In the driver’s seat: Multiple reforms to boost local automotive content

Egypt’s foreign exchange troubles throughout 2015-16 have sparked intense debate in the automotive industry, where the challenges have led to multiple reform proposals to shore up a troubled area of the country’s industrial production. Concerns peaked in April 2015, when Mercedes-Benz announced a partial exit, claiming it would continue to produce automotive components in Egypt but that local assembly was no longer economically feasible.

Certainly, the country’s long-term fundamentals for automotive production remain appealing. Egypt has 92m potential consumers, a large, low-cost labour pool and a market with limited penetration currently; roughly 35 of every 1000 Egyptians owns a car, compared to 130 in Algeria. Due to figures such as these, the Automotive Marketing Information Council expects 500,000 domestically produced vehicles to be sold annually by 2020, which will account for half of overall market share. Currently, domestic vehicles make up 40% of the total market.

In the first three quarters of 2015 auto sales amounted to 209,000 units, down slightly from 210,500 units in the same period in 2014. Overall, the industry has 15 assembly factories and 75 supporting facilities in areas such as supply and component manufacturing. Production capacity stands at approximately 300,000 cars and buses annually, and the workforce consists of 75,000 people.

Local Content

At the heart of the policy debate is the question of increasing local content. Local components comprise on average 40% of domestically produced vehicles, according to Ramez Adeeb, chief manufacturing officer of Ghabbour Auto. Boosting local content would reduce the industry’s exposure to currency risk, because fewer parts would have to be imported and paid for in foreign currencies. Indeed, manufacturers have reported difficulty in accessing bank credit to finance the import of components as a result of the current currency problem. It would also help stoke the growth of local small and medium-sized enterprises who subcontract to larger manufacturers – a strategy that has worked well in Morocco, which now has a large automotive component sector catering to leading auto firms.

In addition to this, local manufacturing could foster a larger export market as long as local components are used at a content rate of at least 60%, Adeeb said. At that point preferential tax treatments would be available for sale in some foreign markets through Egypt’s membership in various free trade agreements with the EU, such as the Arab Mediterranean Free Trade Agreement.

The Federation of Egyptian Industries (FEI) has backed the idea of boosting local automotive inputs and has created a list of 22 components that could be made locally. It has also suggested a tweak to the tax regime on local purchases aimed at supporting the domestic industry. At present, sales tax is charged at a standard rate for cars with an engine capacity of less than two litres. The FEI has proposed a tax rate of 15% for domestic cars with an engine capacity of 1.6 litres or less, and at 22.5% for imports of the same size. The rates would jump to 30% and 45%, respectively, for cars with engines between 1.6 litres and 2 litres.

Open Markets

Protectionist trade measures are posing difficulties, however. Egypt’s free trade obligations constrain it to reduce tariffs by 10% annually for products from the EU, eventually falling to zero by 2019. Potential market opportunities could be found in Africa. “Egypt has had Africa on the radar for a few years now,” Adeeb told OBG. “We have the products to suit their expanding middle classes.” The Tripartite Free Trade Area Agreement, of which Egypt is a signatory, reduces barriers in 26 countries that are a part of several African multilateral organisations; the COMESA, the East African Community as well as the Southern African Development Community.