By Alec Erwin
Chairperson UBU Holdings Pty Ltd
The automotive manufacturing industry is a key component of modern manufacturing in an economy. However, it is not located in all economies and is not often associated with African economies – something that is about to change.
Automotive production does and has taken place in Africa. The industry is nearly 100 years old in South Africa. In the 1980s and 1990s, Nigeria achieved significant production and production occurs in Egypt and more recently Morocco. Smaller production activities take place in Kenya and some decades ago in Zimbabwe. However, currently significant modern assembly is largely located in South Africa.
The automotive industry is dynamic with many competitive pressures and continuous innovation in design and production methods. The history of the auto industry is a complex one and what worked as a policy in one period will not necessarily work in another. Outside of the pioneers of the industry, the development of automotive production is invariably associated with some form of industrial policy intervention by the state – state intervention changed a Japanese textile equipment manufacturer in the 1930s into the present day global giant called Toyota.
Any state intervention needs to have clarity of purpose, be consistent and sustained over many decades. An absence of policy consistency can cause the collapse of the assembly industry as has happened in Nigeria, Argentina and Australia over the last decades. However, there are other critical ingredients required to build a sustainable auto industry. These relate to energy, communications and logistics infrastructure, advanced manufacturing capacity and access to markets. Attempting auto production in a small economy with a limited market will raise costs, reduce choice and constrict the nature of assembly. The assembly industry is associated with larger, industrialising economies.
The modern automotive industry has evolved into one of the great global industries. Whilst it supplies all economies, the production is highly integrated across a limited number of economies. The high fixed capital costs for auto production mean that economies of scale are key in reducing costs and maintaining competitiveness. This means that it makes sense to reduce the variety of models that go through a plant in order to reduce tooling costs. It is more cost effective to reduce the number of models produced in one plant but increase the number of plants in different locations.
A possible future scenario in Africa is a configuration where an OEM plant in South Africa produces models for the South African, Nigerian, African and world markets thereby gaining longer production runs for those models and increasing competitiveness. Then a plant from the same OEM in Nigeria could produce other models in its range for the Nigerian, South African, African and world markets. This lowers overall costs of production, lowering prices and increasing product choice in all economies. As other significant African production sites emerged they could likewise fit into a similar configuration. Not all vehicles and their components in the African market would be sourced from African production locations; many would be sourced from other economies. However, it is possible for Africa to become balance of payments neutral and add a large sector to its economy that is very productive and creates high quality employment.
Longer production runs make it easier for component manufacturers to invest, thereby leveraging additional investment into the economy. This globally integrated system can only work with very modern and efficient communications and logistics systems that themselves depend on economies of scale to be cost effective. The scale of the supportive infrastructure required for such complex production provides an impetus toward the auto industry clustering in areas where these basic operational and infrastructure needs can be best provided.
The overall effect of these characteristics of the automotive industry is that it is dominated by large global original equipment manufacturers (OEM) that operate on many production sites spread across strategically located economies. This strategy of the OEM also makes sense for the host economies as from a macroeconomic point of view, they can achieve a degree of balance of payments neutrality exporting and importing within the automotive sector – this can be in the form of Fully Built-up Units (FBU), semi-knocked-down kits (SKD), completely-knocked-down kits (CKD) or componentry for both the OEM and the aftermarket. For large highly populated economies such as Nigeria, such a macro objective of a degree of balance of payments neutrality within the automotive sector is an important one as to import all its transportation equipment needs would have a massive balance of payments effect.
Clearly in such large populous economies such as the US, EU, China, India, Russia, Brazil and Nigeria, considerable economies of scale can be achieved within the domestic market. However, attempts to be self-sufficient will either reduce the product range or raise the costs of production and price levels for the more varied range. In practice therefore, the global industry has evolved into a highly integrated industry even in regard to the very large and populous economies.
African economies, outside of South Africa and more recently Morocco, have suffered from a lack of the supportive infrastructure for the industry and a lack of policy consistency. Consistent policy must be developed but the weaknesses of infrastructure means that the industry has to be developed in stages – as has been the case in other developing economies. This is usually done by developing from the assembly of imported SKD and then progressing to CKD assembly where componentry is sourced on a growing scale from local suppliers. SKD assembly is a stepping-stone to a more sustainable industry and policy has to be well designed to attract investments that will move toward CKD production and beyond.
Badly designed policy can have two perverse effects. If it allows long-term production of SKD, it will have a cost raising effect on vehicles, reduce product variety and minimise the important componentry and employment multiplier effects. This in turn will increase the attractiveness of cheaper second hand vehicles that are spewed out of the developed economies making it even more difficult to attract CKD investment.
