Investment Opportunities in Automotive Sector in RAK -A Sector Study on Automotive Sector in UAE with Regional Perspective

Photograph: Ashok Leylands

Bus Assembly plant in RAKIA

Industrial Park in Ras Al

Khaimah (UAE)

December 2009

2

Contents

Executive Summary 3

Introduction

The Changing Nature of Global Manufacturing 6

The Changing Nature of Supply Chain 8

Global Automotive Production & Major Players 10

Automotive Production in the Middle East 12

GCC Automotive Sector

GCC Economic Outlook-Macro-economic Indicators 13

GCC Macro-economic Indicators 13

GCC Auto Industry SWOT 15

Outlook for GCC Automotive Sector 16

GCC Competitive edge 17

Vehicle Assembly in GCC 19

GCC Source of imports 19

GCC Highlights-Foreign trade in Automotive sector 21

UAE Automotive Sector

UAE Auto Industry SWOT 22

UAE Economic SWOT 23

UAE Business Environment SWOT 23

UAE Automotive Sector trade 24

Automotive Manufacturing in UAE 31

Low cost and Luxury car market in UAE 33

Used Car Market in UAE 35

After- sales Business in UAE 36

Car Rental Market in UAE 37

Rationale for setting up projects in RAK 38

Identified Projects 38

UAE Auto Industry Forecast Scenario 54

Automotive Products & Free Trade Agreements 56

About Ras Al Khaimah 57

About RAK Investment Authority 59

References 64

Annexure

I World Motor Vehicle Production By Country And Type In 2008 65

II World Ranking of Vehicle Manufacturers In 2008 66

III UAE Imports & Re-exports of Vehicles in value term 67

IV List of Automobile Component Manufacturers in GCC 68

V-A UAE Trade figures on components 2006-1008 In value term 70

V-B UAE Trade figures on components 2006-1008 In Numbers 71

VI-A UAE Trade on Tyre & Tyre Products-2008 72

VI-B UAE Trade on Tyre & Tyre Products-2007 73

VII Key Global Tyre Manufacturers Contact Details 74

VIII UAE Trade on Vehicle Battery (Accumulators)-2006-2008 75

IX UAE Trade on Electrical Ignition System-2006-2008 76

X List of UAE car dealers 77

References..

1. Hiromi Oki, Where intra-regional trade in East Asia is

heading, JETRO Research Paper Vol. 06, 2008,

2. Changing Features of the Automobile Industry in Asia - Asia-Pacific Research and

Training Network on Trade

Working Paper Series, No. 37,

July 2007

3. Dubai Chamber of Commerce Economic Bulletin, vol-4, issue-

35, May 2007

4. OICA Statistics on global motor vehicles production

5. Trade Statistics-2008, Dubai Port & Customs, Dubai World

6. BMI report on UAEs Auto sector 2009

7. GOIC report on sector study on Automotive Industry in GCC

2009

8. Dubai Chamber of Commerce Economic Bulletin, vol-4, issue-

35, May 2007

9. Dow Jones Factiva database of compaies.

Websites:

http://www.researchandmarkets.com

/reports/

http://www.worldbank.org

http://www.unido.org

http://www.gulfnews.org

http://www.khaleejtimes.org

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Executive Summary

As automobile industry is becoming more and more

standardized, the level of competition is increasing and

production base of most of auto-giant companies are being

shifted from the developed countries to emerging markets

in developing countries, to take the advantage of low cost

of production. Thus, many developing countries are

making serious efforts to grab these opportunities. The

share of developing countries in global exports of

passenger motor vehicles increased from 11 per cent in

1999 to 18 per cent in 2006. Emerging markets will

contribute about two thirds of the growth in global light

vehicle assembly between 2006 and 2014.

State of the Global Automotive Industry

The supply chain of auto industry has completely changed

over the years. Major OEM (original equipment

manufacturer) players world-wide are increasingly

focusing on basic design and assembly operations as well

as servicing the after-sales market and prefer to deal with a

smaller number of large suppliers. Consequently, the

supply chain is morphing into sub-system integrators,

component makers, and commodity players.

With the gradual opening up of the component sector, now

the challenge is for individual governments to support the

development of domestic critical component and sub-

system suppliers through, interalia, improvement in the

investment environment, stronger patent regimes and

incentives for R&D.

Free trade agreements can have important implications

for the automotive sector because of the improved access

(addressing both tariff and non-tariff barriers) which they

can provide and because of the reduction in tariffs which

Highlights

Global The share of developing countries in global exports of

passenger motor vehicles increased from 11 per cent in

1999 to 18 per cent in 2006.

Global production of passenger cars and commercial

vehicles grew at a rate of 4to 5% between 2002 and

2007.

In 2007 the world production of automotives reached

73.27 million units

In 2008 the production fell by -3.7% due to global

recession. Out of this 75% was car and balance

commercial vehicle

About 69% of the total production was limited to top

10 companies.

In the Middle East, Iran and Egypt are the two main producers of automotives. Approx.1.1 million units

were produced in 2007 at a CAGR of 12.4%.

Highlights

GCC There is no significant manufacturing of Vehicles.

Manufacturing is limited to a few assembly lines for

bus and trucks.

Saudi Arabia and the United Arab Emirates (UAE)

are the two high- consumption markets within

GCC

4-5ml passenger cars in the GCC, out of which

1.4million are in UAE

UAE constitutes about 30% (2007) of the total GCCs demand.

No significant manufacturing of vehicles except some assembly lines.

In 2008 GCC imported 1.2 ml vehicles. About 80% constitutes passenger car and rest trucks & buses.

The growth in terms of value of imports of vehicles in GCC was @ 22% with $24.14bl of imports in 2007.

Japanese automobiles dominate the GCC auto market with 60.98%, while the rest of the pie was shared by

Korean brands at 13.78%, American brands at 10.15%,

and European brands at 8.20%.

There is no significant manufacturing of components. A few small scale manufactures are the active and

catering to the requirements of aftermarket.

The value of import of new tyres has gone up from USD 817 million in 2003 to USD 1.3 billion in 2007

(CAGR 12%).

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can occur under them. Modern agreements typically also

cover a wide range of issues other than tariffs and these

can be relevant to trade in automotive products or

services.

Global production of passenger cars and commercial

vehicles grew at a rate of 4 to 5% between 2002 and 2007.

In 2007 the world production of automotives reached 73.27

million units. In 2008 however, the production fell by -

3.7% due to global recession to 70.53 million consisting of

52.6 million (75%) cars and 17.9 million (25%)

commercial vehicles.

About 69% of the total production was limited to top 10

companies. This level of output was equivalent to USD

2.8 trillion. It employed over 8 million workforce directly

and five times as much indirectly. Thus nearly 50 million

workforce depend on auto industry for their livelihood.

Middle East in general and Gulf Cooperation

Council (GCC) in particular is a fast growing market for

automotive industry. The region has a high ratio of cars

per household. GCC countries with their high GDP is a

high consumption vehicle market and present enormous

untapped opportunities for the manufacture of vehicles

and its components. The combination of relatively high

living standards, a growing population in the region, as

well as favourable oil prices, have been the key driving

forces behind the growth in the auto sector in the region.

Despite an expected slowdown in auto sales during 2008-

2009, the outlook based on resurgence in consumer

demand on the back of a pick-up in the global economy

is likely to lead to robust growth in 2010 and beyond.

Whilst the GCC (Consisting of UAE, Saudi Arab,

Kuwait, Oman, Qatar and Bahrain) does not possess a

sizable domestic automobile manufacturing, its high

national wealth has created a niche market for sales of

imported vehicles in recent years, and there is a large re-

export trade based on the countrys regional status as a key strategic location, With almost 4m passenger cars in

the GCC, out of which 1.4million are in UAE; this region

offers opportunities for car parts and accessories

distributors, retailers and the aftermarket industry, in

general, a huge opportunity to enter a market least

affected by the current credit crunch. Saudi Arabia and

the United Arab Emirates (UAE) are the two high-

consumption markets within GCC and present

enormous and untapped opportunities for automotive

manufacturers.. In 2008 total imports in this sector in

UAE was $16.9bl. of which 77% was imports and

balance re-exports. As regards the 2008 distribution of

total trade within this sector by activity, motor vehicles

accounted for 68%, followed by auto component 24% and

tyre was 8% respectively.

Highlights

United Arab Emirates (UAE)

There is no significant manufacturing of vehicles. Manufacturing is limited to a few assembly lines

for bus and trucks.

In 2008 total imports in the automotive sector in UAE was approx. $16.9bl. of which 77% was

imports and balance re-exports. As regards the

2008 distribution of total trade within this sector

by activity, motor vehicles accounted for 68%,

followed by auto component 24% and tyre was

8% respectively. UAE trade of component and accessories in 2008

were $2.8bl out of which 29% was re-exported.

The major source of imports being Japan, Germany, USA and China The top destinations

(Re-exports) of motor vehicle parts and

components are Iran, Russia, Iraq, Libya and

Tanzania respectively.

