How Nigeria can become Africa's next automotive hub

13 Jan 2016, 12:00 am
Chibuike Oguh

Summary

Nigeria must make the development of a robust local automotive industry a priority because it has the capacity to inject life into the entire manufacturing sector, especially when automakers begin to source for their components locally.

Front end of a bus manufactured by indigenous automaker Innoson

Over the last twenty years, South Africa has been the top destination for vehicle manufacturing in Africa. With an automotive industry capable of churning out over 600,000 vehicles annually, South Africa is one of the largest bases used by global automakers to reach markets in Africa, Europe, South America, Australia, North America, and the Middle East. Today, South Africa's automotive industry generates over $10 billion annually and accounts for over 15 percent of the country's total exports.
    
As Africa's largest economy and the continent's most populous country with significant regional influence, Nigeria can compete with South Africa as an automobile manufacturing hub. In a recent report, PricewaterhouseCoopers said Nigeria has the potential to become Africa's leading automotive manufacturing hub, which has been boosted by the 2013 National Automotive Industry Development Plan (NAIDP).

In the 1970s, Nigeria had a thriving automotive industry, but decades of inconsistent government policies caused production to halt. Nevertheless, Nigeria still has huge prospects in having a viable automotive industry. We have a growing middle class population, which currently accounts for about 30 percent of the national population, according to the African Development Bank. Furthermore, annual spending on imported pre-owned vehicles, which flood the country as the local auto industry floundered, is currently estimated at about $4 billion annually.

It is the sheer size of Nigeria's automotive industry prospects that drove global automakers into a frenzy when the federal government announced the new automotive policy, which slashed import duties for completely knocked down parts (CKD) and semi-knocked down parts (SKD). In less than 12 months, over 35 automakers – including Ford, Nissan, Peugeot, Volkswagen, Hyundai, Kia, etc – have acquired licenses to build assembly plants in Nigeria. The National Automotive Design and Development Council (NADDC) estimates that these global vehicle manufacturing companies have already spent up to $128 million (N25.4 billion) to buy land and equipment for their factories.

Despite this initial success in revitalizing Nigeria's auto industry, the fact remains that a lot still needs to be done if the country must develop a robust automotive industry just like South Africa and also end the importation of used cars by 2050 as the PwC report states. Firstly, the Nigerian government must maintain clear and consistent policies in order to promote the fledgling auto sector.

South Africa has nurtured its auto industry because of its powerful incentive structure created under two main government policies: the Motor Industry Development Programme, initiated in 1994, and its successor, the Automotive Production and Development Programme, launched in 2013.

Thus, it behooves the federal government, led by President Muhammadu Buhari, not to take its “change” mantra too far by truncating the current automotive policy crafted under former President Goodluck Jonathan and his trade and investment minister, Olusegun Aganga.

Inconsistent or unclear government policies would scare away global automakers who have the resources needed to spur Nigeria's auto industry to generate capacity to meet local demand and become a regional automotive hub.

Secondly, Nigeria must maintain a stable economic performance. But Nigeria, which averaged seven percent GDP growth rate in the last decade, has slumped to less than four percent GDP growth rate in 2015.

Just like other industries, the auto industry is impacted by a country's macroeconomic environment: interest rates, exchange rates, GDP growth rate, inflation, rate of unemployment, disposable incomes, etc. Thus, for Nigeria's auto industry to continue the success it has recently achieved, the country's macroeconomic indicators must be placed on a path of stability.

Nigeria's benchmark interest rates, recently cut to 11 percent by the Central Bank of Nigeria (CBN), must fall further, still. Inflation, which crossed the CBN's upper limit of nine percent in June this year, must be brought under control. Nigeria's GDP, which stands at $510 billion (2013 rebased GDP) – is much higher than South Africa's. Its growth rate must be returned to its pre-oil-crisis rate of seven percent. The CBN needs to also stabilize the fluctuating exchange rates by easing its strict foreign exchange controls. (A wildly fluctuating exchange rate can quickly move the auto industry, which is dominated by global car companies, from a viable to a non-viable position in a short time).

Thirdly, automakers operating in Nigeria must assemble or design cars suited to the country's auto market, where price-sensitive consumers currently spend about $4 billion annually on imported pre-owned cars. At present, most vehicles assembled in Nigeria – about 30,000 vehicles, according to PwC – are sports utility vehicles (SUVs), trucks, and buses, which are too expensive for most Nigerian auto consumers. (The majority of Nigerian auto consumers – about 60 percent – are unable to own a car without financial support). Thus, automakers must begin to assemble cheap and durable vehicles to compete with the importation of pre-owned vehicles, which account for over 75 percent of all cars on Nigerian roads.

In addition to this, automakers must work with financial institutions in Nigeria to provide viable car-financing options to boost local demand for locally-assembled vehicles.

Finally, Nigeria's logistics infrastructure – especially ports and customs administration – must be modernized to help the auto industry get needed parts on time to keep production at an optimal level. Nigeria has one of the highest cargo dwell times in sub-Saharan Africa – at about 21 days – and the country ranks 75th position on the World Bank's Logistics Performance Index, which measures indices such as timeliness of shipments, quality of trade and transport infrastructure, efficiency of clearance processes, etc. (South Africa, the highest ranking African country, is ranked at 35).

With Nigeria's poor transport and logistics infrastructure, automakers would find it very difficult to manage the robust supply chain needed to produce vehicles on a large scale.

Nigeria must make the development of a robust local automotive industry a priority because it has the capacity to inject life into the entire manufacturing sector, especially when automakers begin to source for their components locally. Thus, the auto industry may just be the secret key to achieving the much-talked about objective of diversifying Nigeria's oil-dependent economy and creating jobs for the country's massive unemployed population.

Chibuike Oguh is Financial Nigeria's Frontier Markets Analyst


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