THE MIDDLE EAST AFTERSALES INDUSTRY

TRENDS & OPPORTUNITIES

Frost & Sullivan–Exclusive White Paper

Prepared for

Traditional Process

Challenged – Driving

Profitability through Global

Best Practices is The Key

2

Table of Content

VEHICLE SALES REVIEW

VEHICLE IN OPERATION (VIO) REVIEW

SPARE PARTS REVIEW

AREAS OF OPPORTUNITY

ABOUT FROST & SULLIVAN

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23

CRUDE OIL SCENARIO AND IMPLICATIONS 03

3

What do lower oil prices mean for GCC Economies?

• Real growth would be affected by changes in oil production (oil sector) and government spending (non-oil sector)

• All regional budgets are still heavily reliant on oil. Increased expenditure in recent years has pushed up the ‘break-even’ oil price

• Fiscal policy stance in the region is becoming more prudent as oil prices remain lower for longer

• Interbank rates rose sharply in 2015 on tight liquidity. We expect conditions to remain challenging in 2016

3.2 3.4 3.4

2.6

3.2

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0.5

1.0

1.5

2.0

2.5

3.0

3.5

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2013 2014 2015e 2016f 2917f

% y

/y

GCC Real GDP Growth • Already measures announced to mitigate loss of oil revenues:

• Cuts to fuel subsidies

• VAT to be introduced at 5% in 2018

• Airport, housing taxes

• Corporate taxes proposed in several GCC countries

• Raising government bond issuance, syndicated loans

• Capex remains protected for now, key projects in the UAE and Qatar related to Expo 2020 and FIFA 2022 moving ahead.

Source: Bloomberg, Markit, Emirates NBD Research

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What do lower oil prices mean for GCC Economies?

Contd…

• Growth estimated at 3.4% in 2015, forecast 1.9% in 2016

• Budget deficit to narrow to -13.9% of GDP this year from -15% in 2015

- Energy subsidies cut in 2016, further cuts likely before 2020.

- Increased focused on raising non-oil revenues through taxes/ fees.

• Financing the deficit is not problematic in the short term

• Privatization proceeds expected to help plug deficit gap.

Saudi Arabia: Under scrutiny

• Capital spending likely to be maintained for now

- Expo 2020: Infrastructure spend of at least AED 22bn (official est.)

- Tourism/ hospitality strategy: target 20mn tourists p.a. by 2020. The supply of hotel rooms in Dubai increased by 6.7% y/y in 2015 to 79,002 rooms (target: 140,000 to 160,000 hotel rooms by the end of the decade).

- Dubai Economic Tracker showed business activity in March move back into positive territory after slipping in February.

• Cuts in subsidies and government transfers on the cards

- Cuts to foreign grants

- Increased fees and indirect taxes – housing taxes, airport taxes

- Reduced subsidies on fuel and utilities by 6% in 2015

UAE: Diversification is paying off

Source: IMF, Haver Analytics, Markit, Emirates NBD Research

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The global crude-oil market is moving toward balance. Crude oil prices

will gradually recover

• Oil prices will remain under considerable pressure in 2016 but ultimately a rebalancing in fundamentals will exert limited upward pressure

• A repeat of 2015's strong demand gains are unlikely but we are confident that consumers won't think twice about filling their tanks

• Failure among producer nations to reach a production freeze agreement reopens market share battle within OPEC with anticipation that Iran will add new volumes

• In the longer run the global crude-oil market is moving toward balance. Crude oil prices will gradually recover

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Source: IMF, Haver Analytics, Markit, Emirates NBD Research

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Automotive Industry Review

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Vehicle Sales—Review …oil prices and limited government investment negatively impacting vehicle sales in 2016 in the GCC countries; in Yemen, Syria and Iraq

market potential already reduced to half, however, in most of the ME countries we expect nearly double digit growth from 2017

1.8 2.2

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1.9 0.2

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3.2

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1.0

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2015 2020f*

Sale

s in

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ion

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its

Light Vehicle Sales, Middle East, 2015-2020f

GCC Iran RoME Total

• We are expecting overall CAGR of 9.1%

• The GCC countries likely to grow at 8.5% CAGR, however 2016 would see decline in vehicle sales, a recovery is expected 2017 onwards

• Iran is ready to lead the region with near double digit growth expected in next 5 years

• RoME is mainly driven by market recovery in Jordan and Lebanon. We also expect Yemen to get back to business as usual by 2018 (pertinent to note that Yemen sold 22,355 vehicles in 2014 which has come down to 7,760 in 2015, similar was the case with Iraq with 44% drop in overall sales [year on year])