The major items of imports are Bumpers & parts, Suspension shock-absorbers, Parts & accessories

for bodies, Clutches & parts, Brakes and servo-

brakes, Road wheels & parts & accessories and

Steering wheels, columns & boxes

GCC Import of auto components too have shown a

healthy double digit growth. Main components

are: tyres, mounted brake components, gear

boxes, drive axle, components, mufflers and

exhausts, automotive spring (leaf and

helical),glass, lead acid batteries and

accessories such as car radios and air

conditioners. The individual import figures of

major items have been given in the report.

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Despite the size and potential of the UAE market and its

strategic location and well developed logistic support

system, the emirates still have no significant passenger

car assembly or manufacturing operations, although this

is set to change in coming years. The presence of even a

car assembly line in UAE would open the way for a local

tie-up with a foreign car manufacturer seeking to tap into

growing demand for low-cost cars in Africa, the Middle

East, and Asia.

The UAE has also been making strategic investments in

European auto firms, which could pave the way for

building up a domestic industry. Leading the investment

has been Abu Dhabis Aabar Investment, an Abu Dhabi investment fund, bought a 9.1% stake in German autos

company Daimler in March 2009.

Swedish automaker Scanias and Indias Ashok Leyland have set up their trucks and bus assembly units in UAE.

However, considering the potential, the manufacturing in

this sector is insignificant and presents enormous

untapped opportunities for the manufacture of vehicles

and its components

One of the strategies of UAE has been to promote

industrialization away from oil and gas based industries

in order to ensure a stable broad based economy for a

balanced growth in the medium to long term. Automotive

industry is an ideal investment scenario. Besides saving

expensive imports, it tends to drive all-round

development by investing in R&D, developing

ancillary industries and generating employment

opportunity for the local population. UAE has taken a

number of steps in broadening the industrial base away

from oil and gas.

The competitive edge of the UAE lies in its excellent

infrastructure such as roads, sea ports, power and

telecommunication and geographical proximity to

MENA, Europe and Asian markets. Apart for this, UAE

has a stable government and sound macro-economy; high

per capita GDP & high standard of living. Fiscal Benefits

include 100% income and corporate tax exemptions,

100% capital and profit repatriation, fully convertible

currency, no financial risk and relatively low Inflation.

Regulatory benefits include 100% ownership in Free

Zones, no trade barriers or quotas, easy licensing

procedures & company formation, liberal labour laws

and no restrictions on hiring expatriate. All these

contribute to lower cost of operations.

Identified Projects for RAK (UAE)

Based on import substitutions of major components

Car/ bus/ trucks assembly/ manufacturing unit

Tyre & Battery manufacturing units

Auto components manufacturing units of both metallic and plastics particularly,

Bumpers & parts

Suspension shock-absorbers

Parts & accessories for bodies

Clutches & parts

Brakes and servo-brakes

Road wheels & parts & accessories,

Car Air conditioners

Automobile ignition system

Rationale for Setting up Project in RAK (UAE)

Competitive Landscape e.g.

Benefits 100% income and corporate tax exemptions

100% capital and profit repatriation,

Fully convertible currency

100% ownership in free zones

Exemption of equipment and raw material required by industrial units from customs duty.

No trade barriers or quotas,

Easy licensing procedures & company formation, Liberal labour laws

No restrictions on hiring expatriate.

Sound Macro-economy & favourable Govt. policies

Excellent infrastructure and logistic support system

Increasing demand for vehicles and components

Strategically located

Base for Raw materials- Aluminium, Plastics and float glass

Aluminium -DUBAL (Dubai)

Plastics-ADNOC(Abu Dhabi), SABIC (KSA)

Glass- Guardian (RAK), Emirates Float Glass (Abu Dhabi)

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Introduction

The automotive sector, comprising of the automobile and auto component sub sectors, is one of the key segments of the

economy having extensive forward and backward linkages with other key segments of the economy. The automotive

industry is no stranger to change. Many of the changes occurring in the global marketplace today - tightened credit

markets in a capital-intensive industry, declining consumer confidence, increased government involvement - are the

most recent manifestations of this reality.

The combination of these new realities with familiar industry challenges such as volatile raw materials costs and fuel

prices, tighter regulations, capacity and sourcing challenges and the need to satisfy consumer demand for cleaner,

greener cars, have combined to create a business environment that has had a profound effect on the global automotive

industry.

With the global economy in the midst of its worst recession, cash conservation has been the key element to survival for

many automotive companies. However, to survive and prosper successful companies still have to invest for the future.

The silver lining for the auto industry is that the price of oil is set to remain softer during this global downturn, as are

commodity prices. Some experts feel the global slowdown in the auto sector, although harsh, will not be as

pronounced as that during the recession of the early 1990s thanks to the strength of the BRIC nations (Brazil, Russia,

India, and China).

The Changing Nature of Global Manufacturing and Trade in Automotive Products and Services

As automobile industry is becoming more and more standardized, the level of competition is increasing and production

base of most of auto-giant companies are being shifted from the developed countries to developing countries to take the

advantage of low cost of production. Thus, many developing countries are making serious efforts to grab these

opportunities. Auto-giants such as General Motors, Ford, Toyota, Honda, Volkswagen, and Daimler Chrysler, to shift

their production bases in different developing countries which help them operate efficiently in a globally competitive

marketplace.

Different countries adopted different policies to handle the overcapacity problem in the sector. Specialization in

automobile sector is increasingly becoming segment specific as each of these countries is finding its niche. For example

in the emerging markets e.g. China is specalising in components, India in two wheelers and small vehicles, Thailand in

pick-up trucks and passenger cars and Indonesia in utility vehicles. Thailand is exporting to developed countries and

strengthening its position in ASEAN. Indonesia is also increasing its trade relation with ASEAN. India is concentrating

on Middle East and south Asia beside traditional developed country destinations. With the gradual opening up of the

component sector, now the challenge is for individual governments to support the development of domestic critical

component and sub-system suppliers through, interalia, improvement in the investment environment, stronger patent

regimes and incentives for R&D.

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As with other industries, reductions in trade barriers and lower shipping costs, among other factors, have led to

changes in the global automobile industry. These changes include increased demand for and production of vehicles

in developing countries; the adoption of more globally focused strategies by major automotive producers (of both

vehicles and parts); the development of integrated supply chains, including the use of e-commerce; increased

involvement by suppliers, including in the development, manufacture and bearing of risk; greater diversity of roles

among suppliers, ranging from specialist suppliers to component integrators; and highly specialised trade in vehicles

and components. These changes have resulted in significant restructuring within the industry, particularly among

parts manufacturers, with first-tier suppliers typically operating on a global basis.

According to JETRO data, the share of developing countries in global exports of passenger motor vehicles increased

from 11 per cent in 1999 to 18 per cent in 2006. Papers released for the Review suggest that emerging markets will contribute about two thirds of the growth in global light vehicle assembly between 2006 and 2014. The papers also note that the automotive components industry is becoming increasingly global, with many companies now having a

production network of well over 20 locations around the world. Manufacturing services, such as design and research

and development are increasingly performed on a worldwide basis.

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In some respects, however, the motor vehicle industry has not changed as much as other sectors. In contrast to

the information, communications and telecommunications industry, where tariff barriers are mostly at zero as a

result of the WTO Information Technology Agreement, regional and global production networks remain less

significant. This is reflected in the patterns of trade - in East Asia external trade [i.e. primarily export of assembled vehicles] is greater than intra-regional trade [of both vehicles and parts] and in investment patterns, as countries,

remain focused on getting behind tariff barriers rather than efficiency-seeking production.

While these factors have all operated to reduce the opportunities for the significant growth of production networks,

the experience of other industries suggests that, as barriers are reduced further - through unilateral action and

bilateral, plurilateral and multilateral agreements - intra-industry trade will increase, bringing with it

opportunities in particular for trade in specialised parts and vehicles.

The Changing Nature of Supply Chain:

The supply chain of auto industry has completely changed over the years. Major OEM (original equipment

manufacturer) players world-wide are increasingly focusing on basic design and assembly operations as well as

servicing the after-sales market and prefer to deal with a smaller number of large suppliers. Consequently, the supply

chain is morphing into sub-system integrators, component makers, and commodity players. The segregation is

increasingly defined by risk sharing which was earlier defined by only cost pressure. Tier 1 suppliers (concentrating on system supply, module assembly and sub supplier management) are taking increasing risk from major players

shifting the cost pressure to Tier 2 supplier who concentrate only on production of sub components.

