Driving change: What impact will Covid-19 have on the UAE car industry?
Expected number of Ramadan purchases will still go ahead, with the majority of non-Ramadan buyers waiting until later in the year as job security and other economic factors become more clearly defined, writes Adam Whitnall, founder & CEO at Simply New Cars
We currently find ourselves in the midst of one of the biggest periods of uncertainty the modern world has ever witnessed. Other crises of the past century have often had some basis in history in which to model and predict follow-on effects, but the current situation has presented the world with an entirely new challenge.
The magnitude of this challenge for the auto industry in particular is still being assessed with levels of disruption not seen since perhaps the great wars of the 20th century.
To truly analyse the impact of the coronavirus, on both the global auto industry and the local UAE market, I believe it’s important to focus on three areas: supply chain, consumer spending power/intent, and ultimately - sales.
Supply chain is intact, but questions remain around production
The manufacture of cars revolves around five core materials – iron, steel, aluminium, plastic, and glass.
Thankfully for the industry, supply is outstripping demand for these commodities at present, leading to favourable prices and the ability for companies within the automotive supply chain to stockpile if necessary to mitigate against production delays as different parts of the world move through the crisis in different phases.
As the world’s automotive powerhouse, China has been quick to restart production as it cautiously eases itself out from the grip of the virus, with almost all auto production in the country back online since the end of March.
With the virus slowly releasing its grip on Europe we are beginning to see production restart there too, with plants in Czechia, Slovakia, and Hungary already back online. Daimler has restarted production in Germany within the last week, and most other European auto makers are expecting to restart production by the middle of May.
American manufacturers are further away from being able to commit to restart dates with the country still grappling to control the spread of the coronavirus and numerous political challenges impacting the ability of the Big Three (Ford, Fiat Chrysler, and GM) being able to return to production.
Here in the UAE most dealerships are confident in their current stock levels and ability to fulfil customer orders over the coming months.
The next quarter will be critical from a production standpoint in order to ensure enough vehicles are available for the busy sales season at the tail end of the year.
The UAE has some of the highest performing new car dealerships in the world, giving them increased leverage to be able to secure inventory in the event of a supply shortage.
Purchase intent remains, but to what extent?
Peter Dicken writes in his book 'Mapping the Changing Contours of the World Economy' that saturated vehicle markets of developed economies are typified by replacement demand, leading consumers to defer purchases during periods of economic uncertainty, rather than cancel them outright.
There is no doubt that the world is heading for another recession and that consumer spending power has been reduced by the survival measures most employers have been forced to implement, but only time will tell what impact this reduction will have on the necessity of a car purchase.
A report from Statista based on a global survey at the end of March revealed that 67% of people intend spending the same on a new car purchase in the next 6 months as they were originally planning to, with 20% expecting to spend more. Whether these purchases materialise or not is yet to be seen, but it does show that most car buyers appear to be adopting a deferment intent.
A number of Simply New Cars customers we spoke to in the UAE in the first part of this year were waiting for the Ramadan sales to begin in order to make a purchase. I anticipate that a number of these Ramadan purchases will still go ahead, with the majority of non-Ramadan buyers now waiting until later in the year as job security and other economic factors become more clearly defined.
Ramadan sales boost
The Chinese Automobile Association is currently predicting that sales will normalise in the country by Q3 of this year. While some will remain sceptical of this forecast, March sales figures certainly showed promise of a rebound with over 1 million passenger cars sold. This number represents a 48.4% decrease in sales year-on-year which is hardly anything to get overly excited about, but shows a significant improvement over the abysmal results in the first two months of the year.
History also shows us that the automotive industry has the ability to rebound strongly. In 2010, just one year after the peak of the last financial crisis, car production in the US increased by 25.8% - higher than pre-recession levels by more than 5%. This increase in production provided the base for a strong sales recovery over the following years resulting in a record year in 2015.
The UAE saw a similar record year in 2015 with around 420,000 sales. Since then sales have been falling consistently, to a low of 240,000 in 2018 with largely flat growth in 2019.
This year will likely see a further fall with March being all but written off, although there is hope on the horizon with dealerships scrambling to adjust their Ramadan campaigns after confirmation in the past week that Dubai dealerships will be able to open for the holy month (dealerships in other Emirates have largely remained open throughout the crisis).
A number of dealerships across the country have acted swiftly to cater to the needs of a more cautious buyer. Numerous showrooms I've spoken to are accelerating the development of their digital services and implementing initiatives such as online bookings for new car sales, home delivery for test drives, and job loss protection wrapped up into finance packages.
I expect these initiatives to start tempting small numbers of buyers into showrooms – both virtual and physical – over the Ramadan period, as people who have been deferring their purchases seek to discover any deals in the market. This trickle of buyers is unlikely to increase much over the summer months, although it’s interesting to hear that some buyers are already redirecting funds saved from cancelled summer holiday plans into new car purchases.
Dealerships around the country will likely be holding their breath until the end of the year, with Q4 being the most important period for UAE car sales in a decade.
An industry in reflection
A decade after the last financial crisis the automotive industry once again finds itself in turmoil. But what we haven’t seen this time around is the compounding negative impact on sales of a high oil price, or the mass layoffs that reached to every corner of the sector.
Supply chains remain mostly intact with companies eager to resume production as soon as it is safe to do so. UAE car dealers are confident in their inventory levels and are optimistic about being able to fulfil demand for the remainder of the year.
Globally, car buyers are appearing to resume their purchases once the worst of the virus is past, with UAE consumers being no exception – we’ve seen a 16% increase in traffic on simplynewcars.com over the past week as the government’s sanitation drive eases.
Global car sales will likely decline in 2020, with S&P Global Ratings predicting a 15% decrease in sales. The UAE will not be immune, likely observing a further fall from the already-low sales volume of the past couple of years. Ramadan will be a key indicator of initial market recovery here, with the tail end of the year then providing the greatest contribution to overall 2020 sales figures.
Ultimately the industry will emerge stronger from this crisis, with dealerships learning new methods to communicate with customers and digitise the car sales process leading to greater efficiencies. The rest of this year will be a period of recovery and reflection, towards an optimistic outlook for 2021.
Source: www.arabianbusiness.com/ Adam Whitnall is founder & CEO at Simply New Cars
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