SAUDI ARABIA'S AUTOMOBILE SALES SLOW DOWN

UNCLAS RIYADH 000462

SIPDIS

STATE FOR NEA/ARP AND EEB/TTP/MTA BRIAN NAFZIGER

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PREL WTO SA
SUBJECT: SAUDI ARABIA'S AUTOMOBILE SALES SLOW DOWN

REF: STATE 4753


1. (U) Key points and comment:

-- The "boycott" of local car dealers by Saudi
consumers, launched in late 2008, continues.

-- Saudi consumers are relying more on a market
of second hand cars from Dubai.

Comment: The grass roots campaign against "greedy car dealers" and
criticism of the Ministry of Commerce are symptoms of a general
dissatisfaction over the increase in the cost of living, which
official statistics do not capture fully. Growing uncertainty about
the global economy and a sense that the car dealers and government
authorities are in cahoots exacerbate the dissatisfaction. End
comment.

It's a Boycott
--------------


2. (U) In late 2008, Saudi consumers launched an extensive
internet-based campaign entitled "let it rust" to boycott local car
dealers. Since Saudi Arabia does not manufacture cars locally,
American and Japanese cars constitute the bulk of the Saudi
automotive industry. The lack of auto financing and news of steep
declines in Ford, GM, and Chrysler sales in the U.S. raised Saudi
consumers' expectations that American car prices will drop by at
least 40% on the local market. However, car dealers continued
toward the end of 2008 to offer no reduction in retail prices; a
policy they believed would prevent the market from going into a
steep decline.

Tough Dealers, Tougher Consumers
--------------


3. (U) The boycott campaign gained momentum in December 2008. There
was much public criticism of the Ministry of Commerce and Industry
for failing to "reign in greedy car dealers," who, in the public's
eye, coordinated efforts to manipulate the market in direction
contrary to global trends. In spite of local dealers' efforts to
fight the campaign and keep sales from plummeting, recent public
reports quote sources in the car industry as saying that Saudi car
sales dropped by around 80 percent from November to January. They
attributed this acute and unprecedented decrease to the current
global recession.

Saudi Consumer Patterns
--------------


4. (U) In spite of it being the largest market in the Gulf, the
Saudi automotive market has tended to grow at a far slower rate than
neighboring Gulf states. Saudi consumers do not generally take out
car loans. Most Saudi and expatriate workers produce salary
statements from their employers, which allow them to place a down
payment on a car and pay the rest in monthly installments over 2-3
years. Local economists believe that this tendency to favor cash
purchases, along with continued expectation that a reduction in
prices is inevitable, has encouraged most consumers to abstain from
near-term purchases.

Other Alternatives
--------------


5. (U) A Saudi British Bank economic report published in February
predicted that the Saudi car market would face bitter competition
from the second hand car market and unofficial importers. As a
result of the credit crisis, a growing number of expatriates have
been departing Dubai, leaving behind their unpaid for properties and
vehicles. We have heard numerous reports that a large number of
unofficial importers are purchasing hardly used, second hand cars
from Dubai at highly attractive prices. Saudi Arabia also tends to
have more lower-cost cars than neighboring Gulf states. With more
Saudis and expatriates holding onto their old cars and a growing
second hand car market, the car spare part market is booming.
Recent reports indicate a 35 percent hike in car spare parts.

FRAKER