The underdeveloped nature of Africa’s automotive industry provides ample room for growth across the entire value chain from vehicle production and assembly to sales and after-sales service, according to new research by Deloitte.
The global consulting firm sees Africa as the “final frontier for the global automotive industry” due to rising per capita income levels, the ongoing development of financial markets, and projected increases in motorisation rates. But accommodative policy is necessary to unlock the full potential of the largely untapped industry.
Its research shows that the continent’s automotive market is relatively small, with a motorisation rate of just 44 vehicles per 1 000 inhabitants (the global average is 180). While around 1.55 million new vehicles were sold or registered across the continent in 2015, estimates indicate that new vehicle sales could reach 10 million units a year within the next 15 years.
Nigeria, Africa’s largest economy and most populous country, is recognised as an automotive market with enormous potential.
According to Deloitte, the country’s combined new and second-hand car market ranges from 500 000 to a million units per year, but it has an extrapolated market size of 1.7 million unit sales a year. With only around 2% of the population able to afford new vehicles amid the country’s current economic challenges and tough financing environment, many of the vehicles currently in use are second-hand imports from the United States.
Furthermore, the country’s assembly plants have been dormant for close to a decade, with production hamstrung by “inconsistent policy implementation, declining patronage by local and federal government departments and a lack of reliable power supply” among other factors, according to Deloitte.
Its economic and population dynamics nonetheless generate interest among automotive industry heavyweights and original equipment manufacturers (OEMs) as a future market in Africa. To realise this potential and avoid the fatal errors of the past, the country must provide suitable policy, says Dr Martyn Davies, MD for emerging markets and Africa at Deloitte and leader of its Africa automotive industry team.
He says Nigeria could leverage its population size and impose import duties on previously owned vehicles – those under five years old, for example – which would give the country’s automotive sector “breathing room” to grow and develop while providing immediate confidence and a market for OEMs to invest in the country, build production lines, create jobs and add value.
“Cars will become more expensive, of course. But the government needs to choose: do you want to purely import cars with zero industry or do you want to have a nascent automotive sector that is starting to scale, with OEMs and supply firms coming in?
“In the automotive sector, you need a proactive industrial policy, a smart one,” he adds. “It’s not so much about import substitution – which is socialist and counterproductive – it’s more about being pragmatic as to how you shape public policy and protect your economy while at the same time providing the necessary incentives to investors through policy. I’m afraid the Nigerian government has been very slow to react to this. It cannot say that its priority is industrialisation while it does nothing policy-wise to enable this, particularly in the automotive sector.”
South Africa, the continent’s leading car manufacturer and new vehicle sales market, has been the “only example of successful industrial policy” in South Africa over the past two decades, says Davies. He adds that the automotive industry contributes around a significant 7.7% to GDP and is the only sector to have has grown in terms of manufacturing while other sectors have shrunk.
South Africa is soon to sign off on a revised Automotive Production and Development Programme (APDP) incentive scheme, which is set to run from 2020 through to 2035.
A key target in the plan is to grow vehicle production from around 400 000 units at present to one million units a year, but Davies believes this target may be too ambitious as weak economic growth and constrained consumer finances hamper local demand.
To achieve the target, he says South Africa must increase economic growth, partner with other African states to protect their economies from second-hand vehicle imports being dumped from abroad, expand export markets further, capitalise on trade agreements such as Agoa (the African Growth and Opportunity Act), and create a regional value chain, at least into neighbouring states such as Botswana in order to lessen production costs.
Deloitte believes the onset of the Fourth Industrial Revolution gives African economies the opportunity to create robust automotive manufacturing industries, which can help to reduce their exposure to commodity price fluctuations and stimulate inclusive growth.
“The automotive sector is crucial for economic growth, and we must do everything we can to support it – from government to the private sector, and from a research and development perspective as well,” says Davies.
Brought to you by Deloitte.