In general, suppliers can be divided into few groups such as Systems Integrator (capable of designing and integrating

components, subassemblies), Global StandardizedSystems Manufacturer (specialist in design, development and manufacturing of complex systems), Component Specialist (produces specific component or subsystem for a given car

or platform) and Raw Material Supplier. Many companies (such as Volkswagen and Renault) feel that a mono-supplier strategy (such as in Ford) is not good but

having limited number of large suppliers are of a better strategy. Ford pushes the supplier to own the tools, a strategy of

pushing the risk associated with volume fluctuations onto the supplier rather than Ford. On the contrary, Volkswagen

and Renault, are satisfied with 2 suppliers in each region with an additional one having less responsibility but ready

replace any of the existing supplier. Globally, these companies want their suppliers to invest near their plants or transfer

their knowledge to local players. Companies bring the quality standards and price reduction condition while developing

the contract with the suppliers. In general, contract length and overall value are related to price reduction targets that the

supplier is able to commit to. For some of the assemblers, suppliers can also propose alternative designs that have the

same economy results. The experience shows that magnitude of reduction per year varies from 2 to 8 percent due to

achieving economies of scale. The competitive pressure in the industry is increasingly bringing the cost reduction

targets as a major management decision of assemblers. Nowadays, major companies target cost reduction along with the

design and models over a period of time. For example, German companies are targeting price reduction of 13% for the

next generation model. Ford and Renault targets price reduction of 5-8% per annum and the figure is 13% for Toyota

over 3 years

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The components industry is now increasingly concentrating in companies that can design and provide systems and sub-

assemblies across different markets. Several supplier companies were

created by assemblers. In fact, in-house component manufacturing division were given separate identities and

encouraged to compete with other companies. For example, Delphi was created out of

GMs component activities. Similarly, Visteon (formerly part of Ford), Magneti, Marelli (Fiat) and ECIA (formerly owned by Peugeot-Citroen and now fused with Bertrand Faure) were also created in the similar line. M&A activities

among suppliers also became a common feature in 1990s. Lucas and Varity merged in 1996, T&N was taken over by

Allied Signal; Bertrand Faure was acquired by ECIA. New global companies were created through the fusion of smaller

manufacturers also.

In Asia-Pacific region, the growth of component manufacturers has taken a different route. Most of the Japanese

producers followed a tight relationship with their suppliers (independent or quasi-independent). The existence of the

keiretsu system (business affiliation) in Japan greatly facilitated such an arrangement. But other manufacturers

especially Korean, Chinese and Indian gave lot of importance on price and quality while buying from number of trusted

suppliers. As a result of this indigenous auto-component sectors are thriving in many Asian countries though some

MNCs are also present.

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Global Automotive Production & Major Players

The global automotive industry is a highly diversified sector that comprises original equipment manufacturers (OEM),

component suppliers, dealers and agents, service stations, environmental & transport safety groups, and trade unions.

The growth in world production of automotives is given in Fig.1.

WORLD MOTOR

VEHICLE PRODUCTION

in million units

Year Quantity

2003 60.66

2004 64.50

2005 66.48

2006 69.22

2007 73.27

2008 70.53

Source- OICA Statistics Fig-1 Global production of automotives

According to Fig. 1 above, world production grew at a rate of 4% between 2002 and 2007. In 2007 the world production

of automotives reached 73.27 million units. In 2008 however, the production fell by -3.7% due to global recession to

70.53 million consisting of 52.6 million (75%) cars and 17.9 million (25%) commercial vehicles ( Fig-2).

Category wise distribution of 2008 production

in million units

Type Cars

Commercial

Vehicles

Quantity 52,637,206 17,889,325

Source- OICA Statistics

Fig-2 Product distribution

Region wise breakup of automotive production in 2008 is shown in Fig.3.According to this, Asia pacific, Europe and

NAFTA countries contributed maximum towards world production in 2008. (Annexure-I)

60,6664,50 66,48

69,2273,27 70,53

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

2003 2004 2005 2006 2007 2008

Qu

anti

ty in

mill

ion

s

World Vehicle Production in 2008

Cars75%

Commercial

Vehicles25%

Category wise distribution of 2008 production

11

World Motor Vehicle Production By Region In

2007-2008 in million units

Region 2007 2008 % Change

Europe 20,834,089 19,590,808 -5.90%

CIS 2,018,489 2,179,977 8.00%

NAFTA 15,454,764 12,974,058 -16.10%

South America 3,699,295 3,942,457 6.60%

Asia-Oceania 29,717,618 30,204,954 1.80%

Middle East 1,101,713 1,166,212 5.80%

Africa 440,093 468,065 7.00%

Total 73,266,061 70,526,531 -3.7%

Source- OICA Statistics Fig-3 Global production of vehicles by region

Auto industry produced over 70 million vehicles in 2008. About 69% of the total production was limited to top 10

companies. This level of output was equivalent to USD 2.8 trillion. It employed over 8 million workforce directly and

five times as much indirectly. Thus nearly 50 million workforce depend on auto industry for their livelihood.

World Ranking of Top 10 Vehicle Manufacturers in the World in 2008 (Annexure-II)

Refer Annexure- for the list of top 50 companies and their production

Rank Total CARS LCV HCV HEAVY

BUS

1 TOYOTA 9237780 7768633 1102502 251768 114877

2 GM 8282803 6015257 2229833 24842 12871

3 VOLKSWAGEN 6437414 6110115 271273 46186 9840

4 FORD 5407000 3346561 1991724 68715

5 HONDA 3912700 3878940 33760

6 NISSAN 3395065 2788632 463984 134033 8416

7 PSA 3325407 2840884 484523

8 HYUNDAI 2777137 2435471 85133 151759 104774

9 SUZUKI 2623567 2306435 317132

10 FIAT 2524325 1849200 516164 135658 23303

Sub-total 47,923198 39,340128 7,496028 812961 274081

Source- OICA Statistics

Europe27%

CIS3%NAFTA

18%South America

5%

ASIA-OCEANIA

44%

Middle East2%

Africa1%

World Motor vehicle production by region in 2008

12

Automotive Production in the Middle East

Middle East in general and Gulf

Cooperation Council (GCC) in particular is

a fast growing market for automotive

industry. The region has a high ratio of cars

per household. GCC countries with their

high GDP is a high consumption vehicle

market and present enormous untapped

opportunities for the manufacture of

vehicles and its components.

The combination of relatively high living

standards, a growing population in the

region, as well as a resurgence in oil prices,

have been the key driving forces behind the

growth in the auto sector in the region.

Despite an expected slowdown in auto sales

during 2008-2009, the outlook based on

resurgence in consumer demand on the back

of a pick-up in the global economy is likely

to lead to robust growth in 2010 and beyond.

In the Middle East, Iran and Egypt are the two main producers of automotives in the region. Production of automotives in

the Middle East is shown in Fig.4 According to this, the production of automotives increased from 0.88 million units in

2005 to 1.1 million units in 2007 at a CAGR of 12.4%.

Middle East automotive production in 2008

Year Egypt Iran Total % change

2005 64,549 817,200 881,749

2006 91,518 904,500 996,018 12.96%

2007 104,473 997,240 1,101,713 10.61%

2008 114,782 1,051,430 1,166,212 5.85%

Source- OICA Statistics

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

1.400.000

2005 2006 2007 2008Q

uan

tity

Middle East Automotive production in 2008

Egypt

Iran

Total

Fig-4 Middle East Automotive production in 2008

13

GCC Economic Outlook

Gulf economies are benefitting from the global economic recovery. Although it is set to contract this year, real GDP

should bounce back in 2010. Expansionary fiscal policy is a key part of the recovery story. If oil price drops substantially

in 2010, the bullish outlook could be jeopardized. Despite the recovery, private sector activity could still be constrained by

slower growth in bank credit.

In its latest GCC brief, National Bank of Kuwait (NBK) reports that the recent months have witnessed an overwhelming

consensus that the global economy is on the road to recovery, suggesting that the bottom of the financial crisis is behind.

A number of recent economic indicators and signs strongly suggest the crisis has subsided. The most recent projections of

the IMF show the world economy is expected to contract by 1.1% in 2009 and expected to recover 3.1% next year. This

represents an improvement of 0.3 and 0.6 percentage points from the Funds projections three months earlier, respectively. There is, however, less agreement among economists on the shape of the probable global recovery; W, V, U or something in between.

The road to this recovery has been cemented to a large extent by governments around the globe expanding fiscal and

monetary policies, bailing out firms, and injecting capital and liquidity in the banking system. Nowadays, new economic

concerns are emerging as governments, including the G20, start talking about the post crisis environment and the proper

timing of an exit strategy. Exit, of course, entails the withdrawal of governments stimulus, whenever the signs of solid and durable recovery are established. More likely, such an exit strategy will not be executed in most countries before

the second half of 2010.

World economic recovery is good for the region. The Gulf economies are definitely among the top beneficiaries of any global rebound. As oil continues to be the major

driver of GCC macro performance, the higher oil prices that started stabilize since June of this year began to gradually

restore regional confidence and to leverage its favorable prospects. Recent consumer confidence surveys show a

substantial improvement relative to earlier in the year. Indeed, the regions economic performance and outlook have always been an oil story. Over the last 10 years, oil accounted for an average of 46% of GDP, 75% of merchandise

exports, 84% of governments revenues. Numbers were even higher in recent years.

The global recovery, if robust, is expected to provide further support to oil prices in the near term. For 2009, however, it

has been projected that the real GDP of the region to contract by 2.5%, affected mainly by cuts in oil production. The

largest GDP contractions are to be recorded in the UAE and Kuwait. Growth in the non-oil GDP of the region is expected

to continue in 2009, though at a slower pace (2%), compared to an average growth of 7% in the previous five years.

Meanwhile, it has been projected that Gulf economies will post 4.8% real growth in 2010, outperforming most regions

around the world. There are, however, some downside risks to this projection.

