Policy updates in Morocco lead to growth in new industrial segments

 

With an increasingly diversified manufacturing base, the industrial sector has become an important component of Morocco’s GDP. The country produces an array of finished products and components for customers not only in traditional markets such those in southern Europe, but also increasingly across Africa, Asia and the Americas. Firms based in the kingdom produce items as varied as automotives and auto parts, cables, chemicals, textiles, aeronautical products, agro-industrial goods and electronics for both domestic and international customers.

The growing strength of industrial activities is also a reflection of efforts to diversify the economy away from a traditional dependency on agriculture. By betting on the revamping of exports such as textiles and minerals, as well as new value-added segments such as aeronautics and automotives, Morocco is poised to further develop its industrial capabilities in a manner that encourages sustainable and more geographically widespread economic growth.

Sector Performance

Despite regional political and economic instability over the past decade, Morocco has been able to promote itself as a stable and reliable centre for manufacturing, with a geographic location that makes it cost- and time-efficient to service markets in Africa, Europe and the Middle East. Industrial GDP expanded from $21.6bn to $29.3bn between 2009 and 2018, according to figures from the African Development Bank (AfDB). Over that same period, value-added manufacturing grew from $13.4bn to $17.7bn.

Industry is major contributor to GDP and employs about 20% of the population, according the AfDB. Given the high rate of unemployment – at 9.4% overall and 26.7% for youth as of the end of the third quarter of 2019 – the authorities are looking to industrial development as a means to create jobs. Even with the relative availability of workers, industry is challenged by the inadequate matching of skills with the needs of employers, highlighting the need to improve education and vocational training programmes, especially if new industrial sectors are expected to alleviate unemployment. “The current industrialisation plans were implemented just a few years ago, and we are now starting to see the positive effects of this,” Souhail Chalabi, deputy director-general at investment banking firm BMCE Capital, told OBG. “Between 2000 and 2010 Morocco went through a period of deindustrialisation in sectors such as textiles and metallurgies, and saw the closing of refining operations. The new segments Morocco is developing do not yet account for the same volume of jobs as the previous ones.”

Policy

The government has leveraged the growing network of industrial zones to incentivise new manufacturing ventures and allow investors to establish capacity in advantageous conditions. Manufacturers in the zones are entitled to corporate tax exemptions for the first five years, followed by a favourable rate of 8.75% for the subsequent 20 years. Exemptions are also available for urban and licence taxes for 15 years, as well as for value-added tax (VAT) and the repatriation of foreign earnings.

While the country is looking to establish a new economic model that will accelerate growth, infrastructure development is likely to facilitate industrial expansion. “It was a good strategic decision to focus on infrastructure development, as it has facilitated business exchanges both within Morocco and with partners across the world,” Hicham Bensaid Alaoui, risk, information, claims and collection director at insurance company Euler Hermes, told OBG.

The diversification of industrial offerings was part of a medium-term plan to make the country a competitive manufacturing base in several sectors with high-value-added potential. The 2008 National Pact for Industrial Emergence was a six-year strategy that aimed to attract foreign investment and establish automotive, aerospace, agro-industry and electronics manufacturing centres. The plan also sought to integrate Morocco within global production chains. Other sectors were added to the list of industrial ambitions in 2013, including pharmaceuticals, metallurgy, mechanics and chemicals. The strategy combined incentives with key infrastructural developments and adapted government support to the needs of each subsector.

Industrial Acceleration

Significant changes to national policy were implemented with the Industrial Acceleration Plan (Plan de d’Accélération Industrielle, PAI) 2014-20. The policy focused on several goals, including the creation of segment-specific ecosystems that would establish connections between global manufacturing firms and smaller suppliers, the transfer of informal activities to the formal sector, the specialised training of human resources to fit the demands of the market, and the improvement of the overall competitiveness of small and medium-sized enterprises (SMEs).

The PAI channelled resources into the establishment of special economic zones (SEZs), where firms are able to take advantage of centralised government services and incentives. The SEZs feature sector-specific clusters, and as of February 2020 key production value chains in auto manufacturing, aerospace and agro-industry had been created. By establishing operations in SEZs, several companies in the same sector are able to work in close proximity and access suppliers more efficiently.

