Locating manufacturing in the country makes commercial sense for many large automotive companies

Unsurprisingly, given its comparative advantages as a manufacturing hub and its sizeable consumer market, Egypt is the third-largest car manufacturing country in Africa, after South Africa and Morocco, according to the International Organisation of Motor Vehicle Manufacturers (OICA). The automotive manufacturing sector has a range of major international brands present, as well as a growing components industry. Many international names have established facilities in Egypt, often with local partners, to supply the large and growing domestic market directly. The opportunity to avoid high taxes on imported fully built units is another incentive, particularly for manufacturers making models that are subject to Egypt’s swingeing luxury import taxes.

Production Fluctuations

In 2013 Egypt produced 39,050 vehicles, a 30.9% decline from 2012, according to OICA, as the market took a hit from political turbulence and slow growth. Of the units produced, 25,650 were passenger cars and 13,400 commercial vehicles. The fall followed a slight recovery in 2012, when output rose 7%, but still remained well below the 2010 peak. As of 2012, locally produced cars accounted for 37% of those sold on the Egyptian market, according to the American Chamber of Commerce in Egypt (AmCham), a proportion that almost certainly rose in 2013 as the falling Egyptian pound pushed prices of imported vehicles (among other goods) up. While there were few disruptions to output in 2013, sales fell due to lower demand from belt-strapped consumers, and supply and distribution networks remained fairly intact. General Motors (GM) and Nissan shut down production for short periods to ensure the safety of their employees – including through curfews.

Despite recent dips, the vehicle market is expected to grow strongly over the longer term as the middle class expands and incomes rise across the board. The market is very large, and car ownership is still relatively low, at just 32 cars per 1000 people, compared to 62 per 1000 in Morocco and 100 per 1000 in Iran. Over half of all Egyptians are under the age of 25, meaning a substantial new generation of potential car owners will come of age in the next two decades.

Major Players

The automotive sector has several producers with local facilities. GB Auto, one of the MENA region’s largest automotive producers and distributors, manufactures Hyundai models in Egypt under licence from the South Korean company, as well as some Mitsubishis for the Japanese firm, some units for China’s Geely and Volvo commercial vehicles under the Swedish brand. The Hyundai licence proved particularly valuable in 2012, when the Verna model was the only car sold as a taxi in Egypt – where taxis are ubiquitous.

GB Auto had a tough first three quarters in 2013, but recovery towards the end of the year drove group revenue to LE9.13bn ($1.3bn) for the full year, up 10.1%. Over the medium term, the company is likely to continue its strategy of geographical diversification, which should help insulate it from possible further shocks in the domestic market – where it expects sales to recover in 2014. Meanwhile, US-based GM, one of the world’s biggest automotive companies, produced around 47,000 units in the country in 2012, including both passenger cars and commercial vehicles, according to AmCham. Its Chevrolet brand vies with Hyundai for sales market leadership, with the Lanos and Aveo models performing particularly well. Since July 2012, SAIC-GM-Wuling Automobile, a joint venture between GM and Chinese automakers SAIC Motor and Liuzhou Wuling Motors, started manufacturing Chevrolet’s Move van in Egypt.

In September 2013 GM Egypt launched a sixth generation of its Chevrolet Dabbabah pick-up following an LE180m ($25.6m) investment project that upgraded production facilities. GM officials said that the investment indicated continued confidence in Egypt on the part of the international manufacturer.

Germany’s BMW also builds vehicles in the country, focusing on saloons and sports utility vehicles, while Egyptian German Automotive, 26% owned by Daimler, produces BMW rival Mercedes’ C, E, S and GLK classes. Though Mercedes vehicles are increasingly being imported these days as tariffs fall, in July 2013, AGM started building MG 750 saloons from completely knocked-down (CKD) kits delivered from China.

Models of Russia’s AvtoVAZ’s Lada are produced from kits by Egypt’s Al Amal, which in 2013 added to its output classic saloon Lada 2107. Other brands also being manufactured locally include Toyota, which had a 7% market share in 2012, according to the Automotive Marketing Information Council, and Jeep.

Despite the difficult market conditions of recent years, there have been new capital injections into the sector. In January 2014 Egypt’s New Engineering Company inked a deal with China’s FAW Group to build cars in Egypt. FAW will invest around $100m in the joint venture, reportedly one of the biggest manufacturing deals to date between Egypt and China. FAW is expected to export around 50% of its Egyptian output – an interesting development given that previously much of the local production was sold locally.

Reform Pressure

The legislation governing the manufacture, import and sales of vehicles in Egypt has been designed to promote local production, but some in the sector feel that it needs overhauling. Farid El Tobgui, the chairman of the Bavarian Auto Manufacturing Company (BAMC), BMW’s local subsidiary, told OBG that exports to Africa in particular should be promoted through agreements with the Common Market for Eastern and Southern Africa, while the industrial law dating back to 1958 also needs to be revised to encourage domestic manufacturing. This could then strengthen the country’s position as a centre for automotive exports, an opportunity on which it has not capitalised as much as it might have done.

“The fact that the cost of manufacturing in Egypt is very low in comparison with the West, even in spite of the fuel price increase, makes the country an ideal hub for auto manufacturing,” El Tobgui told OBG. “The calibre of the workforce is also a competitive advantage.” An association agreement between Egypt and the EU has already had the effect of increasing imports of German-made cars as duties have fallen, lowering demand for the locally produced models developed by BAMC and Daimler. El Tobgui suggests two particular changes that could tilt the market towards local producers: the compulsory scrapping or replacement of all cars older than 20 years, and a ban on public sector bodies buying imported vehicles.

Components

The automotive component or “feeding” industry as it is sometimes known in North Africa has grown steadily in recent years, and Egypt is no exception. There are now more than 300 components manufacturers supplying automakers in Egypt and abroad, according to AmCham. GM has a particularly strong supply chain in the country. However, the sector’s expansion has been limited by the fact that many of the vehicle models produced are made from CKD kits. Other firms, including BMW, use semi-knocked-down kits. These models allow foreign automakers to circumvent import tariffs for complete built units (CBUs, i.e. complete vehicles), while maintaining closer control over the source and quality of components. It also some limits the scope of local supply-chain development.

This may be changing, as Egypt has tightened import standards on components – and as the weakening Egyptian pound means sourcing parts locally makes even more financial sense. Significantly, GM’s new Dabbabah has a higher proportion of Egyptian-manufactured components in its class, according to GM, which says that its suppliers have also invested heavily in improving their advanced manufacturing technology.

Furthermore, the automotive industry in some countries has thrived thanks to the establishment of local supply chains – a technique known as clustering. With a number of Egyptian components companies already meeting international standards, the potential for growth in the component subsector and the strengthening of supply seems a natural step. European suppliers in the upper-middle to luxury segments may increasingly look to CBU exports to Egypt rather than local CKD assembly, as their volumes are not particularly high. This perspective could change, however, with improvements to the investment and general business environment, particularly given Egypt’s sizeable export potential.