. but regional fiscal policies should be supportive Oil prices have been very volatile since Q3-08. The average monthly price of the OPEC basket dropped from USD 131

per barrel in July 2008 to USD 39 in December, but had risen back to USD 78 by late October 2009. The current price

level is considered fair by OPEC members who also prefer to see oil prices stabilizing at their current levels. OPEC members have so far insisted on keeping the cartels production level unchanged, and see no need to reverse the daily 4.2 million barrel in production cut that entered into force since November of last year. Looking ahead, oil prices may move

in either direction depending on a number of issues, including the status of the global economy, demand and supply

conditions for oil, geopolitics, the US dollar outlook, and any other oil-related changes in Western economic policies. Any

forecast of the future direction of oil prices carries more uncertainty than usual. For Gulf countries, the major concern is to

see prices slide again below USD 50 a barrel or below the breakeven price that balances governments budgets. Although such a scenario would have a negative impact on the regions finances and outlook at large, but the net impact would depend on governments and private sectors reactions to lower oil prices. Historically, government spending programs, especially on development projects were highly correlated with oil prices. In 2009 for example, and with the exception of

Saudi Arabia and UAE, other GCC countries announced a small rise or a cut in their spending.

If prices witness a substantial drop in 2010 and governments, out of budgetary concerns, decided to reduce spending, then

the bullish outlook of the region would be jeopardized. Instead, Gulf governments would be advised to exploit the positive

atmosphere and to build on it with more spending and more public-private projects. They also ought to pursue economic

reforms and introduce further improvement to the business environment.

14

as well as banks Banking services are a leading private sector activity in the Gulf region, contributing between 4-12% of the regions GDP, despite the large share of the oil sector. However, the financial results of most banks across the region during the first half

of 2009 show a drop in profits relative to the same period of last year. At any rate, GCC banks have always been among

the strongest and safest banks in the region according to most financial indicators, including capital, profitability,

government backing, and prudent risk management. It is believed that GCC banks have drawn the proper conclusions, like

others around the globe, and should remain healthier and in better shape than banks in other emerging economies. 2010 is

expected to see the resumption of growth in bank intermediation, though at a slower pace than in previous years.

GCC Macroeconomic Data 2006 2007 2008E 2009F 2010F 2011F 2012F 2013F

Real growth (%) UAE 9.4 7.6 7.7 0.9 4.3 6.7 7 6.7 Saudi Arab 3.2 3.4 4.2 0.4 3.3 3.7 4 3.9

Qatar 9.9 8.4 14.3 12.4 19.9 8.6 4.7 3.7

Kuwait 6.3 4.7 8.5 0.7 4.3 5.1 5.4 5.2

Bahrain 6.7 8.1 6.1 2.4 3.1 4.6 4.1 1.4

Oman n/a n/a n/a n/a n/a n/a n/a n/a

Nominal GDP (US$ bn)

UAE 170.1 198.7 240.4 201 232.3 266.7 310.6 360.5 Saudi Arab 356.6 381.7 468.1 331.8 393.6 425.1 455.5 467.3

Qatar 56.9 70.4 95.8 75.2 105.2 127.6 140.6 147

Kuwait 101.7 112.1 148.4 108.6 130.9 14909 165.8 175.3

Bahrain 15.8 17.5 18.6 18.1 19.7 21.6 23.5 25.3

Oman n/a 40.3 n/a n/a n/a n/a n/a n/a

CPI (Average %)

UAE 13.5 13.3 14 4.5 6.5 7.3 6 6

Saudi Arab 2.3 4.1 9.9 1.3 3 3.5 3.7 3.5

Qatar 11.8 13.8 15.1 9.2 8.1 6.5 5.4 5.6

Kuwait 3 5.5 10.8 7 5.6 4.5 4 3.2

Bahrain 2 3.8 7 0.8 2.8 3 2.7 2.5

Oman n/a n/a n/a n/a n/a n/a n/a n/a

Population (m)

UAE 4.9 5.3 5.6 5.7 5.9 6.2 6.6 6.9 Saudi Arab 23.7 24.3 25 25.6 26.3 26.9 27.6 28.3

Qatar 1.1 1.3 1.6 1.7 1.9 2 2.2 2.3

Kuwait 3.2 3.4 3.6 3.8 3.9 4.1 4.3 4.6

Bahrain 0.9 1 1.1 1.1 1.2 1.2 1.3 1.4

Oman n/a 2.6 n/a n/a n/a n/a n/a n/a

GDP per capita (US$)

UAE 34,550 37,690 42,690 35,340 39,660 43,030 47,330 52,160 Saudi Arab 15,060 15,700 18,710 12,950 14,980 15,790 16,510 16,530

Qatar 50,190 52,660 61,420 43,670 55,780 62,330 64,970 64,380

Kuwait 31,950 32,980 41,510 28,810 33,280 36,480 38,380 38,460

Bahrain 17,190 16,810 16,510 16,090 16,660 17,390 17,990 18,470

Oman n/a 15,546 n/a n/a n/a n/a n/a n/a

Net FDI (US$ bn)

UAE 1.9 6.6 7.2 3 6.1 4.8 6 6.5

Saudi Arab 17.5 11.2 15 13.6 13.9 14.4 15.7 17

Qatar 32 -4,125 -2,880 -1,290 -2,120 -950 -1,125 -855

Kuwait -8,056 -13,563 -11,078 -9,503 -10,907 -11,994 -13,976 -15,334

Bahrain 1,935 87 -100 320 190 -107 -97 46

Oman n/a n/a n/a n/a n/a n/a n/a n/a

Source- Deloitte Touche Tohmastu- Report on GCC macro-economy indicators, E-Estimated; F-Forecast

15

GCC Automotive Sector

GCC Auto Industry SWOT

Strengths

The regional economy is still liquid with strong current account balances which will sustain growth under the present depressed economic conditions for some time. High business confidence and an increase in disposable income provide a favorable background for the automotive sector.

The SUV and luxury car markets are strong and growing on the back of rising levels of young drivers and disposable income

Fuel prices are the lowest in GCC

GCC has potential to become a base for aluminum and plastics based industry due to availability of raw materials locally. This in turn can be developed into a base for aluminum and plastic based auto component industry

There is no local production of passenger cars in GCC and only a small number of commercial vehicles are assembled.

Weaknesses

The domestic market is largely dependent on international car manufacturers for their style and design, and hence its profitability is hostage to the demands of those major suppliers.

Lack of awareness of automotive quality standards

Opportunities

The used car market is expanding. This will help boost spare parts demand locally.

As a result of climatic conditions and a rugged terrain, there is a vibrant and growing market for accessories and spare parts

Trade liberalization between the Gulf Co-operation Council (GCC) states and the EU will open regional markets to more European imports

Plans for a car assembly plant could help spawn a local automotive ancillary manufacturing industry.

Proximity to markets in MENA region and hence potential for export

Threats

A potential threat exists if other regional suppliers (Egypt, Turkey, Iran and possibly, India) become competitive in a wider range of vehicles. But this threat is not significant to the luxury vehicle market.

16

GCC Automotive Sector Outlook for GCC Automotive Market

Whilst the GCC ( Consisting of UAE, Saudi Arab, Kuwait,

Oman, Qatar and Bahrain) does not possess a sizable

domestic automobile manufacturing, its high national wealth

has created a niche market for sales of imported vehicles in

recent years, and there is a large re-export trade based on the

countrys regional status as a key strategic location,

The current global financial crisis does not seem to have

affected GCC vehicle market significantly according to

market analysts. Major economies such as Saudi Arabia

and UAE are still growing though at a reduced pace during

the slow down phase of global economies. Experts feel the

impact will be significant only if the oil price remains

subdued for a longer duration.

Reported research show that the Japanese automobiles

dominate the GCC auto market with 60.98%, while the rest

of the pie was shared by Korean brands at 13.78%, American

brands at 10.15%, and European brands at 8.20%. With

almost 4m passenger cars in the GCC, out of which

1.4million are in UAE; this region offers car parts and

accessories distributors, retailers and the aftermarket

industry, in general, a huge opportunity to enter a market

least affected by the current credit crunch.

Automotive market in GCC is buoyant. According to one

industry estimate, GCC imported 1.2 million vehicles in

2008. Analysts feel the automotive sector in GCC is growing

at an impressive rate of over 10% annually. The growth in

terms of value of import of vehicles into GCC is given in

Fig.5. Overall, the dollar value of imports has grown at an

impressive rate of 22% CAGR.

Growth in import of vehicles into GCC

In billion USD

Item 2007 2006 2005 2004 2003

Vans and Buses 1.11 0.72 0.62 0.49 0.55

Cars 19.42 14.91 12.06 9.61 8.40

Trucks 3.61 2.10 1.70 1.55 1.78

Total 24.14 17.73 14.38 11.65 10.74

GCC- Highlights

Higher per capita income, growing population and low fuel cost are driving the demand for

automotives in GCC. This has led to a rapid

development of an automotive market here.

In spite of the current downturn in the world financial market, auto market in GCC is very

strong.

GCC imported 1.2 million vehicles into GCC in 2008. 80% of these are cars.

Saudi Arabia and UAE are two prime markets in GCC leading the way. Import of vehicles is

growing at a rapid rate in GCC. The growth rate

is in excess of 10% per annum between 2003

and 2007.

The Automotive component industry too has shown a double digit growth rate. Large number

of used cars on road and inclement road and

weather conditions are fueling the demand for

spare parts.

Based on import data, import of vehicles into GCC grew from USD 10.75 billion in 2003 to

USD 24.1 billion in 2007. This is equivalent to

22% CAGR.

