To the uninformed in the Western world, the Middle East seems to operate as one large, oil-producing state. In fact, it is a combination of markets with many regional differences. Nonetheless, all of those markets are in a state of flux due primarily to the falling dominoes caused by the free fall in oil prices in 2014.
Not more than two years ago, the Gulf region experienced 15% to 20% growth per annum, though that’s fallen to 2% to 3% per year, according to economic reports.
“Since oil prices have dropped, the whole dynamic has changed,” says Bob Farrow, a Middle East car rental consultant.
Car rental in the Middle East is tied closely to commercial interests. Since exiting the Recession, service industries in the region benefitted from an influx of expatriate workers to satisfy the building boom. In United Arab Emirates (UAE), instance, the total population of 9 million is made up of 2 million natives and 7 million foreign workers.
In Saudi Arabia, Farrow says the government has put on hold close to 70% of new developments and has slowed construction of the Riyadh Metro, deemed the world’s largest mass-transit system built from scratch. Farrow says at least six rental companies fleeted an extra 500 vehicles for that project, but the situation has reversed. “Rental companies, the leasing side in particular, are getting massive numbers of cars returned,” he says.
“Everyone is nervously waiting to see what will happen with Prince Mohammed (bin Salman’s) reform plans,” Farrow says. The “National Transformation Plan” aims to lure investment to Saudi Arabia and wean the country’s dependence on oil.
Farrow — who first traveled to the region 25 years ago to help Hertz UAE set up its network — says Middle Eastern businesses are making decisions on the assumption that oil won’t rise above $65 a barrel in the foreseeable future — five or six years. The feeling of his business associates: “It’s the norm we have to accept.”
The economic impact from the drop in oil prices has rippled into tourism, the used car market, and fleet funding.
Because Middle Eastern economies are heavily dependent on government spending, a slowdown constricts disposable personal income. For Dubai and Abu Dhabi in UAE, that means fewer tourists from Middle East neighbors. “The average tourist to the Gulf countries is spending much less on his travel,” says Rahul Singh, managing director, Car Rental Group for A A Al Moosa Enterprises LLC, a franchise of Dollar and Thrifty in UAE. “The tourist who took four trips a year to Dubai is now traveling once or twice a year.”
The Middle East is heavily imbalanced to new car sales. In Western Europe and the U.S., a typical dealer group would sell two used cars for a single new car. In markets such as UAE and Saudi Arabia, for every used car sold, dealers sell 16 new cars, Farrow says.
Once de-fleeted from rental, Persian Gulf nations such as Saudi Arabia, UAE, Qatar, and Kuwait funnel the majority of those cars through a pipeline to West Africa, Iran, and Iraq. Demand in those countries traditionally meant that after three years used vehicles could enjoy valuation as high as 70% of their original price.
But the drop in oil prices has not only slowed the flow of money; political unrest in those markets has also constricted demand. “Several of the countries where our vehicles are finally destined for are in some sort of unrest or conflict,” Farrow says. “Even in the global financial crisis of 2008, we didn’t face this problem.”
During the global Recession, Dubai was on the brink of bankruptcy. But the revolutions in Libya and Egypt and the banking crisis in Cyprus caused money to flow into Dubai, a safe haven. Property prices started to grow again, and real estate was flipped quickly. Investors were buying exotic cars with the proceeds, as evidenced by the line of exotic car showrooms on one commercial avenue in Dubai.
However, “For the last 12 months in Dubai, nobody has been buying property,” Farrow says, and many of the Bugattis, Ferraris, and Lamborghinis in the showroom windows today are on consignment. “Their owners can’t afford the payments on them anymore.”
Funding fleet was easier when used car values were high — medium-sized rental companies would use a bank loan and a 10% to 20% down payment, with a final balloon payment after three years that would be settled by the proceeds from selling the car. With today’s lower returns, Farrow says the proceeds don’t often cover the balloon payment, forcing some companies to take out cash to pay off the vehicle.
“I’ve had three companies in the last four months asking, ‘What do we do next?’” says Farrow.
Similar to UAE, the populations of Kuwait, Bahrain, and Qatar have high expat ratios with stagnant population growth. The expats come as laborers and middle managers for the region’s construction boom and to work in retail environments. Westerners make up only a fraction of expats; many come from India, Pakistan, Bangladesh, Philippines, and Egypt.
