With large domestic demand, an available workforce and emerging industrial capacity, Algeria is set to restart its automotive manufacturing sector after years of being out of operation. Despite growing sales of vehicles over the past few years, the country has lacked local manufacturing facilities. However, interest in supplying the rising demand for private cars has been increasing the appetite of foreign car manufacturers, which see Algeria as an attractive base that can help offset losses in traditional European car markets.

PRODUCTION BOOST: Seeing the potential, foreign firms are jumping at the opportunity to produce cars locally. Renault has decided to take this step by setting up a production unit. A joint venture agreement signed in December 2012 will result in Renault building a factory in the country to manufacture vehicles for Algeria’s bourgeoning domestic car market. The investment for the first phase of the project is expected to reach €50m and continue steadily over the following years.

Renault’s return is full of historical significance. The last Renault factory in Algeria was nationalised in 1969, seven years after the former French colony achieved full independence from Paris. The deal involves a joint venture between Renault, Algeria’s National Company of Industrial Vehicles (Société Nationale de Véhicules Industriels, SNVI) and the National Investment Fund (Fonds National d’Investissement, FNI).

The new production unit will be 49%-owned by Renault, while the majority 51% stake will be divided between the SNVI, with 34%, and the FNI, which will own the remaining 17%. It will allow for the setting up of the new factory in Oued Ttélat, close to the western city of Oran. The location was chosen because of its existing connections to road links and the city’s port, as well as easy availability of sufficient land and a large pool of qualified workers. The deal is said to include an “exclusivity of manufacturing” agreement, which means the French manufacturer received assurances from the authorities that no other manufacturers will be allowed to set up operations in the country for three years.

This is the second assembly factory opened by Renault in North Africa in a short span of time. In early 2012 Renault inaugurated its $820m car factory in Tangier, in neighbouring Morocco. The large production unit, which was set up in close proximity to the new TangerMed Port facility, is expected to eventually manufacture up to 400,000 vehicles each year. The difference with the smaller Oran factory is that, while the Tangier unit will be mostly dedicated to exporting new cars around the Mediterranean basin, Renault’s Algerian facility is aimed at serving local car buyers to gain a competitive edge as the only international company manufacturing cars in the country. Capacity at Oued Ttélat is expected to start at 25,000 units when the factory enters operations in 2014, but eventually climb up to 75,000 manufactured cars per year at a later stage.

BETTING ON THE LOCAL MARKET: The deal might prove to be an important way to encourage the development of domestic car manufacturing in a country where vehicle registration numbers climbed 57% in the first 10 months of 2012. Car sales in Algeria reached 300,000 units in 2011 and are estimated to have surpassed the 430,000 mark in 2012. Some forecasts point to a potential growth of between 800,000 and 1m cars sold by 2020. Despite a governmental freeze on consumer credit, which had been used to purchase vehicles, car sales have nonetheless continued to climb. An expanding economy as well as governmental measures to increase the purchasing power of citizens, such as the back-to-back public worker salary increases in 2010 and 2011, have kept the door open for many middle-class Algerians wanting to own a vehicle.

The expectation of continuously increasing consumption is one of the attractions for car producers. Renault is estimated to have a 27% share of the market, according to local media, providing it with a sizeable customer base from which to grow. Algeria has become important for European manufacturers, which have faced challenges in a depressed local market since the 2008-09 credit crisis hurt car sales in EU countries.

LOCAL CONTENT: Renault’s investment will also involve the creation of a training facility for the local workforce. The factory is expected to employ about 500 people once operations are up and running and provide about 10,000 new jobs in the long term as the new production unit gathers pace and involves local companies.

More importantly than direct job creation, the authorities expect that the arrival of the car manufacturer will help to spur local sub-contractors. Successful transfer of knowledge could ultimately be useful to create a local automotive manufacturing cluster. Of the 150 ha that has been allocated to the new Renault factory, 20 ha have been reserved to receive associated sub-contractors. The government has also already identified about 50 sub-contractors that are likely to work with the new Renault unit. Algerian content for the new vehicles will likely focus on electrical components, glass parts, radiators, batteries and plastic components. According to company officials, the new cars will start with 20% local content and eventually include up to 40% or more.

LEARNING TO BUILD: Despite the strong political will behind the project and Algeria’s relatively well-established mechanic and engineering industries, there has been no real automotive production cluster for decades. This means that for the local content of the new Renault vehicles to grow substantially, Algerian sub-contractors will have to adapt rapidly to manufacturing practices.

Knowledge transfer might also come from neighbouring Tunisia, where the automotive industry has more experience. In a recent conference of businessmen from both countries, several of Tunisia’s auto parts manufacturers showed an interest in setting up operations in Algeria to work with the new Renault production unit. For Tunisian manufacturers, suffering under the economic context of post-revolutionary instability and slower demand from European manufacturers, getting a foothold in a more stable market with growth potential, such as Algeria’s, would help offset losses.

Although more specialised, additional contributions to local car manufacturers might come from the defence sector. The government has signed a deal with UAE company Tawazun Holding to build military vehicles. The joint venture between the UAE group and the Mechanical Industry Promotion Group, which is under the Algerian Ministry of National Defence, will set up a factory to produce 200 4×4 military vehicles a year over the next 15 years. With the new factory, Tawazun Holding will also establish a technical facility and training centre for the 300-person workforce.

The Algerian automotive sector is close to entering a new phase. Despite the fact that the market’s attractiveness has been proven by consecutive years of rising sales, the question now will be to secure its place as an efficient manufacturing base for cars. Foreign investment is leading the way to this, but much of the success of establishing a local manufacturing cluster for the sector will need to come from Algerian subcontractors’ ability to adapt to international standards.