Ethiopian Business Review

Missing the Point: A Major Reason for the Auto Industry’s Market Problem is Being Ignored Featured

Government Officials and manufacturers have recently held discussions on the market challenges of metals and engineering companies particularly (car assemblies) in Ethiopia. The government blames the society for its impaired attitude about local products while the manufacturers accuse the government of taxing their products twice which contributes to their inability to compete. But the public says if people want to understand the culprit behind their rejection of new, locally assembled cars for much older, used imports one need look no further than the quality of the vehicles, access to maintenance and delivery of spare parts. In fact many people were at first proud of owning a locally made car, however they soon became jaded, writes Berihun Mekonnen, EBR’s editor-in-chief. 

In late January this year, representatives of 36 industries engaged in metals and engineering manufacturing, high government officials and other stakeholders such as potential buyers of metals and engineering products held a consultative meeting in the House of Peoples Representatives (HPR).  The objective of the meeting which was chaired by the House Speaker Abadula Gemeda was to discuss the root causes of the market problems the industries were facing and find solutions for their dire challenges. 

The industrialists blamed the government’s policy of double taxation as the major cause for the market stagnations they face. Particularly those engaged in assembling Chinese origin automobiles blame the double excise tax which is levied on imports of knocked down parts as inputs and again on finished products. (While the Ethiopian Revenue and Customs Authority regulation in calculating excise tax payable on vehicles assembled locally says, the tax paid on import of inputs that are used to produce such goods shall be deducted. Ethiopia imposes an excise tax of 30Pct for vehicles up to 1,300cc, 60Pct for 1,300-1800cc and 100Pct for 1801cc on imported vehicles.)

They say this makes them less competitive mainly against imported used cars which are taxed once. The attitude of the society towards locally manufactured products and lack of credit services to buyers were also blamed as causes for the problem. The private engineering companies furthermore criticized the government auction systems which systematically exclude them from participating in government purchases. Participants, including several senior government officials shared the complaints and talked about each one of them and promised to find solutions.  

All of them might have contributed to the market challenge the industry is facing. But an important explanation which several people who are final consumers of the products complain about locally produced products - their quality and durability, timely provisions of maintenance and access to spare parts - seems to have been missed and understated in the meeting. Even though at the conclusion quality improvement was suggested as an additional element to resolve the market challenge, it was not discussed as a top priority concern as it is for many of the buyers and consumers of the products.

Number of cars imported assembledThree years ago anyone who wanted to acquire a locally assembled brand new car had to wait from three to six months after paying the full bill. Locally assembled cars were seen as a new stimulating phenomenon and glimmer of hope by many. They were a dream come true for those who wished to own brand new cars with reasonably lower prices. Thousands of people were convinced about the advantage of locally assembled cars and many of them have bought them. 

It was following this promising scenery that additional car assembly factories were established. The number of car assembling manufacturing plants, which started a few years ago has reached about 10 and their production has grown from a mere 132 in 2007 to more than a thousand after 2011. 

In the subsequent years their performance and durability was called into question. There were a couple of incidents related to a brake problem that were reported by the media and eventually brought to court.  And now things appear to have gotten worse.  The preference of the public towards locally assembled vehicles has once again halted as people have become suspicious of their quality.  Furthermore, the failure of assembly companies to provide timely maintenance and delivery of spare parts to the vehicles they have sold has added fuel to the problem.

The amount of stockpiles in metal and engineering companies
Types of companies Amount in ETB
Private companies (5) 89 million
MetEC 13.6 billion
Agricultural Machines 10.3 billion
Construction Machines 1.8 billion
Automotive 676.5 million
Engineering Machines 519.7 million
Fabrication 174 million
Others 169.7 million
Total 13.7 billion

Girmay Abebe in his early 40s is a driver in a private company. He drives a Lifan 520 model automobile that he bought two and half years ago after it was recommended to him. He very much regrets the decision he made to persuade his bosses to buy the car after being inspired by the pride of ‘locally produced’ cars. “The vehicle wore out very quickly within two years, the engine heats easily and the sound it creates while driving is very irritating and unpleasant,” he told EBR. “Why would someone buy these vehicles knowing there are all these problems with them?” he questioned. 

Some other people who drive locally assembled cars have expressed similar complaints that the bodies of locally assembled cars are so fragile they become damaged easily from a very small bump by other objects or vehicles. In addition to this, spare parts are not available in time and the assemblers’ repeatedly failed to provide maintenance and other services properly to their customers. 

On one afternoon in mid February, EBR met Mekonnen Endale, a young man in his late twenties, who works as a sales manager for a private company, on Africa Avenue while driving a Geely Addis automobile, assembled by Mesfin Industrial Engineering (MIE). Mekonnen shares some of the same complaints.  

“First we all were happy to have a brand new car with reasonably fair prices. But the performance and durability of the vehicles are not what is promised in the company promotions,” he told EBR.  “The fuel consumption for example is much higher than what they say, its body and parts are not sturdy enough so they get damaged easily and that is not everything that is wrong.” An old Toyota vehicle which has been on the road for 15-20 years is much better in every aspect he added.  He wouldn’t advise anyone to buy these locally assembled cars although I have been pro-locally produced products previously.  “They have lots of troubles,” he concludes.

Although manufacturers accept some of these complaints they have justifications for most of the other dissatisfactions. 

