Egypt sees local production and export growth

 

With a large consumer base, a skilled labour force, a strategic geographic location for trade, and a series of pro-business government efforts to streamline licensing and operations, there are a number of reasons to recommend Egypt as an industrial centre. While challenges remain, there are new local and export-focused opportunities for increased investment – particularly with the ongoing construction of the new capital – a continued focus on infrastructure development and a government-supported pivot towards sub-Saharan Africa as a market.

Sector Performance

Even in ancient times, Egypt served as a centre of production for commodities like papyrus and pottery. Today, the Ministry of Trade and Industry (MTI) notes in its 2016-20 Industry and Trade Development Strategy that non-petroleum manufacturing industries contributed 16% to GDP in FY 2015/16, while the Cairo-based think tank the Egyptian Centre for Economic Studies estimates that manufacturing comprised 17.1% of Egypt’s total GDP in FY 2015/16, an increase on the 16.5% recorded in FY 2010/11.

The sector is also an important source of employment, with 2017 data from the World Bank indicating that 25.3% of the employed population works in industry, an increase from 25.1% in 2016. Moreover, despite the currency depreciation in November 2016, industry has maintained its growth, with manufacturing production increasing by 2.6% in April 2017 compared to the same month in 2016, as told to local press by the Ministry of Planning. The Central Agency for Public Mobilisation and Statistics (CAPMAS) reported that the index of manufacturing production, excluding petroleum products, registered 137.37 points in November 2017, compared to 136.53 points in October 2017.

Government Support

In 2016 the MTI announced a four-year, five-pillar strategy to help transition Egypt into a major regional industrial centre and export hub. The strategy sets specific targets to support this, including increasing the annual industrial growth rate to 8%, the industrial contribution to GDP to 21% and non-oil exports by an annual rate of 10% through to 2020.

This push is embodied by the passage of a new Industrial Permits Law, designed to expedite the process for establishing new industrial projects and facilitate new investment. In August 2017 Tarek Kabil, the minister of trade and industry, announced that the government had confirmed the executive regulations for the law, reducing the waiting period to obtain industrial licences from 600 days to a maximum of 30. Through the new law, the waiting period for 80% of industries will be reduced to one week or less, while the remaining, more complex industries could require up to a month.

In addition, in September 2017 Kabil announced the near completion of an industrial investment map to help Egypt diversify and target investments across industrial sectors, noting the needs and capacities in each governorate. He explained that it will help inform the types of employment and training programmes provided, and lead to the integration of factories and decrease of imports.

New Investment Law

Government support for the industrial sector has also helped brighten the outlook for manufacturers with the new investment law, signed by President Abdel Fattah El Sisi in June 2017, likely to be particularly beneficial. The reform includes a so-called golden licence that will allow the prime minister to issue a single approval that includes all the required business establishment and operating licences, land allocation and building permits for strategic and national projects deemed crucial to Egypt’s economic development.

“The new investment law should support the existing comparative advantages of manufacturing in Egypt, such as affordable manpower, availability of raw materials, cheap energy and growing local demand, and allow Egypt to better exploit its free trade agreements and boost exports,” Walid Gad, managing director at Swiss vertical transportation company Schindler, told OBG.

Going Local

One result of the depreciation and high inflation witnessed throughout 2017 has been a stronger emphasis on manufacturing with local products as opposed to imported ones, when possible. For example, global confectioner and pet food manufacturer Mars has been increasingly sourcing from local packaging suppliers in Egypt since 2014. Some 70% of its packaging is now sourced locally, and the company aims to produce all packaging with Egyptian materials by 2018.

Similarly, PepsiCo announced that its local brand Chipsy hopes to limit imported potatoes to 30% by 2018, while Egyptian dairy and juice producer Juhayna Food Industries has started using only local mangoes for its products. “The depreciation of the Egyptian currency should boost inbound foreign direct investment in domestic agribusiness,” Abdel Gelil Abdilhak Besher, chairman at Coca-Cola, told OBG. Meanwhile, Yasser Abdul Malak, chairman and CEO of Nestlé, pointed out that raw food processing, in particular, holds plenty of opportunities for investment. “The potential for investment in the processing of local raw food produce has been structurally under-tapped,” he told OBG.

This trend is not limited to food. Dutch-UK consumer goods company Unilever has also announced that it is seeking local packaging suppliers for its production of soaps and detergent powder.

