It was an act of defiance. On Dec. 19, 2010, a young, often unemployed, street vendor in Tunisia decided that enough was enough. With no opportunities on the horizon and frustrated by the oppressive regime he lived under, Mohamed Bouazizi set himself on fire. His act of extreme protest set into motion a chain of events that has changed the political face of an entire region. In one country after another, the region has seen regimes topple. Protesters both peaceful and violent have driven reforms. Some reforms have been rushed to placate a restive mob and other reforms have taken the form of moderate liberalization. The need for economic opportunity and the desire for personal liberty have been the hallmarks of what has been called the “Arab Spring.”
Like this article? Sign up for our enews blasts here.
Along with this turmoil, there has also been another story. The stable countries of the region have seen strong economic growth, driven largely by the increase in petroleum prices. Saudi Arabia, the biggest beneficiary of higher crude oil prices, has begun massive investments in infrastructure projects. Currently, there are more than $600 billion in infrastructure improvements underway around the Kingdom. Much of the improvements are focused on roads, rail systems and air transport.
The United Arab Emirates (UAE), having been hit hard by the recession of 2008-2009, has diversified its economy and is expecting 5 percent growth in 2012. Dubai, an Emirate within the UAE, has been working to improve its transportation, trade and logistics infrastructure. Those, along with tourism, accounted for 60 percent of Dubai’s Gross Domestic Product (GDP) in 2011, according to Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee.
All of the improvement projects currently underway will call upon a strong aftermarket that is capable of providing replacement parts for the many varieties of cars, trucks and industrial equipment being used to carry out these projects. And this spells opportunity for US exporters.
A key destination for exports
The Middle East has always been a strategic trading partner for the United States. Our reliance on petroleum from the region is well known. But the region is also a key export market for US-made goods. US exports of agricultural products, industrial equipment and automotive products are key drivers of this bilateral trade. For US aftermarket companies, the Middle East has been a solid growth market for many years. In 2011, US exports of auto parts exceeded $498 million to the region. That figure is up from $247 million in 2006, accounting for a 101 percent increase during the past five years. The growth has been broadly spread throughout the region, but some trading partners have done better than others.
To be sure, political change is driving some of the opportunities. In 2001, the US was enforcing trade sanctions against Iraq, and there were no reported exports to that country. Last year, US parts exports to Iraq totaled over $70 million. That number has more than tripled since 2006, when exports totaled just $20 million. As political stability has come to the region, countries like Lebanon, Jordan and Oman, much like Iraq, have all seen stratospheric growth of US aftermarket products.
Gray market exports
Since 2006, the destination with the largest growth in US auto parts sales has been the UAE. During the past five years, exports have grown by $90 million to surge past the $150 million mark in 2011. The UAE is now the top importer of US auto parts in the Middle East, and ranks 16th worldwide among countries that receive export parts. The biggest growth segments have been in steering and suspension components (up 728 percent), gearbox components (up 1,535 percent) and engine cooling systems (up 691 percent). But how does a country with just 2.4 million people import more parts than neighboring Saudi Arabia, a country with a population of nearly 28 million?
The obvious answer is that it doesn’t. Those parts are going somewhere else. Export diversion is a known issue in the Middle East, and the UAE is a known hub of such activity. The US Commerce Department’s Bureau of Industry and Security (BIS) has published a list of best practices for US exporters who are suspicious that export diversion might be taking place. (USDOC BIS, 2011) One of the key best practices is to know your customers and establish their bona fides before making shipments to them. Some of the gray market exports will wind up in countries where the US government imposes trade sanctions, like Iran and Syria. Others will wind up in countries where an exporter may already have an established distribution channel. In some cases, you may find the product back in the US, being sold for less than your US distribution prices. So it really pays to know to whom you are selling.
Focus on Saudi Arabia
Saudi Arabia is currently enjoying very strong economic growth. Oil revenues are at records levels, and the government has embarked on an ambitious infrastructure improvement project on a scale never before seen in the Kingdom. These improvements will rely on both on-road and off-road vehicles. Servicing these vehicles will help boost aftermarket sales considerably for the heavy-duty segment. But the light-duty segment will continue to see strong growth.
With a vehicle population estimated at around 8 million vehicles, the Kingdom offers a strong aftermarket opportunity for US exports. While vehicles of US origin are estimated to make up about 12 percent of that total, Japanese and Korean vehicles are the dominant brands in that market. However, factors like extreme weather conditions, unusual amounts of sand and dust in the air and poor road maintenance push replacement rates much higher than in the US. In particular, suspension systems, HVAC systems and filtration systems require higher frequency of repair and maintenance than other markets around the world. In 2011, US parts exports to Saudi Arabia exceed $132 million, which grew 30 percent since 2006. So the market opportunities are there, in particular for brands that can offer coverage across a global range of vehicles.
Branding is very important in Saudi Arabia. Well-known brands from around the world are the dominant players in the aftermarket. Every city has a district where the parts shops set up. Larger cities will have several of these districts. A stroll down any of these streets will seem familiar to anyone who is involved in the aftermarket. Prominent brands and logos from US, European and Japanese companies are plastered on buildings and in shop windows. The installers, many of whom cannot read Western letters, can all easily identify brand names from the colors and logos on packaging.
Introducing a new brand into the market is not easy, but it is far from impossible. Country of origin plays a big role the decision process. Products made in the US are considered to be of a premium nature, regardless of their actual performance. Therefore, a US brand can pioneer a product in the market by stressing the features and benefits of their products, and also by prominent mention of their national origin. A marketing program aimed at both jobbers and installers that can lead to repetitive use is one such tool that has been used successfully in the past.
The biggest hurdle for sales success in Saudi Arabia is getting past the OEs. OE brands like ACDelco, Motorcraft and Toyota Genuine Parts are still the dominant aftermarket suppliers in the country. Their perceived value as “the parts the car came with” should not be underestimated. They are the premium-priced suppliers in the market, and their market approval is almost universally unchallenged. Almost every retail shop will carry some OE-branded products for their customers.
However, this popularity has a downside. Transaction prices for OE-branded parts can be much higher than their aftermarket equivalents, in some cases selling up to a 30 percent premium. As such, strong aftermarket brands have made in-roads with installers by stressing their value, quality and availability across a variety of vehicle platforms. Additionally, OE brands are the target of many counterfeiters. Because of the general unfamiliarity with Western writing, a reasonable-looking fake would be indistinguishable from the genuine article by most installers. It is a good reminder for any US firms who wish to engage in foreign markets to have a handle on their intellectual property rights, and to seek advice when it comes to protecting their brands and trademarks.
Opportunities in the Middle East
While the opportunities seem unlimited, US-based exporters should be mindful of the risks as well. Diversion of products away from its intended destination could have repercussions in other markets. And while imitation is a dubious form of flattery, counterfeiting is a serious problem that demands attention as your brand reputation grows. Know your distributors. Understand their business and understand the dynamics of their market. If your company needs help getting their export operations set up, there are many export management companies who can provide a full menu of services, including critical market intelligence.
As the US aftermarket growth curve flattens, it is more important than ever to find new market opportunities. The Middle East region offers big potential for established US brands and for new brands that seek to establish themselves in a growth market. The Middle East region has the fastest growing population in the world right now. With continued economic growth expected and newly found liberty in many countries, the region should provide a rich environment for US aftermarket suppliers. In an exceedingly competitive world, a market of this potential should not be ignored.
