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The Nigeria auto industry part II – The implications of our decisions

Nigeria auto industry
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The Goodluck Jonathan government and now this one has a desire to kick-start the sluggish auto industry. A strategy was developed and a policy was introduced. So far, 54 licences for an installed capacity of 406,000 vehicles have been issued by the National Automotive Design and Development Council (NADDC). The government argues that the policy works, but I’d say only on paper. In reality, it is far from being the solution.

When the auto policy was announced, interest was 12%, Naira was N162: $1 and everyone could access forex. Now, interest rates are 14%, Naira is $367 to the dollar and rubber, steel and plastic products are all on the “41 item” list, excluded from buying forex at the CBN rate. As much as the government would argue that it has stopped the pressure put on the naira by stopping the demand for US dollars, a counter argument is that it has in one fell swoop, almost killed off the very industry that it is trying to develop – an industry that directly supports the economy. In its stead, smuggling has increased, unemployment is rife amongst car dealers and older cars have flooded the market, bringing with it, more technically unsound vehicles and more clandestine methods to avoid duties and levies. The current situation in the auto industry throws up a worrying picture (see below). Imports have fallen, so you can be sure that the hike in duty to defend local production will kill imports – and the revenue generated by Customs – and that is a lot of money for NCS to lose!

The current problem

Nigerians will more likely purchase a used, but trusted brand, than a new and relatively expensive, but unknown brand. This invariably means “tokunboh” (imported, used). The Naira being less than half the value when the auto policy was introduced in 2013 hasn’t helped. In addition, the government has increased the duty on vehicle imports. Ironically, while the Nigerian government was increasing duty on vehicle imported, Benin Republic reduced transit charges – by up to 27% (in March 2017). This encouraged the import of vehicles through the Autonomous Port of Cotonou in transit to Nigeria. In 2013 – the year the Nigeria auto policy was released, 37% of the 800,000 used cars imported into sub-Sahara Africa were to Benin republic (see below).

Source: Eurostat Comext Database, Japanese Customs and Tariff Bureau, U.S. International Trade Commission

 

If you want any further proof, you will find that the “Customer of the Year” in the auto industry are the banks (who finance the sale of cars) and the oil companies (that are liquid and have net dollar positions). So, why don’t the numbers add up with 11m vehicles on the roads and Nigerians being discerning shoppers? Well, the government didn’t factor in the cultural issue and ignored the obvious.

Take the city of Ibadan. It has an estimated 10,000 Nissan Micras (see below). This 1.1Litre engine car will cost you less than N1m (used) and has fuel economy, is easy to procure parts/service, has road maneuverability and a robust 2nd hand market are common comments by the drivers – things that NADDC should consider when giving out licenses, because there are 10,000 Micras that need support – and that’s in Ibadan alone!

For a different reason, NADDC is failing to recognize the economic importance of our mindset. For reasons that are mostly urban myths, theOpel (left below) and VW Golf (right picture below)  ply the 56km stretch of road from Ajah to Epe in Lagos State. The Opel Astra “F” (manufactured between 1991 and 1998) and the 2nd generation VW Golf MK2 (manufactured between 1983 and 1992) have an estimated age of 26yrs and their production has stopped, but are the vehicles of choice. What happens when the drivers no longer find the parts – and why has this also been missed by the NADDC?

These “theories” are matched by common knowledge that the preferred vehicle for carrying gravel is the Mercedes Benz 911 or the Bedford TJ series; that the vehicle for carrying cement blocks is the Land Rover Defender 90; that the passenger vehicle within towns is the VW “Kombi”(outside town it’s the Hiace). The Volvo 200 series station wagon and Peogoet 404 Pick-up are the preferred vehcles for carrying tomatoes or plantains on “last mile” deliverier to Oyingbo, Wuse and Mile Onemarkets and the Honda Accord is allegedly the car with the highest likelihood of a ball joint disalignment. Shouldn’t we be aligning our policies to position these brand OEMs to establish plants and support our industry here in Nigeria?

The Combustion engine dilemma

The 54 licenses in issue from NADDC are for combustion engine (CE) vehicles. In the meantime, more than nine OEMs and a dozen or so cities have announced the ban or phase out of CE vehicles in favor of electric vehicles (EV). Volvo, Ford, VW Group, Land Rover have all made such announcement. Toyota’s R & D expects the internal combustion engine to be dead by 2050 and power only about 10% of cars as part of hybrid systems from 2040. In 2017, 783 000 Electric vehicles were delivered during the 1st half of 2018 – an increase of 66 % over the same period last year. The cities of London, Paris, Madrid, Athens and Mexico City are planning to end diesel engine vehicles. So, in 20years time, Africa will probably be the only place producing combustion engine cars.

I once heard an argument that even if most OEMs switched to EVs, Africa still has a large enough market to support investment in CE vehicle assembly. This would have been a valid argument based on how slow we are on take up of technological advances. However, the argument is flawed because the OEMs are the same ones that would have exported CKDs/SKDs to Africa – and I don’t think they will continue the production of CE parts just to satisfy our inability to convert.