Import of auto components too have shown a healthy growth rate. Main components are:

Tyres, Mounted brake components, Gear boxes,

Drive axle, components, Mufflers and exhausts,

Automotive spring (leaf and helical),Glass,

Lead acid batteries and Accessories such as car

radios and air conditioners.

In the case of vehicles, apart from a handful of truck and bus assembly units there is no serious

automotive manufacturing activity in GCC

currently. GCCs entire demand for cars are met through import.

In the case of tyres too there is no manufacturing unit in GCC.

In the case of components, there are manufacturing units, currently producing these

items in the GCC. But majority of them supply

to aftermarket only.

17

Fig-5 Growth in import of vehicles into GCC

Saudi Arabia and the United Arab Emirates (UAE) are the two

high- consumption markets within GCC and present

enormous and untapped opportunities for automotive

manufacturers. The total automotive market in GCC can be

broadly divided into the passenger cars (including SUVs), trucks,

and buses.

Saudi Arabian Market:

Saudi Arabia with highest population in GCC and blessed with

plentiful oil resources along with its strategic location in the

Middle East is a booming automotive market. Automotive import

into Saudi market is given below. Automotive import into Saudi Arabia

In USD, million

2007 2006 2005 2004 2003

Vans and Buses 400 224 315 247 263

Cars 6,991.00 6,700.00 6,305.00 4,274.00 3,283.00

Trucks 1,385.00 923 1,172.00 862 9,61.0

Saudi- Total 8775 7,847.00 7,791.00 5,384.00 4,507.00

GCC Total 24,141.00 17,730.00 14,386.00 11,646.00 10,748.00

As % of GCC total 36% 44% 54% 46% 42%

As can be seen from above Table, the share of Saudi automotive market has declined over the years to 36% of GCC

market in 2007.The passenger car segment is the largest and the most important segment of Saudi auto market and

contributed around 80% of the total vehicle sold in Saudi market in 2007.

Toyota is the leading market brand in the Saudi Arabia, followed by Nissan. Daimler is the leading automotive firm in

the commercial vehicle market. The German company operates through the Mercedes-Benz brand. In 2004, Japanese

cars captured approximately 36% of the Saudi market with Toyota topping the list with 29.5%. US manufacturers were

0,00

5,00

10,00

15,00

20,00

25,00

30,00

2007 2006 2005 2004 2003

Growth in import of vehicles into GCC CAGR 22%

Trucks

Cars

Vans and Buses

GCC- Competitive edge

The competitive edge of the GCC lies in the following

aspects:

Resilient economies High per capita GDP

High standard of living

Reasonably low inflation

Favorable tax environment with no personal, corporate, value added or withholding tax

Favorable business climate Excellent infrastructure such as roads, power and

telecommunication Geographical proximity to

MENA, Europe and Asia markets

Governmental encouragement

One of the strategies of all GCC States has been to

promote industrialization away from oil and gas

based industries in order to ensure a stable broad

based economy for a balanced growth in the medium

to long term.

Automotive industry is an ideal investment

scenario. Besides saving expensive imports, it

tends to drive all-round development by investing

in R&D, developing ancillary industries and

generating employment opportunity for the locals.

GCC states have taken a number of steps in

broadening the industrial base away from oil and

gas. Incentives given to entrepreneurs are:

Exempt equipment and raw material required by industrial units from customs duty.

Exempt profits and earnings of industrial projects from taxes for a specified period.

Assistance in export of goods manufactured locally.

18

the other prominent manufacturers with 25% market share with GM leading the pack from American suppliers.

Popularity of Australian Built cars is on the rise and sales have improved dramatically since 2006.

Car rental services and limousine services are among the largest buyers of passenger cars in Saudi Arabia. Majority of

car purchases were made through local suppliers although some governmental agencies such as Saudi Arabian National

Guard (SANG), the Ministry of Defense and Aviation (MODA) and the Ministry of Interior (MOI) are believed to

purchase directly from overseas suppliers.

Vehicle Assembly in Saudi Arabia

There is no car assembly plant in Saudi Arabia. The Saudi automotive production base is limited to a handful of firms

that assemble commercial vehicles under contract with foreign automakers. The main brands of commercial vehicles

assembled include, Mercedes, Volvo and MAN Trucks.

National Automotives Industry, Jeddah, operates a truck assembly company in

partnership with Mercedes group Germany. The plant is designed and run by Mercedes.

Components are imported in CKD condition and assembled here.

The plant has a capability to assemble 15-20 trucks per day to make trucks of 20Ton capacity. Products of this

company is sold in GCC as well as exported. Demand for the truck is very strong. This is indicated by the expansion

drive of Mercedes.

Volvo Vehicle truck assembly, Jeddah was set up as a joint venture between Zahid

Tractors, the sole distributor of Volvo vehicles and Volvo Group of Europe. The plant

assembles Volvo trucks from CKD units. The plant has a capacity to assemble 18

trucks per day. However, their current production level is 2 -3 trucks per day.

In January 2009, MAN, together with its Saudi Arabian partner Haji Husein Alireza &

Co. Ltd., opened a truck assembly plant in Jeddah.

The plant is designed to produce 3,000 vehicles a year in single-shift operation. It assembles MAN TGA-WW trucks

and semi-trailer tractors, initially for the local market. In 2007, MAN's share of the market for trucks over 16 tons was

22.7%.

In summary, automotive demand in Saudi Arabia is largely met through imports. The car import is tightly regulated by

the authorities. Prior to 2003, the government set a fixed gross profit margin of 15% for car importers. The ending of

this policy in 2003 stimulated further growth in the market. Nonetheless, until 2005, when the country finally gained

entry to the World Trade Organisation, the Saudi Seaports Authority continued to impose a fixed customs duty,

insurance and freight charge on each vehicle imported into the country. Motor vehicles are currently subject to a 5%

customs tariff. Imported cars are sold through sole distributors who also provide after-sales service. There is greater

competition, however, in the market for spare parts. Sizeable volumes of automotive imports are re-exported to

neighboring countries such as Sudan, Yemen, Djibouti, Ethiopia and Eritrea.

Saudi Arabia Component Sector

Saudi Arabia component market is a dominant one in the Middle East. Saudi automotive component market remains

an import driven market in spite of the presence a large number of local manufacturers. Saudi Arabia imported more

than $650 million worth of parts and service equipment in 2006, compared to $630 million in 2005. Large population

of used cars and extreme weather conditions have boosted the requirement of spares for repair and maintenance.

Presently, Japan, USA, Germany, Australia, and South Korea, are the major suppliers of automobiles, and spare parts.

Tyres come from dozens of countries around the world.

Mercedes

group

Volvo Group

MAN

19

There are over 350 dealers for supplying automotive parts in Saudi

Arabia.U.S. companies command a leading position in the supply

of transmission, steering, suspension, and braking components

and parts. Nonetheless, Japanese car manufacturers and spare

parts suppliers still command the lion share of the Saudi market at

more than 40 %.

Manufacture of components in Saudi Arabia

The automotive component industry in Saudi Arabia comprises

more than 300 small and medium-sized firms manufacturing

and stocking of parts and accessories. Most of these firms have

low capacities. A number of joint ventures for manufacturing have

been established in recent years providing high-volume, fast-

moving car components, especially filters, oils and fluids, batteries,

brakes and exhaust systems. However, majority of these units are

catering to the requirement of aftermarket. The government aims to

encourage further development of car-parts manufacturing as part

of its strategy to develop more industrial production in the

kingdom.

A comprehensive list of major manufacturers under these

categories is given in Annexure -4.

UAE Market:

UAE automotive import market is given in Table next page. As

can be seen from this table, UAE market constituted 30% of the

GCC total. The major suppliers in UAE auto market are Toyota,

Nissan, Mitsubishi, Honda, Mercedes, BMW, Volkswagen, Ford

and General Motors.

UAE Autos Sector - Key Players

Company Segments

Toyota Motor (Al-Futtaim) Passenger, SUVs, Commercial

Ford Motor Passenger, SUVs, Commercial

General Motors Passenger, Luxury, Commercial

DaimlerChrysler Passenger, Luxury, Commercial

Honda Motor (Al-Futtaim) Passenger, SUVs, Motorcycles

Nissan Motor Passenger, SUVs, Commercial

GCC- Source of import

GCC automobile industry relies on imports with

Japan accounting for 65%- 70% of sales, Europe

15%-20%, USA contributing 6.5% and the rest

coming from other countries. Virtually, the

entire car and light vehicles required in GCC is

currently being imported. Barring a couple of

truck units assembling CKD components, there

is no serous manufacturing activity taking place

in GCC to manufacture automotive vehicles.

Leading players in Middle East are:

Toyota tops the Middle East car sales

chart. Toyota recorded Jan to June 2008

sales of 260,000 units up 31% from the

same period 2007. GM sold 128,000 units

in 2007 and ranked 2nd

in 2007 However,

they are likely to be overtaken by

Nissan this year after the Japanese

company's Jan-June (2008) performance

showed an increase of 27 % to more than

74,000 units - nearly 8,000 more than GM.

Others in the Gulf top five are

Mitsubishi and Hyundai with Honda

making up ground after a 52 % sales

increase in the first half of 2008.

