The first few weeks of 2016 haven’t been good for oil producers. Crude oil prices have continued to fall as they did through much of 2015. Oil hit its latest peak in June of 2014, closing at $105 a barrel. It’s fallen continuously since then and hit a low of $27 in January 2016. The world is awash in petroleum.
While low prices have been a boon to consumers, economies that are highly dependent on petroleum exports have been ravaged. Mexico, Venezuela, Russia and Nigeria have seen deep contractions in their GDP’s. Other countries, such as Saudi Arabia, have opted to produce even more oil to protect their market share. At $27 a barrel, the oil costs less than the barrel that holds it.
With oil and gasoline prices at historic lows, it seems counter-intuitive that Saudi Arabia would embark on a multi-billion dollar enterprise to produce energy efficient industries and drive changes in how vehicles consume energy. The Kingdom, however, sees it differently. The relative wealth that Saudi Arabia has enjoyed over the past 30 years has resulted in a growing population that is ever more demanding of creature comforts and necessities, which all require energy. And the source of that wealth may be drying up. Well, not quite literally.
In 2000, Sheikh Ahmed Zaki Yamani, the former oil minister of Saudi Arabia, gave an interview in which he said, “Thirty years from now there will be a huge amount of oil – and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.” The Kingdom of Saudi Arabia has seen the future, and they did not like what they saw.
The current population within the Kingdom, including foreign workers, is roughly 30 million people, and that is up from nearly 9 million in 1980. By 2030, the population is expected to reach 36 million, according to World Population Review. During this period of growth, the Kingdom has seen its daily energy consumption climb from less than one million barrels of oil a day in 1980 to more than 4.2 million today. That figure is expected to reach 8 million barrels a day by 2030.
In 2012, the Kingdom established the Saudi Center for Energy Efficiency, with a goal of reducing by 20 percent that 8 million barrel a day figure by 2030. They plan on driving these efficiency gains by better use of thermal insulation in new buildings, and by adopting the use of energy efficient air conditioners, refrigerators and washing machines. But they also feel automobiles will play a major part in reaching their goals.
Vehicle parc
From an automotive perspective, the current vehicle parc of Saudi Arabia is approximately 12 million vehicles. That number is expected to increase to 16 million vehicles by the year 2020. The current value of automobile sales inside the Kingdom is valued at US$30 billion.
New vehicle sales are dominated by Asian brands. For 2014, the last full year statistics are available, Toyota was the best-selling brand in the Kingdom with a 36 percent share of the market. Hyundai (17.7 percent) and Kia (7.0 percent) rounded out the top three. Nissan (6.9 percent), which has been growing rapidly in the region, jumped to fourth place. Ford (5.7 percent), Chevrolet (4.6 percent) and GMC (2.1 percent) were 6th, 7th and 9th respectively.
Toyota had four models in the top 10 spots, led by the Hilux pickup truck at number 1. Ford had the only U.S. made vehicle in the top 10 models with the Ford Expedition coming in at 10th place. The Toyota Corolla, Toyota Yaris, Hyundai Elantra and the Hyundai Accent all had strong sales to put them in the top 10. These vehicles are smaller and fuel efficient, which speaks to the changing trend toward overall energy efficiency that has gripped the market. The Toyota Yaris was up 50 percent from its 2013 sales figures.
According to a 2014 Frost and Sullivan evaluation, the value of aftermarket parts sales within the Kingdom is estimated at US$ 3.8 billion. They’ve further pegged the aftermarket growth rate at 7.7 percent, and estimate the market will be worth US$ 5.5 billion annually within five years. It is the strong growth in both vehicle sales and the aftermarket that is leading the drive to greater efficiency and reducing overall energy consumption.
One of those methods is instituting Corporate Average Fuel Economy (CAFE) requirements modeled on the U.S. CAFE program that was instituted in 2012. The Saudi CAFE standard is modeled closely to the U.S. program, but its timeline is four years behind the U.S. The CAFE rules for the Kingdom went into effect January 1st 2016, and will require manufacturers to meet a 40 MPG average for their passenger car fleet and a 32 MPG average for light trucks this year. By 2020, those standards will have risen to 48 MPG and 37 MPG, respectively. Since most manufacturers already sell vehicles with smaller engine displacements abroad, as opposed to here in the U.S., those numbers may not be as difficult to achieve in Saudi Arabia as they might be here at home.
