Africa’s Auto Industry Stuck In Second Gear?

Despite a very favourable demand environment, the growth of Africa’s automobile industry remains stunted. However, recent developments suggest the industry may be about to pick up as consumer demand grows. Sherelle Jacobs analyses the challenges and opportunities that lie ahead for the industry.

The development and nurturing of manufacturing industries will be crucial to Africa’s transition to the next stage of its economic development. Manufacturing will also be key to creating jobs, thus passing down the fruits of the current economic growth boom. In this regard, auto manufacturing locally holds out vast potential – it would, in theory, satisfy a growing demand with cheaper units suited to the continent’s transport environment, it would create skilled employment, it would raise the technical bar and save billions of dollars spent each year importing often rickety second-hand vehicles from abroad.

Attempts to set up a viable car assembly and manufacturing industry on the continent go back several decades but indifferent government policies allied with a host of other challenges have meant that the industry has grown in fits and starts.

Is this about to change? Recently, there has been some progress. For example, while Nigeria’s long, often frustrated, battle to launch a credible auto manufacturing sector has been well documented, Business Monitor International offered a rare glimmer of hope when it published a report in August which predicted that Nigeria would become a net exporter of vehicles in Africa by 2016, with production climbing to around 2m vehicles.

Moreover, there are signs that the government’s will to nourish a solid vehicle manufacturing sector in the country is growing. For example, this summer Nigeria’s House of Representatives mooted a proposal to review the government’s current policy on imported cars.

There is strong desire within Nigeria’s parliament to reduce the age limit for imported cars to five years, in line with legislation in other countries such as the UK and the US, in a bid to limit the market for imported cars and therefore give an indirect boost to locally manufactured vehicles.

The Nigerian Customs Agency has also been working on legislation to control the smuggling and illegal registration of vehicles, which again damages the local manufacturing industry, by establishing a centralised database. These measures can be contextualised within the Nigerian President Goodluck Jonathan’s Transit Policy, which aims to ensure that Africans have access to affordable transport. Currently, because of the lack of locally manufactured cars on the market, Nigerians favour buying imported cars, which are inevitably more expensive because of import charges.

New manufacturing milestones have also been achieved by foreign car firms operating in the country recently. For example, early in 2012, Peugeot Automobile Nigeria (PAN) launched a new Alsvin Sedan model to be manufactured in Nigeria, at an immediate capacity of 3,000 units in the first year, rising to 7,000 units later on, with some of the cars being exported throughout the rest of West Africa.

Top priority in S Africa

Nigeria is not the only country where the car manufacturing industry is showing some positive growth signs. In South Africa, the government has perhaps shown even more commitment to boosting the car industry. The automotive industry, which accounts for 10% of export revenue, is a top priority and the government has set an ambitious target, boosting vehicle production to 1.2m units by 2020. Increasing the use of local content is also a key priority.

Foreign firms manufacturing in South Africa are showing just as much ambition as the government. An example is Ford Motor Company South Africa (FMCSA). The company aims to double its production of vehicles every year until 2016 in order to get an edge over its competitors, Toyota and Volkswagen. Recently, the company announced its intention to create 800 new jobs at its Silverton Assembly Plant and Struandale Engine Plant to ramp up production of its Ford Rangers.

BMW South Africa has also been making progress in the manufacturing stakes recently. Since investing R2.2bn ($262m) in its Rosslyn plant between 2009 and 2012, BMW’s commitment to its manufacturing outfit in South Africa has started to pay dividends. In August, it achieved the right to export its F30 BMW 3 Series to China.

The achievement is impressive – it makes BMW the first South Africa-based car manufacturer since the Motor Industry Development Plan (MIDP) to gain the necessary permit from the Chinese authorities to export to China. Overall, the firm expects capacity at the Rosslyn plant to reach more than 90,000 units per year.

That said, BMW is not the only firm exporting to China in some form. In July Volkswagen hit the local headlines when it announced that it had obtained an export order from China for over 12,000 engines, giving a much-needed boost to its Uitenhage plant.

Progress has also been by no means confined to Nigeria and South Africa. Lesser-known car manufacturing and car parts manufacturing firms are currently flourishing in Ethiopia.

One of those firms is the British engine manufacturer Ricardo. Ricardo is set to coordinate with the Chinese car firm Lifan to create engines tailored to the African market. More specifically, the two firms are cooperating to come up with an engine for the Lifan X-60, a sports utility vehicle.

Belayab Car Assembly, which recently launched a new locally assembled vehicle, is another firm making steady progress in Ethiopia, as is Holland car, the country’s first ever local car manufacturer, which started up business in 2005.

