrain suffered the heaviest loss at 41% followed by KSA 38% and UAE 28%.

This decline in activity resulted in dealers and distributors holding too much stock of both new and used cars. At the end of Q1, we saw the increase in consumer offers as the industry tried to generate showroom traffic. The manufacturers increased their financial support on new cars which then put pressure on their certified pre- owned car pricing which made them uncompetitive.

Ramadan

 

By the end of April industry insiders were already pinning their hopes on a good Ramadan period for car sales. The offers were launched prior to the start of the Holy month and were even more generous than previous years with options such as “Buy now, pay next Ramadan”, 0% finance, 0 deposit, extended warranty and 3-5-year service contracts available across various makes. In some cases, all of these were available. Again, manufacturers provided the distributors with the financial support to pay for these offers. The elephant in the room was the fact that in real terms, new cars became cheaper. This had the effect of making Certified Pre-Owned cars look even more expensive and so sales of these slowed. As long as the manufacturers continue to push new cars into a shrunken market their residual values will fall.

While it is still too early for any firm numbers the feedback we have received from our contacts indicates that the Ramadan/EID period did see some increase in showroom traffic but sales levels were just classed as normal. As expected, those with the “biggest” consumer offers reigned supreme is the indication so far.

The VAT Effect

 

So, is there any light at the end of the tunnel? Yes, with VAT due to be introduced at the start of 2018 we believe this will create demand for a typical CPO (Certified Pre-Owned) car. ‘The VAT treatment of a used car is considerably different to a new car; the nearly new item will be seen as a more affordable option. This should be a great opportunity for the more professional operator to drive sales and rationalise the inventory levels’ said Ian Batey, General Manager at Autodata Middle East.

We know some analysts are stating that there will be a rush to buy new cars before VAT is introduced. Our view is somewhat different in that most new car sales are already discounted to more than the 5% rate of VAT and so the consumer offers will be realigned to “we pay the VAT” so that then end result for the consumer is the same.

‘We, at Autodata Middle East have been highlighting the fact that this is not a “downturn” but a market correction for the last 6 months. This correction has been 18 months in the making and we believe that this is the new normal’ said Ian Batey. The market has now stabilised. We do not forecast any market growth until 2019 and then only a modest 5%.

The Industry needs to concentrate on maximising market share and promote CPO rather than chasing non-existent growth.

While the consumer needs to know there has never been a better time to buy.

Share