The high number of expats on temporary visas drives monthly rentals and leases. Owning a car — renewing the registration, servicing, and smog testing it — didn’t make sense. While this is still the case, outright ownership is growing, as dealerships have streamlined car-buying procedures and paperwork, Farrow says.
Yet many expats and locals don’t use credit cards, especially in Saudi Arabia, and that comes with obvious problems for rental — some particular to the Middle East. While outright fraud or theft is less of an issue, Saudi Arabia and UAE have instituted a system of red light and speed cameras — and violations are easily tracked electronically to owners, the rental companies. Without a credit card on file, it’s hard to track down renters to pay up.
Unpaid fines prevent the rental company from re-registering the car, but the situation is often more problematic for the violators. Farrow recounts a recent incident in which a rental company took back a large group of leased cars from a construction company, yet many of the company’s expat drivers hadn’t paid their traffic fines. The government holds their visas, and by law had blocked them from leaving the country.
When it comes to expats, Saudi Arabia bucks the norm — its percentage of natives to expats is two to one, with 60% under 25. This has led to a growing demand for cars, particularly used ones. “There are young people coming into the market without a lot of money and looking for cheap transport,” Farrow says.
In Saudi Arabia, “the only thing keeping car rental companies reasonably stable is the growth in the population,” Farrow says. “More people are coming of age to drive, which is creating more demand.”
A Growth Market?
While the Middle East struggles with the new economy, one market may be poised to take off. After Saudi Arabia, the second largest economy in the Middle East and North Africa is Iran, which also has the second largest population in the region — about 80 million people.
Iran has a strong tradition of higher education, engineering prowess, and domestic industrial production. After the signing of the nuclear deal this year, the lifting of sanctions is beginning to generate foreign investment and unleash pent-up demand. Since the breakup of the Soviet Union in the 1990s, Iran is the biggest market to rejoin global trading.
Auto manufacturing in particular is moving into Iran: PSA Peugeot Citroen has finalized a joint production deal; Mercedes-Benz and Volkswagen are exploring partnerships.
New investments call for related services, including personal transportation — and car rental companies would supply the long-term rentals and leases. Iran has been the single biggest importer of up to three-year-old cars from the Middle East and has a tradition of car driving, unlike bicycle and scooter markets such as India. Similar to India, however, many think the rental market will initially develop as cars with drivers, as opposed to self-drive.
Foreign investors are taking a careful approach to Iran based on the tenuous political situation. Banking needs to sort itself out, Farrow says, as wary large foreign banks are still doing business through accounts in Dubai.
“There is opportunity, but a lot of reservations still on both sides,” Singh says. “While there has been some progress, we still need to see how things scale politically.”
For Iran, it’s only a question of when. Global brands are in active talks with franchise partners, with 2018 as a realistic timeline.
While car rental and other service industries process the Middle East’s “new normal” of an extended period of low oil prices, the big picture hasn’t changed too much. Expats will still make up the majority of the work force in most Gulf countries. The used car market will continue to be export based.
Dubai — which grew from a desert backwater 20 years ago into an international business and tourist destination — will continue to grow. “It’s quite a draw for people across the world,” Singh says. “It will bounce back.”
New business models are creeping in.
Carsharing could be a growth area in certain markets, Farrow says. In Abu Dhabi, a carsharing service called eKar makes cars available in apartment blocks that serve crew members for Etihad, the city’s airline. Emirates Airlines presents another opportunity with a larger employee base, and other “free zones” in UAE have 50-story buildings to place carsharing vehicles, as well as near Dubai’s growing metro system.
Uber operates in markets such as Riyadh, Abu Dhabi, and Dubai, and a local competitor, Careem, now operates in 24 cities. But Singh says, heavy regulation and licensing issues are barriers to growth. Unlike the regular Uber model, licensing requirements in the UAE prohibits individuals to use their vehicle to drive for Uber during their spare time.
Another consequence of hard times is market consolidation. While most Middle Eastern markets have the international car rental brands, there are still large numbers of mom-and-pop companies. “Anyone with a few million dirhams gets into the car rental business with 50 to 100 cars,” Singh says. “Now such companies will be severely tested to sustain themselves.”
Moreover, says Singh, the current economic landscape has caused businesses and investors to plan for realistic growth. “In the UAE, especially in certain sectors, we’ve been used to very high profit levels over the past several years,” Singh says. “What we were earning was exceptional, benchmarked against similar businesses across the world. Going forward we need to reset our expectations and start getting used to the ‘New Normal.’”