Luxury vehicles are an industry of pure prestige, and the Middle East is far from lacking in demand for opulent car brands. While numerous reports say that luxury sales in Dubai are down around 45 percent in the first two quarters of 2009 compared to the same time last year, most car manufacturers are surprisingly optimistic.
Since the financial crisis began, prices for luxury automobiles have not fallen. Instead, leading extravagant car brands have tailor-made their strategies, altering the supply to demand equation by offering fewer cars than they did before, while not lowering the asking price for each model.
The Gulf is highly dependent on expatriate spending, but the financial crisis has lowered their spending power, especially in the United Arab Emirates. But there is still much growth potential that stems from demand among the Gulf population. This situation leaves the luxury car market room to roam in the region.
Levant vs. Gulf
In Lebanon, a major speedbump for the deluxe car industry is high taxes. Nabil Bazerji, managing director of G.A. Bazerji & Sons Co., the country’s Maserati dealership, says the accumulation of taxes on luxury vehicles is outlandish.
First, consumers in Lebanon must pay a customs duties, which is 5 percent of the cost of the car. Next, customers spend another 45 percent of the car’s price tag on the ‘consumer tax.’ Then, buyers pay a value added tax of 10 percent of the car’s selling price, as well as registration taxes amounting to 7 percent of the product’s worth.
“When you pay 10 percent VAT, you’re paying it on the built-up costs, which includes taxes already,” says Bazerji. “When you pay the registration tax, you pay it on top of the selling price, including VAT. So we pay tax, on top of tax, on top of tax, on top of tax!”
Wissam Trad, director at Saad & Trad, Lebanon’s distributor for international luxury leaders Lamborghini, Jaguar, Bentley and Rolls Royce, agrees that the luxury vehicle taxes in Lebanon are absurd.
“This is too high and discouraging to potential buyers. Should these taxes be revised, I am sure sales would be even higher,” he says.
Consumers in Dubai get a much better tax deal. Assaad Raphael, chairman and general manager at Porsche Center Lebanon illustrates the drastic taxation contrasts between Lebanon and the GCC.
“[In the Gulf], there is a big tax incentive because the cars are taxed only 5 percent, which makes it the cheapest place in the world to buy a car,” Raphael says.
This benefit makes buying a luxury vehicle more reasonable in the GCC than in a country like Lebanon, where the taxes add up to more than 60 percent of the car’s total value.
Still, sales in Dubai have gone down rather noticeably.
“They’re dumping prices and it’s another issue of flooding the Lebanese market and other markets with the overstock and excess products they have from their market,” Bazerji says. “This is a serious problem. We are losing opportunities and sales, especially since a lot of potential customers are taking advantage of registering their cars in the Gulf to avoid paying [the high taxes they would face in Lebanon].”
A question of sales
In times such as these, who would buy a brand new, luxurious, exclusive car? It seems the current economic circumstances have mostly affected the middle class.
“High net worth people are still today’s spenders,” says Raphael.
Frank Bernthaler, director of sales and marketing at Mercedes-Benz Middle East and Levant, believes consumers looking to purchase luxury vehicles may put a bit more thought into what they’re buying now than before the financial crisis.
In Lebanon, luxury vehicles have fared well amidst the global chaos.
“We are enjoying our best year ever in terms of Bentley and Lamborghini sales, and second best with Jaguar,” notes Trad. For Bentley, the Middle East represents 12 percent of the brand’s sales worldwide.
Maserati in Lebanon has also performed remarkably well in 2009.
“Sales in the first quarter of 2009 have been better than that of 2008,” Bazerji says. The brand’s opulent Quattroporte, which was launched in 2005, is the company’s bestseller.
Sales of lavish vehicles have, without a doubt, softened in the Gulf. Despite scarce liquidity and credit, GCC sales are expected to pick up as the crisis bottoms out.
Compared to the first quarter of 2008, Audi reported a 16 percent drop in sales in the first quarter of this year. A spokesman for the company says they remain optimistic.
“It is a tough time for the whole industry, but our outlook is very positive,” he says.
BMW sales have also dipped this year. Sales fell by 9 percent overall for the company. But the brand’s sales in Lebanon and Syria grew by more than 100 percent, while in Saudi Arabia they accelerated by 15 percent.
According to Stathis I. Stathis, general manager at AGMC in Dubai — the sole importer of BMW in Dubai — this year will present the industry with many obstacles, but hopes remain high.
“We anticipate 2009 to be challenging, but consumer demand in the luxury segment still remains healthy,” he says. “We have several new products planned for the year, so we are optimistic that 2009 will be another good year.”
Bernthaler of Mercedes notes that it hasn’t been all bad for the Middle East luxury car industry.
“Looking at the market in the Middle East and the Levant, we’ve seen year-on-year sales increase. Our most iconic vehicle, the evergreen G-Class SUV, grew by 139 percent in May 2009 compared to the same time last year.”
Candidly, Raphael admits that the global financial crisis has taken a toll on Porsche’s transactions.
“Of course, the economic crisis has had a negative effect on our sales, that’s for sure,” he admits.
Thankfully, Porsche’s production strategy has allowed them to avoid major fallouts.
The engine of strategy
“We forecast our deliveries from the factory one year in advance,” Raphael says. “So by the time the crisis happened in September 2008, the factory had time to react. The strategy of Porsche factory was to produce less cars, and the reason is that we’d rather sell one car less than discount our cars.”
Thus, by producing less the company itself modified the supply-to-demand equation in order to not feel the burn of the crisis.
Trad’s company also uses a similar approach to working around the financial crisis.
“In terms of adjustment, we are more careful with the way we order and stock cars compared to last year,” he says.
Regardless, most luxurious car brands only produce a small amount of each model in order to keep the exclusivity of each design. The crème de la crème of premium manufacturers remain confident that their grandiose brand images will help sustain their sales and consumer loyalty.
Sanguine about his dealership’s brands, Trad sees opportunities.
“We are confident that our portfolio of brands[Lamborghini, Jaguar, Bentley and Rolls Royce] are very strong and have a bright future,” he says. “For this reason, we are investing in new showrooms.”
Speeding past crisis
The epitome of luxury is the $1.4 million Maybach Landaulet. The 2009 limited edition model allows passengers in the rear to relax with the top down while the driver remains separated and covered. Maybach has produced only 20 units of the Landaulet for the entire global market, and the Middle East was the first to receive one of these vehicles.
Mercedes and Maybach are some of the top-selling brands in the Middle East. According to Bernthaler, one in every 10 Mercedes S-Class vehicles sold around the world is delivered to the Middle East. Porsche is also amongst the region’s favorite list.
“Porsche has had strong growth in the Middle East in the past six years,” says Raphael. “We have grown from 2,500 cars seven years ago to 8,000 cars this year.”
Compared to last year, 2009 sales have been rather exceptional and are even higher than 2007, according to Raphael. In the Middle East, the average age of the Porsche buyer is around 35 years old, whereas in Europe the profile is around 45.
The new Porsche 2009 Panamera is the brand’s luxurious new four-door sedan. This model is expected to alter the performance of the posh sedan market, as critics say it will create high competition with Maserati’s Quattroporte, a more expensive four-door sports car.
Although car sales in many places have dropped this year, most upscale players in the luxury market segment remain optimistic. With manufacturers such as Maybach rolling out new models like the Landaulet in 2009, who is buying? The richest of the rich, of course. For the rest of us, we’ll keep on dreaming.