The PAI is largely regarded as a success. By August 2017 the plan had led to the launch of 47 manufacturing ecosystems. By that month it had also reached 97% of its targeted 500,000 jobs created. The programme exceeded another of its goals, to increase the industry’s contribution to GDP, from 14% in 2014 to 23%. Morocco reached this target by mid-2017 and as of 2018 this figure was 25.9%, according to the World Bank. The PAI also led to the establishment of the Fund for Industrial Development and Investment (Fonds de Développement Industriel et de l’Investissement, FDII), valued at Dh20bn ($2.1bn) for the 2015-20 period. The fund has been an important source of finance for the government’s sectoral programmes. Additionally, the FDII made 1000 ha of industrial land plots with attractive terms available for rent to SMEs.

The success of the PAI has led officials to begin planning the next steps. In December 2019 the government announced it would develop a new PAI to guide development over the 2021-25 period and secure the gains from past industrialisation efforts. The second plan will be created in partnership with regional governments and will focus on integrating SMEs into the value chain and encouraging innovation with a view to prepare the kingdom for technological change. “Although the first iteration of the PAI was successful, it is now necessary to develop a research and development (R&D) component that will ready Morocco for Industry 4.0 and efficiently integrate the use of renewable energies throughout the production process,” Yassine Mellouk, managing director of local water infrastructure firm KSB Pompes et Robinetteries, told OBG.

Some industry observers note that to bring R&D up to par with its counterparts, the government and the private sector will have to allocate more investment. To this end, the second PAI will place a greater focus on digitalisation. “The industrial sector is grappling with the Moroccan market’s long payment terms, which can impact companies’ sustainability and financing capacities,” Ridha Chouk, managing director of paint and coatings firm AkzoNobel Coating Morocco, told OBG.

Morocco’s industrial development goals are receiving support from international financing bodies. In March 2019 the AfDB granted the kingdom a loan of €268m ($301.2m) to support the second phase of the PAI. The financing will be channelled towards improving logistics infrastructure and supporting banking guarantees for SMEs.

Exports

The diversification of the industrial base has enabled the sector to secure a greater proportion of overall export volumes. It has also strengthened the economy by diluting the risk of lower demand for manufactured products across a larger and more varied basket of goods.

A combination of policy changes, a more attractive environment for foreign investment and improved trade relations have enhanced the export performance of most segments in recent years. Automotive exports, for instance, jumped from Dh42.8bn ($4.5bn) in 2014 to Dh72.3bn ($7.5bn) in 2018, according to the Office des Changes’ 2018 annual report. Indeed, positive signs of successful diversification came as early as 2015, the first year that the value of phosphate exports was overtaken by exports of the automotive industry. Agro-industrial exports increased from Dh23.4bn ($2.4bn) to Dh32.3bn ($3.4bn) between 2014 and 2018, and exports in phosphate and associated products rose from Dh38.3bn ($4bn) to Dh52bn ($5.4bn). Although textiles and leather’s export performance has fluctuated, the segment has seen improvements, with exports rising from Dh33.5bn ($3.5bn) to Dh37.8bn ($3.9bn) over the same period.

One of the fastest-growing segments has been aeronautics assembly and component manufacturing, which saw its exports roughly double, from Dh7.5bn ($781.4m) in 2014 to over Dh14.7bn ($1.5bn) in 2018. Growth has also been significant in the export of electronic components, which expanded from DhD6.8bn ($706.4m) to DhD8.9bn ($927.2m) between 2014 and 2018. Pharmaceutical exports increased from Dh900m ($93.8m) to Dh1.2bn ($125m), and the total export of non-phosphate minerals grew from DhD3.7bn ($385.5m) to Dh4.5bn ($468.8m). This underlined the need for renewed mineral exploration efforts and enhanced mineral processing capacity (see analysis).

Despite broader economic challenges, industrial exports are expected to continue to increase due to stable demand for the country’s main products on the international markets. It will thus be important for firms – and SMEs in particular – to attract foreign customers. “Most of the companies that depend on exports have a largely positive outlook,” Alaoui told OBG. “But those that depend on the domestic market will likely face slower growth prospects.”

