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Saudi Arabia: Migrant Workers and Mid-Income Group Drive Record Sales of Cheap Cars

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Saudi Arabia’s booming automobile market powered through the global sales slump over 2009-2013 and is set to register roaring growth over 2013-2019. Surprisingly, sales expansion is being fuelled not by sales of bespoke Rolls-Royces but by low-cost vehicles, which are increasingly popular among mid-income Saudis and foreign workers. Dynamic growth has already attracted major brands from China such as Geely, which capitalised on robust growth to expand market share by catering to low-cost vehicle buyers. As leading competitors continue to launch new models and more foreign workers arrive in the Kingdom, car sales will only grow further during the forecast period.

Strong growth in car sales shaped by mid-income Saudis and migrant workers

Over 2009-2013, motor vehicle sales value in the Kingdom nearly doubled to US$7.1 billion, with the country thus having one of the fastest-growing automobile industries in the world. Growth is primarily being fuelled by low-cost and mid-priced vehicles rather than by top-tier models.

In 2009 the government banned imports of used cars older than five years, as it sought to maintain the young age of the national automobile fleet. By 2013, constraints on used car sales and accelerating inflation proved to be key drivers in low-cost car sales, as Saudi mid-income consumers continue to show growing demand for value-for-money cars.

Sales of cheap automobiles are being further boosted by an abundance of migrant workers in Saudi Arabia. Over 2009-2013, the number of foreign citizens in Saudi Arabia grew by 18%, to the point where foreigners accounted for a third of the country’s 29 million population and nearly half of its workforce. Although many foreigners from Bangladesh, Egypt, Ethiopia and other developing economies are engaged in low-paid manual and semi-skilled labour, some have managed to achieve mid-income levels and purchase automobiles.

Chinese manufacturers penetrate Saudi low-cost car market

In 2013, Toyota and Hyundai dominated the market and accounted for over half of car sales volume, followed by Ford, Chevrolet and Kia. All of these brands owed their success to their offer of small sedans and hatchbacks, such as Toyota Corolla and Hyundai Elantra.

Producers and distributors of low-cost automobiles, particularly South Korean and Chinese brand owners, are also proving quick to capitalise on robust market growth. For instance, Geely, one of China’s largest automakers, entered Saudi Arabia in 2011 and established 2% volume share within a year.

By 2013, Geely ranked as the ninth most popular car brand in Saudi Arabia after introducing the Emgrand X7. This is the company’s first low-cost sports utility vehicle (SUV) and has sold nearly 8,000 units in the Kingdom. The company's success is a result of its attractive offer to consumers in the form of its four-brand product portfolio and is also due to its cooperation with Haji Hussein & Alireza Group, an experienced Saudi Arabian motor vehicle distributor.

Robust demand for low-cost cars to drive growth over 2013-2019

Saudi Arabia is expected to rank among the fastest growing motor vehicle retail industries over 2013-2019, with a projected value CAGR of 9%. In comparison, car sales in the US are projected to see a CAGR of 2%, while Germany is set to see -1% CAGR. Furthermore, auto dealership profitability stood at 44% in Saudi Arabia in 2013, with this being well above the US at 32% and Germany at 12%, thus making investment in the Kingdom even more attractive.

Low-cost vehicles are set to be the key driver of growth during the forecast period, owing to fierce competition between new Chinese entrants and established Japanese and South Korean brands. Furthermore, low-cost car sales will benefit from a further 18% increase in the number of foreign citizens in the forecast period, more of whom will be able to afford cars. The average revenue enjoyed by foreign citizens is set to grow during the forecast period, thanks to adjustments in the labour law increasing wages and accelerating the assimilation of migrant workers.

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