The first automotive assembly plant in the UAE is due to open in June as Middle East governments increasingly see the benefits of vehicle manufacturing in creating jobs for their young and growing populations.

Truck chassis from Swedish manufacturer Scania's European and Latin American plants will be shipped to Jebel Ali, where they will be fitted with bodies to meet the specifications of local suppliers. The facility will cover 20,000 square metres at the Jebel Ali free zone, and will have the capacity to build about 1,400 vehicles a year.

Currently, the Gulf's automotive sector is small and focused on truck and bus assembly, with demand fuelled by the region's recent construction boom and the need to transport building materials.

Growing demand

The UAE is not alone in exploring the sector's potential. In April 2008, Japanese truck manufacturer Isuzu was reported by the Saudi and Japanese press to be considering local production of its trucks in Saudi Arabia, based on its strong sales in the country.

In February 2008, the Saudi Authority for Industrial Cities & Technological Regions and Abu Dhabi-based Gulf Automobile Manufacturing Company signed a $100m deal to build a plant producing 15,000 vehicles a year in Dammam, work on which is due to begin by the end of 2009, with production targeted at the GCC truck market. Details of the brand of truck to be manufactured have yet to be released.

Interest in building vehicle manufacturing plants in the region is being driven by the fact that despite the current financial meltdown, demand for vehicles and automotive components in the GCC remains strong, with the volume of imports growing steadily since 2003, according to Doha-based research centre Gulf Organization for Industrial Consulting (GOIC).

About 969,000 vehicles were imported into the region in 2008, according to GOIC, which forecasts imports will grow to 1.17 million vehicles in 2010 and up to 1.9 million by 2015. Saudi Arabia and the UAE were the most lucrative markets for car firms last year, representing 36 per cent and 28 per cent of total GCC imports respectively. Kuwait and Oman took 13 per cent each, Qatar 8 per cent and Bahrain 2 per cent.

As the Scania and Dammam announcements show, the UAE and Saudi Arabia will also be the focus of attention for car makers wanting to make money in the Gulf market by producing and assembling cars in the region.

Saudi Arabia hopes to create jobs in its industrial sector by breaking into automotive manufacturing. With more than 50 per cent of its population of 22 million under the age of 20, the government is acutely aware that it faces the prospect of high unemployment if it does not create enough jobs each year.

Car manufacturing is one of the industries identified by the Saudi National Industrial Cluster Development Programme (NICDP), which was launched in 2006.

While creating employment remains the key priority for Saudi Arabia, the UAE considers car making as a way of diversifying its economy while reducing its dependence on imports and broadening its industrial base. "In the UAE, Qatar and elsewhere, establishing a local production unit could help achieve import substitution and add value to industry," says Ismail Elshafai, head of the automotive unit at GOIC.

But in the short term, despite the potential for Gulf-based manufacturers to export to the wider Middle East, industry observers say the collapse in demand for vehicles elsewhere in the world will stall plans to shift production to the region. Some industry commentators say the collapse in demand globally means the automotive market is already oversupplied by as much as 30-40 per cent.

But the longer term is more promising. "Sooner or later demand will recover," says Elshafai. "In about two years, if the economy recovers and oil prices rise significantly, people will start to seriously look at the region."

But timing is not the only hurdle. Doubts remain over the viability of parts manufacturing or assembly plants in the Gulf due to protectionist measures historically employed by Middle East states. Many of the countries that have become strong in manufacturing have used tariffs to shield themselves from external competition, meaning the Middle East market has not been a level playing field.

Saudi Arabia abandoned such tariffs when it joined the World Trade Organisation (WTO) in 2005, and the UAE has some of the lowest import duties in the world for cars, at about 5 per cent. But in Iran, for example, which is the dominant producer in the region, the car making industry is protected by import tariffs as high as 105 per cent.

However, once more regional states join the WTO and see the potential that free markets offer, these obstacles will be removed, says Elshafai. "The GCC countries will all be members of the WTO and have open markets so will not have import duties," he explains. "Protection is not needed. We [governments and manufacturers] are looking to create a competitive industry by exporting to neighbouring regions such as Africa."

The UAE, for example, with its network of Dubai World-managed ports around Africa in countries including Kenya and Senegal, already has the hi-tech logistical infrastructure in place for exporting to the continent.

For some industry experts, the case for vehicle manufacturing in the Gulf is already proven. In Iran, for example, Saipa is an established car brand that is manufactured locally. Founded in 1966, it has entered into several joint venture agreements, with France's Citroen and Renault, as well as Japan's Nissan and South Korea's Kia motors.

Regional benefits

The company exported $60m worth of products from March 2008 to March 2009 and has set a target of $300m worth of exports by March 2010. Saipa also aims to take its prod-uction global, launching two new facilities in Syria and Venezuela.

There are plans for two further plants in Central Asia and North Africa. Overall, Iran's car exports are expected to reach $1bn by the end of March this year, up 30 per cent year on year.

But while the news on 30 April that US car manufacturer Chrysler had gone into administration gives grounds for scepticism over the current health of the industry on a global basis, there is greater acceptance among industry analysts of the possibility of manufacturing spare parts in the region.

According to GOIC, there are more than 22,000 garages and vehicle workshops in the UAE and Saudi Arabia. A healthy second-hand market, along with extreme weather conditions in the region and poor maintenance, have contributed to significant demand for spare parts. Currently, however, there is only a limited network of automotive component manufacturers in the GCC.

"This component manufacturing network can be further developed to transform it into an original equipment component supplier base in due course," says Elshafai.

The potential for this market is enormous and, if realised, the next stage for the GCC's automotive industry may be to build a signi-ficant manufacturing base.

"With approximately 30 per cent of the GCC population below driving age, the GCC region presents enormous untapped opportunities for vehicle manufacturers," says Elshafai.

For now, however, the industry will remain small as companies test the water with assembly plants in the region.