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Thursday, October 24, 2013 08.55 AM / FDC

 

The recent announcement of a “new” automotive policy by the Minister of Trade and Investments, Dr. Olusegun Aganga, has been met with a lot of excitement. The stated objectives of the new policy are to encourage local manufacturing of vehicles and to enforce a gradual phasing out of used cars, which in turn will help achieve a more favorable balance of trade (currently at N2.14trn in Q2’13) and a reduction in the import bill (currently at N1.6trn in Q2’13). The new policy will run as a 10-year plan and will be reviewed every five years. An integral part of the policy is the establishment of automotive clusters in three regions, which will enhance productivity and cost efficiencies. According to the Minister, the policy is expected to create at least 700,000 jobs as well as make brand new cars more affordable for Nigerians in the long run.

 

Even though the new automotive policy is short on details, most analysts and the public believe the overall aim of the new policy is a welcome development in the ongoing diversification of the Nigerian economy.

 

This paper intends to put the proposed automotive policy of Nigeria into perspective, highlight important lessons from our past auto policy attempts, propose an implementation framework drawing from the experiences of countries that have successfully transformed from net-importers to manufacturers of automobiles, and paint a realistic expectation on the outcomes of the policy.

 

Was there ever an auto policy for Nigeria?

Given the mention of a “new” automotive policy, a concerned Nigerian could ask “What was the previous automotive policy?” In 1990, the Federal Government of Nigeria resuscitated the technical committee on national automotive industry (now National Automotive Council - ‘NAC’) with the sole purpose of reviving and developing the domestic automotive industry. The NAC in collaboration with The Nigerian Automobile Manufacturer’s Association (NAMA) and other relevant stakeholders were involved in the formulation of the policy. The resulting policy was approved by the Ernest Shonekan-led transitional council in 1993.

 

The objective of the policy which was to be promoted by NAC was to ensure the development, survival and growth of the Nigerian automotive industry using domestic human and material resources. Like most Nigerian policy implementations, NAC’s intention to revive the automotive industry was not achieved due to the lack of a suitable framework to support the tenets of the policy.

 

Hindsight Analysis of the Nigerian Automotive Industry

Domestic automotive production began in the late 1970’s through partnerships between the Nigerian government and foreign companies. Six assembly plants (two for cars and four for trucks) were established between 1970 and 1980. These were: Peugeot Automobile Nigeria Limited (PAN) in Kaduna; Volkswagen of Nigeria Limited (VWON) in Lagos; Anambra Motor Manufacturing Limited (ANAMMCO) in Emene-Enugu; Steyr Nigeria Limited (Bauchi); National Truck Manufacturers (NTM) in Kano for Fiat; and Leyland Nigeria Limited in Ibadan. The timeframe of establishment of the assembly plants coincided with a dynamic period in the global automobile sector. The rapid rise and dominance of the American and European automobile industry after World War 2 had become tenuous with the intrusion of smaller car manufacturers of Japanese and Korean origins, and it was against this backdrop that the primordial Nigerian automotive policy was introduced.

 

The sector was a vital component of the national economy, contributing to overall economic development through capacity building (made possible by transfer of technology) and job creation. Total production capacity was about 108,000 cars, 56,000 commercial vehicles and 10,000 tractors annually. The strategy was to encourage backward integration with the steel mills.

 

However, the automotive industry underwent a transformation in the early 1980s with the increasing acceptance of smaller and technologically advanced cars worldwide. This rendered Nigeria’s assembly plants, which had been designed mostly to fit the production of post-war era vehicles, uncompetitive. Modern automobiles are characterized by standardization, fuel injection engines, and the use of computer aided designs. To measure up to the new global standard of production, the Nigerian government and its foreign partners would have had to put up major capital investments to reconfigure their plants. Also, the new era coincided with the infancy of the Nigeria automotive industry which is typically the time of investment recovery.

 

The strategic decision to commit an incremental investment of a sizable nature while the industry was still at a loss, proved difficult for the joint ventures especially the foreign companies. This caused the decay of the once promising Nigerian auto industry.

