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Assessing the African market

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Africa is trying hard to place itself on the automotive roadmap, says Ryan Bax, Industry Analyst for Mobility at Frost & Sullivan Africa

Despite wide-spread importation of used cars, the average level of motorisation in Africa remains the lowest globally at an estimated 44 vehicles per 1 000 inhabitants. New vehicle sales lag significantly behind other regions, with unit sales estimated at 1,55-million units in 2014.

The figure represents approximately 1% of global new car sales and 1,36 new vehicles for every 1 000 inhabitants. This contrasts sharply with 18,05 and 56,94 new vehicles per 1 000 inhabitants in China and the United States in 2016.

If new vehicle sales on the African continent grew seven units per 1 000 inhabitants, total new vehicle sales would tally about 7,7 million units annually. This would make Africa the fourth largest new car regional market after China, the USA and Europe – larger even than Japan, which sold 4,3 million units in 2016. It is this potential that has enticed automakers into Africa.

In response to the fervour exhibited by CEOs and manufacturers, African governments have understood the gains to be made from the automotive sector and have adopted policies to achieve wider government objectives of industrial and economic growth.

These policies are export oriented and permit automakers to assemble cars in the local economy at competitive rates, yet source the necessary demand from foreign markets that possess the disposable income.

Though South Africa, Kenya and countries in North Africa have been producing vehicles for a number of years, in recent times it has been Nigeria that has taken the greatest steps to attract investment into its automotive sector.

The Nigerian government developed the National Automotive Investment and Development Programme (NAIDP) in 2013, which provides wide-ranging benefits to automakers wanting to assemble vehicles in that country.

The policy was well received, with over 10 assembly plants being setup to produce for the local and West African automotive markets and, though new vehicle sales reached approximately 50 000 units in 2014, the weak economic climate reduced sales to approximately 7 000 units last year. As a consequence, assembly operations in Nigeria have slowed as inventories continue to expand unsustainably.

Upping the ante, Morocco developed an investment cluster programme which saw Renault enter the local market. Renault will be the only global automaker assembling vehicles in the country until the arrival of Peugeot in 2019.

In neighbouring Algeria, the government’s drive to create a local automotive manufacturing base has led to a quota system being placed on all automakers importing cars to “force” the investment into local assembly.

New vehicle sales dropped from over 300 000 units in 2014 to 160 000 units in 2015 and a forecast shows 95 000 units in 2016 due to the quotas. A number of automakers have noted their intent to invest in the country, with Volkswagen being the latest to do so.

Kenya is currently looking to develop a specialised policy to create a turn-around in their local assembly sector, which started to slow in late 2015 due to a lack of support measures and the enforcement of a 20% excise duty on locally built vehicles.

Placing further pressure on Kenya are the aspirations of Ethiopia, which is looking to become a major assembler of vehicles on the continent within the next 10 to 20 years.

The introduction of investment promotion measures has seen a number of Chinese companies establish assembly facilities while, more recently, Hyundai noted its intention to commence assembly in the country.

South Africa’s government announced that a follow-on Master Plan from the Automotive Production and Development Programme (APDP) would be aimed at providing confidence and stability for automakers to consider further investments in the country.

The Master Plan will go beyond the APDP by providing benefits not only for light-duty vehicles, but also for motorbikes and medium and heavy vehicles.

However, regulatory and labour limitations, along with the slowing new vehicle sector, are challenges for sector participants. That said, strong demand from the United States and Europe is maintaining growth in the sector.

Unfortunately, wide-ranging challenges throughout African markets are restricting the success of policies and economic goals. However, it is not the economic and regulatory factors alone that have limited success; it is also the policies themselves that pose challenges.

Automotive polices place limiting covenants on automakers that lift the business case for establishing assembly facilities in the said country. Due to the fact that a number of countries have enforced these policy stipulations, the combination of high initial investment cost and concern for small new car market size, the sustainability and viability of these policies is being questioned.

In response, the African Association of Automobile Manufacturers (AAAM) has been established to assist countries wishing to participate in the automotive value chain. The association consists of senior management with representation from the South African divisions of BMW, Ford, General Motors, Nissan, Toyota and Volkswagen.

The association engages with African governments and automotive bodies to enhance sustainability and the working environment for the eventual growth and success of automotive markets in Africa.

As a consequence of these challenges, Egypt is currently developing an alternative approach to revitalising its automotive assembly sector. As the new vehicle sector shows a strong resurgence following the Arab Spring, the government is looking to benefit the wider economy from this trend.

In a repeat of a move made in the 1960s, the government is aiming to invest in and engineer an entirely new Egyptian vehicle for Egyptians. The plan aims to ultimately produce one million units annually. The policy is at an early phase and time will tell whether it reaches consensus among policymakers.

Though the African new vehicle sector is facing a number of challenges, various developments will facilitate wider recovery towards 2020. The recovery is expected to show slow growth initially, but is anticipated to benefit the wider supply side of the economy, which will enable sustainable growth in the coming decades.

 

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