Another part of the effort will be reducing dependence on fossil fuels for energy generation. Saudi Arabia, along with Iran and Japan, account for 44 percent of electricity and heat produced from oil in the world. While the necessity of using oil may be sustainable with current supplies and low costs, the Kingdom is aiming to reduce such dependence by one third on their way to the 2030 target. That means that 56 gigawatts (GW) of power will have to come from renewable energy sources. This includes photovoltaic (PV), concentrated solar power (CSP), nuclear, wind and waste conversion. This effort was announced in 2013, and the Kingdom has pledged US$108 billion toward the effort. However, due to the financial impact of low oil prices, it is predicted that effort will be slowed by several years.
In the meantime, Saudi citizens are awakening to potential implications of long-term fossil fuel use and are looking to hybrid vehicles. Gasoline costs in the Kingdom are about $0.70 a gallon, so the impetus is not for savings. There is definitely a “cool factor” associated with hybrids and plug-in automobiles such as the Tesla and the Toyota Prius. In particular, the hybrid Nissan Pathfinder has found wide appeal throughout the six-nation Gulf Cooperation Council (GCC), including Saudi Arabia.
“As Middle East consumers become more eco-aware and environmentally conscious, we foresee that hybrids will start to increase in popularity the same way they have in Western markets. The big ideal doesn’t just come from the fuel efficiency and cost reduction but from an ethos to be more environmentally responsible,” said Samir Cherfan, managing director of Nissan Middle East. “We see a lot of opportunity for the Hybrid Pathfinder in the Middle East market, especially as countries start to make more of an effort to drive sustainability initiatives, Cherfan said.
Of course, advanced vehicle platforms require advanced service and components. To that end, Saudi Arabia recently announced two separate initiatives to address those questions. The first is a program that was developed as an effort between the governments of Saudi Arabia and Japan. The effort is called the Saudi Japanese Automobile High Institute (SJAHI), and is working to train 10,000 Saudi high school graduates in automotive repair and technology. The focus is on maintaining Japanese vehicles, but the broader skills would apply to all vehicles.
Distribution of automotive parts within the Kingdom takes place through the three largest cities. Riyadh, the capital of Saudi Arabia, is the largest. Jeddah located near the Red Sea, and Dammam, which is on the Persian Gulf, are the other two. Principally, importers and distributors will be based in one of these three cities, but often, they operate in more than one city at time. They may have satellite operations in other regions of the country as well. While there are a few large distributors/importers that operate nationally, there are also many smaller distributors who operate within their own geographic area. In each city, there are districts where automotive distributors and service centers are congregated. Being that these districts have many competing companies aggregated into a small area, competition can often be fierce. It is not unusual for installers to haggle over prices, and if not satisfied, will just walk into the store next door to try again.
The Saudi’s are also known for their affinity toward name brands. Some of this is related to the consumers desire to use only the best parts available. However, often times it is simply a matter of the installer being unable to read in English, so they point out the brands they want by logo identification. As such, anyone looking to establish sales within Saudi Arabia should consider a variety of branding strategies. Among these strategies should be marketing materials that are printed in the local language and the training of a direct sales force that can convey brand messaging as well as product features and benefits colloquially. Taking a longer view, those companies that can work with their local distributors to establish technical training seminars that are delivered in the local language will establish significant goodwill amongst service dealers.
Finding the right distribution partner(s) within Saudi Arabia is likely the first and most important step to establishing sales there. Program distribution groups are prevalent within the market, and there are few, if any significant industry associations that exist. Independent manufacturers representatives are very common in the market, and they often have the experience and the contact to guide your company toward the right distributors. Buyers from Saudi Arabia do often attend industry events. Lately, it has become difficult for many Saudi buyers to obtain visas to enter the U.S., making their once common appearance at AAPEX less common. However, shows such as Automechanika Dubai and the biennial Automechanika Frankfurt (held in even number years) attract many Saudi buyers. If your company exhibits at either of these shows, it would be a good place to meet distributors or sales representatives.
The Kingdom recently has expressed its willingness to invest in the automotive sector by announcing car assembly and parts manufacturing operations with various companies. The most high profile of these ventures is one with Daewoo International (POSCO) to assemble vehicles in Saudi Arabia by the end of 2016. Johnson Controls and Denso have on-going joint ventures set up in the country. With its access to the entire region, an educated work force and relative stability, Saudi Arabia makes an attractive location to set up manufacturing and/or distribution operations within the GCC market area.
The future of petroleum may not be set in stone, but the long-term trends indicate that Saudi Arabia will be a viable, growing market for the indefinite future. Even as the Kingdom prepares to transition to a post-petroleum economy, there are still many opportunities for manufacturers who deal in new technologies to do business in the Saudi market today. With the Saudi aftermarket growing at a 7.7 percent annual rate with no signs of slowing down, there is ample opportunity.
Subscribe to Aftermarket Business World and receive articles like this every month….absolutely free. Click here.