• At overall level RoME likely to post +14% CAGR by 2020

Source: Frost & Sullivan Analysis

(*) f=forecast; GCC = Gulf Cooperation Council CAGR = Compound Annual Growth Rate Click for TOC

8

Vehicle In Operations—Review …growing VIO with movement towards higher warranties offered by OEM to retain customers for longer period at authorized dealerships –

this is already been challenged by regulators (changing market dynamics)

14.6 19.4

16.9

20.9 3.3

4.2

34.8

44.5

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20.0

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2015 2020f*

VIO

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Light Vehicles in Operation, Middle East, 2015-2020f

GCC Iran RoME Total

(*) Limitation: VIO details for Iran also includes commercial vehicles, which is estimated to be around 8-9% of total vehicle parc; f=forecast CAFÉ = Corporate Average Fuel Economy

• Most of the GCC countries does not allow imports of more than 5 year old vehicles, hence overall share of used vehicle imports is negligible in the VIO, however RoME has large share of used vehicle imports (specially in countries like Iraq, Yemen, Syria)

• In terms of overall growth in VIO, the GCC likely to witness CAGR of 5.8% (2015-20) where as Iran likely to grow at CAGR 4.3%. Iran expecting to scrap 3-4 million vehicles by 2020

• In terms of segments >50% GCC VIO is dominated by SUVs and Pickups whereas the share of SUVs and Pickups in Iran is less than 8%.

• The recent CAFÉ implementation in KSA likely to have major impact on VIO by year 2020, we are expecting SUV/Pickups to drop by 10-12% due to CAFÉ regulation

Source: Frost & Sullivan Analysis

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Vehicle In Operations Review—Age Breakup …average vehicles age in Middle East is around 7.8 years, lowest being in Qatar (at 6.9 years) and highest in Yemen (10+ years). Most

of the middles eastern countries still operate >15 year old vehicles which has 10.8% share in VIO (highest in Yemen, Syria)

37.7% 41.6% 36.5% 26.9%

30.7% 25.7% 35.5%

28.7%

20.8% 25.0% 16.5%

23.6%

10.8% 7.7% 11.5% 20.8%

Total ME GCC Iran RoME

VIO

Sh

are

in p

erce

nta

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Age of Light Vehicles in Operation, Middle East, 2015

Less Than 5 years 6-10 Yrs 11-15 Yrs More than 15 yrs

34.8M 14.6M 16.9M 3.3M

40.4% 41.8% 39.6% 38.5%

28.1% 31.3% 26.5%

20.9%

22.7% 19.4% 25.8% 22.3%

8.8% 7.5% 8.1% 18.3%

Total ME GCC Iran RoME

VIO

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Age of Light Vehicles in Operation, Middle East, 2020f

Less Than 5 years 6-10 Yrs 11-15 Yrs More than 15 yrs

44.6M 19.9M 20.9M 4.3M

Source: Frost & Sullivan Analysis

(*) Limitation: VIO details for Iran also includes commercial vehicles, which is estimated to be around 8-9% of total vehicle parc; f=forecast; M=Million CAFÉ = Corporate Average Fuel Economy

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Vehicle In Operations Review—Application Dominance (Iran excluded) …in terms of dominance, the GCC and RoME market is largely dominated by Japanese applications, however Korean applications are very

fast picking up

(*) Limitation: VIO details for Iran also includes commercial vehicles, which is estimated to be around 8-9% of total vehicle parc; f=forecast CAFÉ = Corporate Average Fuel Economy

52.2% 48.0%

25.7% 30.0%

14.9% 11.0%

3.2% 5.0% 4.0% 6.0%

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2014 2020f

VIO

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Market Share Analysis, the GCC & RoME, 2015-2020f

Other brands*

European brands

US brands

Korean brands

Japenese brands

European OEMs are set to increase market share in luxury segment due to strong brand image and increasing focus on fuel-efficient technologies in the region. However, high maintenance cost is expected to hinder sales.

Other brands, such as Geely, Great Wall etc., are expected to gradually gain market share due to price competitiveness and improving brand image.

US brands are expected to face challenges in terms of portfolio adjustment as a result of growing focus on smaller and fuel-efficient vehicles.

Korean brands are expected to gain market share until 2020 thanks to improving brand image and low parts pricing.

Japanese OEMs likely to drop market share as a result of drastically growing competition from Korean brands. Parts pricing and maintenance costs are expected to have a negative impact on overall performance.

Source: Frost & Sullivan Analysis *Other brands include Geely, Great Wall etc.

