Auto finance: Freedom to buy a car

Various financial schemes offered by auto finance companies translate into easy monthly installments for the car buyer. This has fuelled the proliferation of cars on Oman’s roads

Oman’s GDP grew by an impressive 13 per cent in 2007 with a significant contribution from the non-oil sectors. The overall structural character of the economy continued to be dominated by the oil and gas sector during 2007, accounting for 45.3 per cent of GDP, 75.9 per cent of merchandise exports and 75.8 per cent of net oil revenue in 2007. While production of natural gas rose by 1.8 per cent in 2007, domestic demand from upstream and downstream projects has also been rising consistently.

The year 2007 was another year of impressive performance for the banking sector, in terms of capital adequacy, assets and profits. “Capital levels of commercial banks in relation to risk weighted assets remained adequate at 15.9 per cent as at the end of 2007, which was considerably higher than the regulatory minimum capital requirement of 10 per cent.

The core capital and reserves of commercial banks increased by 62 per cent over the year to RO1,458.2 million. Aggregate assets rose by 42.5 per cent RO10.3 billion, while gross Non-Performing Loans (NPLs) recorded an absolute decline of RO33 million to about 320 million.

Net profits of commercial banks, which had almost doubled over a period of two years from RO79.4 million in 2004 to RO162.9 million in 2006, grew further to RO213.7 million in 2007.

CBO’s foreign reserves at the end of 2007 stood at RO3,662.1 million, providing cover for 7.2 months of merchandise imports and 4.4 months of all gross current account payments. The reserves further rose to RO3,864.5 million at the end of June this year.

According to Public Authority for Social Insurance (Pasi) data the employment of Omanis in the private sector increased by 15.3 per cent during 2007. In view of the high demand for labour during this robust economic growth phase, there was an unprecedented increase in the number of expatriate labour by 213,659 in the private sector over the two-year period 2006-2007 to a total of 638,447 at the end of 2007 - which increased further to 680,099 at the end of March 2008. Employment growth for expatriates, thus, remained very high at 25 percent in 2007, over and above a 20.2 per cent growth recorded in 2006.

Besides robust economic growth, the year was marked by generation of a vast number of employment opportunities, notable progress in economic diversification, sustained surpluses in the fiscal and balance of payments positions, declining levels of public debt, comfortable levels of foreign exchange reserves, and a sound and resilient banking system. The high levels of growth was particularly remarkable because of its “employment-intensity, which has also facilitated better distribution of the benefits of growth in the economy. This augurs well for Non Banking Finance Companies which offer a host of auto-loans and other personal loans for consumers.

The auto finance companies have made buying a car like a cake walk and due to this it is easy to understand why everyone and anyone are seen driving around in gleaming new cars even before they are officially launched.

The easy installment scheme, which is mostly spread over a period of five years, has given car buyers the freedom to pick a car of their choice without the least worry of the cost of the vehicle. For car freaks and automobile lovers, one of the most eagerly awaited time in the calendar is the month of Ramadan. It is during this period that automobile dealers and finance companies dole out many offers, discounts etc to facilitate your decision to buy a new car.

Numerous newspaper advertisements scream out with tempting captions. Perhaps the most attractive of all the details in a car advertisement would be the part which talks of the numbers – the installment amount to be precise. This magical number, talking about the monthly installment scheme, is the gateway through which many wannabe car owners walk away with the vehicle of their choice and dreams.

And finance companies fall head over heels and also in the process, trample upon each other, to compete for customers’ share. The best auto financing company is usually the one offering the best deal.

While attractive schemes also display the competitiveness within the automobile industry, most often these are observed as the necessary tools devised to help the local population to satisfy its basic need of transportation.

As far as the market is concerned, most of the dealers agree that the prime car sales season is during Ramadhan, when some of them rake in more money in a month than during the rest of the year. The best schemes, offers and deals roll out of the woodwork then. Car companies vie with each other to sell. A major din in the market emerges and auto finance companies work overtime, checking and double-checking bank statements and salaries of prospective customers.

