“Buying a vehicle, new or used, has become more difficult than before. The biggest car dealers told me I had to book the car 3 to 6 months before I receive it. I was told that car manufacturers are having complicated production problems. Japanese, Korean, American and European automakers are not producing enough cars,” Hamed Abdulkhaliq, a Jeddah-based private sector employee, told Majalla.
Except for luxury cars, the huge demand for new cars in Saudi Arabia is not being met by automakers for different reasons. The car production challenge is related directly to a bigger crisis: COVID-19. Let’s trace the origins of the problem and how it affected car sales in the Kingdom.
SHORTAGE OF SEMICONDUCTOR CHIPS
“In March 2020, automakers were forced to close their plants temporarily all over the world. They halted orders from suppliers without knowing when production would be resumed. On the other hand, the demand for electronic devices rose dramatically. Semiconductor chipmakers re-routed their supplies to electronics companies to fill the rising demand for TV’s, computers, video games, etc.,” said Yousef Salem, a car sales expert based in Jeddah.
But how is this related to cars? What is the importance of electronic chips?
Salem answered, “Semiconductor chips are extremely important in the auto industry. From door locks and brakes to dashboards and radios, chips are essential and cars cannot be made without them. The chip industry is worth USD 500 billion. The production was disrupted in countries like South Korea, Malaysia, Indonesia, China, Thailand, Vietnam, and other countries around the world. Those countries were hit hard by COVID-19 and the factories have not restored production to the pre-pandemic levels!”
“According to the latest industry reports, the world has lost around 11 million units of production in the car industry worldwide. This trend will continue in 2022 and 2023 until the chipmakers fully recover. Each chip order takes 3-6 months to be finalized and shipped to carmakers. It will take us 2 to 3 years for chipmakers to restore their capacity with more investment and plants being built now,” he explained.
It is important to note that the auto industry accounts for less than 10% of the global chip market, meaning that chipmakers’ priority is electronics companies, a matter that causes further delays in chip orders.
WEAK SUPPLY CHAINS
Supply chains refer to the process of making and selling commercial goods, from supplying raw materials and manufacturing to distribution and sales.
It is a full circle that needs to be completed to have consumer products available in the markets. When supply chains are disrupted, markets will eventually suffer from shortages. This is exactly what is happening in the auto industry.
“If we take Japanese cars as an example, we will find that tens of countries are included in the supply chain. Each part of the vehicle is brought, produced and manufactured in one country or more, and sent to Japan which does not produce any raw materials. Due to closing production facilities in different parts of the world following the COVID-19 lockdown, the supply chains have been disrupted, which made it difficult for Japanese automakers to fill in gaps. That explains the delay of car orders to the Saudi market and the rest of the world,” said expert Yousef Salem.
CAR PLANT CLOSINGS AND LAYOFFS
Tens of thousands of workers in the auto industry were laid off worldwide in 2020 as companies could not afford paying its workers with the decline in sales. There were huge stocks of cars that nobody bought and automakers were skeptical about the future.
“With more money pumped into financial institutions by governments and the quick recovery of car markets in 2021, it was not easy for automakers to restore their production capacity,” said Ousama Hamad, a long-time car expert in the Saudi car retail market.
“Automakers had to hire people again to resume production, but the lack of semiconductor chips slowed new hiring. In addition, higher inflation rates have made automakers more cost conscious. That’s why car prices are rising by 10% to 15% in the Saudi car market. This is a clear example of “imported inflation” that raises consumer prices for goods coming from abroad,” he added.
LUXURY CAR EXCEPTION
“Luxury cars are available in the market and you can buy and receive your car on the same day from Saudi dealers. The automakers of luxury cars produce fewer vehicles than the ones dedicated to the “middle classes.” The supply chains for luxury cars were less exposed to shortages and weaknesses,” said OusamaHamad.
Another exception is the Chinese cars. I visited some Chinese car showrooms in Jeddah and noticed that almost all models are available. Luxury cars which cost USD 80,000 and above were ready for sale without waiting lists.
“The Chinese were better prepared and they are ahead of competition. Our customers don’t have to wait to get their car delivered to them,” said a showroom salesperson.
It seems that Chinese automakers managed to keep their supply chains on track, which gives them a bigger slice in the Saudi car market.
Saudi Arabia is the biggest car importer in the Middle East with a 40% share. In 2019, the total value of imported cars was USD 12 billion. The demand remained stable despite global decline because women are a major growth driver after they were granted the right to drive cars in 2018.
“Saudi Arabia is on the radar of major auto makers. The Saudi markets have recovered from the consequences of the pandemic and the economy is expected to grow by 7% in 2022. This is good news for automakers. However, they need to strengthen supply chains and produce more vehicles to satisfy the rising demand, especially with the Saudi banks’ policies to lend more money to consumers,” concluded expert Ousama Hamad.