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Fine tuning... This year, dealerships will see a decline in parts and after-sales revenues. A turnaround in car sales will likely have to wait until next year and during the Expo. Image Credit: Gulf News Archive

Dubai: The UAE’s new car sales could be hit by a 50-60 per cent drop this year, and will have to wait until next year’s Expo before a recovery. That’s according to forecasts by leading dealerships in Dubai.

Even secondhand car sales will not offer much of a lift – volumes could be off by 15-30 per cent from a year ago. “Dumping by car rental companies (de-fleeting) is expected as these firms face utilization challenges,” states the findings by the automotive group.

In fact, there will not be one single category that dealerships can fall back upon, with the COVID-19 wrecking demand. Parts and service centre revenues are estimated to also drop 15-30 per cent. That dent will be quite severe as revenues from this had provided some boost in the last four years.

The dealership group says that short-term sops from the government could help them out of an extremely difficult situation. This could include a reduction in VAT and custom duty, which can help push new car sales.

“Additional support in terms of government purchases can drive revenue generation,” the report adds.

“Due to the severe situation (caused by COVID-19), companies are not in a position to purchase new vehicles as their requirements have also dropped in line with the market,’ said Michel Ayat, CEO of Arabian Automobiles Co. and Chairman of Dubai Car Dealer Business Group.

“The only opportunity is in the segment of delivery vans where there is a slightly bigger demand than other vehicles.”

Dashed all hopes

When the year started, dealerships had expected 2020 to be the comeback year after four straight years of new car sales decline. In 2018 and last year, new sales were pegged at 247,196 units and 243,332.

Now, instead of a turnaround to brace for a 50-60 per cent drop is nothing short of catastrophic.

But Ayat, who has seen through the worst of the 2009-10 market crash, believes dealerships will just have to sit out the worst of the current phase.

“Our expectation is that the second quarter could see an overall sales decline of 70 per cent vs. last year and will gradually improve in the third and fourth quarters to ultimately close the year with approximately 40-50 per cent drop as compared to 2019,” he added.

“Due to the impact of reduced sales during COVID-19, the inventory holding period for many automotive distributors have increased from average levels of 2-3 months to as high as 6-7 months.

“This challenging situation has led to an estimated inventory buildup of approximately 100,000 cars among distributors in UAE which equates to approximately Dh10 billion of working capital

“This situation puts enormous financial strain on the distributors and requires close collaboration between carmakers and distributors in order to bring down the inventory levels back to optimal levels.”

Michel Ayat
Michel Ayat, CEO of Arabian Automobiles, says dealerships in the UAE have to contend with a stock pile up of around 100,000 units. That's Dh10 billion stuck in working capital. Image Credit: Arabian Automobiles Co.

Biggest concern

How to gradually sell this stock pile-up will be the biggest concern the industry has to carry around.

In the dealership’s findings, the finger of blame is pointed at banks for not doing their bit to encourage new car buys. This was quite apparent during the Ramadan and Eid campaigns, typically a peak time for the auto retail industry.

“Banks are skeptical with regards to issuing new auto loans while trying to adjust their financials to the forecasted increase in default provisions,” the report states.

What dealerships want

UAE dealerships want manufacturers to do whatever’s needed to help them out of the predicament.

The report notes that “Special support mechanisms are required to push ageing stock. Manufacturers could also look at delaying certain model launches until stock is cleared.”

According to Ayat, “COVID-19 is unlike anything that we have witnessed in the past and it will significantly redefine the global automotive industry. Currently, distributors are focusing on addressing immediate challenges relating to inventory buildup, high working capital, cash flow management and cost optimization.”

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Dealerships and carmakers are trying to come up with ways to time their new model entries. (Pictured used for illustrative purposes.)