Gear change: Taking a long-term view, automotive manufacturers are hoping to make big gains

As the economy grows, sales of buses, trucks and cars are rising in Nigeria. Automakers are capitalising on the vehicle boom and setting up dealerships across the country, while some firms are taking a stab at local assembly. However, ensuring that the vehicles – whether imported formally or locally produced – can compete with cars sold on the grey market is still a challenge.

BY THE NUMBERS: Some 15m vehicles were registered in Nigeria in 2013, up from 10m in 2007, according to Bola Akindele, managing director of Courteville Business Solutions, a private firm that registers vehicles in 20 of Nigeria’s 36 states.

Many of these vehicles, however, enter the market through semi-legal or illegal channels. Indeed, Nigeria’s grey market for vehicles remains the biggest challenge for dealers and manufacturers alike. “Some 80% of vehicles are purchased on the grey market,” David Edwards, general manager of Toyota dealer Mandilas Group, told OBG. According to the National Automotive council, 150,000 used vehicles and 50,000 new vehicles flow into the country each year, but local media estimated the grey market as far larger, reporting annual imports at 350,000 used and 70,000 new vehicles. Toyota dominates the formal market, with the brand agent Toyota Nigeria supplying 70% of new vehicle imports through eight official dealers, according to local media. Korean brands Hyundai and Kia are gaining market share, according to retailers and local media. And on the Victoria Island enclave, wealthy Nigerians can buy vehicles from Porsche to Mercedes Benz.

In the commercial segment, India’s Tata has been growing its sales of commercial vehicles at the rate of 100% a year since entering the market in 2008. More specifically, the firm already supplies buses and garbage compactors to Lagos State, and with new infrastructure projects in the pipeline, Tata concrete mixers and tipper trucks look set to be in demand.

FORMAL MARKET: The formal retail market is largely geared toward supplying corporation and government fleets, along with a small group of high-end consumers. Around 90% of sales at Mandilas dealerships are to corporations and banks. “Very few people can afford to buy new cars other than government or corporate clients,” Edwards said. Lack of financing constrains consumer sales in the formal sector. Most loans require a 20% down payment, a high interest rate often in excess of 20%, and can take weeks for approval, all of which pushes consumers towards the informal market.

The grey market, commonly known as tokunbo, includes new or used vehicles that enter the market through ports or land borders without being appropriately taxed with Customs duties or excise fees. As a result, after-sales service is a large growth area. “The grey market can be a strong source of demand for authorised after-sales service, as many foreign makes of car require special tools unavailable at ordinary roadside service stations. There is also a large risk in using unauthorised parts in a quality vehicle – so dealers again have an opportunity to service grey market vehicles through the sale of authorised car parts,” Mirko Plath, CEO of authorised car distributor Weststar, told OBG.

RELIANCE ON IMPORTS: Virtually all vehicles are imported, as Nigeria’s assembly plants operate below 10% of utilisation capacity, according to National Automotive Council data. Private companies, including UAC, Leventis and Bewac, established Nigeria’s first auto-assembly plants during the 1960s.

Over the last decade there has been frustration at the lack of patronage from the Nigerian government, yet there are signs of increasing government support for the local industry. The 2013 government budget removed the 5% duty on completely knocked-down components for mass transit buses, for example. In June 2013, the National Automotive Council dispersed N7bn ($44.1m) in loans to Nigeria’s automotive industry, including a N3bn ($18.9m) loan to IVM. Much of the funding and focus is aimed at developing production of automotive parts. While local production may face further challenges, making cars for Nigeria’s growing population is all about the long-term potential.