Nigeria’s expanding auto market

As might be guessed from the snarled traffic on the bridges of Lagos, vehicle sales in Nigeria are growing rapidly, with automakers seeing double-digit growth over the past year. To try to capture a greater share of demand, firms are looking to expand retail detailerships while some of the more adventurous are taking a stab at local assembly. The government has taken steps to support domestic production, but investors say that without greater protections for the nascent industry, further development may be challenging.

Expanding sales market

Nigeria imports nearly all of the cars on its roads, with 50,000 new and 150,000 used vehicles entering the 160m-person country each year. The largest supplier of new cars is Toyota, accounting for 70% of imports, although others are making inroads.

These include Ford Motors, which announced in September it would introduce more than five new models to the Nigerian market, including the Fusion, Edge, Escape, Ranger and Focus. The company saw a 33% increase in sales in the first half of 2013, and 44% year-on-year (y-o-y) sales growth in July 2013, selling 2156 units compared to 1617 in July 2012.

“Nigeria is a significant market in Ford’s Sub-Saharan Africa region and accounts for a solid percent of our regional sales. Sales in Nigeria grew more than 40% from 2010 to 2011; and 8% from 2011 to 2012, despite overall challenges in the Nigerian auto industry,” Eugene Prinsloo, Ford’s senior manager in sub-Saharan Africa, told local media.

Nissan has identified Nigeria as one of the key markets it is targeting for expansion of its small passenger vehicle product lines, saying in July 2013 that it aimed to double vehicle sales in sub-Saharan Africa to 220,000 units by 2016. Honda announced in September that it would begin to sell passenger cars at its first showroom in the country, already having established a motorcycle production base in Nigeria.

Other companies, including Mercedes-Benz and Skoda, have recently expanded in Nigeria, with Mercedes-Benz opening a new showroom in Lagos in August, and Skoda introducing two new models, the Octavia and the Rapid, in September.

Developing a local manufacturing base

While imports account for nearly all vehicle sales, attempts to establish a domestic auto industry have been made over the years. Private companies, including UAC, Leventis and Bewac, established Nigeria’s first auto-assembly plants in the 1960s. The government invested in auto and truck manufacturing in the 1970s, with joint ventures involving Peugeot, Volkswagen, and later GM.

More recently, local conglomerate Innoson Group embarked on a plan to manufacture a “Nigerian car”, opening the Innoson Vehicle Plant in Anambra state in 2010. The factory assembles completely knocked down parts from Chinese, German and Japanese makers to produce around 300 units per month.

Innocent Chukwuma, the chairman of Innoson, says the biggest challenge for his company had traditionally been a lack of local demand, particularly from large clients. Earlier this year, Chukwuma told the media that both the government and consumers have been slow to buy locally made vehicles, preferring imports.

The government’s reluctance to buy domestic autos was noted by Kola Jamodu, the president of the Manufacturers Association of Nigeria, in an interview with OBG last year. “The government, as the largest single spender in the economy, should patronise locally assembled vehicles in the spirit of the ongoing Made-in-Nigeria campaign,” he said.

Jamodu added that it was important to provide protection to local suppliers. “It is necessary to create adequate tariff differentials between knock-down kits for assemblers and imported fully built units. Strict adherence to the age limit on vehicles imported into the country would also help.”

With regard to both of these issues – tariffs and limits on the age of used vehicles – the federal government in recent years has, in fact, tended towards reducing trade barriers, rather than erecting them. In 2010 it raised the age limit on used vehicles that could be imported, lifting it from 10 to 15 years. Over time, it has reduced tariffs on fully built units, from 30% to 10% for commercial vehicles and 20% for cars.

However, policymakers now appear to be tacking in the opposite direction. In September, President Goodluck Jonathan indicated the government was considering a ban on the import of vehicles to bolster domestic production, although he provided no specifics in terms of timelines or types of automobiles that could be covered. He added that the government had directed state entities to purchase vehicles made at the Innoson facility.

At the same time, the government is looking to boost the industry from the supply side. In June, the National Automotive Council (NAC), a government agency that is part of the Ministry of Industry, announced that it had disbursed $46m in loans aimed at developing local production, including $20m to the Peugeot Automobile Nigeria, $8m to Dunlop and $6.6m to Innoson Vehicle Manufacturing. Much of the funding and focus is earmarked to develop production of automotive parts.

The government is also investing in skills development and workforce training, announcing in
August a partnership with the government of Brazil to create three auto clusters in Lagos, Anambra and Kano states. The facilities will develop local workforce capacity as part of the National Industrial Skills Development Programme, an initiative rolled out last year.

While these efforts will help boost local manufacturers, clearer import policies will be important to capitalising fully on increasing automotive demand. This may mean an increase in price for foreign-made cars, but international automakers could instead find it profitable to invest in local production facilities.