Egypt's domestic automotive industry shows promise

The Egyptian car industry resonates as a marker of prestige and self-sufficiency. However, it also holds more tangible benefits for the country’s economy. The 15 car assembly factories and 75 facilities in supporting industries employ 75,000 workers and have the capacity to produce 300,000 cars and buses per year. The industry performed strongly in 2014. Overall sales figures, including imported vehicles, reached almost 300,000 units, up almost 50% on the previous year. The local production sector performed even better. Sales of locally assembled cars increased by 57%, bringing the total to approximately 145,000 units in 2014, according to the Automotive Marketing Information Council (AMIC).

Rising Narrative

From a consumption perspective, these growth trends are expected to continue for the foreseeable future. The large and young population can provide plenty of demand, particularly considering that Egypt is an under-penetrated market. Currently, vehicle ownership remains low, with approximately 35 out of every 1000 Egyptians owning a car, compared to a figure of approximately 130 per 1000 in Algeria. “The market has, statistically speaking, huge potential,” Rafaat Masrouga, honorary chairman of AMIC, told Business Monthly, a magazine of the American Chamber of Commerce in Egypt. Passenger car sales are expected to increase by 7% in 2015, according to AMIC, and longer-term forecasts are also positive. The industry is targeting total sales of all vehicle types of 1m units by the end of this decade, half of which will be met by local production.

Bumps Ahead

Despite the positive forecasts, industry players are less bullish in their short-term outlook. Much of 2015 has seen producers subject to a range of broader macroeconomic challenges, including an energy crisis, a currency devaluation and a dollar shortage that is hampering output and inflating the cost of production. Although AMIC has given an optimistic 7% growth forecast for 2015, current figures suggest a tough year for producers. Sales for the first nine months of the year totalled 209,000 vehicles, according to AMIC, down 1% from 210,500 in the same period of 2014.

The weakening Egyptian pound has made the import of car parts for assembly more expensive. Given that the industry imports as much as 60% of the required components, this has had a substantial impact on the cost of production and subsequently the selling price of vehicles. With limited access to dollars because of measures taken by the Central Bank of Egypt to stop the flight to the currency in the wake of prolonged political instability, producers have faced difficulties obtaining letters of credit from the banking sector. Alaa Elsaba, chairman of Elsaba Automotive, told local press in August 2015 that an inability to obtain letters of credit had pushed up the sales price of cars by as much as 4%.

“Profit margins are low, and with the added pressures, losses are inevitable,” Menna Sadeki, investor relations manager at GB Auto, the largest car assembler in the market, told local media.

Competitiveness

Not only has the fallout from the 2011 Arab Spring and the subsequent currency devaluation affected the cost of production, but the gradual reduction of import tariffs under a 2001 EU free trade agreement has also had an impact on the competitiveness of local assemblers. As the grace period ended in 2010 and the government began reducing the import tariff by 10% per year down to the requisite 0% by 2019, local producers fear for their competitiveness in the face of cheaper imports. In 2014, imported cars increased their local market share by five percentage points to 60%. Currently, import duties stand at 40% on the value of a vehicle with an engine of less than 1600 cc and 135% on cars with an engine of 1600 cc or more.

The tariff draw down will have a particular impact on larger cars that have had higher levels of protection. “The producers of the top brands have shrunk their business and shifted to importation. BMW and Chrysler have shifted to importing smaller engines. This will be cheaper than local assembly,” Mohamed Maher, vice-chairman and CEO of Prime Holding, told OBG.

In April 2015 Mercedes Benz announced it was shutting down its assembly line in Egypt. The company will continue to produce brake discs and other components, as well as retain its after-sales service in the country, but said that it would no longer be economically feasible to make cars in Egypt.

Streamlining

To confront tariff challenges, the industry is looking to take aggressive action to improve competitiveness. Several initiatives by private players and the government are under consideration. One such proposal is a readjustment of the sales tax for local assemblers, as a means of re-establishing a cost advantage.

The Federation of Egyptian Industries (FEI) submitted such a proposal to the Ministry of Industry and the Ministry of Finance in January 2015. Currently, there is no differentiation in sales tax between local and imported cars with engine capacity under two litres. Under the FEI proposals, small cars with a capacity of less than 1.6 litres would be taxed at 15% for locally produced vehicles and 22.5% for imported vehicles. For cars between 1.6 litres and two litres, the sales tax would be 30% for local cars and 45% for imports.

There are also a number of other suggestions to restructure the industry and increase its value and sustainability, including by expanding the local content of the industry. This is seen as a key component of restoring or maintaining the competitiveness of the sector. The transport division of the FEI made further recommendations in this regard to the Ministry of Industry in July 2015. The proposals, which were agreed upon collectively by local automotive manufacturers, call for 22 new car components to be manufactured in the country.

With an increase in local value-added components, producers could reduce their tax liabilities, according to the proposals. Such a strategy has worked wonders for other North African markets – particularly Morocco and, to a lesser extent Tunisia, both of which have sizeable component manufacturing industries – although some producers have voiced concerns about prohibitive investment costs for establishing facilities for local component production.

Export Potential

The volume of the local market makes it difficult for domestic producers to compete with large-scale European and Asian exporters. “We’re not competitive because the scale here is small,” Maher told OBG. As a result, Maher believes that existing assemblers will look to produce cheaper brands in the country, as these would likely have a higher sales volume. Ali Tawfik, chairman of the Egyptian Automobiles Feeders Association, told Business Monthly, “We have a very strong automotive infrastructure, while Africa is booming and demand for cars is increasing across the board.”

With the recent signature of the Tripartite Free Trade Agreement – a trade liberalisation pact with the 26 countries of the Common Market for Eastern and Southern Africa, the East African Community and the Southern African Development Community – the prospects for Egypt’s automotive sector to export to the growing markets of Africa are appealing. The effects of the deal, in terms of economies of scale and foreign exchange earnings, could be just what is needed to revitalise the country’s ailing industry.

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The Report: Egypt 2016

Industry chapter from The Report: Egypt 2016

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