Stakeholders in Nigeria look to use revenues to fuel motor vehicle growth

Automobile manufacturing is poised for accelerating growth over the medium term, as major carmakers like Nissan, PSA Group and Volkswagen move to revive, expand or build new manufacturing and assembly bases in-country. These firms and their domestic partners should reap the potential dividends of Nigeria’s large and growing automotive market, as well as recent protectionist initiatives that have effectively curbed expensive vehicle imports. Although the industry has struggled with supply-side parts procurement since the oil crash of 2014, reduced consumer purchasing power and some vehicle smuggling, the existence of manufacturing facilities, strategic commitment by public policymakers, and the expansionary views of the above automakers and their competitors could catalyse the segment’s growth in 2019.

Boom & Bust

The discovery of oil in 1958 and the boom of the early 1970s drew European manufacturers Peugeot, Volkswagen, Daimler, Steyr, Fiat and Leyland to enter into partnerships with the Nigerian government. Their joint ventures established six assembly plants – two for cars and four for trucks and light commercial vehicles – over the course of the 1970s, and their initial successes enticed the Japanese companies Mitsubishi, Nissan, Isuzu and Mazda to conclude agreements for similar arrangements in 1982. However, this latter set of proposals remained non-operational, and the volatility of export receipts and tax revenues earned from petroleum quickly undercut the new market. The combination of rising local tariffs and a shortage of foreign currency exerted downward pressure on the plants’ capacities to import necessary intermediary parts, and following steep drops in output, all six facilities had been privatised by 2007 and fully shuttered by 2012.

Growth Potential

Even considering this history, the automotive segment retains promise for growth, predicated on an existing industrial base, rising domestic demand and the administration’s interest in becoming a regional exporter of manufactured goods. The local rate of market penetration is also quite low: a National Bureau of Statistics (NBS) report on road and transport data for the second quarter of 2018 counted 11.8m vehicles – 6.8m commercial, 4.8m private – registered to an estimated 198m Nigerians, indicating that slightly more than one in 17 nationals are car owners.

The segment’s revival would bring additional dividends. Given the labour-intensive nature of automotive manufacturing, growth would exert considerable labour demand and drive job creation in the production process itself, while increased vehicle ownership and use could generate ancillary employment opportunities. Furthermore, expanding production would put downward pressure on an import market that, according to the National Automotive Council (NAC), citing data from the United Nations Conference on Trade and Development, cost the country $4bn in foreign exchange (forex) reserves in 2012. The analysis also estimated that demand for vehicles stood at 100,000 new and 400,000 used units that same year, and the Lagos Business School has projected that sum to double to 1m units annually, if policy changes are made to improve access of to affordable credit.

Policy Planning

Recent policymaking has proposed a series of concrete steps for the administration to take in leveraging its structural advantages and drive automotive growth. Most recently, the Economic Recovery and Growth Plan (ERGP), 2017-20 defines a broad and ambitious agenda for the country’s mid-term economic development. It aims to diversify away from exports of crude oil and proposes a range of strategies, grounded in incentivising private capital investment and budgeting a surge in public spending on power, water and transport infrastructure to lift growth in other sectors. Vis-à-vis manufacturing, the ERGP aims to expand sector GDP by 8.5% annually between 2018 and 2020, and it instructs the Ministry of Transport to review the incentives currently available to producers of knocked-down parts and fully built units (FBUs).

The ERGP highlighted many of the goals of the Nigeria Industrial Revolution Plan (NIRP), which similarly emphasised manufacturing growth as a means to lessen the country’s commodity dependence. The NIRP, in turn, encapsulated a segment-specific reform programme known as the Nigerian Automotive Industry Development Plan (NAIDP). Introduced in 2013 and scheduled to run through 2023, the plan’s primary function to date has been the introduction of tax changes intended to protect local producers from foreign competition. To that end, the NAIDP added a 35% levy on passenger cars and maintained 35% import duties on passenger and commercial vehicles, lowered tariffs on knocked down and semi-knocked down parts, and exempted from duties and value-added tax all machinery and equipment used in tyre production and vehicle assembly.

