Strong automotive sales bolster local industry

Authorities have zeroed in on the automotive industry in their bid to re-industrialise the Algerian economy and reduce import spending. Automotive sales have boomed in recent years and, despite a slowdown in late 2013 and 2014, strong demand for personal vehicles among Algeria’s 38.8m people will continue to drive sector growth. Recent state investments in industrial and transport infrastructure should help reinvigorate the manufacturing sector, provided that private investment can keep up the pace. Algeria will have to differentiate itself from its neighbour, Morocco – which has more liberal regulations on foreign direct investment and has channelled capital into a spate of major automotive facilities, including a new Renault factory – but a handful of new projects on the horizon bode well for Algeria’s sector.

Sales Boom

Automotive sales in Algeria have surged in the last five years, despite the ban on a consumer credit facility in 2009 (which was rolled back in early 2014). The market peaked in 2012, when Algeria spent €5.59bn on vehicle imports, passing 600,000 units for the first time, while domestic sales jumped 50% year-on-year (y-o-y) to reach 433,233 units. This rapid growth has made Algeria, along with its Maghreb neighbours, an increasingly important export market for European manufacturers seeking to offset stagnant growth in the EU. French manufacturers Peugeot and Renault led the sector with 17.5% market share and sales of just over 74,000 vehicles each in 2013, followed by Renault’s subsidiary Dacia (8.8%), South Korea’s Hyundai (7.8%) and Japan’s Toyota (7.6%).

Market Slowdown

However, the market began to slow in October 2013, and the year ended with 396,181 units sold, down 1.9% y-o-y. This climate has continued in 2014, with dealerships reporting that sales in the first five months of that year were 28% lower than in the same period of 2013. According to Algeria’s Customs agency, total vehicle imports in 2013 were 554,269 units worth €5.37bn, down 8.4% and 3.5%, respectively, compared with the previous year. As existing stocks rose, the value of vehicle imports in the first half of 2014 settled at AD256.5bn (€2.4bn), down 18% y-o-y.

Dealers attribute the decline in new automobile purchases to a temporary shift in consumer spending towards real estate. The government is working to speed up social housing projects and has announced a number of new housing allocations in the first half of 2014, making homes more affordable for lower-and middle-class families than in recent years.

Driving Factors

However, the need for mobility is still as keenly felt as before, and operators expect car sales to pick back up after 2016 as the real estate surge subsides. Rising incomes in the capital and other major urban centres have pushed up living standards; back-to-back public salary increases in 2010 and 2011, introduced in an effort to avoid Arab Spring-related social unrest, have put vehicles within the reach of many middle-class families.

Algeria’s sprawling territory, combined with a lack of reliable public transport options in urban centres, also encourages the use of personal vehicles. Metro and tram lines in Algiers, for example, have limited utility, particularly considering that large-scale shopping centres are located on the city’s outskirts. In addition, ongoing upgrades to Algeria’s highway network will also support the market. The first continuous coastal highway link, the East-West Highway, is nearing completion, and work is set to begin shortly on the Hauts Plateaux Highway, which will create a critical link within the central region.

Local Production

Algeria is working to encourage car manufacturers to set up processing activities locally in order to stem the rising tide of import spending. As a result, French auto manufacturer Renault signed a joint venture agreement in December 2012 to build a production plant near the northern city of Oran. Renault had previously managed a factory in Algeria that was nationalised in 1969.

The production unit will be 49% owned by Renault, according to Algeria’s 51:49 law that requires foreign partners to be the minority shareholder of any joint venture operating within its borders. The majority share will be split between the state industrial vehicles firm, (Société Nationale de Véhicules Industriels (SNVI) with 34%, and the National Investment Fund (Fonds National d’Investissement, FNI) with 17%.

Project partners estimate that the first phase will require a €50m investment, with production set to begin by the end of 2014. The plant will be located outside of Oran in Ouel Ttélat, in order to take advantage of available industrial land, the site’s existing connection with the road network and its proximity to the port of Oran. Renault plans to produce 25,000 cars per year in an initial stage and to scale up to 75,000 cars per year in the future.

Domestic Market Development

The entirety of Renault’s production will be manufactured to serve Algeria’s domestic market, in line with the government's effort to promote the consumption of locally produced goods. Renault reported sales of 74,088 imported vehicles in 2013, very near its ultimate domestic production target of 75,000 units per year, and the firm may hope to gain a competitive advantage by opening its new plant in the country. The site is expected to employ 500 people in the early stages of production, and could reach 10,000 employees as production increases and a local sub-contracting network develops. Of the 150 ha attributed to the Renault plant, 20 ha were reserved for the installation of related industries, which sector players hope will encourage the creation of new small and medium-sized enterprises (SMEs).

Sector authorities hope that Renault’s arrival will unleash a wave of related investments, including components manufacturers and industrial service firms, which Algeria currently lacks. A similar effect was observed in Morocco following the launch of Renault’s €1.1bn factory in Tangiers in 2012; authorities of the city’s industrial park noted that Renault’s arrival brought more than 10 top components manufacturers and industrial suppliers in its wake.

The effect may not be the same in Algeria; the Tangiers plant is much larger in scale, with annual capacity set to reach 400,000 vehicles per year, and focuses on exports to the Mediterranean basin. Nonetheless, the arrival of major production operations could serve as a catalyst for Algeria’s automotive industry. The Renault joint venture reportedly includes an “exclusivity of manufacturing” clause, which means no other manufacturers would be allowed to establish competing ventures for a three-year period. The rest of the industrial value chain, furthermore, has very little presence in Algeria, leaving considerable room for growth. In August 2014, the local press reported that the Ministry of Industry was in initial talks with its Italian counterpart on possibly building a Fiat automotive parts factory in Algeria.

Regulatory Reform

In addition, new elements included in the 2014 Finance Law seek to encourage local investment on a smaller scale. Most notably, the law requires all authorised car dealerships to invest in some variety of industrial or service activity directly related to the automotive sector between 2014 and 2017, at the risk of losing their authorisation. This move stands to channel some of the revenue generated from import sales into the national economy and to concentrate the local business network in the industrial and service sectors.

The government also aims to stem the tide of foreign vehicle imports by adding a stipulation to the new law that restricts foreign imports to only those vehicles or rolling engines that are meant for direct sale in dealers’ distribution networks. This would end the practice of dealers importing vehicles on behalf of a third-party vendor and limit sales channels to officially authorised platforms.

Obstacles

As industrial groups in Algeria can attest – not just in the automotive industry but across many sectors – one of the principal obstacles to local production in the country is the absence of a well-developed industrial value chain, which could in theory range from component manufacturers to technical maintenance and specialised office tasks.

The state is working to overcome a lack of available industrial land by launching a new programme to construct some 49 industrial zones nationwide (see analysis). This should help to significantly expand the amount of available land in the next 5-10 years, including specific financial incentives for zones located in under-served areas in the Hauts Plateaux and the south. The new zones will all be located on major transport axes in an effort to facilitate national distribution and perhaps encourage exports down the line. Should it wish eventually to become an automotive exporter, Algeria will run into competition with more established producers like Morocco and Tunisia. For now, however, the increased demand from the domestic market should be sufficient to drive the sector’s development forward in the medium term.