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, those markets are all in a state of flux due primarily to the falling dominoes caused by the drop in oil prices.
Since exiting the Recession, service industries in the region — including car rental — benefitted from an influx of workers to satisfy the building boom. The region also enjoyed strong vehicle residual values, as the Gulf nations of Saudi Arabia, United Arab Emirates (UAE), Qatar, and Kuwait channeled used cars through a pipeline to West Africa, Iran, and Iraq. But the drop in oil prices has dried up building projects and slowed the flow of money, and used car depreciation rates have dropped to similar levels in the U.S.
“Since oil prices have dropped, that whole dynamic has changed,” says Bob Farrow, a Middle East car rental consultant.
For service industries, the situation is exacerbated in those Middle Eastern countries that rely heavily on an expat workforce. Except for Saudi Arabia, which has a younger domestic population and a growing middle class, other oil-producing nations are grossly imbalanced: in UAE, for instance, the total population of 9 million is made up of 2 million natives and 7 million foreign workers. As new development stalls, expats leave.
Farrow says the Saudi government has put on hold close to 70% of new developments. While these projects are re-evaluated, “Rental companies, the leasing side in particular, are getting massive numbers of cars returned,” Farrow says.
Farrow 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. “It’s the norm we have to accept,” he says.
While the Middle East in general struggles with the new norm, there is one market that 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, with a history of engineering prowess and domestic industrial production. After the signing of the Iran nuclear deal earlier this year, the lifting of sanctions is beginning to generate foreign investment and unleashing pent-up demand. Since the breakup of the Soviet Union in the early 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 venture production deal; Mercedes-Benz and Volkswagen are said to be exploring partnerships.
New investment calls for related services, including personal mobility for the domestic workforce and an influx of expat workers. Similar to other countries in the Middle East, car rental companies would move in to supply 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, Farrow believes the rental and leasing market will initially develop as cars with drivers, as opposed to self-drive.
Farrow and others note that foreign investors are taking a careful approach based on the tenuous political situation. The banking situation needs to sort itself out, Farrow says, as large foreign banks are still wary of the risks and thus are doing business through accounts in Dubai.
We’ll continue to keep readers abreast of developments in Middle Eastern markets, including Iran, as well as markets worldwide as they pertain to transportation, mobility, and car rental.
Look for the next edition of Auto Rental News International, covering Africa-Middle East, soon. The current edition, covering Asia-Pacific, is available here.
Originally posted on Business Fleet