A case study of Nigeria, Ethiopia and Kenya by Deloitte Africa, reveals that the shift of sales from developed, high-wage countries, to emerging, low-wage countries, has been accompanied by the shift of production capacity to growth markets in order to respond to increasing pressure on margins.
Siaka Momoh
Deloitte Africa, in a study titled Navigating Africa’s Automotive Sector (with Kenya Ethiopia and Nigeria as case study), has revealed a promising unfolding trend in Africa’s automobile business.
According to the study, to date, new vehicle sales on the continent as well as the local production and assembly of vehicles have been limited by various factors such as a small market size, lower purchasing power, a less competitive operating environment and an insufficient policy environment. This, it says, has undermined the industry’s ability to reap economies of scale and thus supply price competitive vehicles to domestic and regional markets and that to help unlock the markets of the countries evaluated, formalising and consolidating the automotive retail sector will be a priority in the short term.
This, it says, will assist players across the automotive value chain to be closer to the consumer, “at the same time educating the consumer about the benefits of new or certified pre-owned vehicles and will also enable industry players to build local expertise and scalable capacity.
The study adds: “As economies of scale at an individual country level will be challenging to achieve in the short term, domestically created capacity could be further scaled. This should be achieved through an export-orientated focus of both building regional value chains around components and plugging the continent into the global automotive supply chain through cost-competitive production in the medium to long term.”
The study notes that this global value chain is already undergoing a shift, with two external mega trends underway that will help to unlock Africa’s automotive potential:
“Firstly, the strong growth of vehicle sales in emerging markets generally reflects the global shift of sales from developed, high-wage countries to emerging, low-wage countries. This shift of sales has been accompanied by the shift of production capacity to these growth markets in order to respond to increasing pressure on margins. The relocation to low-wage emerging markets allowed automotive manufacturers to save on labour costs and to be closer to the end consumer.”
The Deloitte study notes, “In order to reduce logistics costs and to ensure uninterrupted supply with parts and components, tier-1 suppliers are increasingly relocating to the vicinity of the automotive plants they supply. While in 2002, seven out of 10 vehicles sold were in high-wage countries, Deloitte expects this to reverse by 2023.
The second mega trend is the shift within emerging or low-wage economies. According to Deloitte, “A key focal point in this regard is China. Due to rising labour and input costs, it has been estimated that more than 80 million Chinese lower-end manufacturing job opportunities will offshore over the medium term. Although China is expected to remain an automotive manufacturing powerhouse in the coming years, rising production costs will encourage producers to move labour-intensive elements of the automotive value chain to cheaper locations.
“Due to its large labour pool and low cost for semi-skilled labour, Africa is well positioned to take advantage of this trend. To transform the used vehicle markets to assembly and ultimately production markets, players in the automotive value chain have to commit to investments in market development activities that address the current bottlenecks and unlock the sector’s future potential. This includes industry stakeholders building partnerships with governments and other auxiliary players in the value chain, in order to work towards a more competitive operating and supportive policy environment.”
From Archives Siaka-Momoh first published in The Real Sector Magazine in January 2017.