Although no official data exists on the

market's overall vehicle sale industry

executives expect sales of new vehicles in

the Gulf market -comprising Saudi Arabia,

Bahrain, Kuwait, Oman, Qatar and the

UAE -to grow to around 1.2 million cars

and light trucks this year, up about 10 %

from 2007.

And recent figures issued by the Japan

External Trade Organisation (JETRO) on

the UAE-Japan trade figures, showed that

the export of cars with engines up to three

litres, surged by 71 % while more high-

powered vehicles increased by 67 %.

20

Automotive import Market of UAE

Unit: USD, million

2003 2004 2005 2006 2007 2008

Vans and Buses 121.00 113.00 134.00 244.00 387.35 766.19

Cars 1,987.00 2,451.00 3,183.00 3,923.00 6,017.88 7,307.52

Trucks 265 177 142 371 956.52 1113.13

UAE- Total 2,373.00 2,741.00 3,459.00 4,538.00 7361.75 9,186.84

GCC Total 10,748.00 11,646.00 14,386.00 17,730.00 24,141.00 N/A

As % of GCC total 0.22 0.24 0.24 0.26 30%

The automotive component segment is also growing rapidly in UAE. In 2008, the UAE automotive parts and

accessories market was estimated to be worth approximately $2.83bl. About 29% of the auto parts and accessories that

have been imported are re-exported to other countries. Auto components are among the top 10 re-export products of

UAE. The main destinations of these re-exports are Middle East, Africa and East Europe. The main sources of the

imports are Japan, Europe and the US.

UAE market for automotive parts is open and highly competitive. Like Saudi Arab, UAE automotive component

market remains an import driven market. There are few companies manufacturing fast moving automotive parts a list of

those major companies has been attached in Annexure-4. Supply of spurious components is the main threat affecting

this sector.

A detailed analysis of UAE Auto sector has been given separately in subsequent chapters.

21

GCC Automotive Sector

Trade -Highlights

GCC- Highlights of foreign trade in Automotive sector

Components Import to GCC

1 Import of Vehicles

In terms of USD, the value of net import of vehicles have grown from USD 10.7

billion in 2003 to USD 24.1 billion in 2007. This corresponds to a CAGR of 22%.

2 Import of Tyres

The value of import of new tyres has gone up from USD 817 million in 2003 to

USD 1.3 billion in 2007 (CAGR 12%). In terms of weight of new tyres imported,

the net import rose from 340,000 tons in 2003 to 433,000 tons in 2007. The CAGR

in terms of weight is approximately 6%.

3 Import of mounted brake components

Import of mounted brake components rose from1,121 ton (USD 12.0 million) in

2003 to 11,558 ton (USD 81.0 million) in 2007 (CAGR 79%).

4 Import of leaf and helical springs

Import of leaf springs rose from 7,300 tons in 2003 to 13,300 tons 2007 (CAGR

16%).Import of helical springs rose from 2,200 tons in 2003 to 3,500 tons 2007

(CAGR 12%).

5 Import of filter-air, oil, fuel types

Import of oil and fuel filters rose from 8,960 tons (USD 51million) in 2003 to

13,460 ton (USD 102 million) in 2007 (CAGR 11%). Import of air filters rose from

3,226 ton (USD 37million) in 2003 to 8,930 ton (USD 103 million) in 2007(CAGR

29%).

6 Import of glass products

Import of toughened safety glass (tempered) rose from 870 tons (USD 8.3 million)

in 2003 to 3600 ton ( USD 30.0 million) in 2007(CAGR 43%). Import of laminated

glass rose from 1,900 tons (USD 10.4 million) in 2003 to 5,240 ton (USD 35.8

million) in 2007(CAGR 30%).

7 Import of accessories such as car radios and

car air conditioners

Import of car air conditioners rose from USD 5.6 million in 2003 to USD 7.6

million in 2007(CAGR 8%). Import of car radios rose from USD 22 million in

2003 to USD 24.5 million in 2007(CAGR 2%).

8 Import of lead acid batteries

Import of lead acid batteries has gone up from USD 65.7 million in 2003 to USD

97.4 million in 2007.This corresponds to an increase of 10%.

9 Import of mufflers and exhausts

Import of muffler and exhausts rose from USD 9.5 million in 2003 to USD 18.5

million 2007(CAGR 18%).

10 Import of Transmission components (gear box

and drive axles)

Import of gear box has gone up from 3,440 ton (USD 29 million) in 2003 to 4,480

ton USD 55 million in 2007 (CAGR 7%). mport of drive axle components has gone

up from 3600 tons (USD 20 million to 15,370 ton (USD 84 million) 2007 (CAGR

45%).

GOIC report on Automotive sector

22

UAE Automotive Sector Auto Industry SWOT

UAE Auto Industry SWOT

Strengths

The luxury car market is strong and growing on the back of rising levels of disposable income Investment in European auto firms lays the foundation for future partnerships

Weaknesses

There is no local production of passenger cars, and only a small number of commercial vehicles are assembled locally The domestic market is largely dependent on international car manufacturers for the style and design of autos, and its profitability is dictated by their demands

Opportunities

As a result of climatic conditions and a rugged terrain, there is a vibrant and growing market for accessories and spare parts Trade liberalization between the GCC states of Saudi Arabia, UAE, Kuwait, Oman, Qatar, and Bahrain and the EU will open regional markets to more European imports Plans for a car assembly plant could help spawn a local automotive manufacturing industry Car leasing is becoming more attractive with residents preferring to hire a car rather than take out loans

Threats

The rising cost of living is putting pressure on sales and could lead to a decline in the market share of luxury brands, which have led growth in recent years

UAE- Competitive edge

The competitive edge of the UAE lies in the following

aspects:

Resilient economies High per capita GDP High standard of living Reasonably low inflation

100% tax exemptions with no personal, corporate, value added or withholding tax

100% ownership in free zones 100% repatriation of profits No restriction on hiring of expatriate workers

Stable Government Excellent infrastructure such as roads, sea ports,

power and telecommunication Geographical

proximity to MENA, Europe and Asian markets

Low cost of operation (in RAK) compared to other (Emirates) and GCC countries

Governmental encouragement

One of the strategies of UAE has been to promote

industrialization away from oil and gas based

industries in order to ensure a stable broad based

economy for a balanced growth in the medium to

long term.

Automotive industry is an ideal investment

scenario. Besides saving expensive imports, it

tends to drive all-round development by investing

in R&D, developing ancillary industries and

generating employment opportunity for the locals.

UAE has taken a number of steps in broadening the

industrial base away from oil and gas.

23

UAE Automotive Sector Economic & Business Environment SWOT

UAE- Economic SWOT Strengths

The UAE is a member of the Gulf Co-operation Council, which being a common market can access the GCC market with common favourable terms.

The UAE has one of the most liberal trade regimes in the Gulf, and attracts strong capital flows from across the region

In common with most Gulf states, there are a high number of expatriate workers at all levels of the economy, making up for the otherwise small workforce

The UAE is progressively diversifying its economy, minimizing vulnerability to oil price movements

Weaknesses

The UAE's currency is pegged to the dollar, giving it minimal control over monetary policy and reducing its ability to tackle inflationary pressure

Opportunities

Oil prices are expected to stay high (by historical standards)

Economic diversification into gas, tourism, financial services and high-tech industry offers some protection against volatile oil prices

The construction, tourism and financial sectors are growing rapidly, driven by domestic and foreign investment

Threats

Some bottlenecks have been forming in the

construction sector and there is a chance of delays in several high-profile construction projects

UAE Business Environment SWOT

Strengths

The UAE is a member of the Gulf Co-operation Council, a six member common market, and has been a member of the WTO since 1996

The state has invested large amounts in infrastructure, and will continue to do so over the next 10 years

The UAE's diversified economy reduces risks from volatile oil prices

Weaknesses

Due to the state's federal nature, regulations can vary considerably across the emirates

The regional economy is oil-dependent. This has historically been very cyclical, which increases

risks for long-term projects

Opportunities

Large number of free trade zones offering tax holidays and full foreign ownership

Comparatively relaxed rules on expatriate employment

The UAE's social stability and relative prosperity means that there is far less concern for security

than in some other Gulf states

Threats

Oil prices have massively increased liquidity in

the region. This has resulted in strong financial inflows,

24

UAE Automotive Sector

Trade

Automotive parts, accessories and components are a thriving business in the region, and UAE is the undisputed leader

in the region for the auto parts trade and re-export activities.

Around 29% percent of imported auto goods (spare parts, accessories & equipment) were re-exported to neighbouring

Middle East countries, Africa and the CIS. Iran, Saudi Arabia, Kuwait and Oman are amongst the most important trade

partners. Eastern African states such as Kenya and Sudan have strong trade relations with UAE.

The latest official figures indicate that a total number of 5 to 6ml vehicles are on the road in the GCC countries. Of those,

1.4ml vehicles are registered in the UAE with the figure growing at an annual rate of about 10 percent. The vehicles on

the road in the Arabian Gulf are mainly Japanese (66 percent), followed by European with 23 percent, USA with 6.5

percent and 4.5 percent from other countries.

Trade in Motor Vehicles & Auto Components

In 2008, total trade in this sector accounted for $16.9 billion of which 77% were imports, 23% were re-exports. Locally

manufactured vehicles, spare parts and accessories are sparse. As regards the 2008 distribution of total trade within this

sector by activity, motor vehicles accounted for 68%, followed by auto component 24% and tyre was 8% respectively.