The quality of local suppliers in Egypt is seen as a comparative advantage, with nearly 60% of participants in the OBG Business Barometer: Egypt CEO Survey released in May 2017 saying they were highly or very highly satisfied with the quality of local suppliers and service providers.

Exports

In April 2017 international media reported that Mars was planning to invest LE750m ($49.4m) over the following 18 months to boost exports from 50-60% of its production in Egypt to 80%. The confectionery company expanded its facilities in mid-2013, when it invested LE580m ($82.7m at the time) in a new production site in Cairo.

Ashraf Bakry, managing director of Unilever Egypt, told media in April 2017 that the floatation of the pound had catalysed Unilever’s plans to double its assets in Egypt and develop the country into a regional centre for exports.

In July of the same year Ayman Khattab, president and CEO of General Electric North-east Africa, shared similar sentiments. “We see large competitive potential in the Egyptian market, and we plan to turn Egypt into a hub to manufacture our products over the upcoming period,” Khattab told local media. “Egypt is a large consumer market that needs businesses and expansions in all economic sectors, including health, energy and electricity.”

Small Businesses

While mega-projects grab headlines, there is also an increasing understanding that smaller enterprises create an important link in the industrial supply chain.

The second pillar of the MTI 2016-20 development strategy is providing support for small and medium-sized enterprises (SMEs) to help increase industrial production, create more jobs and boost exports. The strategy estimates that Egypt has 2.5m micro- or SMEs, comprising 75% of the labour force, yet only 17% of these businesses undertake export activities. Creating an enabling environment for these businesses will require assistance from a number of government-driven initiatives. Accessing credit and obtaining the necessary licences remains a particular challenge for Egyptian businesses, as highlighted in the World Bank’s “Doing Business 2018” report. This was also stressed in the “Global Entrepreneurship Monitor Global Report 2015-16”, which focused on the country’s need for simplification in licensing and permitting processes, and improved access to finance.

In addition to the new permits law, to help address these challenges, in 2016 the Central Bank of Egypt (CBE) allocated LE200bn ($13.2bn) to national banks for lending to SMEs at rates of 5-7%, depending on the size of the business, to be repaid over five to seven years in a state-led attempt to support the commerce and industry sectors. Furthermore, commercial banks have been directed by the CBE to raise lending to SMEs to 20% of their total loan portfolios by 2019 (see Banking chapter).

New Projects

Kabil told local press that during the FY 2016/17, 1573 factories were established across 24 governorates, resulting in the creation of 52,000 new jobs, with investments reaching a total of LE48.2bn ($3.2bn) and an anticipated annual production value of LE86.3bn ($5.7bn). The newly established factories are manufacturing a variety of consumer products, ranging from compressed wood for furniture construction, to poultry and animal feed, to plastic bags and air-conditioning units.

In July 2017 Kabil announced the completion of 15 new projects with LE3.4bn ($210.8m) of investments. Among these projects is the new Robiki Leather City, which lies to the east of Cairo. Leather exports currently bring in approximately $200m annually, and this project is intended to help increase that number to $1bn by 2020.

In September 2017 Egypt signed an agreement with Singapore to establish the first industrial city, located in the northern Fayoum governorate, stretching over an area of 33m sq metres. The city is expected to cover a range of industries, including pharmaceuticals, automobiles and textiles. The project will be jointly implemented by the Industrial Development Authority, which is responsible for the designated land area, leaving Singapore Holding in charge of managing the project. Construction is scheduled to commence in 2018.

This trend of increased manufacturing of a wide range of goods does not show signs of slowing down. “Several multinationals have realised the advantages of Egypt as a production hub and have established manufacturing facilities there, as well as increased their capacities,” Karim El Din, general manager of Coca-Cola Egypt, told OBG. Multinational conglomerate General Electric also reported to local press in June 2017 that it sees Egypt as a potential manufacturing centre and has already signed off on agreements to provide 100 locomotives to the Egyptian Railway Authority by 2018 to help reach the target of transporting 25m tonnes of consumer goods via rail by 2022. Of the 100 locomotives, 50 will be assembled in Egypt in cooperation with the Arab Organisation for Industrialisation, and they are expected to be delivered in the first quarter of 2018.

