Grasping for Tech Transformation in the Auto Industry

In recent years, Africa has become the newest frontier for automotive companies from all over the world. Once majorly occupied by Chinese car manufacturers such as Hafei and Geely, Africa is now hosting car makers from Europe and the United States, including BMW, Volkwagen and Ford, all of whom are building production plants on the continent. EBR’s Ashenafi Endale explores the factors behind Africa’s automotive boom and what Ethiopia’s role as an auto manufacturing base.

It is been a while since Chinese car makers started to make a go of it in Africa due to their failure to break into international markets against fierce competition from existing players. Chinese automakers such as Geely, Chery, Hafei, Chana and Foton established strong presences by opening up assembly plants all across Africa, including in Ethiopia. But they are now facing renewed competition from automotive companies from the United States, Europe, Japan and South Korea, who are betting on Africa as the next growth frontier. In fact, companies like BMW, Volkswagen, Ford and Toyota are building new production hubs in Africa. Although it is a relative late comer, Ethiopia is also trying to lure these leading car makers.

On February 29, 2019, Volkswagen and the Ethiopian Investment Commission signed a Memorandum of Understanding that will pave the way for the German car maker to establish a vehicle assembly facility in Ethiopia. “Ethiopia is an attractive and competitive location for production and supporting logistics,” said Thomas Schafer, CEO of Volkswagen sub-Saharan Africa, during the signing ceremony in Addis Ababa.

Ethiopia will be the fifth African country that Volkswagen has invested in. While Volkswagen has had a vehicle manufacturing plant in South Africa since 1951, it is also involved in car assembly in Nigeria, Kenya and Rwanda. Volkswagen is the second European car assembler to enter Ethiopia, after the French car maker PSA, producer of Peugeot automobiles.

Collaborating with Mesfin Industrial Engineering, PSA opened an assembly line in Ethiopia in July, 2016 at a cost of USD1.2 million. The plant, which assembles 2008, 301 and 208 Peugeot automobile models, has the capacity to assemble 1,200 cars annually.

Asian car makers are also getting in on the race. In 2017, KIA Motors Corporation, a South Korean car manufacturer teamed up with Belayab Motors, an Ethiopian automotive company, to open an assembly plant. The facility has the capacity to put together 3,000 vehicles each year. Hyundai Motors, another South Korean car maker recently struck a deal with Marathon Motor Engineering and inaugurated an assembly plant in Addis Ababa. Toyota, which has the largest share of Ethiopia’s car market, is also conducting studies to kick off local assembly, according to sources.

The growing middle income society in Africa combined with the necessity of vehicles for mobility, as well as expanding economic sectors are the factors that attract car makers, according to Tilahun Abay, director of the Planning and Policy Directorate at the Metals Industry Development Institute (MIDI). ”Car makers produce in bulk and the car market in the developed world is already saturated. Manufacturers have to get buyers for their products.”

For Berhe Gebre, marketing manager at Mesfin Industrial Engineering, the main reason for the renewed influx of automotive companies into Ethiopia is down to the relatively cheap cost of assembling vehicles in Africa. Custom duties and tax is comparatively lower for components.”
Today, the per capita GDPs of the 10 wealthiest African countries range from USD12,000 to USD39,000 per person, according to the International Monetary Fund (IMF). Even the 34 African countries that fall into middle income category have per capita incomes ranging from USD1,000-USD7,000. Considering this, it’s easy to see why automotive firms are interested in Africa, a continent that is home to more than one billion people, with an expanding middle class. With the rise of income levels comes the desire for freedom of mobility, which ultimately leads to increasing demand for vehicles.

On top of this, the availability of vehicles for personal use is low in Africa with only 42 vehicles per 1,000 inhabitants, compared to the global average of 182, and 800 vehicles per 1,000 people in the United States, according to the International Organization for Motor Vehicle Manufacturers. Despite these facts, Africa satisfies almost all of its demand for vehicles through imports.

However, Northern African countries and South Africa have relatively strong automotive sectors. The automotive sector accounts for about seven percent of South Africa’s gross domestic product, according to the National Association of Automobile Manufacturers of South Africa. In fact, the auto sector has thrived even during periods of sluggish economic growth, due to the many firms producing component parts such exhaust, batteries, tyres, radiators, brake pads, and springs. South Africa produced 600,000 vehicles in 2017, the majority for export. This number is expected to reach 850,000 in 2020.

