While much attention has been paid to the lack of structural transformation or to processes of premature deindustrialization, a number of Sub Saharan African countries have actually made important steps in the development of a manufacturing sector, and have attracted increasing investment towards an emerging auto industry.

Introduction

The automotive industry, while shedding light on still relatively unexplored markets. In particular, it seeks to highlight the potential of a number of Sub-Saharan countries that have not received sufficient attention compared to more advanced North African auto industries like Algeria, Tunisia, Morocco or Egypt. Beyond the long established South African industry, this report thus includes a focus on Ghana, Ethiopia, Kenya, Namibia, Nigeria, and Rwanda. While being at different stages, the auto industries in all of these seven countries have attracted new investments or have some potential to expand in the near future. In this regard, the present research tried to explore investment plans of the major auto-players present in the country, together with government's intentions to support the development of the industry and existing policy frameworks. Such an investigation was driven by various factors: the idea of sustainability, the scope, the objectives and the potential impact (in terms of local development on the labour market and on the broader economic environment) of the proposed investments. It not only seeks to address whether the promised investment will respond to the pressing need of generating employment which is extremely urgent across the African continent but it specifically questions whether the awaited jobs will be decent.

Besides the most developed auto industries in North Africa (Morocco, Algeria, Tunisia, Egypt) and the long established South African industry, the automotive sector in the rest of the continent is characterized by relatively small, isolated markets at their infant stage (e.g. Rwanda) or still obstructed by severe structural weaknesses. Many countries are land-locked and still poorly connected to the neighbours on the continent or to large buyers/advanced auto hubs (Barnes et al, 2020). This adds to high transactional cost as transportation of goods and services are time consuming and expensive.1 In financial terms, setting-up a large-scale vehicle manufacturing plant requires a massive initial investment, still inaccessible to many small African economies.2 The level of existing infrastructure is often very low with insufficient road coverage – a pattern still serving the extractive industries and interrupted provision of water and electricity. As Markowitz and Black (2019) note, “Sub-Saharan Africa has the lowest density of infrastructure of any world region. The existing infrastructure is primarily geared to supporting extractive industries, at the expense of stimulating growth in sectors with value upgrading potential.” The availability of adequate skills to meet the needs of the industry is often limited, and these are unevenly distributed across the working population. Besides the lack of access to quality education, the distribution of skills is often worsened by persistent gender and racial inequalities (see Namibian or South African cases). In addition to structural weaknesses, market ‘distortions’ like the still high importation of second-hand vehicles, the scarce localization in the manufacture of components (still subject to frequent global sourcing), and the excessive assemblage of CKDs and SDKs as opposed to proper manufacturing, frequently weigh on the growth and the expansion of the infant African industries (Black et al, 2018; Barnes, et al. 2020). The SSA region, however, also shows positive signs of growth and steps towards regional integration, which will increasingly attract new investments and hopefully determine more intense trade flows. In this regard, the launch of the AfCFTA in 2018, bringing together 55 economies from the continent, represents a visible attempt towards the creation of a common exchange area (Barnes et al. 2020). At the same time, moderate growth coupled with an emerging middle class undoubtedly constitute an attractive factor for foreign investors. In this regard, increasing domestic demand plus positive steps in the direction of regional integration are a promise of potential expansion and future growth. Taken individually, several SSA economies have started investing and supporting either the revitalization (e.g. Nigeria) or the early establishment of their automotive industries (e.g. Rwanda). The seven countries selected for this study, albeit at different stages in the development of their auto sectors, all show some promising indicators of future expansion, and important challenges for both policy makers and organized labour. For example, Kenya, Rwanda, Ethiopia, Ghana and Nigeria all signed MOUs with Volkswagen to establish vehicle assembly.

