To unpack the complexity of the automotive industry on the African continent, Deloitte South Africa today releases the first report of their annual Series. In this inaugural report, Deloitte Africa Automotive Insights focuses on three key African economies where most business interest is currently being channelled: Nigeria, Kenya and Ethiopia.
The report states: “Despite its billion-strong population and rising income levels, Africa’s automotive industry is yet to be unlocked. Apart from a small number of countries, African automotive markets are mostly pure retail markets that are largely serviced by imported second-hand vehicles. In 2015, approximately 1.55m new vehicles were sold or registered across Africa.”
Karthi Pillay, Director: Africa Automotive Leader at Deloitte explains the purpose of the series of reports: “Africa holds enormous promise, but is complex. The automotive industry is clearly gearing up to address Africa as the next big market and needs to stay close to this market. While no single report will capture that complexity, our objective is to begin creating a portal of data including automotive insights; leveraging our network across the continent, which includes access to 51 of the 54 countries in Africa.”
Though it is an ambitious postulate that Africa could one day rival industrialising countries such as China in the production and assembly of vehicles, Pillay points out that Ethiopia’s current rate of motorisation, two per thousand population, is higher than was China’s when it commenced automotive manufacturing in the period 1983-85.
“We are not claiming that Africa has any immediate comparative advantage that has been extensively exploited. Though many of the commodities necessary to automotive manufacture are to be found in abundance in Africa, a thriving industry is feasible only if certain African countries put in place appropriate competitive and enabling environments. Auto companies are already interested in Africa – being active not only in South Africa, but Egypt, Morocco and Algeria. However, most African markets are currently some distance from being open for business given that 80% of the continent’s existing market consists of second-hand vehicles.
“Globally, the strategy for manufacturers is to get closer to their consumers – and Africa has a growing number of consumers entering the middle income bracket,” explains Pillay. “The value chain of the automotive manufacturing industry is massive, and on its own can kick-start the industrialisation of Africa, provided the continent can harmonise manufacturing and trade policies”.
Deloitte has a blueprint vision for the automotive industry in Africa. It involves identifying an anchor country, which already exists in the form of South Africa, which has the necessary enabling environment and export-focus, and which has already supported Nigeria in establishing its policy. Secondly, it requires a regional approach in order to leverage economies of scale, with each country in the region identifying its unique role within what will be a single value chain.
“This regional conversation has to start, with individual countries both putting in place their enabling investment environments and deciding where they belong in the value chain. It requires breaking down isolationism and aligning tax regimens – strategies which are not insurmountable, given the political will,” says Pillay.
Nigeria’s auto manufacturing industry is one of the emerging successes of the continent. The report states: “While the NAIDP [National Automotive Industry Development Plan, aimed at stimulating local investment in local production and thereby bolster Nigeria’s economy] has been welcomed in general by motor vehicle assemblers, the policy reveals potential gaps. To ensure that the NAIDP is successful, the automotive-focused policy needs to be embedded into a broader industrialisation and economic policy that reduces operating costs across industries in Nigeria,” states the report.
The NAIDP in its current form focuses on the following elements: Industrial infrastructure development, in particular supplier parks and clusters; Skills development; Homologation certification and standards; Investment promotion, including fiscal measures; and Domestic market development. The fiscal measures, which include a sliding-scale of tariffs and levies, came into effect in July 2014 and follow the import substitution concept. By increasing the cost of importing FBUs the Nigerian government encourages the establishment of local assembly.
The report states: “It is Deloitte’s view that achieving scale and unlocking the automotive market in Africa is a potentially sizeable medium- to long-term opportunity. A market-shaping approach, including a combination of interventions by industry stakeholders and governments that target supply-side and demand-side challenges, will however be required in the countries evaluated.” It outlined some of the challenges:
- Overcoming the over-reliance on second-hand vehicle imports. For instance, according to the Kenya National Bureau of Statistics (KNBS) the volume of imported vehicles between 2003 and 2012 grew at over 300% from 33 000 units to 110 474 units, with over 80% of those units being second hand. Passenger vehicles were Kenya’s fourth largest import overall in 2014, valued at US$420 million and making up 2.3% of total imports (by value) while commercial vehicles ranked seventh, valued at US$370 million ;
- Designing and implementing an automotive policy to unlock the auto market;
- Consolidating a highly fragmented aftersales market;
- Addressing insufficient vehicle finance options; and
- Building a sufficient local supplier base.
Regarding Ethiopia, the report states that while the country lacks a coherent automotive strategy, its government offers strong “support for industrialisation and auxiliary industries, and sizeable investments in infrastructure (both physical and economic) position the country favourably for automotive manufacturing in the long term”. Ethiopia’s economic policy, the second Growth and Transformation Plan, aims to support and grow the manufacturing contribution to GDP from 4% in 2014 to 8% by 2020. This is supported by attracting investment through industrial parks and extending incentives, including tax incentives, to foreign investors.
In Kenya, expenditure on the purchase of cars, motorcycles and other vehicles accounted for 1.5% of total consumer expenditure in 2015 and is expected to remain relatively stable to 2025 as incomes rise. “Decreasing the age of cars that are allowed to be imported into Kenya whilst simultaneously decreasing the affordability of these cars by increasing the taxes levied on them should drive sales of more affordable, newer, more road-worthy, locally-assembled cars. Incentives to assemble locally, such as tax breaks or waiving of import duties for parts, will make it more affordable to assemble vehicles in Kenya…” the report states.
The value chain will only be successful if it can compete with low-cost, labour intensive manufacturing bases such as Mexico and Thailand. As China is in the process of retooling its economy away from being a low-cost, labour intensive one, with the prospect of as many as 80 million job opportunities being exported to alternative countries – those regions ought to be positioning themselves right now, advises Pillay.
The Deloitte Global Automotive Team has a leading presence in the global automotive industry, providing services to 80% of the Fortune 500 automotive companies.