How has COVID-19 Impacted the GCC Auto Sector

Historically low oil prices and decreased demand in the aftermath of COVID-19 – a double whammy for the GCC economy – have severely impacted all sectors in the region, including auto industry. Along with low unit sales, traffic on roads has decreased amid the crisis. However, certain growth opportunities are emerging even during the tough times. Additionally, some countermeasures can be taken to help the sector ride out the challenging environment.

COVID–19 has not spared the GCC economy. Lockdowns, travel restrictions, slump in oil prices, and interruption in supply chain, among other factors, have drastically affected demand-supply dynamics and slowed growth across industries, including the auto sector.

The Saudi auto industry, which showed signs of revival (29% Y-o-Y growth in 2019) amid optimistic consumer sentiment and addition of women drivers as a new customer segment, has been hit by the crisis. Auto sales nose-dived 35–40% in March 2020. Growth in the UAE’s auto industry has also plummeted as shutdowns and crashing oil prices led to a 45–50% fall in car sales in March 2020. Moreover, with consumers in the region deferring vehicle purchases, new car sales are expected to decline 25% or more in 2020.

Decrease in traffic (~30–45% in major cities in KSA and the UAE), coupled with delayed periodic maintenance, is negatively impacting the auto aftermarket industry. In March 2020 alone, the GCC region recorded ~70% decline in periodic maintenance, while sales of auto parts fell a whopping 50% during the same month. The UAE, which is the key export hub in the GCC region, and caters to several countries in the Middle East, has registered more than 50% decline in auto/ auto -components exports since the outbreak of COVID-19. KSA, the largest market in terms of automotive spare parts and services in the GCC region, is expected to contract 15% to US$ 6.8 billion in 2020.

Auto sectors in major GCC economies, such as Saudi Arabia and the UAE, depend heavily on imports, with countries such as Japan, China, the US, South Korea and Germany accounting for 60–70% share in the auto and auto parts market. Production cuts and shutdowns in these countries have not affected auto dealers/distributors in the GCC region until now due to decreased consumer demand and the fact that most of them are sitting on idle inventory. However, after COVID-19 subsides, when production in these global auto hotspots resumes, there will be intense competition among different markets to procure auto components, spare & wear parts and vehicles. This will hamper supply to GCC countries. Furthermore, dealers and distributors in the region will face rising pricing pressure from OEMs, who themselves must deal with increasing CAPEX requirements and declining profit levels.

On a positive note, all is not lost for the region’s auto industry. As witnessed across the globe, public transport usage has diminished significantly and is expected to remain relatively less utilized due to social distancing even after the infection has been brought under control. Even in the GCC region, the use of public transport dropped by over 75% in March 2020. The changing consumer behavior will open new avenues for growth. For example, shared modes of transportation can be used for point-to-point delivery of essential services as well as for e-commerce. Maintenance and repair service providers can offer advanced services such as servicing at home, vehicle pick-up and delivery for maintenance, and complete vehicle disinfection. Aftermarket service providers must adapt and tap the new revenue streams to offset the losses sustained due to COVID-19.

Although this is an unprecedented situation, all stakeholders in the GCC automotive ecosystem (dealers, distributors, spare parts retailers, IAMs, etc.) will need to evolve and adapt to the ‘new normal’ in order to safeguard their business.

Some of the recommended countermeasures are:

• Increasing Digital Presence – With people locked down in homes, the consumption of online content has increased. Hence, it is important that automotive stakeholders improve digital penetration in order to connect with e-commerce-friendly customers and derive online sales. Continuous contact with customers and employees through digital channels, updating them on business conditions, the company’s plans and new product launches, will not only boost confidence of employees in the organization but also reassure customers. This will ensure significant customer turn-around once normalcy is restored. Online campaigning (for example, advertising hygiene initiatives at one’s showrooms, workshops) and customer engagement initiatives (such as prizes for online quizzes and games for women customers) are a few steps that can be taken to drive growth.
• Protecting Supply Chain – Various spare part suppliers for GCC nations, especially from countries affected severely by COVID-19, may not be able to cater to demands due to capacity shortage. Therefore, players in KSA should look to diversify their vendors and connect with new suppliers from other regions (for example, South East Asia – India, Thailand, Indonesia, etc.) where the impact of the crisis is comparatively low. This will mitigate the risk of interruption in supply during and after COVID-19.
• Offering Value-added Services – Providing services not otherwise offered traditionally (such as home -delivery of cars purchased, advanced EMI options, etc.) at no cost will ensure higher customer footfall relative to the competition. Discounting strategies should be revisited, and targeted incentives should be provided to specific customer segments (for example, customized packages for fleet owners entailing free maintenance services for a longer duration than usual). This will indicate that dealers/distributors/retailers are always putting customers first.
• Investing in Cutting-edge Technologies – Considering the current slowdown, it is imperative that investments and resources be diverted from traditional operations to newer technologies (for example, connected car technologies, predictive maintenance capabilities, advanced ERP for stock management) and related planned initiatives. This will also ensure quick and efficient resumption of operations once the situation improves.

Yes, safety first is the need of the hour. However, optimized and thoughtful allocation of resources, and effective planning can minimize the impact for auto -businesses in the GCC region. Companies should not adopt a wait and watch policy. They must act! And ACT NOW!!