Egypt’s automotive sector not immune to economic downturns
Despite taking huge strides forward over the past few years, Egypt’s automotive industry has experienced a sharp drop in sales in 2000, reflecting the general slowdown in the local economy.
The Egyptian automotive industry, together with its feeder industries, has made remarkable progress over the past years. With the help of skilled Egyptian labor, the number of locally assembled cars has increased and the feeder industries are developing rapidly, including several that have begun exporting. The automotive industry’s importance stems from its dependence on a huge base of labor-intensive feeding industries that originate from almost every field and could have a heavy impact on the economy.
The present and future are not, however, nearly as promising. Thus far in 2000, sales have dropped by approximately 15% and everyone is hoping the liquidity problem will be solved by the end of the year.
The problem has affected car assemblers and importers equally, reports Egypt’s Business Today magazine. Dealers who have sold their vehicles on credit are unable to collect their money and consequently are deferring on their bank payments.
The industry crisis was exacerbated last July, when the Ministry of Industry issued decree number 192 for 2000, increasing the local component requirements for passenger cars assembled locally from 40 percent to 45 percent
The new decree has created trouble for many local manufacturers, especially those assembling sophisticated cars such as Mercedes. Other manufacturers, like Kia Motors Egypt, claim they have already reached that percentage. The government is setting January 2001 as the deadline to comply with the new regulation. Most companies are now studying which components can be most easily localized with minimal investment.
The decision to increase the local requirement is designed to make car manufacturers eligible to export to Common Market for Eastern and Southern Africa (COMESA) countries, according to an agreement that has just become effective, cancelling customs duties among the 21 member countries.
One of the main drawbacks of the Egyptian market is its small size of around 70,000 vehicles annually, including all passenger and commercial vehicles, locally assembled and imported. The existing 16 factories could produce 225,000 vehicles per year, working only one shift, which implies they are currently utilizing less than 30 percent of their production capacity. For that reason, several local car manufacturers, including Kia Motors, are renting the production capacity of already existing factories.
Another reason why some car companies avoid assembly is the General Agreement on Tariffs and Trade (GATT), which could threaten the continuance of the car industry in Egypt. According to this agreement, customs on all products will be reduced to reach a maximum of 30 percent, which means it would be cheaper to import the entire car than to assemble it locally.
Another serious issue about the GATT is that it requires cancellation of the local content requirements, which would cause grave problems for the feeding industries by giving assemblers the freedom to import all parts of the car. Egypt was granted a transitional period of five years, which ended last June, and the government is now negotiating to extend the period for another five years to help develop the feeding industries.
At the same time, according to the European Partnership, Egyptian products are going to be allowed into European markets free of customs duties. The same freedom will apply to European products entering Egypt, but only after a transitional period of around 12 years.
Car manufacturers do not appear as enthusiastic about exporting to COMESA countries as the government is, primarily due to the small size of the market. Excluding Egypt, member states have an aggregate market of only 67,000 cars per year. Except for Egypt and Sudan, all other member countries are right-hand drive, which would require an adaptation of the cars that is not justified by the size of the markets. However, certain industry sources suggests regarding COMESA as a sort of training ground, to prepare Egyptian companies to later export to larger markets like Europe.
Until the early 1980s, Egyptian consumers had a choice of only three brands of cars with different price ranges: Fiat, Peugeot and Mercedes. Buyers often had no choice of colors and had to reserve their cars and wait for several weeks. Today, by contrast, there are more than 62 different passenger cars available on the market and buyers have a wide variety of automobiles to choose from.
As more brands have entered the market, the Egyptian consumers' expectations have risen accordingly. Through a recent survey of car owners conducted by Hyundai, price, credit facility, after-sale service and reputation of the agent were found to be the most important elements consumers consider when buying a car. At Hyundai's service center in Abou Rawash, customers now wait in an air-conditioned cafeteria, watching satellite programs and having drinks, while their car is in for service. – (Albawaba-MEBG)
© 2000 Mena Report (www.menareport.com)