On the other hand, attempts to move too quickly from SKD to CKD without the necessary preparation will only serve to delay and divert investment as CKD is not feasible in the early stages as it requires major investments in plants and supportive infrastructure. The key is to define a realistic programme that will incentivise investment that moves from SKD to CKD and ultimately to what are referred to as Integrated Manufacturing Facilities. The latter are fully integrated into the global supply chains and model distribution patterns. With persistence, wisdom and good administration, an economy like Nigeria will be able to move down this path significantly faster than South Africa was able to as a result of the larger market developing in Nigeria.
This progression in the development of automotive production has historically encouraged transnational partnerships. Examples are programmes such as the North American Auto Pact that linked the USA and Canada in 1965; the role that Japan’s industry played in South East Asia and the agreements between Mexico and Brazil, being some.
In the last decade, Morocco has shown how intelligent government policy and wisely using its close proximity to the European market can lead to an assembly industry. There have also been three recent developments in sub-Saharan Africa, which are starting to change the scenario for the African automotive industry.
The first is two recent reforms in the decades-old South African programme. The first – the Motor Industry Development Plan – moved the industry toward longer production runs and export competitiveness in FBU and componentry. The exports of the automotive sector grew significantly. The recent APDP further increased emphasis on production runs and component investment. The strategic intention is to move the industry toward more sustainable Integrated Manufacturing Facilities and greater integration into the global supply chains of FBU and componentry.
The second is the recent adoption by Nigeria of the Nigerian Automotive Industry Development Plan (NAIDP) as part of a wider Industrial Revolution Plan. The population and potential size of the Nigerian economy make it a very attractive market in its own right but its membership of ECOWAS with 340 million people makes it a strategic economy for the global automotive industry. The NAIDP is already attracting SKD investment and OEM such as Nissan, Hyundai and Volkswagen have joined Peugeot’s ongoing operations in reviving automotive assembly. If wisely managed and sustained, the NAIDP holds out great hope for Nigeria’s industrialisation.
The third is that economic growth and the growing middle class in Africa is causing other governments to turn their attention to this key sector of any economy. As this happens, there are key lessons to bear in mind. These are:
- The automotive industry is capital intensive and requires long term programmes to make it viable and sustainable.
- Economies of scale are central to the operation of the industry. It is a highly integrated industry and is easier to develop in larger rather than small economies.
- At some point in their development, large and populous economies have little choice but to introduce automotive production to alleviate balance of payments pressures.
- The challenges of developing such a complex industry mean that in practice it is always going to be an intelligent partnership between governments, national investors and the global OEM.
- To obtain the full economic benefits of this industry, systematic and sustained programmes have to be introduced to encourage industry supportive procurement systems in government, component manufacture, high quality aftermarket services and dealerships and affordable vehicle finance – all of these being necessary to grow the market.
- Operating and safety standards are essential. African economies need to develop these but they also need to develop a coherent policy to stop the flow of second hand vehicles out of the developed economies. This dumping into Africa undermines our standards, safety and cost effectiveness. It restricts Africa’s industrialisation and shifts environmental clean up costs from the wealthy to developing economies. Producing affordable vehicles and allowing a more reliable second hand market to evolve from the new is a far sounder policy.
- Finally and importantly, the development of the industry depends on cost effective, reliable and efficient logistics, communications and electricity infrastructure and operating systems.
This is complex industrial policy requiring a battery of policy, regulatory and institutional reforms along with efficient customs administration. It would be economically unsound to try to develop the industry in each African economy. The experience of the European Union suggests that increased economic integration will lead to the concentration of vehicle assembly in a few economies. However, trade between such producer countries will increase dramatically in the auto sector and its supply chain. In addition, there are major opportunities for the smaller adjacent economies to attract investment in componentry to supply new assembly activity.
Experience has shown that the total supply chain for the automotive industry can be located across many economies. This is even more the case in economic blocs such as the EU where barriers to trade are reduced and logistics systems improved. As Africa starts in earnest a similar process of reducing trade barriers and improving logistics, the opportunities for smaller economies in blocks such as ECOWAS, SADC and the EAC to participate in the automotive industry supply chain, will grow. To the extent that the African industry is configured strategically, the greater will be the opportunities for all economies in Africa. Such configuration will start step-by-step and economy-by-economy, but Nigeria and South Africa – the two largest economies – provide a good start.
Success will depend on intelligently designed partnerships between and among governments, national investors and the global OEM – both assembly and componentry. Such a vision is already informing important initiatives to facilitate such an African partnership. A degree of coordination is needed and there needs to be coherence of approach. However, the process has to be pragmatic and accept that it is the competitive economics of this vast, technologically advanced industry and its leading OEM that shape the reality for sustained and intelligent state interventions through industrial policy partnerships.
By Alec Erwin
Chairperson UBU Holdings Pty Ltd
This article was first published in the Africa Policy Review