The government is courting Volkswagen

During the visit of Chancellor Angela Merkel to Nigeria in September last year, the Federal Government signed a Memorandum of Understanding (MoU) with Volkswagen to develop “a joint vision for an automotive hub in the country”.  The statement mentions plans to implement a phased approach in relation to the assembly of vehicles with the long-term view of establishing Nigeria as an automotive hub on the West Coast of Africa, establishing a training academy, provide broader technical training in automotive skills and develop a comprehensive Volkswagen vehicle and service network subject to commercial viability.

As good as this must be for Nigeria, I ask:

  • Didn’t Volkswagen exit Nigeria in 1989 as a result of poor government patronage, falling oil prices and market liberalization?
  • Hasn’t Volkswagen already restarted its auto business in Nigeria? (a statement by the Stallion Group in 2015 quoted Ritz Wolfgang, leader, Volkswagen Group’s delegation from Germany, that the plant on the Badagry expressway had rolled out the first set of vehicles, including Passat, Jetta, CC and Amarok models).
  • Is Stallion no longer representing VW models in Nigeria, and if it is, why is there a new MoU and was the Stallion Group involved?

 

Interestingly, VW signed an MoU in Ghana before the one with Nigeria. The Ghana MoU promised “to establish a vehicle assembly facility, assess the feasibility of a modern Mobility Concept for Ghana, develop a fully-fledged sales and service network in Ghana as well as establishing a Training Academy for Production and After Sales – so Nigeria being a hub was already in doubt ab initio.

More importantly, if VW, what about Toyota?

Toyota having a large operation in Nigeria is a no brainier if you note the extent to which the brand is entwined in the Nigerian economy. The vehicle of choice to ferry passengers to the East (HiAce H200) – indeed, if there is one example of aligning supply to an existing market, it’s the HiAce. Toyota identified the sheer volume of vehicles required by Nigeria and opened an assembly plant for the HiAce in 2016. One would expect that with the Hilux contributing 70 per cent of vehicles sold by Toyota Nigeria (and 22% of the total market share), we shall see a Hilux roll off a Nigerian assembly line soon. Other reasons for encouraging such a brand is not rocket science:

  • Nearly every airport in Nigeria is supported by a fleet of car hire services, the larger number being the Camry (“muscle”, “big daddy” “envelope” models).
  • Uber and Taxify in Nigeria currently have an estimated 15,000active driver-partners. A significant number of their vehicles are Corollas (manufactured between 2000 and 2007).
  • The Inter-city routes in South-West Nigeria are first generation Sienna XL10 (made between 1998 and 2003) and the Picnic (made between 1995–2001)
  • More than half of most staff, church and school buses (26-30 seater Coaster)
  • Forty percent of SUVs (Prado/Land Cruiser)

These are not sentiments. Imagine the opportunities if (and when) these vehicles need to be upgraded as a result of technology, global environment and regulation. According to Investopia, Toyota Motor Corporation Japan buys directly from 200 component suppliers who account for 2 billion units of which 150,000 types are purchased monthly with a total value of purchased components of $300m (N190billion)/month. Toyota spends approximately $32 billion per annum on supplier parts and materials, goods and services in the North American market – to put it in perspective, Nigeria’s underfunded budget proposal for 2019 is $28.85bn using N305/$1.

Maybe if we answer this, we would have cracked the nut of why the known OEMs are opening shop in South Africa, Morocco and Rwanda, but not Nigeria. A car manufacturing company typically get many of its component parts from suppliers at the local level, preferring a long-term contracts to assure a steady supply of everything from upholstery to tires to windshields. Imagine our SMEs supporting such companies!

Challenges of the auto policy implementation

There are gaps in the plan to develop the auto industry and it’s not just the auto policy. The auto policy as a stand-alone document is almost brilliant in concept. It is however an ineffective tool in the development of the auto industry for one major reason – it is a government backed policy based on a number of assumptions that don’t reflect a thorough understanding of the industry it is hoping to develop. Key anchors of the policy – credit purchase, suppressing smuggling, regulating the dealers and protecting local content are variables that must have been in place before the policy was launched. Take for instance two local producers – Innocent Chukwuma’s Innonson brand (cars, busses, SUVs and pick-up trucks) and Ade Ogundeyin’s Proforce (armoured vehicles). Given the amount of support promised by the government, you don’t see that many of these brands on Nigerian roads, yet the government is promoting “made in Nigeria” and we have a penchant for security vehicles.

Investors haven’t been given sufficient time to attain critical mass required to break even (having said that, many of the assemblers are their own worst enemies – pushing the used vehicle dealers away, rather than bringing them on board as potential new car dealers).

The borders were (and still are) not sufficiently manned, missing the point that key to the success of the policy, is the protection of investment and a gradual reduction in the tendency to acquire cheap and cheaper pre-owned vehicles, sourced from economies that have little interest in Nigeria’s development and creating a grey market for cars now coming in from locations like Benin Republic.

We are now seeing what we have always been saying. The policy reduces imports (and duty revenue to government), auto businesses will collapse (and reduce corporate tax to government), staff will be laid off (and reduce personal income tax to the government). The same government will then blame other countries and businesses for their short sightedness, refuse to take responsibility and go off in a different direction to make another mistake!

 

 

 

BAMBO A. ADEBOWALE

Adebowale is chair of the automobile section of the Lagos Chamber of Commerce and Industry

 

 

 

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