Challenges

The low level of industrialization is a major problem in Africa. Many analysts have argued that lack of structural change during the phase of economic expansion since 2000 will impede future growth prospects due to the ongoing reliance on commodities. This in turn has serious consequences for the ability to expand employment. The automotive industry is a relatively sophisticated industry, but with sub-Saharan Africa’s rapidly expanding market and automotive trade deficit of $16.3 billion, it is important that ways are found to efficiently attract investment especially into parts of the sector, which are more appropriate for lower income countries. A number of larger countries such as Nigeria and Kenya are now embarking on plans to develop domestic automotive production. Some of these plans run the risk of encouraging low volume, inefficient production which provides little value added or employment. What is required is the broadening of the market through regional integration to allow for large-scale, productive investment. These issues are explored using Kenya as a case study. Rights and Permissions All rights reserved.

Notwithstanding the recent trough in the commodity cycle, African growth rates since 2000 have been impressive, and in some cases even spectacular. It is, however, a striking fact that manufacturing has not kept pace. The level of industrialization remains low, and manufacturing has declined as a share of GDP. Examples of dynamic manufacturing growth are few and far between. Limited industrialization is Africa’s Achilles heel. There are very few instances where manufacturing growth has been the engine of rapid development in the continent. There are a number of reasons for this. One important factor is simply the reliance on commodities: Africa, according to Wood and Mayer (2001), has a comparative advantage in land, resources, and resource-based products. But Wood and Mayer go further to show that, even as a region that is well endowed in resources, Africa underperforms in manufacturing. There have also been inappropriate policies, which have led to inefficient industrialization in a number of countries. For example, the style of import substitution industrialization led to problems in the early years of independence. Much of this was then swept away by the combination of economic crisis and draconian liberalization under ‘structural adjustment’. With rapid growth on the continent since the turn of the century, conditions have become more conducive to manufacturing development and the question is whether a more deeply rooted process of industrialisation is starting to emerge. The market for cars and commercial vehicles is growing rapidly but for the most part is supplied by imports of used vehicles. A number of countries are putting plans in place to expand production. Industrialisation has everywhere been associated with economic development. However, in Africa the link appears weak. The share of manufacturing in GDP was around 10 percent in 2015 and, the sector has grown more slowly than the economy as a whole in every period since the 1960s. This includes the low-growth crisis years of the late 20th century as well as the boom times since 2000. The United Nations Economic Commission for Africa (UNECA) refers to this as ‘deindustrialization’ (UNECA, 2015) and in a sense this is the case. However, it is important to note that manufacturing has been growing in absolute terms.

African countries generally have underperformed compared to Asian countries with regard to manufacturing growth, manufactured exports and manufacturing as a share of GDP. They perform particularly poorly according to the United Nations Industrial Development Organization (UNIDO)’s Competitive Industrial Performance (CIP) Index, which is designed to determine long-run sustainable growth of manufacturing (UNIDO, 2015)2 . Essentially the Index is an indicator of how countries have upgraded technological capabilities, expanded production capacity, improved infrastructure and adopted suitable policies to improve manufacturing value added over time. Kenya, which is the subject of section 4, ranks ahead of its regional peers but nevertheless performs poorly according to this indicator. The background context for Africa’s poor manufacturing performance is well understood. In the post-independence period, manufacturing grew quite rapidly supported by import substitution policies and other forms of state support. Given the small domestic markets and the low level of manufacturing capabilities, much of this capacity was inefficient in the sense of being internationally uncompetitive. Manufacturing remained import-dependent, and exports were minimal.

Oppurtunities

The reality is that SSA consists of a large number of mostly small economies. The combined SSA market is, however, significant with a GDP of $1.66 trillion and a passenger vehicle market of 1.84 million units per annum. A comparison with India indicates the extent of the problem, but also the opportunity (Table 4). The total GDP of SSA and India, as well as average per capita GDP and population, are of the same order of magnitude. Vehicle market size is also similar. The major difference comes in production. India produces its own vehicles while Africa imports. India is also a significant exporter with net automotive exports of $8.3 billion. It also has its own brands such as Tata. SSA on the other hand, consists of a large number of mainly very small markets. It is heavily reliant on imports and, apart from South Africa, exports very little. As a result, the region had an automotive trade deficit of $16.3 billion in 2013.

