Calvin Ebun: Should major car makers focus on Africa?

by Calvin Ebun

Major car makers are keen to grow stronger roots in Africa. Talks with different African states authorities continue as internationally renowned car manufacturers adapt to the surge in demand from African governments for local manufacturing plants. The demand has intensified as some commodity dependent African states are looking to diversify their economies.

The African Association of Automotive Manufacturers will play a fundamental role in ensuring that entities such as BMW, Toyota Motor, Volkswagen, and General Motors establish a core local presence on the continent.

Focus On Nigeria

Nigeria may be the primary focus of the African Association of Automotive Manufactures. Full-scale manufacturing remains a difficult prospect due to challenges such as the volume of imported used cars and lack of vehicle financing options which, in the face of vehicle demand, is subdued by temporary negative economic growth.

Johannesburg-based FirstRand’s WesBank is collaborating with the Nigerian government to provide solutions to some of these issues, including the provision of a 23 billion naira ($73m) assistance fund. Nigerian banks are likely to assist in providing additional funds for these initiatives.

In 2013, the Nigerian Automotive Industry Development Plan (NAIDP) was introduced to form a new direction for the automotive industry in the nation that encourages increased activity in the local vehicle assembly. With its investments in Nigeria currently at $10m, automaker Tata may increase its activities in the country’s auto industry by $8m.

42.5m

 is the number of registered vehicles in Africa

Many factors, however, have given rise to challenges for auto manufacturers looking to increase sales in Nigeria. A decrease in vehicle sales of over 60%, caused by the depreciation of the Naira, and Nigeria’s new tariff regime are two such factors. Corporates, the biggest group of new vehicle consumers in Nigeria, have extended the replacement cycle of their fleet from four years to seven years.

With its different challenges and opportunities, Kenya remains a key region for Volkswagen’s plans to expand its production in Africa. By the end of 2016, assembly of the Polo Vivo will begin in Kenya. Thomas Schäfer, managing director of Volkswagen South Africa, is positive about the company’s plans to produce 1000 cars in the first year of what he described as an “industrial experiment”. The Kenyan government’s restrictions on imports of used cars which are seven years or older may provide Volkswagen with some advantages in its regional operations.

The Pluses And Minuses Of Africa

Africa has been regarded as the final frontier for the global automotive industry. This comes as no surprise. The underdeveloped automotive market may present both advantages and disadvantages for car makers attempting to extend their presence in the region. The motorisation rate on the continent is 44 vehicles per 1000 people, far below the global average of 180 cars per 1000 inhabitants. This may be indicative of the relatively low purchasing power of African consumers. Viable vehicle financing remains dismally low. Volkswagen’s Schäfer stated that only 5% of vehicle sales in Kenya now and none in other African countries were financed, due to high inflation.

As history has shown, such figures should not be considered out of context. By establishing an early position in the market, automotive companies can increase their prospects of attaining market control in the long-term. Automotive companies such as Volkswagen and GM moved into China when its GDP per capita was less than a third of Ethiopia’s current level. Now, they hold combined market shares of 30% in China, selling 3.5 million units per year.

Conclusion

The golden era for profitability in the automotive industry may be long gone. According to some reports, it is clear that a decline is inevitable despite all-time highs in global car sales reached in 2015 by manufacturers. Some reasons for this may include deteriorating pricing and rising production costs. The shift of production capacity to Africa could assist carmakers in overcoming the currently increasing pressure on margins.

Small market size, lower purchasing power, and insufficient policies are some factors to consider which pose threats to fundamental strengths (such as economies of scale) that vehicle manufacturers should possess as they operate in African regions. Taxation, border control, financing, and human capital are some of the key drivers of change that will enable African states to meet the needs of carmakers expanding into Africa.

While the relatively low 42.5 million registered vehicles in Africa may be viewed as a reason for caution, its current one billion inhabitants and projected middle class of 1.1 billion by 2060 shed light on a different perspective which may promise phenomenal growth for market leaders willing to ride the waves of change ahead.

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