Egypt: Cautious optimism for auto industry

With a large domestic market and a substantial local manufacturing base, Egypt’s auto retail sector is one of the largest in the Middle East and North Africa (MENA) region. Sales have been hit by the recent political instability and economic slowdown, but pent-up demand is expected to help the recovery accelerate from its currently sluggish pace. This will have a knock-on effect for the manufacturing sector, which is gearing up for resurgence.

Overall vehicle sales were up 4.4% year-on-year (y-o-y) in May, the local press reported on June 26. Some 15,465 units were sold, two-thirds of them passenger cars, according to the Automotive Marketing Information Council (AMIC). An uptick in sales of commercial vehicles – trucks and buses – was the main growth driver. While passenger car sales totalled 10,758, down 3.8% on May 2011, bus sales rose 30.7% to 1358 units and truck sales increased by 29.6% to 3340 units.

The passenger car market is led by GB Auto, which had a 34% market share in the first five months of the year. The biggest independent carmaker in the Middle East, GB manufactures, assembles, imports and distributes vehicles for international firms, including Hyundai, Mitsubishi, Volvo and Mazda.

Around 40% of passenger cars sold in Egypt last year were assembled domestically, according to AMIC. A number of major brands, including General Motors, Mercedes, Hyundai, BMW and China’s Chery, are assembled in Egypt. Some use complete knocked-down kits, which are imported and then put together locally, thus bypassing high taxes for the import of complete units. Egypt also has a growing components industry, benefitting from the local automakers and from the country’s competitive advantages, including low labour costs, low overheads and geographical location.

Sector leaders will be reassured by the market’s return to growth – and hopeful that the slowing fall in passenger car sales can be turned around in the near future. While 2010 figures seemed to indicate a tentative recovery in the sector, 2011 was a difficult year, as overall sales fell by around a third to 176,157 units. Luxury brands were particularly hard-hit, whereas GB auto, which focuses on mid-range brands and commercial vehicles, outperformed the market by posting a drop of only 19%.

Consumers and businesses have been deferring such big-ticket purchases during the political and social upheavals that started in January 2011, waiting for a more secure climate before buying. A sharp drop in economic growth to around 1.8% last year, according to the IMF, was led by a 4.3% contraction in the first quarter, constraining demand throughout the year. Both factors increased banks’ caution toward lending, which affected most individuals’ ability to finance the purchase of vehicles.

Additionally, in the six months after the start of the revolution, some automobile firms focused on securing their stockyards rather than production, slowing or freezing distribution, according to Hesham Ezz Elarab, the president of the Ezz Elarab Automotive Group of Companies.

Manufacturers, distributors and retailers alike will be watching sales figures closely over the next few months, with the expectation being that if political and economic stability and clarity can be restored following June’s presidential election, which was won by Freedom and Justice Party candidate Mohammed Morsi, vehicle sales growth can return to the previous rate. With car ownership levels remarkably low (just 30 units per 1000 people, compared to 109 in Algeria and 128 in China, according to international press reports), the scope for expansion is considerable, particularly if robust economic growth is restored and leads to increases in real incomes.

“The month of May showed signs of improvement in the market but consumer confidence will not return until elections take place and unified government is in place,” Khaled Youssef, head of the automotive division at Egyptian International Motors, told OBG. “This will be critical to getting the automotive sector back on track. With a population of 80m and only a small proportion owning cars, the potential for growth is vast.”

Released pent-up demand from the past year and a half should help growth accelerate, and some expect sales to rise by up to 10%, in spite of GDP expansion remaining low. Manufacturers are already preparing: in February, GB inked a deal with China’s Geely for the establishment of a CKD assembly operation in Egypt. The factory will aim to export across North Africa – a vote of confidence in Egypt’s strengths as an automobile manufacturing base.