Transport Infrastructure

The rise in industrial exports was facilitated by key investment in transport infrastructure, which accelerated around the early 2000s. The results have had a palpable impact on the ability of industries to operate and export. Since 2010 the network of paved roads has increased from 35,000 km to 43,000 km due to a concerted efforts to build new highways that connect major cities and industrial production centres.

The country’s 2000-km railway network received a boost in November 2018 with the completion of a high-speed link between the northern coastal city of Tangier and Kenitra, 350 km to the south. Transport authorities plan to extend the high-speed connection further south, to Marrakech and Agadir, with preliminary studies for the longer line completed in March 2018. There are also plans to extend the Tangier-Kenitra line to Casablanca and link Tangier to Oujada via high-speed rail.

Ports have been targeted for development as well. After the completion of a $1.3bn second terminal at Tanger-Med in June 2019, the facility became the largest port by container capacity in the Mediterranean. Tanger-Med moved 4.8m twenty-foot equivalent units (TEUs) in 2019, with container traffic up 38% from the 3.5m TEU moved in 2018. Such large-scale infrastructure developments have helped increase Morocco’s industrial capacity and facilitate exports to the region and beyond.

The upgraded transport infrastructure combined with the emergence of new and value-added industries is expected to help ease unemployment, but additional efforts to enhance integration are necessary. “The government wants to leverage new sectors such as automotives and aeronautics, and take advantage of the infrastructure it has developed,” Alaoui told OBG. “However, because the integration of these industries is still relatively weak, their impact on the country’s overall economic growth is not as strong as it could be.”

Investment Trends

Industry has been aided by Morocco’s overall stability as nearby countries such as Algeria, Tunisia and Libya continue to be affected by political and economic uncertainty. This has made the country a preferred destination for foreign direct investment (FDI). In 2018 the kingdom attracted Dh34.2bn ($3.6bn) in FDI, a 31.3% improvement on 2017 figures, according to the Office des Changes. Although only 14.3% of FDI was directed towards manufacturing, the overall dynamic had a positive – if indirect – impact on the sector. Importantly, industry was the top recipient of accumulated FDI, with an investment stock of Dh137.8bn ($14.4bn) in 2018.

More developed infrastructure and favourable economic performance has attracted investment aimed at boosting manufacturing capacity from both domestic and international operators. In early 2016 OCP Group, the state-owned firm in charge of phosphate production, inaugurated a €488m ($548.6m) fertiliser plant in the Jorf Lasfar industrial complex, 110 km south of Casablanca. The facility has the capacity to produce 1.4m tonnes of sulphuric acid, 1m tonnes of fertiliser and an additional 450,000 tonnes of phosphoric acid. The majority of the unit’s production is exported to sub-Saharan Africa through the Jorf Lasfar port.

In September 2017 French aerospace manufacturer Thales opened a 1300 sq-metre 3D metal printing factory in Casablanca to manufacture components for the spatial and aeronautic industries. Between 2017 and 2022 the new Thales unit is expected to receive between €15m ($16.9m) and €20m ($22.5m) in investment.

Cosumar, a sugar producer and one of the country’s largest agro-industrial companies, is building a Dh350m ($36.5m) plant in Casablanca to produce vegetable oils. The unit – the first of its kind in Africa – will be built in partnership with Singapore-based Wilmar International and is set to begin operations in 2020. The majority of the unit’s annual 35, 000-tonne output will be exported.

Tunisian cheese products manufacturer Land’Or, announced in June 2019 that the company is investing €10.7m ($12m) to build a factory in Morocco. The new unit is expected to begin operations in 2021, with most of its output expected to service the domestic market. In late December of that year another agro-industrial producer, Moroccan biscuit manufacturer Excelo, finalised a second production line at its Had Soualem factory, a Dh100m ($10.4m) investment that will allow the company to increase annual production to 5000 tonnes.

Government initiatives under the PAI have supported investment in industry. For example, under the programme Dh2.6bn ($270.9m) was invested in chemicals with state support, benefitting 43 companies operating in the segment. Between 2015 and 2020 industrial support programmes are expected to help create 12,450 jobs in the chemicals segment. However, as of 2019 only about half of those jobs had been created, according to government figures published in December that year.