Economic Shocks

The July 2014 implementation of the NAIDP was expected to kick-start an era of rapid growth. By October of 2015, 35 firms held licences to operate assembly plants, and the National Automotive Design and Development Council (NADDC), a successor to the NAC, had suspended the issuance of such permissions. Furthering that optimism, the global consultancy PwC reported in 2016 that several original equipment manufacturing (OEM) firms had begun planning to set up factories to build components. Despite this surge of investor interest, segment growth fell short of projections, owing in large part to headwinds prevailing in the broader economy. The rapid deterioration of the global price of oil – and, by consequence, the depletion of the forex reserves held by the Central Bank of Nigeria (CBN) – in the second half of 2014 precipitated a reversal of longstanding and robust growth, and the economy entered into recession at the beginning of 2016.

The industry’s response bore considerable resemblance to the production decline that followed the oil slump of the mid-1980s. PwC estimated that median vehicle prices doubled and FBU production fell by more than 60% between 2014 and 2016, from 10,200 vehicles to 4000, stemming from the shortage of forex needed to import intermediaries and the lack of local OEM capacity. Moreover, in an effort to slow the forex depletion, the CBN unpegged the naira in June 2016, and the currency’s overnight depreciation – from 197 to 280 naira per dollar, a change of 29.6% – further weakened consumer demand for local and imported vehicles. In near parallel with the production decrease between 2014 and 2016, vehicle imports fell over the same period by 57.6%, courtesy of data from the National Bureau of Statistics (NBS). In addition to coping with the weakness of the naira, the industry has been subject to the high rates of interest on car loans, which range on average from 25% to 27%. Together, these factors catalysed a contraction in the sector, with the US International Trade Administration (ITA) estimating that its GDP fell from $2.5bn to $1.7bn between 2015 and 2016.

Potential Resurgence

NBS data asserts that the economy returned to growth in the spring of 2017 and has retained that trend since, reaching a 10-quarter high of 2.1% in the final quarter of 2017, before declining to 1.5% expansion to close the second quarter of 2018. The gains have come amid the climbing price of oil, a surge in domestic production and a reduction in the CBN’s forex holdings. Recent activity suggests that this recovery has penetrated the automotive segment. While vehicle assembly had contracted in every NBS report since the first quarter of 2015, the segment reversed that trend at the end of 2017 and grew by 2.3% in the first quarter of 2018.

In March 2018 Nissan announced that it had reached a preliminary agreement with the NADDC to further invest in its 380 ha facility in Lagos, with the automaker’s regional executive vice president affirming the company’s support of “NADDC’s drive to make Nigeria the automotive design and development hub of Africa.” PSA Group followed in June 2018 by declaring its intention to restart its assembly operations in Kaduna state in the first quarter of 2019. According to a report in Reuters in June 2018, Aliko Dangote, Nigeria and Africa’s wealthiest man, will be the majority owner, while the French auto firm will retain a 10% stake in the venture, which, per an advisor to the Kaduna governor that spoke to Reuters, will launch with $10m of equity and $5m of working capital. The investors intend to import parts to assemble the Peugeot 301 sedan and sell these products chiefly in northern Nigeria, beginning with 3500 units in the first year of production and scaling up to 10,000 vehicles annually as the project matures.

Lastly, Volkswagen announced in August 2018 that it had signed a memorandum of understanding with the federal government. The document expressed the firm’s interest in helping to develop the country as an automotive hub in West Africa over the long term, in part through the establishment of a vocational skills academy to be run in conjunction with the German state. The administration, for its part, committed to implementing a legal framework more fit to facilitate scalable, viable business by fast tracking the approval of policies that will further reduce imports and encourage foreign investment in local production and distribution.