macroafricaintel | On the African auto sector resurgence

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In late June 2018, Volkswagen, a German carmaker, opened a new $20 million factory in Kigali, Rwanda. Parts for the VW cars would be sourced from South Africa and moved across a supply chain that passes through Kenya, both of which already host VW plants; a good model for intra-African trade. VW also has a plant in Nigeria. What is unique about the venture is that some of the locally built cars that would be rolling out of its factory gates are not aimed for sale. They would be used for a car-sharing service by VW. Global auto companies clearly realise countries where car ownership is low for income-related reasons could still be serviced by forward integrating into transportation. Besides, even in rich economies, ride-sharing services have been reducing the need to own a car outright. Ride-sharing services are certainly more affordable either way. Various models to make experiencing the delight of a good car a wallet-friendly endeavour are being explored. In early June, for instance, Mercedes-Benz, a subsidiary of Daimler, another German carmaker, announced a car-subscription service in two American cities. This was only about two months after its rival, BMW AG, another German automobile company, launched a similar service. American carmaker Fiat Chrysler Automobiles NV has also announced plans to launch a subscription service in 2019. There is another reason global auto companies are looking for new markets: tariffs on European Union auto exports by protectionist American president, Donald Trump. American imports of $300 billion worth of European cars and parts could halve consequently. So if successful, the Rwandan experiment would probably be replicated in other African countries and everywhere else in due course.

New investments
Also in June, Mercedes-Benz announced an almost $1 billion investment in its East London plant in South Africa. And India’s Mahindra & Mahindra Ltd opened an assembly plant in South Africa only just a month or so before in late May. PSA Peugeot Citroen, a French carmaker, has also revealed it would set up a car assembly plant in Nigeria in the first quarter of 2019. Considering its previous venture in the country failed and perhaps only managed to last as long as it did because of a government decree that all cars used by officials must be those produced locally, it is a little surprising the French automobile firm is giving it another go. But it is not doing so blindly. Aliko Dangote, Africa’s richest man and certainly Nigeria’s most successful entrepreneur, is a partner in the new venture. There are other foreign car manufacturers aiming for Nigeria. In July, for example, executives from Volkswagen, Nissan, Bosh, BMW, and Uber met with Nigerian officials and other stakeholders in the country’s automotive sector to discuss opportunities and seek clarification on policy. Furthermore, if ongoing talks succeed, Renault SA, a French car company, and another three automakers, could partner with Simba Corporation, a Kenyan company which already assembles trucks for Japanese, Chinese and Indian auto brands, to assemble cars in Nairobi soon. Mahindra & Mahindra and Nissan, a Japanese carmaker, also plan Kenyan plants. In the meantime, Mahindra & Mahindra would probably export cars to the rest of the African continent from its Durban plant in South Africa.

Business-friendly policies key
But what informed the choice of the African countries for investment by the global auto companies? Malte Liewerscheidt, Vice President at London-based Teneo Intelligence, a research firm, provides some insight: A preference for comparatively more stable countries like South Africa or Rwanda is…understandable…These countries combine…competitive advantages such as access to a large domestic or regional markets, good infrastructure and a skilled workforce.” Mr Liewerscheidt has a point. Concessions secured by the foreign automakers like easier taxes and discouraging the importation of used cars could easily be overturned by current and new administrations. So, as Mr Liewerscheidt avers, there is some level of political risk. Thankfully, the incentives are being legislated instead of simply being government edicts. In the Kenyan case, a law on the tax incentives for the auto sector and requirement that used cars be newer, is in the works. South Africa, which already hosts myriad global automakers, is more ambitious; albeit stakeholders there insist it has yet to match its ambitions with action. A new 15-year South African auto policy from 2021 being negotiated is expected to target more than double the current car production of about 600,000 units. The authorities wish that incentives in the plan would make it even cheaper for the automakers to produce for export across the world from South Africa. However, the car companies do not think the government proposal, which also includes that they double their workforce, is far-reaching enough. Local auto brands have also been springing up across the continent. In Nigeria, Innoson Vehicle Manufacturing Ltd, set up a plant in 2007. Ghana’s Kantanka Automobile Company, which started operations in 2004, is another. But they are struggling; in part because Africans trust foreign brands more than they do local ones. And for good reason. The foreign ones are more reliable. They are also greater status symbols than local ones. Another challenge for local car manufacturers is skilled labour. Financing also. A case in point is Innoson which is at loggerheads with one of its banks.

Still long way to go
In any case, African auto sales are still quite small. According to Statista, almost 900,000 passenger cars were sold on the continent in 2017, about 1 percent of global sales of over 80 million units. As the type of ride-sharing service in Rwanda spreads across the continent, there would likely be a predictable level of demand. But there is a greater opportunity for exporting cars to other parts of the world. For this to happen, African governments would have to offer more than just tax incentives. They would certainly need to build world-class infrastructure. It must also be easy to do business on the continent. Rule of law must be respected, logistical costs low and agreements respected. In this regard, South Africa, the continent’s dominant car is probably best suited at the moment. London-based Charles Robertson, Global Chief Economist at Renaissance Capital, an emerging markets investment bank, wonders about the timing of the seeming african auto sector resurgence, though, reckoning it is probably “a decade too early for most countries.” Why? There is “not enough electricity to support car manufacturing”, for instance. So does that mean the foreign car manufacturers making a bet on the continent would lose money? Not exactly. Rencap’s Robertson explains: “South Africa can make it work. The others can do low value-added assembly and probably small-scale [manufacturing]”. Mr Robertson is, however, doubtful Africa is as yet ready for high value-added car manufacturing.

An edited version was published by African Business magazine in August 2018

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