As indicated above, the market for vehicles in SSA is growing very rapidly. While it is currently small, the region will become a significant global market over the next decade. This growing demand is for the most part being met by imports, especially of used vehicles. The question to which we now turn is the prospects for expanded production in SSA. According to OICA (Organisation Internationale des Constructeurs d’Automobiles), Africa as a whole accounted for less than 1 percent of global vehicle production (831,000 units) in 2014 (AIEC, 2015: 38). South Africa accounted for the bulk of this output, followed by Morocco and Egypt. These figures exclude nascent assembly operations in a number of countries in SSA. Outside of South Africa and some countries in North Africa, vehicle production is almost non-existent. The largest plant on the continent is in fact the 400,000 car per year capacity plant built by Renault in Morocco with a total investment of €1 billion. The vast bulk of its production is for export to Europe, the Middle East, and North Africa. 9 Automotive exports have expanded from $0.4 billion in 2004 to $5 billion in 2015 and automotive employment increased by 67,000 over this period (Bughin et al., 2016: 76). Egypt also has an industry which has been established for many years.

The country now faces growing international competition especially as a result of the Euro-Mediterranean Free Trade Agreement (EuroMed) with the EU under which tariffs are scheduled to decline to zero as soon as 2019. Imports have risen sharply and 59 percent of vehicles sold in 2014 were locally assembled, down from 66 percent in 2004 (El-Haddad et al., 2015). Domestic production is spread across a large number of small-scale assemblers, none of which can benefit from economies of scale, nor are they able to compete against growing international competition. Total production of vehicles was approximately 180,000 in 2014. If one considers light vehicles only, estimated average model volumes are approximately 10,000 units per year with the largest volume model being a pick-up truck which is produced in volumes of 25,000 units per annum. This makes it impossible for component suppliers to achieve the production runs required to be competitive without heavy protection. As a result, local content is quite limited; in many cases including only components such as wiring harnesses, air-conditioners, seats, axles, exhausts, and smaller components such as batteries. Vehicle exports are minimal and have declined since the 2008 peak to the value of around $50 million in 2014, this is in spite of the generous export subsidy. Component exports are more significant and amounted to $269.8 million in 2014. Both costs and quality are limiting factors in international markets (ElHaddad et al., 2015). In SSA, production is dominated by South Africa but output is still small in global terms with some 533,000 light vehicles produced in 2014 (AIEC, 2015). Vehicles were first assembled in South Africa in the 1920s and, as was typically the case in developing countries, the South African automotive industry grew under high levels of protection.

Conclusion

The present report specifically focuses on seven countries that have either experienced a flourishing automotive sector or that show promising prospects of future expansion: Ghana, Ethiopia, Kenya, Namibia, Nigeria, Rwanda and South Africa. Although structural weaknesses persist (poor infrastructure, uneven distribution of skills, lack of real market integration, etc.) these seven countries have all demonstrated a commitment to grow the industry by implementing targeted policies and establishing partnerships with big auto players. Countries like Ghana (Ghana Automotive Development Policy, GADP), Kenya (National Automotive Policy, NAP), Nigeria (Nigerian Automotive Industry Development Plan, NAIDP) and South Africa (current South African Auto Masterplan, SAAM) formulated targeted auto plans to develop their industries. Kenya, Rwanda, Ethiopia, Ghana and Nigeria signed memorandums of understanding (MOU) with Volkswagen, Toyota, Nissan, BMW and other big auto companies to establish vehicle assembly facilities, assess future mobility concepts and launch training centers for production and after sales. Ethiopia and Rwanda are exploring paths for the production of electric vehicles and the promotion of greener mobility. Overall, the auto industries in these seven countries reveal significant potential to attract future investment and to further expand. For sustainable growth, however, important policy challenges must be addressed. From an industrial development perspective, the large inflow of used vehicles and the prevalence of SKDs/CKDs assembly still weigh against the establishment of a local manufacturing base. This should be promoted more proactively, by focusing on increasing localization and deepening the local supply chain. Measures to support domestic demand for new vehicles, like incentives and financing schemes, should also be developed or enhanced. Issues related to urban mobility and environmental sustainability also emerge as increasingly pressing matters. The most compelling objective, however, remains the creation of more decent jobs.

References

https://www.industriall union.org/Africa industrial automotive
https://www.afdb.org/Automotive Industry Potential and Challenges