Deloitte on unlocking the automotive market in Africa

Deloitte Africa Automotive Insights focuses on three key African economies where most business interest is currently being channelled, namely Nigeria, Kenya and Ethiopia.Despite its billion-strong population and rising income levels, Africa's automotive industry is yet to be unlocked.

Apart from a small number of countries, African automotive markets are mostly pure retail markets that are largely serviced by imported second-hand vehicles. In 2015, approximately 1.55 million new vehicles were sold or registered across Africa, the report states.

Africa holds enormous promise, but is complex, says Karthi Pillay, director: Africa Automotive leader at Deloitte.The automotive industry is clearly gearing up to address Africa as the next big market and needs to stay close to this market. While no single report will capture that complexity, our objective is to begin creating a portal of data including automotive insights; leveraging our network across the continent, which includes access to 51 of the 54 countries in Africa.

Though it is an ambitious postulate that Africa could one day rival industrialising countries such as China in the production and assembly of vehicles, Pillay points out that Ethiopia's current rate of motorisation, two per thousand population, is higher than was China's when it commenced automotive manufacturing in the period 1983-85.

Competitive environments

We are not claiming that Africa has any immediate comparative advantage that has been extensively exploited. Though many of the commodities necessary to automotive manufacture are to be found in abundance in Africa, a thriving industry is feasible only if certain African countries put in place appropriate competitive and enabling environments. Auto companies are already interested in Africa - being active not only in South Africa, but also Egypt, Morocco and Algeria. However, most African markets are currently some distance from being open for business given that 80% of the continent's existing market consists of second-hand vehicles.

Globally, the strategy for manufacturers is to get closer to their consumers - and Africa has a growing number of consumers entering the middle income bracket, explains Pillay.The value chain of the automotive manufacturing industry is massive, and on its own can kick-start the industrialisation of Africa, provided the continent can harmonise manufacturing and trade policies.

Deloitte has a blueprint vision for the automotive industry in Africa. It involves identifying an anchor country, which already exists in the form of South Africa, which has the necessary enabling environment and export-focus, and which has already supported Nigeria in establishing its policy. Secondly, it requires a regional approach in order to leverage economies of scale, with each country in the region identifying its unique role within what will be a single value chain.

Nigeria's auto manufacturing industry is one of the emerging successes of the continent. While the National Automotive Industry Development Plan (NAIDP) has been welcomed in general by motor vehicle assemblers, the policy reveals potential gaps. To ensure that the NAIDP is successful, the automotive-focused policy needs to be embedded into a broader industrialisation and economic policy that reduces operating costs across industries in Nigeria, states the report.

Interventions required

It is Deloitte's view that achieving scale and unlocking the automotive market in Africa is a potentially sizeable medium- to long-term opportunity. A market-shaping approach, including a combination of interventions by industry stakeholders and governments that target supply-side and demand-side challenges, will however be required in the countries evaluated.

Regarding Ethiopia, the report states that while the country lacks a coherent automotive strategy, its government offers strong support for industrialisation and auxiliary industries, and sizeable investments in infrastructure (both physical and economic) position the country favourably for automotive manufacturing in the long-term. 

Ethiopia's economic policy, the second Growth and Transformation Plan, aims to support and grow the manufacturing contribution to GDP from 4% in 2014 to 8% by 2020. This is supported by attracting investment through industrial parks and extending incentives, including tax incentives, to foreign investors.

In Kenya, expenditure on the purchase of cars, motorcycles and other vehicles accounted for 1.5% of total consumer expenditure in 2015 and is expected to remain relatively stable to 2025 as incomes rise. Decreasing the age of cars that are allowed to be imported into Kenya whilst simultaneously decreasing the affordability of these cars by increasing the taxes levied on them should drive sales of more affordable, newer, more road-worthy, locally-assembled cars.