Car manufacturers: Adjusting to a new reality

23 November 2010

The global recession almost drove many automakers out of business, but optimism is returning to the sector

As car producers look to return to growth after a sharp slowdown in demand as a consequence of the global financial crisis, many are pinning their hopes on the Middle East to lead the recovery in sales.

[Middle East] buyers have a bit more money to spend … but everyone still wants the best deal possible

Matt German, Auto Trader Middle East magazine

“Middle East customers love cars and they are very different to European customers,” says Stefan Mecha, managing director of Volkswagen Middle East. “In Germany, customers will return to a showroom many times and think about which model they want, what specification, what colour, everything.

“In the Middle East, we have had customers refuse to buy a $40,000 Toureg because we couldn’t deliver it within two hours. You learn very fast that if a customer wants a car quick you make sure they get it quick. ”

Japanese dominance in automotive sector

Although no official data exists tracking company-by-company automotive sales in the Middle East, the undisputed market leader in terms of overall market share, is Japan’s Toyota Motor Corporation.

The Japanese car manufacturer sells about 260,000 vehicles a year in the region with Nissan and Mitsubishi Corporation, both of Japan, the US’ General Motors and South Korea’s Hyundai Motor Company, comprising the rest of the top five. Together, the three Japanese manufacturers have a 70 per cent market share in the Middle East.

Most cars in the region are sold through showrooms predominantly owned by local franchisees with the local joint-venture dealerships guided on marketing and promotional activities by the manufacturer’s regional or global head offices. All are regarded as a vital aspect of the core business by manufacturers.

“Franchisees are very important to any manufacturer,” says Mecha. “The showrooms are most people’s first impression of a car brand. If that first impression is not a good one, then there is going to be a problem.”

While the other major manufacturers’ Middle East sales reflect their global position, Germany’s Volkswagen’s sales do not. Volkswagen only sells about 10,000 cars a year in the Middle East. With the brand aiming to become the world’s largest car maker by 2018, it is keen to increase its market share in the region.

“One of Volkswagen’s main challenges in the Middle East is one of image,” Mecha says. “Volkswagen is viewed by many people as a premium brand in this region and we need to address that if we are to sell the high volumes required to become the global leader in automotive sales.”

In an attempt to catch up with the Japanese, American and South Korean manufacturers, Volkswagen plans to increase its sales in the Middle East to 100,000 units by 2018. The company also intends to sell 50,000 units by 2015, setting two ambitious milestones. 

To sell such large volumes and eat into its competitors’ market share, the company says it is planning a major expansion in the region, as well as introducing three new models into the sedan market.

“To meet our growth demand, we need to double the number of showrooms by 2018 from 20 to 40,” Mecha says. “Although, that is only one part of it, because while customers are willing to travel long distances to buy a car, they do not want to travel a long distance to get it serviced. Our service network also needs to grow massively.”

As Europe’s largest car manufacturer, with a 20 per cent share, most of its models are geared towards the European market. In the Middle East, most of Volkswagen’s sales comprise either the premium sports utility vehicle, the Toureg, or the firm’s iconic hatchback, the Golf. 

However, in the Middle East, Sedan models account for 50 per cent of total automotive sales. Volkswagen is set to launch three sedan models over the next 18 months. The company hopes the move will increase its market share.

“The Middle East is similar to the US, as in there is still a lot of demand for sedan model cars,” says Mecha. “So, with this in mind, we are going to offer the Polo, the Jetta and the Passat in a sedan model.”

With only 2 per cent of the market, there is scope for Volkswagen to gain fast growth in the Middle East than more mature markets, such as Europe. Mecha is confident Volkswagen can attain its ambitious targets.

“The English translation of Volkswagen is ‘the people’s car’,” he says. “In the Middle East, we need to sell a lot more cars before we can call ourselves that.”

While Volkswagen attempts to lower people’s perceptions to how it is regarded in the rest of the world, the UK’s Lotus recently announced the launch of a range of new models.

Brand resurrection for Lotus

Lotus, wholly owned by Malaysia’s Proton Group, chose the 2010 Paris Motor Show to unveil five new models the company hopes will resurrect the image it attained in the 1960s and 1970s as a glamour brand.

The company has spent about $1.3bn on relaunching the brand and over the next four years will be rolling out the Elan, Elise, Esprit, Elite and Eterne.

With a management and design team that contains several former Ferrari employees, Lotus is taking the relaunch seriously. The company is also hoping that a few select countries in the Middle East will account for about 5 per cent of global sales of the new cars. 

“If you put the numbers to one side for a minute and just think from an image perspective, the Middle East is hugely important,” says Dany Bahar, chief executive officer at Lotus. “Our cars are perfect for the region, so it’s a good market indicator if we succeed there.” 

The five cars have been specifically designed to appeal to various demographics, such as young professionals and wealthier high-performance sports car enthusiasts who do not mind paying $100,000 for a car. 

Lotus currently has dealerships in Saudi Arabia, Bahrain, Oman and Qatar and is in negotiations with interested parties for two in the UAE, in Abu Dhabi and Dubai, as well as Kuwait and Lebanon.

Lotus: adapting marketing strategies

The company is also adapting existing marketing strategies that it hopes will raise awareness of the brand in the Middle East, such as the Lotus Driving Academy (LDA) and the Lotus Cup racing series.

“The LDA is a fantastic grassroots motorsport activity and as part of the planned global roll sees two new locations come online next year, one of which is in the UAE,” Bahar says. “As well as developing grassroots talent, the LDA provides facilities for individual driving courses and for Lotus customers to test drive products.”

In the Middle East, forging links with potential and existing customers is a vital way to secure business and is taken seriously by both high- and low-volume car manufacturers alike.

While the LDA works with fans of high-performance cars, low-volume sellers have to offer customers high levels of service. Most showrooms offer in-house insurance and most in the region can now offer a same-day service to cash buyers.

After-sales servicing is also a vital way of ensuring profitability for franchisees and it is equally important to manufacturers that the after-sales business is a revenue generator.

“People do not like getting their car serviced usually,” Mecha says. “It is always a big problem. So it is important to both do a professional job and to make sure the franchisee earns money out of it. If they do not, corners will start to be cut and the standards will drop.”

Volkswagen does have a reputation in the industry for expensive servicing and parts, but Mecha claims customers get what they pay for.

“We only service cars every 15,000 kilometres whereas other companies service every 5,000km,” he says. “Yes, we are not the cheapest, but it evens itself out over time due to Volkswagen cars requiring less servicing.” 

Despite slight idiosyncrasies in buying new cars, regional customers still want similar things to their peers in the more mature markets of Europe and the US.

“Naturally buyers have a little bit more money to spend [in the Middle East], but everyone still wants the best deal possible,” says Matt German, owner of Auto Trader Middle East magazine. “Today, drivers in the Middle East are a little bit more cost savvy. Petrol has increased over the last few years and the recession has dented people’s spending budgets.

“People still like to drive something different to their home country where petrol is even more expensive, hence the popularity of 4x4s or SUVs,” he adds.

Car manufacturers target UAE

German says many carmakers are announcing record sales for 2010 and there are reports of waiting lists for some cars models, because the needed volumes cannot be brought in.

All of this bodes well for both Volkswagen and Lotus, although Mecha believes that just having a full brand range does not mean Middle East consumers will buy them.

“Volkswagen needs to be prepared, because just throwing products at the market and hoping people buy them is not going to work in this region,” he says. “To compete with the likes of Toyota, which has been selling cars here for many years, is going to take a lot more work.”

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