Saudi Arabia is venturing into a territory normally reserved for automakers. The kingdom is developing the Ghazal, a sport-utility vehicle for the hazards of the desert, to diversify its economy beyond oil.
The SUV, built by King Saud University in Riyadh, is an all-wheel drive vehicle with a rugged carbon-fiber frame aimed at taking on the likes of Toyota Motor Corp. (7203)’s Highlander. The project, which has attracted interest from Saudi investors, reflects the prospects for the Middle East’s largest car market, which is forecast to climb 29 percent by 2015.
“The target is to produce cars and develop a car manufacturing industry in Saudi,” said Adel Al Shayea, head of the university’s industrial engineering department. “The body is built to be very resilient toward accidents, especially against camel accidents, which are quite common in the desert.”
Greater wealth distribution following the Arab Spring uprisings has put cars within reach of more people in Saudi Arabia. In addition, the population, which quadrupled to 28 million people over the past 40 years, continues to grow more than 3 percent annually, creating a steady supply of new buyers.
Demand is forecast to grow 8 percent this year, according to IHS Automotive, a stark contrast to the fifth straight annual decline projected for Europe. Sales are likely to increase to 884,000 vehicles by 2015 from 688,000 last year, according to a June report from Saudi Arabia’s National Commercial Bank. By comparison, 808,059 vehicles were sold last year in Spain, Europe’s fifth-largest auto market.
Easier access to financing and a post-Arab Spring government spending spree of 224 billion riyals ($60 billion) has provided an additional boost for consumers like Abdullah Saeed, who works at investment company in the capital of Riyadh and plans to give his wife a car from Fiat SpA (F)’s Chrysler unit.
“After the Arab spring, government spending increased, companies are trying to spend more on their employees, so average salaries grew,” Saeed said. “People are getting loans for buying cars, for travel, for anything.”
Consumer loans for cars and equipment increased 13 percent in the first quarter to 51.7 billion riyals, according to the Saudi Arabian Monetary Agency.
General Motors Co. (GM:US), Hyundai Motor Co. (005380) and Toyota, the market leader with a 40 percent share, are counting on the flow of oil money to boost sales in the Islamic state, which still bans women from driving.
Saudi Arabia “is a great spot for the automobile industry as a whole,” said John Stadwick, head of GM’s Middle East operations. “Consumer confidence is strong, and the investments across the kingdom are helping the economy.”
The Detroit-based automaker (GM:US) plans to expand its network of sales outlets in the country by 29 percent to 142 showrooms by 2014, said Stadwick. GM, which sells Chevrolet, GMC and Cadillac models in the country, increased deliveries 26 percent through May and expects the sales pace to continue after introducing models including the Chevrolet Colorado and TrailBlazer and the Cadillac ATS and XTS.
Bayerische Motoren Werke AG (BMW)’s ultra-luxury Rolls-Royce brand is also seeing more demand for its Phantom and Ghost models. Sales surged 68 percent in the first five months, said Alaa Tarabay, a spokesman for the brand in the region.
“Our customers in Saudi are becoming more and more discerning,” said Tarabay, who said the brand may add dealers in oil-rich Khobar and Dammam in addition to showrooms in Jeddah and Riyadh. “They are very demanding and want to further personalize ultra-luxury.”
The automaker recently customized a Phantom for a royal family member, incorporating gold and precious stones in the air-conditioning vents, the steering wheel and the Spirit of Ecstasy hood ornament, he said.
Growing demand, low fuel costs and the availability of investment funds make the development of a Saudi auto industry a real possibility, even as the rest of the world grapples with the shift to electric-powered vehicles.
“Car assembly would be a very logical area for the kingdom to diversify in,” said Jarmo Kotilaine, chief economist at the National Commercial Bank in Jeddah. “People like cars and you have long distances and reasonable infrastructure.”
The establishment of a domestic automaker also has precedence in the region. Iran Khodro Co. has developed car manufacturing while suffering from sanctions for about three decades. The biggest Iranian automaker builds its own models and assembles vehicles for other brands, including the Suzuki Grand Vitara compact SUV and Peugeot 206 hatchback.
The goal is to manufacture the Ghazal and another model as part of an industry making about 500,000 cars a year, according to Azzam Shalabi, who is heading the government’s development of the automotive industry. The plans include industrial areas that will allow manufacturers to share production and logistics operations. The government is prepared to fund as much as 75 percent of the costs through long-term loans, he said in an interview last October.
King Saud University, holding company Al Muwakaba for Industrial Development & Overseas Commerce and Digm Automotive Technology Inc. in South Korea created an alliance at the end of last year to fund the $500 million project to produce Saudi Arabia’s first auto. Concrete production plans haven’t yet been made public. The five-passenger car will cost between 35,000 Saudi riyals and 45,000 Saudi riyals, according to the university’s estimates when it first announced the project.
“It’s feasible, but it’s a bit ambitious,” said Pierluigi Bellini, an analyst at IHS Automotive in Milan, who covers the Middle East. “If you want to make a nice car and do it well you need to assemble it the right way and it’s not going to be cheap. Then they need to find enough people to buy the car at that price.”
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