**Does not include Iran

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Spare Parts Demand …total spare part demand in Middle East estimated at US$ 12.98 billion (2015), expected to reach US$ 17.27 billion by 2020

…part per vehicles are highest in UAE (US$ 512) with an overall average of US$ 373

7.19 9.84

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5.95 1.11

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2015 2020f*

Spar

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US$

Spare Parts Market, Middle East, 2015-2020f

GCC Iran RoME Total

• The overall Middle East spare part industry expected to grow at CAGR 5.9% (15-20)

- The GCC = 6.5% CAGR - Iran = 4.9% CAGR - RoME = 6.0% CAGR

• Parts Per Vehicles (PPV) estimated at $493 for the GCC, $277 for Iran and $333 for RoME, overall we are expecting 4-5% increase in PPV by 2020.

• In the GCC, Saudi Arabia and UAE together dominate 72.5% market share where as RoME led by Jordan and Lebanon with +70% market share

Note: For Iran it includes part fitted with locally assembled vehicles whereas for all other countries it is replacement demand

Source: Frost & Sullivan Analysis

The market revenue does not include labor and accessories f=forecast Click for TOC

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Spare Parts Demand (Continued) …Increasing VIO directly impacting the spare parts demand

…Total spare parts market in the region estimated at $12.98 billion in 2015, likely to reach at $17.27 billion by 2020 (CAGR 5.9%)

Revenue (2015) Revenue (2020) CAGR

(2013 – 2020)

Tires $2,672 $4,278 9.9%

Batteries $1,090 $1,393 5.0%

Brake Parts $977 $1,567 9.9%

Filters $448 $789 12.0%

Starters & Alternators $406 $419 0.7%

Lighting $214 $252 3.3%

Wheels $256 $378 8.2%

Exhaust Components $142 $311 16.9%

Spark Plugs $189 $306 10.1%

Others $6,583 $7,573 2.8%

Total $12,977 $17,265 5.9%

Spare Parts Revenue by Category, Middle East, 2015–2020f

Note: Others include Steering System Hard Parts, Reman'd Engine & Transmission, CV Driveaxle & Boot Kit, Reman'd Rack & Pinion Steering Gear, HVAC & Engine Cooling Components of Commercial Vehicles, Class 6-8 Truck Powertrain

Systems & Components, Class 6-8 Truck Chassis Systems & Components, Tire Pressure Monitoring Systems, Light Vehicle Exhaust Emission Control Systems, Fuel Delivery Systems, Engine Control Units, Ignition Parts, Automotive Sensors,

Ignition Wire Sets, Class 6-8 Engine Components, Reman. Engines and transmissions, Selected Fractional Horsepower Motors, Fuel Injectors, Fuel Pumps, Selected Automotive Reman'd Pumps, Sports Compact Underhood components, Belt,

Hoses, Gaskets and Seals, Battery, Carburetor, Gauge, Internal Engine Hard Parts.

Note: For Iran it includes part fitted with locally assembled vehicles whereas for all other countries it is replacement demand Note: All figures are rounded. The base year is 2015. Source: Frost & Sullivan Analysis

• Tires & Batteries has high demand in GCC countries due to adverse climate conditions

• If we exclude Iran then most the parts (excluding Batteries) are imported in the GCC and RoME

• The import duty varies from 5% to 12% depending on part categories

• Limited restrictions for importing parts in Middle East (except Iran)

• Large share of the market controlled by few business families

The market revenue does not include labor and accessories f=forecast Click for TOC

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Spare Parts Demand—Channel Analysis (excluding Iran) …6 routes exist for supply of parts in the Middle Eastern Aftermarket with increasing competition from Branded and

Other After Market Parts

Parts Supply

Genuine Parts

Branded Aftermarket

Parts

Other After Market

Parts

Imports

Counterfeit

System Suppliers

Note : OES – Original Equipment Spares

OE Parts – OE fitted brands supplied in independent after market

Alternate parts – Brand other than OE brand supplied in the independent after market

Spurious – Products which are not original and branded as original popular brands in the market

Imports – It includes domestic imports, which means a part is directly getting imported from the country of origin without involving local operation other supplier

System suppliers – They supply the brand under their name eg. Bosch braking products – Example : Bosch Chassis Systems supplying brake components

Domestic Imports

34.5%

23.4%

13.1%

12.8%

14.1%

2.1%

Total Value: $8.30 billion (excluding Iran) Iran details not known, almost 60% of parts are imported from China and most of those are low quality parts

Note: All figures are rounded. The base year is 2015. Source: Frost & Sullivan Analysis

