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Prepared for takeoff: Assessing Africa's car markets

Issued at 2015-04-01



Africa's automotive industry is preparing for future growth. While many countries are adopting industry-favorable policies and launching schemes to support sales, a number of challenges remain. Learn more about the continent's top vehicle markets, and which can support local production capabilities. Africa's key automotive markets should see future growth as favorable demographics and rising incomes trigger rising car sales. Africa's key automotive markets should see new growth over the coming years. Light vehicle sales across the continent reached 1.7 million units in 2013, and the total market could expand to roughly two and a half million vehicles by 2020. Economic activity will largely drive this expansion, with overall GDP expected to grow at 5 percent a year through 2020. By 2025, analysts estimate that at least 27 million African households will have the wherewithal to purchase a new light vehicle. However, in some areas, political instability represents a challenge to future market growth. Automakers from India already consider Africa a top growth opportunity, and Chinese and Korean carmakers also view the continent as an important market. Five countries sell over 85 percent of new cars OEMs need to focus on just a few countries to capture this future growth: South Africa is responsible for almost 40 percent of current total African sales, followed by Algeria (25 percent), Egypt (12 percent), Morocco (7 percent), and Nigeria (5 percent). Tunisia, the East African Community, Angola, Libya, and Sudan complete Africa's top ten countries in terms of new car sales volumes. Going forward, the current top-ten countries will remain Africa's most important markets, with the highest momentum expected in Nigeria, followed by the East African Community and Angola. Some of these countries have established restrictions on second-hand imports, which appear to be the biggest short- to medium-term catalyst for new vehicle sales growth. For example, in July 2014, Nigeria's government put measures in place to curb the import of used vehicles. Launched in phases, the plan first imposed higher tariffs and duties on used imports. Since 2010, Angola has banned the import of cars over three years old and trucks more than five years old. In addition, several national governments are helping to stoke demand for new light vehicles by introducing attractive financing schemes. With its new automobile policy, for example, the Nigerian government has launched a car-financing scheme involving both local and international banks to provide lower-interest loans to help Nigerians buy cars and light trucks. Exhibit 1 Top 10 automotive markets in Africa A growing focus on vehicle assembly Currently, most OEMs have dealer networks with 200 to 250 dealers spread across Africa-with roughly half of them typically located in South Africa. One Japanese OEM is ahead of other automakers with almost 400 dealerships-with proportionately more located in South Africa. Many OEMs originally established their local retail footprints years ago, mainly in South Africa and in the North African region. Automakers see both markets as strategically important. Not only do they serve local market demand, they also act as export bases (e.g., from Algeria to Europe and from South Africa to all right-hand-drive markets). Consequently, these two regions justify full production plants. Based on the expected growth potential, several OEMs have recently intensified their interest in Africa. For OEMs attracted by growth, the typical entry strategy starts by testing the waters with imports via third parties. Companies then establish a local sales organization for imports and gradually move on to semi-knocked down (SKD) assembly facilities and then completely knocked down (CKD) production. Finally, if the market is large enough to support it, OEMs will establish full production, both to offset local content requirements and to get closer to the market. In embryonic markets like Nigeria and Angola, most OEMs focus on third-party imports due to low volumes and the high levels of uncertainty. However, both Nigeria and Ghana are also experiencing a lot of activity involving SKD assemblies. In an effort to boost local vehicle production, various African countries have introduced new policies. For example, Kenya has exempted imported automotive parts from the 25 percent duties imposed on fully assembled cars, providing OEMs that pursue local assembly a more competitive position. Some countries have also boosted import duties on completely built-up cars to promote local production. For instance, Nigeria raised these tariffs from 17.5 percent in 2013 to 70 percent in 2014. At the same time, it has relatively low import duties (7.6 percent) on car parts compared to other emerging markets (India: 10 percent, China: 11 percent, Brazil: 24 percent). * * * Africa's automotive industry is preparing for future growth. While many countries are adopting industry-favorable policies and launching schemes to support sales, a number of challenges remain, including political instability in some areas. Most countries still also have low-volume bases that cannot yet sustain local operations. Further progress will likely require additional government incentives that lower the risk of doing business in Africa. ■

Source: Mckinsey & Company



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