 

Modern cars produced internationally were more popular with Nigerians than the “post-war” cars produced nationally. The industry’s problems were exacerbated by lack of economies of scale, the disappearance of the middle-class and weak import policies and enforcement. The subsequent devaluation of the naira and increasing inflation resulted in high production costs at Nigeria’s inefficient plants. The result is the import dependent automotive industry we know today: an industry with an annual installed capacity of about 100,000 cars that is 5% utilized. To meet the demand gap, the average Nigerian is forced to be import-dependent with 80% of the automotive imports being used cars (‘tokunbo’).

 

Necessary Steps for an Effective Auto Policy

Countries are endowed with different capabilities in terms of raw materials, technology, manpower, and capital. Nigeria’s automotive industry is currently lacking in terms of technology and expertise. However with promising economic indicators such as a huge population and relatively high GDP growth, the Nigerian automotive industry appears to be a viable opportunity for auto companies looking to penetrate emerging markets. The growing middle class, due to consequent rising income levels indicates that Nigeria is an attractive investment destination. Nigeria is the 8th largest country in the world by population, with a 5-year annual GDP growth rate of about 7%, and an income per capita of $1,616 according to the EIU.

 

Import substitution industrialization policies have realized some level of success in countries such as Thailand, Brazil, India and South Africa. In Nigeria, just like in any other country, policies should be implemented within the context of the unique characteristics of the market environment. We now attempt to answer the question posed earlier: was there ever an automotive policy for Nigeria? We will answer this by presenting a brief overview of the experience in Thailand.

 

The Thai government, as part of its Industrial Investment Promotion Act of 1960, attempted to spur activities in the automotive Industry. In 1961 Thailand produced 525 vehicles, but it is now the ninth largest producer of vehicles with a production of 2.49 million in 2012. To achieve this growth, Thailand essentially underwent a three phase approach: Creating Production Capacity, Rationalization and Localization, Full Liberalization and Export Promotion.

 

Iron-clad incentive agreements are essential both for the development of local capacity and for the protection of investors due to the large capital requirements involved. Creating capacity in the Thai auto industry was implemented through production incentive packages with a lesser focus on protectionist policies. Incentives included a 50% reduction on import duty for Completely Knocked Down (CKD) kits for 5 years, corporate income tax exemption for 5 years, permission to remit foreign exchange out of the country, and permission to bring in foreign experts and technicians.

 

Even though higher import duties were imposed on Completely Built Units (CBU), a net benefit was recorded by the Thai economy. This spurred the formation of Joint Ventures between the multinationals and local companies to operate CKD assembly plants. Vehicles produced in Thailand increased by 1284% from 525 in 1961 to 7,267 vehicles in 1964. The target of the capacity creation was to effectively transfer the technology and expertise into the local production system which yielded significant dividends by creating jobs amongst many other benefits.

 

Moving forward for Nigeria

FDC is proposing an incentive package similar to that of the Thai government with an emphasis on firm long-term agreements and incentives that will shorten the decision timeline for companies to invest. Also, learning from our past failure, an emphasis on developing dynamic and innovative assembly plants is the best way to ensure the industry will be sustainable. This ensures that Nigerians can purchase modern cars, which will equally eliminate the desire for foreign cars since approximately 55% of the purchase price for tokunbo vehicles are related to shipping and customs duties related costs.

 

A sound local content plan is also a critical tool needed to revive the automobile industry in Nigeria. At the time of the automotive reforms in Thailand, a local content policy was introduced and enforced to help its nationals participate actively in the production process. These measures were aimed at deepening the localization of the industry by inducing investment in the parts and components sub-sector. Japanese firms started investing in Thailand along with local entrepreneurs. In the same year, 180 firms were set up to produce parts. A well-designed local content policy will help in the process of technology transfer, an area of severe deficiency in Nigeria. The focus was on developing internal capabilities to wholly integrate the entire value chain of the production process into the Thai economy.