The Suez Canal Economic Zone, part of the larger Suez Canal Area Development Project, also continues to grow as an industrial centre, with the establishment of 30 projects totalling $20bn in investments in 2017, including a petrochemical complex, an oil refinery, and factories that produce textiles, electrical appliances and other goods.

Among the companies that will invest in the zone are German company Siemens, for the maintenance of turbines; General Electric, for the manufacture of wind turbines; and Chinese Dayun, for the manufacture of motorcycles. China was officially named the largest investor in the Suez Canal Area Development Project, with plans to develop the three cities of Suez, Ismailia and Port Said. China has completed the first phase of development of the area, around 7.2 sq km in Ain Sokhna, attracting around 68 enterprises, and started the second phase in 2016. In early 2018 local press reported that Chinese fibreglass company Jushi occupies an area of 146,000 sq metres in Ain Sokhna, with the Egyptian branch undergoing its fourth phase of production.

Plastics

Since the revolution in 2011 a number of sectors, especially tourism, have slowed down, however this has not been the case with the plastics industry, which includes finished products and petrochemicals (see analysis).

Mohamed Taher, the executive director of the Egyptian Plastic Exporters and Manufacturers Association, told OBG, “The plastics industry is growing very fast in Egypt, especially in the last decade, which has witnessed more investment, export activity, manpower and factory construction.

“Plastics and petrochemicals accounted for 20% of exports in 2017, compared with 14% in 2005. This has coincided with a rise in the number of factories from 2490 to 3000 and the number of employees from 280,000 to 600,000. In 2016 we saw almost $980m in export value.”

This steady growth has meant increased opportunities and investment interest. “The fastest-growing segments are plastic drainage pipes due to the growth of the construction sector,” Taher added. “Egypt is also becoming increasingly advanced in the masterbatch industry, as well as in the production of household goods, outdoor furniture and packaging. I think we will also witness growth in the production of raw materials as labour costs are becoming more competitive.” According to Taher, this has encouraged Indian companies to inject capital into packaging and expand the production of raw materials, and has also attracted investment interest from Saudi Arabia and the UAE, as well as early interest from some US companies.

Processed Food

The MTI’s export strategy provvides incentives for food-processing exporters to raise the segment’s competitiveness against other emerging markets. According to a 2017 US Foreign Agriculture Service report, Egypt’s food-processing industry averaged a compound annual growth rate of 12% between 2012 and 2016, with the food groups milk, savoury snacks, and yoghurt and sour milk experiencing the greatest growth in this period.

The “Household Income, Expenditure and Consumption Survey 2015” carried out by the Economic Research Forum and CAPMAS indicated that only 15.4% of Egyptian households reported having a freezer in 2015, indicating that there is room for even further growth in the local market.

There are opportunities beyond the domestic market as well, particularly as the government promotes the growth of high-value produce for export (see Agriculture chapter). The Chamber of Food Industries, a non-profit organisation, reported that Egypt’s food, both processed and fresh, constituted 25% of total exports in 2014, and that there are 11 firms listed on the Egyptian Stock Exchange’s food and beverage index, with seven of them citing a market capitalisation of more than $75m as of July 2017.

Steel

According to a 2017 OECD update on the global steel market, Egyptian steel production has been declining in recent years, in line with global trends, as raw materials prices and operating costs have increased. Especially with increased fuel and electricity tariffs imposed in 2017, energy-intensive sectors like cement production (see analysis) and steel have suffered. Although production levels fluctuated throughout 2017, the total for the year stood at 6.8m tonnes, up 35% from 5m in 2016. However, local steel producers had to keep prices low in the first half of the year as the Egyptian market adjusted to sector challenges.

In a controversial move aimed at supporting the local steel industry, the government imposed a duty on imported – and often less expensive – steel for four months starting from June 2017. Egypt remains a key importer of steel, ranking 17th in the world with total imports amounting to 9.2m tonnes in 2016, according to the World Steel Association.

The fees, ranging from 10% to 27% of the Customs cost depending on the country of origin, were meant to signal a protection of local industry, but there is concern instead that the rise in steel prices will mean an increase in construction and real estate costs in the near term.

