Can Egypt become an automotive manufacturing hub?

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Egypt is expanding its automotive industry following a series of new developments aimed at boosting domestic production capacity.

The most recent development came on January 18 when German manufacturer Mercedes-Benz announced it was planning to open a vehicle assembly plant in the country.

Following talks with government officials, the company said that the facility would be constructed by a local business partner. The development, the details of which are still to be revealed, marks a return to the market for Mercedes four years after it halted automotive production at its previous Egyptian plants.

The announcement follows the inauguration of the first assembly line for the Kia Sorento sport utility vehicle in Sixth of October City in early December, part of a five-year, LE2.2bn ($238.7m) deal signed in March last year between South Korea’s Kia Motors and domestic company Egyptian International Trading.

The deal, which is to lead to the assembly of two more Kia models, is expected to create around 1000 jobs at full capacity, and will produce 15,000 vehicles per year with a local component rate of 45%.

See also: The Report – Egypt 2018

New plants to support local component goals

The increased vehicle production capacity aligns with the government’s Local Industry Development Strategy (LIDS), released in October last year by the Ministry of Trade and Industry, which aims to expand the industrial sector by 10% annually by 2030.

More specifically for the automotive industry, another key goal of the LIDS is to raise the proportion of locally produced components in manufacturing.

Hisham Tawfik, the minister of public enterprise, told local media last month that while there were 12 automotive producers with assembly lines in Egypt, local components only accounted for 17% of the final product.

The Ministry of Public Enterprise aims to raise this to 46%, which it hopes will be partly achieved through the revival of the state-owned El Nasr Automotive Manufacturing Company.

The firm stopped production after its debt rose to nearly LE2m ($113,000) in 2009, but since 2015, when the liquidation of its assets stopped, the government has been working to try and negotiate a deal that will see the company resume operations.

Tawfik stated that several international firms had shown an interest in investing in the idea, with a final agreement expected in the first half of this year.

This model of creating a strong industry ecosystem whereby manufacturers can source most parts locally has been credited with helping North African neighbour Morocco rise to its current position as top car manufacturer in Africa. As a result, some industry insiders see this as a potential blueprint for the sector’s expansion in Egypt.

“Morocco’s development as a centre for car manufacturing can be a good model,” Karim Ghabbour, president of local company Manufacturing Commercial Vehicles, told OBG. “With the appropriate incentives, the Egyptian car manufacturing industry will be able to adapt to the market and provide locally manufactured buses and cars for export to Europe at a competitive cost.”

Auto sales rise in 2018

While figures for full-year 2018 have yet to be released, sales of locally manufactured cars in Egypt appear to be moving in the right direction, posting 18% year-on-year growth to 63,000 units in the first nine months of year, according to the Automotive Marketing Information Council.

Meanwhile, the number of imported vehicle sales rose 58% to 67,000 units, helping the industry to achieve overall sales of LE34bn ($1.9bn) across the period.

“Demand in the local market was dampened following the currency float, but numbers are showing that over the past year it has been recovering,” Kohei Maeda, chairman and managing director for Nissan Egypt, told OBG. “It is the size of this local market, with its potential for growth, combined with regulatory and logistical access to markets, particularly in East Africa, that makes Egypt attractive for investments in automotive manufacturing.”

Phasing out of EU import tariffs to increase market competition

While efforts are being made to increase domestic production, the market is set for greater competition from foreign players following the phasing out of Customs tariffs on vehicles imported from Europe, in accordance with the terms set out in the EU-Egypt Association Agreement.

The pact, signed in 2004, outlined the gradual abolition of Customs duties and charges on vehicles imported from Europe over a period of 15 years, with the previous tranche of reductions bringing the levy to 10% of the basic duty in 2018.

Given the trade protocol’s phased introduction, many stakeholders feel the impact on domestic producers and end consumers will be negligible. Indeed, cars of EU origin with an engine capacity of less than 1.6 litres have not been subject to Customs levies since 2016, meaning a tangible difference on consumer prices is more likely on larger-engine vehicles.

Still, the tariff removal is unlikely to have a broader effect on market prices, as more than 65% of cars sold in Egypt have either a 1.6-litre engine or smaller.

Osama Abu Al Magd, president of the Automobile Dealers Association, told local media in January that importers stand to save between LE5000 ($283) and LE10,000 ($566) per car in Customs duties on those with engines larger than 1.6 litres. However, Al Magd also expects automobile manufacturers to hike prices, which – combined with price increases implemented at dealerships in December – would distil the impact of the tariff removal.

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