 “The quality of vehicles should be seen in relation to the price and the affordability of the vehicles,” says Yared Siefu, sales manager at Lifan Motors; one of the pioneering assembling companies in Ethiopia which has sold more than 3,000 vehicles after it split from Holland Car in 2009. “We sell brand new cars at relatively cheap prices, even less than a third of the prices of other vehicles such as Toyota,” he said. 

It has been very difficult to popularize and penetrate the market for locally assembled vehicles in the first place. The Ethiopian car market for long hasn’t been led by professionals rather it has been under the full control of second hand car brokers and dealers, says Yesuf Ademenus, Automotive Business Coordinator at Mesfin Industrial Engineering, another assembling industry based in Mekele.

Since people don’t have information on the market and price of cars, these brokers have virtually become makers and breakers in the market Yesuf argues. The main challenge to the industry is the import of used cars, he said. This has distorted information buyers have about locally assembled cars. Car brokers set the agenda of resale values, buyers look for easily accessible spare parts and technicians where as they could buy a brand new car with similar prices.

 “The mindset of the general public has been inclined to second hand imported Toyota cars for a long time,” Yared agrees. “But later we have been able to penetrate the market and attract customers, the queue for buying Lifan cars shows we are making progress,” he added.

It is a fact many of the Chinese automobile industry themselves are in their infant stages which are not more than two decades old. Lifan Motors for example was established in 1992 and started production of vehicles only in 2005. The industry has improved very fast and they are reaching markets not only in least developing countries but in the emerging economies, including Eastern Europe, Russia and Brazil. 

“We are not saying quality should be compromised,” says the sales manager at Lifan Motors, “our goal is to reach perfection and with the consultation and support of the mother company we are working for that perfection.” 

Some of the car assembly companies however acknowledge the unsatisfactory provision of maintenance and supply of spare parts for the cars they have sold. They blame the inefficient customs system in the country which delays the supply of spare parts. Some companies tried to fill the gap through importing major spare parts by air.

Although several users of the local cars complain about the lack of timely maintenance and delivery of spare parts, service quality has now improved. This came following the improvement of delivery at the customs and companies opening additional service stations. 

With all these challenges, demand for locally assembled cars has declined compared with the business two-three years ago. 

Despite these fusses there are some customers who still steadfastly stand behind the locally assembled brand new cars. Tigist for example (refused to tell her father’s name), EBR found her while she was buying a Lifan 320 for a total price of 275,000 Birr, is very excited about driving a locally assembled car. Besides the pride of having your own products [though parts are imported and only assembled here] it is much better to own a brand new car than driving a second hand old car she told EBR. They [the assembly companies] also give you a guarantee for any inconveniences and I am happy to have the new car, she says. “I know a couple of friends who have locally assembled cars and they don’t have complaints about their cars” she said.

These customers give the local assemblers hope.  That is why Yesuf is resolute that the prospect of locally assembled cars is very bright and the demand for brand new locally assembled cars will increase. Yusuf is clear that lack of awareness among the general public poses a major challenge for the business. He sites for example the complaints related with fuel consumption. He feels that customers don’t understand that fuel consumption is different in congested traffic.   The 16km per liter fuel consumption doesn’t mean it does that in congested traffic like the one in Addis Ababa these days. It is the maximum potential for the car on a free road.. It is a tested technology, he says. The company gives two years or 100,000 km whichever comes first and the will solve any inconvenience with customers, he told EBR.

According to Yesuf the stiff competition assembling companies are facing is not among each other but from second hand cars. “The import of second hand cars will not help the country to bring the change it wants to achieve”.

All in all the facts show that these metals and  engineering companies are having troubles finding markets for their products and they are blaming others. Prior to the meeting an assessment  study that was triggered by repetitive complaints from the industry actors was conducted by the Ethiopian Metals Industry Development Institute (EMID), established in 2010 with the objectives of facilitating the development and technology transfer in the metals and engineering industries and enable them to become competitive. Finished products that are worth of ETB13.7billion have been stockpiled by these companies in the past couple of years as they couldn’t be sold.

Ahmed Abitew, Minister of Industry for inquiries, when EBR raised the issue on March 06/2014 said that the responsibility lies on all the parties. He particularly stressed that companies should have assessed the market before starting production though the government’s inability to provide enough support has its own contribution. He also mentioned the lack of positive attitude for locally produce goods among the general public is also a challenge to be addressed.

The solution as he noted is that government is working on identifying the demand of government programmes such as the housing projects and support the for companies to supply their products to these programmes. In addition, the government is facilitating local companies to purchase these stockpiles, the minister said. “There should be a way as it is the wealth of the nation and shouldn’t be wasted in this way,” he confirmed. There are some requests from the industries to make the competition be fair and square. The government is identifying those unfair elements to correct them.

As it stands explanations for lack of markets for companies that produce metals and engineering products are missing the point - the producers blame the government for unfair excise tax and the government blames the public for having a poor attitude for local products. Although both issues are important factors, the main reason which is product and service quality, was out of the issue. 

With the double digit economic growth continuing for nearly a decade and the emergence of broad middle class, the market for automobiles is substantially increasing by the day. 

The government seems committed to help industries in finding markets for their products. This may provide a temporary solution to the problem.  However, market oriented economies; tend not to rely on the government to find markets for their industries. The most sustainable and reliable strategy rather should be creating industries that are competitive in quality, price and services. That is how countries such as Japan and Korea have managed to establish industries that produced global brands of quality and competitive industrial products in a shorter time. As Ethiopia usually looks to the east for policy and strategy adaptations, it may have to go further east on this issue.

2nd Year . April 2014 . No.14

Berihun Mekonnen

EBR Staff Writter

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