Agro-Industry

Morocco’s strong agricultural base has allowed it to establish a significant agro-industrial production network. Agro-industry represented about 30% of GDP and about 25% of manufacturing jobs in 2017. Meanwhile, agricultural and agro-industrial exports were the second-most valuable segment in 2018, after automobiles, but outperforming phosphates, textiles and aeronautics.

On the policy side, in April 2017 Moroccan authorities launched a Dh12bn ($1.3bn) agro-industry programme to be implemented through to 2022. The plan aims to create approximately 370 new manufacturing units and over 38,000 additional jobs. At least a third of the new factories are expected to benefit from financial support from the government.

Although many agro-industrial producers in the kingdom are focused on exports, there is significant potential for growth in the domestic market, as imports continue to be substantial. Imports of retail-related food products from abroad reached $1.4bn in May 2019, according to figures by the US Department of Agriculture. The food retail market represented 13% of GDP in 2018.

The segment has also benefitted from a $200m World Bank programme to improve market efficiencies and distribution. The loan scheme – launched in late 2017 and running through to 2023 – aims to support the inclusion of small producers into value chains and distribution channels geared towards the export of agricultural goods, with a particular focus on olives and citrus. Improving the processing, packaging and distribution infrastructure is critical for the future development of the segment. “There is an increasing environmental awareness from the consumer,” Salahaddine Mouaddib, CEO of Pepsi-Varun Beverages Morocco, told OBG. “The biggest concern for manufacturers is how to adapt the packaging to the expectations of the market. The more eco-friendly a product is, the more it will sell.”

Automotive

By taking advantage of its close proximity to Europe and setting the right incentives for manufacturers and suppliers, Morocco has transformed itself into a global centre for the automotive industry. As of early 2020 two French automobile manufacturers – Renault and Groupe PSA – established a presence in Morocco, and in December 2017 Chinese electric car manufacturer BYD announced it signed an agreement to build a facility that would produce battery-powered passenger cars, buses and trucks. These producers have brought with them an array of suppliers to industrial zones in Tangier, Kenitra and Casablanca (see analysis).

The segment has benefitted significantly from the PAI. Between 2014 and 2018 automotive exports increased from D42.7bn ($4.4bn) to Dh72.3bn ($7.5bn), according to figures from the Office des Changes. The kingdom filled orders for approximately €3bn ($3.4bn) worth of automotive components for European automakers, according to the Moroccan Association for Automotive Industry and Trade (Association Marocaine pour l’Industrie et le Commerce de l’Automobile, AMICA). “In addition to attracting new manufacturers, there are several suppliers that have established multiple production facilities across the country, which stands as a real testament to what Morocco has to offer,” Abdelaziz Meftah, general manager of AMICA, told OBG.

Incentives play important role in attracting manufacturers to the market. Morocco offers five-year corporate tax exemptions for automotive industry manufacturers, as well as a 25-year exemption if the majority of production is for export. Additionally, the authorities offer subsidies for industrial land acquisition, as much as 30% of rebates on investment costs and VAT exemptions.

The automotive and automotive parts segment has been a key job creator, employing some 180,000 people in the kingdom as of late 2019. The two largest employers in Morocco – Sumitomo and Yazaki – employed 18,000 and 14,000 people, respectively, as of the end of 2019, according to figures by AMICA.

Textiles

Another job-generating sector is textiles, which employed 185,000 people in 1200 companies as of late 2019, according to figures provided by Moroccan Association of the Textile and Apparel Industries (Association Marocaine des Industries du Textile et de l’Habillement, AMITH).

It has been a key export, with textile and leather exports reaching Dh37.8bn ($3.9bn) in 2018. The EU is the main purchaser of Moroccan textiles, and during the first nine months of 2019 the kingdom saw its textile exports into the trade bloc climb by 2.5% relative to the same period of 2018, according to AMITH. Morocco was the eighth-largest supplier of textiles to the EU, accounting for 3.1% of the European body’s textile imports in 2019. Efforts to make textiles more competitive under the PAI, including a focus on product development and branding, have helped the segment grow (see analysis).

Aeronautics

Despite being relatively new to the country, Morocco’s aeronautics industry has grown significantly in recent years. As of late 2019 the sector had 140 firms in operation that employed 17,000 people, and mobilised annual exports of $1.4bn, according to figures by Moroccan Aerospace Industries Group (Groupement des Industries Marocaines Aéronautiques et Spatiales, GIMAS). Between 2017 and 2019 the sector had an annual growth of over 20%. Morocco-based manufacturers make components for around 30 aircraft models produced by international industry leaders such as Airbus, Boeing, Embraer, Bombardier and Sukhoi.

