The UAE is home to some pretty big spenders — and one thing high-net-worth individuals (and let’s face it, anyone who just got a good bonus) love is cars. You only need to head to any of the city’s five-star hotels for a who’s who of luxury cars parked at the entrance.

But with war hitting the region, cars might fall much lower on people’s wishlists. “Escalation [will likely] trigger a ‘wait-and-see’ pullback in big-ticket discretionary purchases such as new vehicles, particularly in the UAE and other GCC markets where confidence can turn rapidly in response to security developments,” Santiago Arieu, senior research analyst at Fitch Solutions, tells EnterpriseAM.

They will also likely get more expensive. “Rising freight and ins. premia [will likely increase] the cost of imported vehicles, forcing dealers and distributors to pass on higher logistics costs, which would raise effective transaction prices,” Arieu added.

IN CONTEXT- The closure of the Strait of Hormuz and the targeting of several ports across the region have meant risk premia and ins. costs have increased, while airspace closures have impacted air cargo flows, raising freight rates.

This could skew the automotive demand dynamic in the country, with a bigger focus on used vehicles and more affordable segments, while premium car brands take a hit, Arieu says.

SOUND SMART- Most vehicles coming into the UAE are imported as fully built-up units, with the local assembly and manufacturing industry only accounting for a sliver of the market.

Car sales came to a complete halt Sunday and Monday, despite Ramadan typically being the peak season for the industry in the UAE, with sales usually up 50-100%, Glenn Harwood, co-founder of automotive data platform AlgoDriven, tells EnterpriseAM. But in the past 48 hours, some car shopping has resumed, though not at the regular pace at which it usually takes place during this season, he added.

“This could be a repeat of Covid-19 when supply chains froze up, but the one difference is: where at the time, there was not enough new cars in the market, now some car dealers have one to two years’ worth of stock, both of used and new cars,” Harwood said, adding that this could actually be a blessing in disguise for them to clear some of their stock.

What did happen at the time, though, was that used car prices were inflated and took nearly three years to simmer down, he explained. New cars were being sold at full price, with no haircuts offered, he added. “The fact that the car market has been pretty bloated for six months [could help,] but it really depends how big the shockwave is to the new car supply chain,” he noted.

Chinese automakers — some of which are newcomers to the market — have already given traditional automakers plenty to compete with in terms of pricing and have flooded the market with inventory, making it even harder for traditional automakers to clear existing stock, he explained.

Another problem for the market? Newcomer car brands might start shying away. While the UAE has been a popular choice for global carmakers — with yet another Chinese manufacturer, iCaur, launching just last month — headwinds including heightened freight costs, war-risk ins. premia, and deteriorating schedule reliability will deter new brands from entering the market, Arieu said.

“We expect most carmakers to remain more cautious about new localization plans, awaiting more clarity until routing and ins. conditions stabilize,” he added.

The Gulf region might lose its prime position for Chinese carmakers. “The Gulf region was often the first stop for Chinese carmakers looking to expand globally, because it’s geographically close by,” Harwood said. “Other Chinese brands have had such good success, and local importers are chasing them, but if there's instability, no supply chain, and consumer confidence disappears, they're just going to choose a different market to launch into next.”

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