Outside of South Africa and northern African countries such as Egypt, Algeria and Morocco, only a few African countries including Nigeria, Ethiopia, Kenya and Angola have assembly operations. For instance, there are eight automobile assemblers already in Ethiopia, up from two just five years ago, according to information obtained from MIDI. The eight assembly companies have a companied capacity to produce 45,350 automobiles, pickups, buses, three wheeled vehicles, motor bicycles, trucks, tractors and trailers per year.

However, the automobile sector in Ethiopia is not only dependent on foreign supply sources but is also still small. Almost all component parts used for assembling vehicles and spare parts are acquired from abroad. The actual number of assembled vehicles in Ethiopia is around 8,000, which is less than 20Pct of the combined installed capacity the eight assemblers have. “It is expected to drop further this year, due to an absence of raw materials,” says Tilahun.

After the closure of Holland Car, the first Ethiopian auto assembler, a decade ago, penetrating the import-dominated market was difficult for local assemblers. But now this is no more. “There is a high demand for locally assembled Peugeots,” a salesperson at Mesfin Industrial Engineering told EBR.

Now the main problem is a scarcity of foreign currency, which prohibits assemblers from importing component parts. “There is no problem with demand now. In fact, over 2,500 orders have accumulated. But we haven’t been able to access foreign currency since last year,” explains Berhe.

Semereab Serekebirhan, director of Human Resource and Administration at the Chinese -owned Lifan Motors says shortages of hard currency have a huge impact on the company. “It has been eight months since we got foreign currency.”

The other major problem facing the auto industry in Ethiopia is lack of technological progress. Since the first type of vehicle assembly, which involves importing all the component parts and assembling them in a Complete Knocked Down (CKD) form was put in place two decades ago, no considerable technological growth has emerged until now in the country. On the other hand, African countries like Nigeria and Rwanda have managed to transform their automotive industries to the level where they assemble in a Semi Knocked Down (SKD) form by sourcing some of the component parts from the local market.

Berhe says assembling in SKD form is difficult for various reasons. “First, the original manufacturers do not allow us to produce even the simplest component because they have to meet rigorous standards,” he explains. “Initially, we used to import completely built Geely and Peugeot cars before we started assembling them. Over time, the manufacturers came to trust us. Then they gave us their assembling standards and specifications, after stringent assessments of our factory capacity, capital and manpower. They gave us permission to assemble the vehicles in CKD form.” The second reason according to Berhe is that assembling in SKD form requires specialized companies dedicated to manufacturing at least a few component parts.

Since Ethiopia has not started exploring iron for the metal industry, starting local manufacturing is difficult for car makers, explains Tilahun. “They still cannot start SKD in Africa, since manufacturing even a single component here needs a continuous raw material supply, precise automotive and design knowledge, and a sustainable market. They do not want to build a factory unless it is for bulk production. That is why giant car makers have been hesitant for a long time.”

On the other hand, Semereab argues that even the simplest technological transformation cannot be achieved unless the situation changes at the macro level. “In the automotive industry, local companies cannot go far alone. But if the government creates favorable conditions, the new car makers coming to Ethiopia can change that.”

Experts who have vast experience in industrial engineering, like Birhanu Gizaw (PhD), associate professor at Addis Ababa University, say the automotive sector in Ethiopia lacks the basic features. “Localization as well as Research and Development should be the main driver of the sector. But right now companies assemble cars after importing all the parts from abroad and without considering the local need. For example, I know an assembler that produced a car that is difficult to drive on the bumpy roads of Addis Ababa, let alone in rural Ethiopia.” Birhanu is currently teaching PhD students at the Bishoftu Automotive Industry.

Berhe, on the other hand, stresses that Ethiopia needs an automobile policy that discourages the import of old cars, if the government wants to achieve technological transformation in the sector. “There is no coordination among government institutions that are expected to bring change to the industry.”

Yigzaw Dagnew, director of the Public Relation and Communication Directorate at Federal Transport Authority, explains that a draft policy which will ban the import of used car has already been submitted to the Office of the Prime Minister, although Haji Ibsa, director of the Public Relations and Communications Directorate at the Ministry of Finance and Economic Cooperation says it is still at the research level.

8th Year • Apr.16 – May.15 2019 • No. 73