Aeronautics manufacturing has been buoyed by overall positive trends in the global market. “As we mostly produce for export, we are not as dependent on the performance of the local economy as other sectors,” Maria El Filali, director-general of GIMAS, told OBG. “Instead, our performance is linked to that of the international aviation sector, which has significant growth prospects.”

Like several others, the growth of the aeronautics sector has been supported by SEZs, which centralise government services and suppliers, and cater to the needs of manufacturers. More importantly, policymakers and sector players have been successful in expanding the geographic distribution of manufacturing capacity across the kingdom, with aeronautics factories established in Casablanca, Kenitra, Tangier, Salé and Oujda. One of the main areas for aeronautics manufacturing, the Midparc Industrial Zone, opened in 2013 near Casablanca. It spans 125 ha and hosts an array of multinational aeronautics manufacturers including Bombardier and Hexcel. Those operating in Midparc Industrial Zone are offered subsidies to boost access to land and encourage the building of industrial facilities, as well as support human resource training.

A major development occurred in 2016 with the signing of an agreement between Boeing and Morocco to establish the country as a central Boeing supplier. The agreement also encouraged over 100 of the aeroplane manufacturer’s suppliers to establish a presence in the kingdom. Such agreements with international suppliers have helped improve local manufacturing capabilities. Between 2014 and 2019 the aeronautics sector increased its level of industrial integration from 17.5% to 39%, according to GIMAS. Industry authorities expect industrial integration will reach 42% by the end of 2020.

Aeronautics manufacturing has profited from a concerted focus on training that has given it access to a workforce with the specialised skills that employers require to produce complex parts and equipment. To that end, in 2011 the Moroccan Aerospace Institute was established to act as the industry’s main training body. Capabilities were reinforced in mid-2019, when GIMAS signed a deal with the Bureau of Professional Training and Employment Promotion, which oversees the state’s training programmes, in order to establish a training centre for aeronautics maintenance and repair. “Morocco is among the most competitive destinations in terms of local skills,” Khaldoun Bouacida, managing director of chemical producer BASF, told OBG. “Multinationals are incentivised by the quality of talent available.”

Pharmaceuticals

Morocco’s pharmaceutical manufacturers benefit from competitive input costs and an advantageous location. Even so, producers focus primarily on the domestic market, exporting only around 10% of output. As such, the value of pharmaceutical exports are low, increasing from Dh986m ($102.7m) in 2014 to Dh1.2bn ($125m) in 2018. That year, there were 49 production facilities, which met about 60% of local demand. The industry had a turnover of Dh15.5bn ($1.6bn) in 2018 and employed 12,000 people directly.

Despite the low level of exports, recent developments are likely to boost production and increase exports in the coming years. In October 2018 Indiabased manufacturer Cipla inaugurated its first production facility in the kingdom. The Dh60m ($6.3m) factory – built in partnership with two Moroccan firms, Cooper Pharma and Pharmaceutical Institute – will manufacture inhalers to treat respiratory diseases. In June 2019 Mylan Maroc, a subsidiary of US-based Mylan, announced plans to construct a Dh120m ($12.5m) unit outside Casablanca that would produce antivirals for hepatitis C. The unit’s output will not only be for domestic consumption, but the medications will also be exported to key markets in North Africa and other emerging countries.

Outlook

Years of incoming investment and diversification have strengthened Morocco’s industrial sector, increasing its contribution to GDP and expanding its reach throughout the country. Efforts to establish new manufacturing segments such as automotives and aeronautics have helped to diversify the economy, as well as find new export markets.

The implementation of the PAI has further encouraged industrial production, and it is expected that the second iteration will build on the success of the first. However, it will be necessary to channel more financial and administrative support to SMEs to help them thrive. If GDP is to expand to its full potential, businesses will need to be integrated into the global value chain. Nonetheless, prospects remain positive as government and private training programmes fulfil the demands of a growing manufacturing base.

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The Report: Morocco 2020

Industry & Mining chapter from The Report: Morocco 2020

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