Nigeria’s auto industry is in a fix as a policy meant to protect the sub-sector is hurting both local vehicle assemblers and the Nigerian middle-class, writes ODINAKA ANUDU
Samuel Ogundele jumps from one commercial bus to another in the sprawling city of Lagos. Two weeks ago, his three year-old car had broken down along Awolowo Way while heading home from his Ikeja office.
He is the managing director of Skyworld Industries, a company in food packaging industry, but he cannot afford a new car. He had bought a used car, known as ‘Tokunbo’, three years ago for N900, 000, but this was already an 11-year-old vehicle. All together, the car was about 14 years old when it broke down.
His medium-scale company cannot afford to buy him a new car, which now costs around N15 million.
Ogundele now uses Uber taxis for official assignments or when there is an urgent appointment to meet.
“I earn around N300, 000. So, I will need to work for four to five years to get a new car. That is if I hold onto all my salaries for the years without spending anything. You and I know it is impossible,” he tells me.
He is certainly not the only one in this. Chief executive officers of top deposit money banks in Nigeria earn around N15 million to N20 million annually, so may not be able to get new vehicles, except if they refuse to spend anything from their salaries.
Not so before
Back in 2012, Nigerians could afford to buy new cars at N4 million each. Six years after, prices of new cars have shot up to N15 million per vehicle.
Experts point fingers at the National Automotive Industry Development Plan (NAIDP), which appears to be pricing out the middle-class who makes up a large percentage of buyers.
In 2013, the then government of Goodluck Jonathan introduced the NAIDP with a view to ensuring the survival and growth of the Nigerian automotive industry using local, human and material resources. It was a well thought-out policy aimed at enhancing the industry’s contribution to the GDP, especially in the areas of transportation of people and goods. It was approved in October 2013, with a focus on bringing back vehicle assembly operations and developing local content.
Then the duty & the levy
The policy makes provision for commercial vehicles to attract 35 percent duty without levy. Cars are to attract 35 percent levy charged on the fully built units (FBU), in addition to the 35 percent import duty. Completely knocked down parts (CKD), semi knocked down parts I (SKDI) and semi knocked down parts II(SKDII) for use by local assembly plants attract zero percent, 5 percent, and 10 percent respectively.
Assembly plants importing FBU for cars pay 35 percent duty without levy, whereas commercial vehicles attract 20 percent duty without levy, in numbers equal to twice their imported CKD/SKD kits.
To increase local assembly of vehicles, all machinery and equipment for tyre production are duty and Value Added Tax (VAT) free. Also, all machinery and equipment imported for the purpose of vehicle assembly attract zero percent import duty and are VAT free. Furthermore, pioneer status were granted to all tyre plants. There was also harmonised 20 percent duty on car, lorry and bus tyres.
The policy initially yielded fruits. This is because local manufacturers in any country often envisage growth any time certain restrictions are placed on importation. Fourteen existing assembly plants and body builders, which were on the verge of closure, had a new lease of life and obtained or renewed technical partnership agreements with global original equipment manufacturers (OEMs) after the policy was approved. Some of them were VON, PAN, Innoson, Anammco and Leyland-Busan. These companies kick-started assembly in 2014. Sixteen other companies signed commitments with technical partners to set up assembly operations in 2014, said Aminu Jalal, the then director-general of the National Automotive Design and Development Council (NADDC).
Companies such as Nissan, VW, Hyundai, Kia, Honda, Shacman, Sino, FAW, Ashok-Leyland and FAW started assembling buses in Nigeria.
Also, new companies, including Century Auto (Toyota), TATA, Coscharis, Auto (FORD, Joylong, Dongfeng), Globe Motors (Higer), Leventis(FOTON-Diamler), Kewalram Chanrai(GM, Mitsubishi) and Tilad were ssued certificates to assemble vehicles.
Where are the cheap cars?
The ultimate aim of the immediate past government was not only to develop a local auto industry but also to provide cars at cheaper rates.
Five years down the line, Nigerians do not see cars anywhere. Even they see these cars, they are expensive.
A sample list of 1.6-litre engine cars used by banks and other corporate buyers have had their prices double between 2014 and 2017.
In 2014, a brand new Kia Cerato 1.6 litre automatic transmission saloon car cost N3.96 million, but this went for N9.54 million in 2017, according to BusinessDay findings. A Picanto one-litre engine capacity car went for N2.25 million three years ago, but was sold for N4.95 million in 2017.
Similarly, Toyota Corolla 1.6 litre GLI automatic transmission fabric was sold for N4.45 million in 2014, but it surged to N18.9 million last year. During the same period, a Mescedes-Benz C200 luxury Sedan, which was sold at a dealership price tag of N10.5 million, cost N25 million in 2017, while a G63AMG model sold for N50 million currently wears a price tag of N78 million today.
No components industry anywhere
The components industry, which was supposed to support the local vehicle assemblers, is still not in existence. Muda Yusuf, director-general of Lagos Chamber of Commerce and Industry (LCCI), wonders in an interview how an auto industry could be developed without a functional components section. Currently, all the components makers have gone out of business in Nigeria.
In 2015, the only surviving brake pads and lining maker, Star Auto Industries, collapsed, as it was unable to compete with cheap Chinese products and could not pay back a loan from the Bank of Industry.
“It is difficult to compete with Asia, with substandard, cheap brake pads. I am not happy that import duty on brake pads fell from 25 percent to 10 percent. This is the situation since 2004 and government has done nothing about it,” Chidi Ukachukwu , CEO of Star Auto Industries, told BusinessDay before closure.
Michelin and Dunlop, local tyre producers, went under 10 to 11 years ago. Dunlop is now DN Tryes and imports tyres from all parts of the world into Nigeria.