The Genuine Parts, Branded Aftermarket Parts are the categories accounts for nearly 58% in total part sales

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Spare Part Demand—Channel Analysis (Continued) Aftermarket Structure for Parts Supply (Can be represented differently for different countries in the GCC)

Service Channel

Dealer / Distributor

Counter Sales Wholesale

Customer

OES / OEM’s Partner

Sub WS Retailer Fleet / Garage

Export

OES Second Brand OE Parts Non-genuine (China) Domestic Imports

Distributor/Importer

Sub WS Retailer Export

Retailer Fleet / Garage

Customer

Source: Frost & Sullivan Analysis

Parts Suppliers

Tier-2 Tier-4 Tier-1 Tier-3 Customers Tier-5 Exports

Retailer Fleet / Garage

Fleet / Garage

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Area of Opportunity

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Areas of Opportunities – We are taking one area for the discussion today

• Accessories

• Car Rental & Leasing

• Mobile Quick Wash and Door to Door Services

• Car Spa

• Quick Service Centres and Body Shops (multibrand)

• Mobility Solution

• Online Retail

• Organized Waste Management – Petrochemical

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Typical Profitability for 3S Operations—Comparative Analysis

US/EU APAC/India Middle East (GCC)

Vehicle Sales <4% <5% 10-20%

Parts and Services 20-30% 20-40% No Limit (Avg is ~40%)

Accessories >30% >30% Not a key focus area

Others • Financing • Insurance • Registration, etc…

<5% 4-8% Not a key focus area

Mark-up analysis comparison

Profitability in accessories is much more than part sales – Offer similar opportunity for a dealer and for an OEM (Genuine and Non Genuine Accessories)

Source: Frost & Sullivan Analysis

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Accessories—Large Dependency on Dealers/Distributors to drive

Sales with Limited KPIs and Training

$140

$240

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$-

$50

$100

$150

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KSA UAE Rest of GCC

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OES Accessories Market, the GCC, 2015

2015

• High difference is average accessories purchased per

new vehicle among GCC countries

- KSA = $100-170

- UAE = $300-500

- Kuwait = $300-400

- Qatar = $400-440

- Oman = $100-150

- Bahrain = $100-150

Average purchase of accessories per vehicle in the KSA (largest market is in Middle East) is twice as low as

in other countries due to lower demand and lower accessory availability

Note: installation not included. Source: Frost & Sullivan Analysis

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Who is Doing What? Toyota combines strong focus on accessories with high sales volumes

KSA UAE Kuwait Qatar Oman Bahrain

Toyota

Dodge

Chevrolet/GMC

Nissan

Ford

Mitsubishi

Honda

Mazda

Hyundai

• Toyota in KSA has strong focus on electronic accessories (navigation, rear parking systems etc.) and wheels, similarly across other

countries in focus except for Qatar

• Dodge has a very consistent offer of accessories across four key countries in GCC

• Utilization of new sales channel to promote accessories is limited to few dealership

Strong Moderate Low

Source: Frost & Sullivan Analysis

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Key Areas of Concern and Way Forward

• In 75% cases no one knowns who is selling accessories and where it is sold

• Availability is a concern –

- Accessories supplied after 6 months of vehicle launch

- Not displayed properly or displayed at a wrong place with limited knowledge

• Practical Advertising/Promotions always ignored – Accessories are not parts, purchase

decisions are often triggered by emotions

- Limited use of social media – best practices available with in region

- Vehicle not displayed with accessories

• Dealers interest not kept in consideration while developing/ introducing the accessories –

Sales of accessories helps Improve profitability

- OEMs pushing global part numbers in 100% cases (and that too through global websites)

- Limited accessories designed to compete with aftermarket products Source: Frost & Sullivan Analysis

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Key Areas of Concern and Way Forward (Continued)

• Effort to sale accessories with new vehicle is limited

- Sales location and timing for sales/promoting accessories makes real difference

- Showrooms are not equipped to sales accessories along with new vehicles

- No or limited efforts made to sale accessories during the first service of the vehicle

• No or Limited Training Program and Clear incentivization Plan

- First person to promote accessory is vehicle sale person – not motivated to sale accessories or directing

customer to accessory sales person

- Process of selling accessories is not integrated with vehicle sales process

Source: Frost & Sullivan Analysis

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22

Last Three Words….

Tough time ahead – traditional methods will not allow to keep

high profitability

Standardizing operations/process across the GCC is key

challenge – but allows long terms sustainability

Challenges from non-genuine aftermarket increasing every day –

Strategies designed to challenge independent aftermarket will

increase sustainability and profitability

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