Power Constraints

A number of bottlenecks are being addressed as the government aims to increase manufacturing’s share of GDP from 17.1% in 2016 to 21% in 2020, creating 3m jobs in the process. Power, for example, has long been a constraint to industrial output, with household demand growing and the government having to meet gas export obligations, limiting the amount it can transfer to the domestic market for power production. Manish Mehra, regional head, Middle East and Egypt, of multinational paint company Asian Paints, told OBG, “Although there are plans to expand investment in Egypt’s power sector, the reduction in subsidies for electricity will put pressure on industries and increase the cost of manufacturing.”

Domestic energy supply is rapidly recovering thanks to a range of newly tapped deposits and investment in existing fields; overall production is expected to increase by 50% in 2018 and double by 2020. Gas output has already risen from 4.4bn standard cu feet per day (scfd) in 2016 to 5.1bn scfd in the first half of 2017 thanks to output from BP’s North Alexandria project, while the vast offshore Zohr field is expected to provide an additional 4.6bn scfd when it comes on-stream in 2019.

Electronics

Since many electronics and electronic parts are imported, this sector has been particularly affected by rising inflation and tighter consumer budgets. “The biggest hit after the pound’s flotation was in the electronics sector,” Mohanad Adly, CEO of supermarket Spinneys Egypt, told OBG. “The average ticket size for electronic items is much higher than fast-moving consumer goods to begin with, and because so much is imported, we’ve seen a dramatic decrease in sales.”

However, 2017 saw some positive advancement as companies began tapping into competitive operational and labour costs. LG Electronics announced the addition of a new line to manufacture washing machines in 10th of Ramadan City, while Samsung announced it was considering establishing a factory for home appliances in a partnership with a local company. Samsung also expanded the capacity of its Beni Suef factory for manufacturing screens, which exports 2.8m of its products to over 36 countries across the world. In September 2017 Panasonic opened a television factory in Mostorod, Cairo. Similarly, local Helwan Company for Metallic Appliances announced plans to double its production of household appliances during 2017.

AUTOMOBILES: With more than 250 factories, Egypt’s once-burgeoning automobile industry has faced challenges in recent years. Data from the International Organisation of Motor Vehicle Manufactures indicate that the country only produced 10,930 vehicles in 2016, down from 77,563 in 2008. Automobile sales also seem to have been negatively impacted by the depreciation of the pound. According to the Automotive Marketing Information Council, car sales declined by 37% between January and October 2017 compared to the same period in 2016.

However, there is longer-term potential for a revival within the industry, particularly now that the new investment law has been rolled out. “Egypt has had a car-assembly industry for the last four decades, but it was suffering from over-regulation,” Mohamed Maher, vice-chairman and CEO of local investment bank Prime Holding, told OBG. “The new investment law can help this industry move forward, not only with assembly, but by supporting the main feeding industries, such as the manufacturing of electrical parts, seats and consoles. All these kinds of parts can be produced locally, especially since we already have a base on which to build.”

In addition, in September 2017 Mohab Mamish, chairman of the Suez Canal Authority, announced to local press a deal with Mercedes-Benz to establish a centre for logistics distribution and redistribution in Ain Sokhna to support car manufacturing inside the industrial zone, signalling a re-engagement in the Egyptian market. Mercedes-Benz had shifted its Egypt operations to Algeria in December 2014.

Workforce Update

Developing a skilled labour force to support industrial growth has been a key concern of Egypt for decades, as evidenced by its long-standing government and private vocational training efforts (see Education chapter).

A lack of skilled labour has long presented challenges to economic growth; however, some industry players have seen a strong pool of local talent that can be built upon. “Egypt can dominate in the African market because the talent is here,” Korkut Kulbul, managing director for the Egypt office of Norwegian paint company Jotun, told OBG. “Because of this talent and the high education level, we have already dispatched our Egyptian staff to other countries.”

In 2017 the Industrial Training Council announced an increase in efforts to provide skilled labour with trainings that supported over 6000 people across the Cairo, Alexandria, Upper Egypt, Suez Canal Zone and Delta governorates. The garment segment accounted for 22% of all trainees, while the engineering sector accounted for 21% of the total.

Outlook

According to the IMF, as of September 2017 the economy had begun to stabilise after a challenging year. If this stability remains, as many industry players expect it will, there are opportunities to further develop Egypt’s industrial sector. This applies both to exports – particularly to sub-Saharan Africa – and to the large and growing local market.

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The Report: Egypt 2018

Industry & Retail chapter from The Report: Egypt 2018

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