Sales of new cars slowed down in the UAE during the first quarter of 2018 following the introduction of five per cent value-added tax (VAT) in January. However, industry executives are hopeful of reversing the trend and said sales will pick up in the second half of the year.
According to automobile distributors in the UAE, new vehicles sales dropped by 10 to 30 per cent (depending on the brand) in the first quarter of 2018 due to strong buying in the last quarter of 2017 by nationals and residents prior to implementation of the consumption tax.
Industry executives are expected to post single-digit growth in new car sales this year due to strong appetite from buyers and introduction of new models in the market. They were of the view that VAT had a one-off initial impact in the first quarter and now both buyers and sellers treat it as an essential part of the deal.
Axel Dreyer, general manager, Galadari Automobiles Co, distributor of Mazda vehicles in the UAE, agreed that the anticipated drop in volume in the first quarter has become a reality as the fourth quarter of 2017 sales was above expectations due to pre-VAT buying. Hence, the volume in the following month was less.
"I'm confident that the great offers in the holy month of Ramadan from all brands will stimulate the market again and attract a lot of new car buyers," Dreyer told Khaleej Times.
To a question, he said sales of new and pre-owned vehicles were impacted by VAT as buyers have preponed the purchases. For price sensitive pre-owned car customers, it is difficult to digest that they have to pay 5 per cent extra on the selling price, although the car is 2-3 years old.
"I believe after more than 4 months, the customers are familiar with VAT impact on their purchases. At a certain stage, the customer has to decide what is more economical to use the old car with added repair costs or a new car with service package and less running costs," Dreyer said.
Raymond Ma, managing director, Union Motors, said it was a steep decline in new vehicle sales during the first quarter of 2018.
"In first quarter, the sales of new cars were dropped by around 30 per cent due to VAT. But the effect has started to fade now," Ma said at the launch of new SUVs of German automobile brand Borgward.
Hassan Jayouchi, general manager, Al Yousuf Motors, believes that the consumers turned a bit shy, considering 5 per cent VAT increase too big for their budgets, especially for the middle class residents.
He pointed out that the luxury car prices were hit more than the other segments.
"In general, we started the year on a very poor note with 15 to 20 per cent drop in new car sales, but in the past couple of months things improved a little bit. March started getting better and April looked even better and growth is expected to continue for the remaining year."
"We absorbed 5 per cent VAT so the customer doesn't feel the impact of new consumption tax. Going forward, the economy is picking up and new projects are being launched which will drive the sales," he added.
Also, rise in insurance premiums rates for the lower-end cars turned consumers shy from buying new vehicles, he added.
Saud Abbasi, managing director of Al Futtaim Toyota, too, echoed other industry executives, saying that there was definitely an impact of VAT on car sales in the first quarter, but like any other market, there is a point in time when things start normalising.
"If you look from an average consumers' perspective, they have started to get adjusted to the 5 per cent VAT. We see normalisation is starting to happen. The positive side for us is that there is a lot of activity in the commercial space in the B2B segment.
"For Toyota, the year-to-date performance has been pretty strong. Compared to last year it is slower but our large customers with corporate fleet are either replacing their vehicles are upsizing their vehicles. For example, in Dubai, a lot of momentum is going on to get ready for Expo 2020. So, there is a still business out there."
He said the company did exceptionally well in fourth quarter last year due to pre-VAT buying.
Raymond Ma of Union Motors noted that compact sports utility vehicle (SUV) segment is performing fairly well in the UAE.
"Compact SUV segment is definitely growing. The market is very challenging at the moment but it is not about how many cars we sell but selling the right cars. SUV segment is growing around 49 per cent and that is quite steady. A lot of brands are focused on this because this is the segment that sells the most," Ma said at the launch of two new SUVs - BX7 and BX5, recently.
Speaking at the launch of compact SUV Rush, Saud Abbasi, managing director of Al-Futtaim Toyota, opined that this is the best time to launch an SUV because this segment is growing and will continue to grow in the UAE.
"Currently, there is a little bit of slowdown, but this segment will continue to grow because customers are looking for a lot more value for the money they spend. This segment of compact SUV will make up 25 per cent of all the SUV sales in the UAE. Toyota didn't have a product in this segment before; so this is new entry for us and increases the range of vehicles in our showrooms," Abbasi said.
"If you look at last 5 years, there is a very clear trend towards SUV. So passenger cars are doing down and SUVs are going up. In fact two years ago the SUV percentage went higher versus passenger cars. The trend is expected to continue and it's not just UAE but global trend," he concluded.
By Waheed Abbas
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