Trade in Motor Vehicles and Components in 2008 in million USD

Items Imports Re-exports Total

Motor Vehicles 9,187 2,287 11,474

Automobile components 2,831 1,146 3,977

Automobile Tyre & Tubes 922 473 1395

Total 12,940 3,906 16,846

Fig-6 Total trade distribution Fig-7 Trade within the Automotive sector

Trade in Motor Vehicles

This activity includes the trade of tractors, motor vehicles for transport of goods and people, cars, special purpose

vehicles. UAE automotive import market is given in Table below. As can be seen from this table, UAE market

constitutes 22-28% of the GCC total during 2003-2007 and increased to 30% in 2008.

Imports77%

Re-exports

23%

Trade Pie

Motor Vehicles

68%

Auto compone

nts24%

Tyre & Tubes

8%

Trade within the sector

25

Table : Automotive import market of UAE (In million USD)

Category 2003 2004 2005 2006 2007 2008

Vans and Buses 121 113 134 244 387.35 766.19

Cars 1,987.00 2,451.00 3,183.00 3,923.00 6,017.88 7,307.52

Trucks 265 177 142 371 956.52 1113.13

UAE- Total 2,373.00 2,741.00 3,459.00 4,538.00 7,361.75 9,186.84

GCC Total 10,748.00 11,646.00 14,386.00 17,730.00 24,141.00 N/A

As % of GCC total 22% 24% 24% 26% 30%

Fig -8 Import of vehicles during 2004- 2008

The passenger car segment in UAE accounted for about 82 % of the total UAE market in 2007 while trucks and buses

together accounted for the remaining 18%.

Fig -9 Percent of Imports & Re-exports in 2008 Fig-10- Share of car, buses & trucks trade in 2008

Imports80%

Re-exports

20%

Trade in 2008- Cars, Bus & Transport Vehicle

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2003 2004 2005 2006 2007 2008

in m

illio

n U

SD

Automotive import market of UAE

Vans and Buses

Cars

Trucks

Car80%

Trucks and

Buses20%

UAE trade-2008-Share of car, Trucks & Buses

26

Trade in Automobile Components

It is important to note that trade of spare parts, and accessories are related to the trade of motor vehicles. During the period

2007 to 2008, imports within this activity increased annually by 17 per cent, while re-exports grew by 14 per cent,

Import of Components (in million AED) Source- Dubai port & customs, Dubai World

HS Code HS Code Description 2008 2007 2006

87081000 Bumpers & parts 251.12 142.68 78.55

87082100 Safety seat belts 8.20 5.61 2.58

87082910 Luggage carriers 11.84 21.05 6.38

87083000 Brakes and servo-brakes 195.96 1.25 0.00

87083100 Mounted brake linings 3.16 41.62 42.87

87083900 Brakes & servo-brakes & parts-II 51.55 404.35 161.27

87084000 Gear boxes 71.61 56.34 40.26

87085000 Drive-axles with differential, 31.37 48.05 32.06

87087000 Road wheels & parts & accessories 283.27 220.27 196.58

87088000 Suspension shock-absorbers 200.00 304.48 242.86

87089100 Radiators 65.20 51.66 40.23

87089200 Silencers & exhaust pipes 27.32 12.18 12.26

87089300 Clutches & parts 441.09 502.78 228.04

87089400 Steering wheels, columns & boxes 182.83 181.53 97.83

87089500 Safety airbags 6.55 0.05 0.00

87089900 Parts & accessories of vehicle body 8,558.91 6,855.48 5,391.18

Total in million AED 10,389.97 8,867.91 6,591.61

Total in million USD 2831.05 2416.35 1796.10

Re-exports of Components (in million AED) Source- Dubai port & customs, Dubai World

HS Code HS Code Description 2008 2007 2006

87081000 Bumpers & parts 58.96 48.96 26.28

87082100 Safety seat belts 30.30 31.68 17.85

87082910 Luggage carriers 1.08 7.99 1.00

87083000 Brakes and servo-brakes 13.13 0.09 0.00

87083100 Mounted brake linings 0.20 5.08 4.75

87083900 Brakes & servo-brakes & parts-II 9.69 74.83 31.45

87084000 Gear boxes 13.35 25.48 15.89

87085000 Drive-axles with differential, 5.14 12.54 6.75

87087000 Road wheels & parts & accessories 91.14 100.38 91.03

87088000 Suspension shock-absorbers 97.48 84.89 70.12

87089100 Radiators 17.22 68.65 46.66

87089200 Silencers & exhaust pipes 4.03 4.32 1.52

87089300 Clutches & parts 108.73 128.75 78.92

87089400 Steering wheels, columns & boxes 88.99 26.28 6.10

87089500 Safety airbags 0.62 0.01 0.00

87089900 Parts & accessories of vehicle body 3,665.59 3,072.04 2,088.00

Total in million AED 4,206.72 3,693.54 2,487.77

Total in million USD 1146.24 1006.41 677.87

27

Fig-11 Trade of Spare Parts and Accessories during 2006-2008

Imports- Major Trading Partners

Parts like bumpers, brakes, Road wheels & parts & accessories, Suspension shock-absorbers, Clutches & parts, Steering

wheels, columns & boxes and Parts & accessories of vehicle body are the major items traded during 2008. In value terms

constitutes 97% of the total amount of imports in 2008. The major sources of these items and the amount imported in

value terms have been next page. It is internationally known that Japanese, German, American motor vehicle

manufacturers dominate the world market. As a result, a similar representation can be seen with respect to the top import

partners of the UAE automotive market.

Re-exports- Major Trading Partners

On the other hand, the top destinations of motor vehicle parts and components are Iran, Russia, Iraq, Libya and

Tanzania respectively. The Table as given below gives the destination countries in different regions. Re-exports to

Middle Eat constitute 50% of the total re-exports.

Regions Re-exports-2008

Africa 517,483,149

Middle East 2,109,020,953

Cis-Russia 396,182,709

Asia 357,914,786

Europe 283,301,009

Others 542,821,892

Total 4,206,724,498

This can be attributed to the fact that UAEs political stability and strategic location within the Middle East has helped it establish and emerge as regional headquarter for many international market players. In view of above, the buoyancy

of the automotive trade market is a result of the increasing domestic and neighboring countries consumption of

vehicles and related goods and services. However, to further boost this market, avenues surrounding the

encouragement of local manufacturing and assembling of motor vehicles needs to be stimulated in order to gain an

edge over the competitors and market players from other neighbouring countries.

6592

8868

10390

2488

36944207

0

2000

4000

6000

8000

10000

12000

2006 2007 2008

in m

illio

n A

ED

Auto Component Imports & Re-exports

Imports

Re-exports

Africa12%

Middle East50%

Cis-Russia9%

Asia9%

Europe7%

Others13%

MAJOR DESTINATIONS OF RE-EXPORTS IN 2008

28

Major Re-export Destinations

Region Country Name

Africa Nigeria, Kenya, Tanzania, Algeria, Sudan, Angola, Congo Republic, Ghana, Uganda, Mozambique,

Ethiopia

Asia Singapore, Pakistan, Afghanistan, Hong Kong

Middle East Iran, Iraq, KSA, Libya, Egypt, Kuwait, Syria, Yemen, Bahrain, Oman, Lebanon, Qatar

Cis-Russia Kazakhstan, Ukraine, Azerbaijan, Russia

Europe Turkey, Germany, Finland, Italy, UK (United Kingdom)

Major Sources of Imports The major source of imports of the following automobile components, having strong imports and re-exports and volume of trade seen over the years in UAE, have been given below. Each of these components have been discussed separately under the chapter identified projects.

Parts & accessories for bodies (in 2008)

Clutches & parts thereof (in 2008)

Major Sources AED

JAPAN 182,019,154

GERMANY 125,161,324

SOUTH KOREA 41,254,048

CHINA 23,719,789

OTHERS 68,940,566

Total 441,094,881

Brakes and servo-brakes (in 2008)

Major Sources AED

CHINA 42,895,708

GERMANY 42,341,874

JAPAN 26,571,417

SOUTH KOREA 20,859,796

USA 16,322,222

OTHERS 46,970,918

Total 195,961,935

Major Sources AED

GERMANY 2,250,738,758

JAPAN 2,151,491,599

SOUTH KOREA 982,790,828

USA 857,427,987

CHINA 539,775,411

OTHERS 1,776,684,113

Total in AED 8,558,908,696

Bumpers & parts(in 2008)

Major Sources AED

JAPAN 129,518,989

GERMANY 40,438,403

USA 16,715,145

CHINA 12,673,187

OTHERS 51,775,410

Total 251,121,134

Suspension shock-absorbers (in 2008)

Major Sources AED

JAPAN 82,715,745

GERMANY 40,575,703

CHINA 30,243,377

OTHERS 46,461,975

Total 199,996,800

Steering wheels, columns & boxes

Major Sources AED

JAPAN 103,767,143

BRAZIL 54,649,599

OTHERS 24,411,426

Total 182,828,168

Road wheels & parts & accessories (in 2008)