A necessity
In fact, it is the country’s underdeveloped public transport system that is responsible for making a large percentage of the population dependent on personal vehicles rather than buying them for luxury. As a result, the future of the automobile industry is now directly linked to the increasing youth population, which is the prime target segment for most of the dealers.

Naturally, considering the overall dynamics of the economy, low-paying entry level jobs plus the ever-present need, will force the dealers to team up with auto finance companies to launch attractive installment schemes and special offers.

Most automobile dealers have an inevitable link with one auto-financing company or the other. Not to be outdone, the banks are also in the fray with their finance schemes.

It is estimated that every year more than 30,000 cars are sold in Oman, a large part of which are financed.

Many consumers have also realized that it is better to go for an automobile loan than block a huge some of money to purchase a car. The surplus money can be kept for emergencies.
Since most of car dealers have tie-ups with finance companies, it is possible to clinch a deal easily. Things have so simple that it is all a matter of just filling in a few forms and hey presto, you could well be on your way with your car. The only difficult part is providing personal details like bank statements and any other loans that the client would have availed from other financiers.

New and old markets
Essentially, there are two types of markets – replacement and new. The replacement market consists of buyers who have already had cars but want another one. New market represents the first time buyers. The replacement market holds the bigger chunk, covering 80 per cent of the market.

The auto finance industry also has problems. The general problem is non-payment – be it due to bouncing cheques, loss of job, unanticipated payments, over commitment, sickness, etc. Circumstances such as sickness can be resolved in the short term, but problems such as over commitment have to be changed.

The auto financing schemes are here to stay, as long as the Omani population is growing. However, more interesting is the fact that the Sultanate represents the most competitive market in the entire Gulf region, where cars are extremely cheap. This means that dealers are going to bombard the local market with all sorts of offers to lure the customers.

Challenges Ahead
The automotive industry today is in the middle of a dramatic and largely unprecedented transformation. The heart of this transformation is not about how the auto company does its work but rather how it defines itself.

The global automotive industry today is delivering unprecedented levels of customer value. Vehicles today are vastly superior to and more reliable than those produced just a decade ago in terms of economy, safety, comfort, functionality and performance. Fierce global competition for consumers is the prime mover behind this increase in customer value.

But the automotive industry structure that has endured for eighty years may be reaching the limit of its potential. Delivering the next significant increment of value to automotive consumers while remaining profitable will require dramatic increases in productivity across the value chain.

Increasing demands to cut costs to the bone and deliver one innovation after another is putting enormous pressure on purchasing departments of auto manufacturers. Original Equipment manufacturers (OEMs) have taken the lead in mastering this complex balancing act. A close analysis of their success stories has revealed key factors that may also help other industries.

A global study came up with six recommendations six recommendations for purchasing departments in the automotive industry:

• Source in low-cost countries – Manufacturers are increasingly realising cost savings by purchasing in low-cost countries

• Create a global supplier footprint – More and more carmakers are defining a global supplier footprint strategy that provides the decision framework for purchasing

• Ensure access to technological innovations – Manufacturers are taking considerable action to ensure continuous access to technological innovations

• Reduce costs together with suppliers – Manufacturers are accelerating continuous cost reduction efforts together with cross-functions and suppliers

• Standardize – OEMs are increasingly focusing on technical levers to reduce costs and improve the organizational prerequisites of Engineering

• Globalise structures and decision making – Manufacturers are globally aligning their organization and decision-making structures in Purchasing and improving alignment to Engineering

In addition, key success factors have been identified. Companies that are strategically well positioned are mindful of three factors that are decisive when it comes to optimising purchasing, a strategic fit, comprehensiveness and application.

To ensure a strategic fit, business decisions in purchasing must complement the strategy in other functional areas, follow the same aims and be mutually supportive. The steps taken must also be comprehensive enough to generate a substantial impact such as improving the cost situation over the long term. Finally, the actions taken must be stringently applied and constantly monitored to ensure success.

Realising the need to adapt and offer consumers the best most NBFC’s in the Sultanate have been trying to constantly improve their service and offerings. Companies like Taageer Finance, National Finance and Al Omaniya have been taking the lead in this direction.