 

Winning the battle against the Grey Market

All of the above plans are laudable; however, enforcement of the incentives and the local content plan proposed above needs to be strict. Lapses in the structure of the automobile market could serve as a deterrent to the realization of the policy objectives. As we have highlighted in previous reports, there is a current grey market in the automotive industry which operates mainly on its ability to evade the appropriate tax levy on different categories of cars and especially brand new cars. We estimate the loss of about N90 billion to tax evasion in the last four years, which could easily fund the construction of a 1000MW power station to bridge the power supply gap.

 

Apart from causing a significant loss of revenue to the government, grey market activities also negatively impact the operations of the incumbent authorized automobile dealers. Logically, these are the parties that will be in the best position to partner with foreign firms to kick-start the reforms aimed at domestic production of automobiles. However, the lack of an efficient structure to checkmate the grey market may serve as a discouraging factor. The elimination of loopholes that facilitate grey market activities would serve as an appealing incentive package for potential investors.

 

Don’t Expect an Overnight Revival

Another important lesson is the fact that these processes are gradual, especially for foreign investors. The Thai auto industry experienced its complete transformation over 30 years. The first phase of capacity creation lasted about 10 years, while the development of integrated local capabilities lasted another 20 years. This suggests that the policy initiatives (especially the implementation of an appropriate import tariff regime) have to be gradual and sequential with a logical and people-oriented framework. A significant lead time is required from initiation to execution of the policy.

 

An immediate execution of such policies will only result in unwanted inflationary pressures. It will also create a huge gap in the market as automobile prices could increase by as much as 100%; well beyond the purchasing power of the average buyer. Furthermore, this will compound the problem of revenue loss to the government.

 

In the short-term, FDC suggests that the policy needs to focus on creating a conducive business environment for foreign partners. This is the only means to expedite strategic decisions by those countries to bring along their technology and expertise to our shores. Unfortunately, the recent announcements are made with suggestions of protectionist initiatives rather than an emphasis on production incentives. The government needs to swiftly lure foreign partners to begin immediate investments to jump start the industry’s revival. This can be effectively achieved in the short-term with policies that contribute to their profitability. Furthermore, we cannot overemphasize the need for the successful and effective reforms in the power sector along with the earlier proposed incentive packages. Possible provisions for dedicated power generation companies should be made for the proposed clusters.

 

In the medium-term, the policy should switch its focus to improving the local content in the industry. This will require detailed planning for backward integration as well as the transfer of technology. A structured collaboration program with the Ministries of Science & Technology, Mines and Steel Development, and Education is necessary to develop a sustainable industry that will stand the test of time.

  

What is the Nigeria Auto Utopia?

The long-term goal for the policy should be the attainment of a net exporter status especially to the West African region, and more generally, Sub-Saharan Africa. However, as stated earlier it will be achieved in the long-term and not immediately. Thailand in its own case achieved a net exporter status after 30 years, supplying Southeast Asia, United Kingdom, and New Zealand amongst others. Our government needs to have an emphasis on sustainability with a target of developing a fully integrated value chain. This is only possible if the government can attract foreign partners, transfer progressive technology and skills, and locally develop the required capabilities in a sustainable manner.

 

In summary, we hereby make the following recommendations:

1.    Implementation of a staggered and sequential import tariff regime. Increase in import duties should not be immediate but rather gradual over time. This will prevent inflationary pressures.

2.    Enforcement of customs’ rules and regulations to discourage and eliminate grey market activities.

3.    Establishment of realistic timelines for accomplishing the new automotive policy.

4.    Efforts directed at reviving the steel and iron sector should be revamped to encourage backward integration in the automotive sector.

5.    Speedy conclusion of ongoing power reforms.

6.    Iron clad agreements to facilitate investor protection, domestic capacity development and transfer of technology. The recent clashes in South Africa between global automobile companies and organized labor should serve as a warning for our policy makers.

7.    Provision of tax and other incentives to enhance the attractiveness of investment opportunities.

 

With these measures in place, we believe Nigeria will indeed stand a chance to becoming a major player in Africa’s automotive market. 

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