Major Sources AED

CHINA 187303058

GERMANY 24385475

USA 14423613

OTHERS 57157734

Total 283,269,880

29

UAE Tyre market

The Middle East is a very important market as it exceeds the growth potential of other areas, such as Europe and

America. The buoyancy of this region is due to its increasing population and continued economic growth. According to

Goodyear, in 2008 saw the industry sell some 25 million tyres into the Middle East. Some countries in the region, which

covers the whole of the Middle East, North and West Africa, are registering annual growth of up to 5%. Another

contributory growth factor is the fact that local product is virtually non-existent and re-treading is still in its infancy in

most countries within the Region. The Table below gives the UAE imports on all types of Automobiles Tyres and Tubes

in 2008

UAE Trade on new All Types of Automobile Tyres & Tubes in 2008 Imports Re-exports

NEW PNEUMATIC TYRES Value (AED) Units Value (AED) Units

cars 1853365027 9636233 1324694809 4898306

buses & lorries. 1190378134 2198087 284566493 565151

argriculture or forestry vehicles 22,579,890 100,365 71,065 405

Industrial handling vehicles < 61 cm 47,346,029 50,155 2,678,296 13,644

of a kind used on construction or industrial handling vehicles>61 cm 9,167,141 4,520 1,179,262 225

of a kind used on agricultural or forestry vehicles & machines. 969519 5193 247606 603

having a herring-bone" or similar tread, n.e.s. 3,170,660 11,167 1,147,181 3,444

of a kind used on agricultural or forestry vehicles & machines 54,418,049 21,847 8,757,438 146,936

New pneumatic tyres of rubber, n.e.s. 95787325 448235 58258875 159414

SUB-TOTAL 3,277,181,774 12,475,802 1,681,601,025 5,788,128

RETREATED TYRES of a kind used on motor cars (including station wagons & racing cars) 633119 2701 2711137 19571

of a kind used on buses or lorries. 3726889 20852 645368 250

SUB-TOTAL 4,360,008 23,553 3,356,505 19,821

USED PNEUMATIC TYRES

Used pneumatic tyres, of rubber 199842 3702 12043841 268279

TYRE TREADS AND TYRE FLAPS Solid or cushion tyres, tyre treads & tyre flaps, of rubber 11,952,010 135,866 2,098,940 1,902

INNER TUBES

For motor cars buses or lorries. 88229683 531643 40286988 206381

TOTAL IN AED 3,381,923,317 13,170,566 1,739,387,299 6,284,511

TOTAL in million USD 921.50

473.95 Source- Dubai port & customs, Dubai World

30

The imports of all types of tyres and tyre products of UAE in 2008 were valued at Dhs 3.4bl ($0.92bl/ 13 million in

numbers),(compared to Dh2.73bl($0.74bl/ 11.9 million in numbers) in 2007 with an increase of 24% out of which about

97% constitute new pneumatic tyres for car, bus and lorries. The growth trend is expected to rise further in 2009. Out of

total import of new pneumatic tyres, car tyres constitute 56% followed by bus & lorry tyres of 36% and rest being tyres

for other end uses. Car tyres worth Dhs 1.85bl and Commercial tyres worth Dhs 1.19bl for buses and lorries were

imported respectively to UAE in 2008, mainly from Japan, China, and India. Out of which UAE consumed almost 66%,

re-exporting 34% mainly to Iran, Iraq, and African countries.

UAE Trade on Pneumatic Automobile Tyres in 2008

Imports Re-exports

Value (AED) Units Value (AED) Units

New pneumatic tyres 3,277,181,774 12,475,802 1,681,601,025 5,788,128

Retreated Tyres 4,360,008 23,553 3,356,505 19,821

Used pneumatic tyres 199,842 3,702 12,043,841 268,279

Tyre treads & tyre flaps 11,952,010 135,866 2,098,940 1,902

Inner Tubes 88,229,683 531,643 40,286,988 206,381

Total in AED 3,381,923,317 13,170,566 1,739,387,299 6,284,511

In Million USD 921.50

473.95

The commercial vehicle market is an essential industry in the

UAE, increase of 35% is expected from 2008 to 2012 according

to industry sources. UAE (particularly Dubai) is a transport-

oriented country with one car for 1.84 residents, and an average

vehicle occupancy rate of 1.7, it has the highest rate of car

ownership than any other city in the world. The absence of

automotive manufacturing industries results in most of the

vehicles and automotive tyres and parts being imported for

domestic use and re-export to other countries.

Break up of Import of Pneumatic Auto Tyres in 2008

Imports Percent

New pneumatic tyres 3,277,181,774 96.90%

Retreated tyres 4,360,008 0.13%

Used pneumatic tyres 199,842 0.01%

tyre treads & tyre flaps 11,952,010 0.35%

Inner Tubes 88,229,683 2.61%

The positive trend for tyre industry is not just limited to the

UAE, but the entire Middle East (with about 4 to 5ml

passenger cars and booming fleet of transport vehicles) is

characterized by a diverse structure of economies, climates

and transport conditions. The lack of railway connections

on the Arabian Peninsula, forces most of the overland-

transport on the road, making it a high-volume sales

territory for tyre manufacturers. Emerging markets in

Africa are sourcing their products from the region, mainly

from UAE. In general, there exists a huge opportunity to

enter UAE market least affected by the current credit

crunch.

Imports66%

Re-Exports

34%

UAE Trade on new Pnematic AutomobileTyres

New pneumatic tyres

97%

Break up of Import of Pneumatic Tyres in 2008

31

UAE Automotive Sector

Manufacturing

Despite the size and potential of the UAE market, the emirates still have no significant passenger car

assembly operations, although this is set to change in coming years. The presence of a car assembly line in UAE would open

the way for a local tie-up with a foreign car manufacturer seeking to tap into growing demand for low-cost cars in Africa,

the Middle East, and Asia.

The UAE has also been making strategic investments in European auto firms, which could pave the way for building up a

domestic industry. Leading the investment has been Abu Dhabis Aabar Investment, an Abu Dhabi investment fund, bought a 9.1% stake in German autos company Daimler in March 2009. It agreed to invest EUR1.95bn in the automaker,

making it the largest shareholder in the group. In addition to producing luxury Mercedes-Benz vehicles, Daimler

manufacturers Smart cars, and the two companies intend to team up to develop electric vehicles (EVs). Under the

agreement, an industry training centre will also be established in Abu Dhabi. Such investments would eventually encourage

technology transfer.

Swedish automaker Scanias JAFZA plant opened recently. With this new factory, the automaker will become the first vehicle assembler in the UAE. It will provide completed

vehicles to all states in the GCC.

The plant is modest with a capacity for 1,400 vehicles a year, initially for construction haulage, such as tipper and concrete

trucks, but is to be adapted for bus chassis assembly in the future. It will assemble vehicles from semi knocked down kits

(SKDs), adding locally-sourced components.

Ashok Leyland of India is one of the biggest names in industry set up their assembly

unit in Ras Al Khaimah, the northern most emirate. The company's integrated assembly

plant is to build 1000 buses per year in RAK and has started its operations in the year

2008.This is the first fully integrated Bus/truck manufacturing in the whole of GCC.

In 2008, Hafilat Industries of the UAE won an AED30mn (US$8.17mn) contract to supply locally assembled buses for

export. A new purpose-built plant in the Industrial City of Abu Dhabi has been inaugurated for the assembly of the buses

under licence from Australias Volgren.

The buses will be built on the chassis of Euro IV-compliant Mercedes-Benz models,

imported from Spain, but will take the form of Volgrens New Generation City Bus, which is made from aluminium in order to be lighter and stronger.

Production of the buses began in May09, and the order should take four months to fill. Hafilat will assemble double-decker, compressed natural gas (CNG), hybrid, and trolley buses for public transport. The company occupies a niche in providing in

European-standard buses, through its use of Mercedes-Benz chassis and the Swiss technology used in its assembly

processes.

In 2007, Dubai-based engine producer Praktiko GT announced plans to begin car

production in the UAE. From a new production plant in Dubai Investment Park, the

company plans to produce the Tiger Kub budget model for export to Africa and India,

where small cars under INR100,000 (US$2,500) represent the growth segment.

Investor interest has also focused on bus assembly. Founded in 2003, Trans Continental Industries is the UAEs first facility for manufacturing buses and other additional components and began operations in 2006 with initial capital of AED15.5mn

(US$4.2mn). The companys assembly operations are based in the Mussaffah Industrial Complex in Abu Dhabi. It is jointly owned by Advanced Industries of Arabia (51%), through its UAE partner Bin Jabr Group, and the UKs Vectra Azad (49%). The facility, the first of its kind in the UAE, is planning to expand its manufacturing base, targeting production of

mini buses, school buses, public transport buses, luxury coaches and built-to-order buses. At present, it

manufactures bus bodies and components, including the base structure for chassis, doors and seats.

SCANIA

VOLGREN

Praktiko

Ashok Leyland

32

Also in March09, Abu Dhabi state-owned group International Petroleum Investment Company (IPIC) completed its purchase of a majority stake in MAN Ferrostaal, a unit of German industrial group MAN. The EUR490mn deal will

provide greater market access to countries where Ferrostaal is active.

According to figures published by the Dubai Chamber of Commerce and Industry (DCCI), companies operating in Dubais autom