Lack of government support

But despite these achievements across the continent, it is clear that very fundamental challenges are presenting themselves in all countries where car manufacturing is taking shape.

Nigeria can be taken as a case in point. Despite the high hopes for the sector, Nigeria’s manufacturing sector for vehicles is still extremely small and the country is overreliant on imports. It is estimated that the country spends around N550bn ($3.5bn) every year by importing vehicles – 80,000 new and 200,000 second-hand.

Worryingly, the high importation figures show little sign of decreasing in the near future. The number of new vehicle imports actually increased by 15% in the first half of 2012. Foreign imported cars have also become established as a status symbol, which makes trends even more difficult to reverse. This is in heavy contrast with past consumer tastes, when locally manufactured cars were fashionable and sought after.

The importation of low-quality, overly worn second-hand cars to serve the lower-income market is also an enduring trend in Nigeria. One of the biggest criticisms that the Nigerian auto-manufacturing industry has also faced is that it has been undermined by inconsistent policy making by government. Although the government has outwardly championed the car manufacturing sector, it has often failed in the past to back this up with tangible patronage and support to companies in the industry. NTM, a venture first launched in 1975 between the government and the Italian company Fiat to build trucks and tractors, demonstrates this. Because the operation did not receive the support from government that it required, the company was privatised to Art Engineering and Construction Limited in March 2003.

The Nigerian authorities have also faced criticism for failing to maintain a consistent policy on the importation of vehicles. Last year the Trade Union Congress (TUC) and Nigerian Labour Congress (NLC) faced fierce criticism for their decision to give the green light to a deal to buy N5.5bn ($35m) worth of mass transit buses (around 550 units in total) from China.

Other problems that the Nigerian auto industry faces go beyond poor policy making. Power black-outs undermine operations at plants in the country and have a serious effect on final production figures. This ultimately puts off investors making decisions about where to establish new plants in the developing world.

Nor is South Africa immune from challenges. In global stakes, the South African vehicle manufacturing sector is still relatively uncompetitive. “The South African automotive industry is unfortunately not competitive, due to the low percentage (an average of 35%) of local content in the final product,” write MJ Naude and JA Badenhorst-Weiss in a paper on supply management problems in the South African auto sector.

“On average, South Africa was 20% more expensive as a vehicle manufacturing base than Western Europe, and China was 12% less expensive than Western Europe. South Africa is thus 30–40% more expensive than China and India,” the report also remarks.

The financial crisis and global downturn have also depressed spending power in the country, which has in turn led to lower demand for new vehicles. And in contrast to countries ranging from the US to China, which have reduced car sales taxes, there has been limited signs that the South African government is making life easier for the industry to numb some of the pain.

The transport and supply infrastructure in place in South Africa is also inadequate, especially when it comes to export infrastructure at the country’s biggest ports. This ultimately has a knock-on effect on the cost of vehicles being manufactured in the country. High electricity and water costs also add to the high overheads of car and car part manufacturing plants. The sector is also infamously hampered by regular strikes and wage disputes.

“Both skilled and unskilled staff do not have an urgent drive to execute their tasks efficiently and effectively, resulting in lower productivity in comparison with labour in regions such as Asia. As a result, many multinational manufacturers resort to producing parts in the Far East as it is often cheaper,“ the study by MJ Naude and JA Badenhorst-Weiss adds.

In other countries, the industry is also falling short. In Kenya, for example, the domestic market for new vehicles is very weak. Fuel prices and the financial crisis in particular have dented demand for cars in the country. Moreover, imports make up the vast majority of sales – 70%.

Equally, in Ethiopia, the industry faces a number of quandaries. “The major problems observed in the automotive sector are in the areas of government regulation, lack of adequate road infrastructure, absence of trained manpower and lack of adequate financing facilities,” says Eskinder Desta, managing director of Habesha Capital Services, in a paper on the auto-manufacturing sector in Ethiopia.

It is also important to add that in places like Ethiopia, soberingly basic problems inhibit the growth of the industry. Road infrastructure is a case in point. Although road construction projects are gathering pace, the underdeveloped nature of the road networks, which has ultimately left a significant portion of the population without sufficient access to roads, means that the market for cars, new or old, local or imported, is severely restricted.

There is no doubt that the auto-manufacturing industry in Africa has potential. And that if and when manufacturing does take off, the construction of vehicles will be an important aspect of that breakthrough. Encouragingly, foreign firms are interested in manufacturing in Africa and local firms are flourishing in their own way in places like Ethiopia.

Governments are also behind the industry in rhetoric if not consistently in substance. That said, it will be a tough struggle and many of the challenges vehicle manufacturing faces are alarmingly basic. Whether they can be decisively overcome remains to be seen.