“Now ask yourself, how many made-in-Nigeria vehicles have you seen, compared with the demand?” Muda Yusuf, director-general of Lagos Chamber of Commerce and Industry (LCCI), asks.
High production cost
Local car makers are facing what they describe as ‘ extremely high cost of production’ caused by lack of regular public power, multiple taxation and poor access to finance.
Frank Udemba Jacobs, immediate past president of the Manufacturers Association of Nigeria (MAN), says 40 percent of manufacturers’ expenditure goes to alternative energy sources.
Power sector expenditure in the manufacturing sector has been on the rise since 2014/15. Manufacturers spent N51.35 billion on alternative energy sources in the second quarter (H2) of 2017; N66.03 billion in the first half (H1) of 2017; N62.96 billion in H1 of 2016, and N69.99 billion in H2 of 2016, according to MAN.
Average daily electricity supply in H1 of 2017 declined to five hours, from seven hours supplied in the corresponding period of 2016 and eight hours in the H2 of 2016. There was, however, a nine-hour average power supply in the second half of 2017.
“It is no more news that manufacturers in Nigeria currently self-generate as much as 13,000MW through alternative sources of energy in order to stay afloat. In fact, members of MAN expended over N129billion on alternative energy generation in 2016 and the cost of alternative electricity generation alone constitutes about 40 percent of production cost. With such high costs, made-in-Nigeria products will hardly be competitive,” Jacobs says.
In fact, manufacturers have given up on power distribution companies (DisCos), prompting them to form a corporation known as MAN Power Development Company to cater to their energy needs.
The industry also suffers lack of access to finance. Results of survey conducted by MAN shows that the average interest rate banks charged manufacturers in H2 of 2017 was 23.05 percent as against 22.65 percent in H1 of 2017 and 21.4 percent in H1 of 2016.
Also, manufacturers in various states pay 54 types of taxes and levies as against 38 in 2013-14.
“These taxes need to be amalgamated into one or a few, since the whole tax cycle is a multiple chain of taxes on the same income stream,” Vivian Chigozie-Nmonwu, tax expert and lead partner of Vi-M Professional Solution, says.
Then importation of rickety vehicles
Due to the 35 percent levy and 35 percent duty on imported vehicles, amounting to a total of 70 percent, Nigerians have resorted to the importation of what is known as ‘accidented vehicles’.
Importers of damaged or accidented vehicles officially enjoy a rebate of 30 percent. What this has done is to encourage the importation of rickety vehicles, which make up 70 percent of imported cars today, analysts say.
The age of most imported used cars in Nigeria is 15 years, whereas that of Algeria, Angola, Chad, Mauritius and Seychelles is three, according to a research done by PwC, presented by Andrew Nevin, partner and chief economist at PwC Nigeria, in Lagos.
“Imported used car segment (Tokunbo) dominates the industry, accounting for 74 percent of all vehicle imports, making Nigeria the largest in the world. Ten percent of imported cars are less than three years old, while 63 percent are over 11 years,” Nevin says. Smuggling is also on the rise.
“People now divert vehicles to Cotonou. What it means is that government is encouraging smuggling, thereby losing revenue,” Yusuf says.
No market for local manufacturers
Market for new cars in the country is just 6,999 as against 555,716 in South Africa; 181,001 in Egypt; 168,913 in Morocco, and 94,408 in Algeria.
“There is no market for even the investors,” Thomas Pelletier Thomas Pelletier, managing director, CFAO Nigeria, states.
“The fact is that cars are too expensive and people cannot afford to buy. So, how will local assemblers sell? We have seen a market drop of 75 percent in the last three years. Increase in duties has increased smuggling,” Pelletier discloses.
Era of ‘no money’
The minimum wage in Nigeria, Africa’s biggest economy and most populous country, is N18, 000 ($50), while South Africa’s is R3,500 ($255). Recession entered Nigeria in 2016, hurting incomes of households and firms across the country. Inflation, which determines the value of money, is 11.28 percent in Nigeria today. On the other hand, South Africa’s is 5.1 percent, while Kenya’s inflation is 5.7 percent. This means that it is cheaper to buy goods in South Africa and Kenya than you can in Nigeria.
Nigeria, with a population of 198 million, has overtaken India, populated by 1.32 billion people, as world’s poverty capital, according to a 2018 report by Brooking Institute. Nigeria has 87 million poor people today, the highest in the world.
“I am not interested in cars now. My focus is on basic needs such as food, clothing and shelter. I have four children and my priority is also to send them to school. It is only the rich that buy cars now,” a 54-year-old Kareem Obafemi, a civil servant in Kaduna, tells BusinessDay.
A policy in tatters
The auto policy encourages importation of damaged cars, which now litter Nigerian roads, say observers. The cars are competing with locally assembled cars, making it difficult for the assemblers to sell. Local vehicle assemblers themselves do not have cheap or affordable vehicle five years after the policy, which now places all the players in a serious dilemma, analysts say.
The National Bureau of Statistics says Nigerians imported 105,189 units of vehicles in 2016 through the ports and raised the number to 181,404 (72.46 percent increase) in 2017. The capacity of 54 licensed asemblers is 400,000, the same as Morocco with only two assembly plants.
“Imported used car segment dominates the industry, accounting for 74 percent of all vehicle imports, making Nigeria the largest in the world. Ten percent of imported cars are less than three years old, while 63 percent are over 11 years,” Nevin, earlier cited, says.
“Even with Automotive Policy, we have not slowed down on the number of cars we import. In some areas, they will be described as scraps and allowed. In some areas, they will be allowed into the borders of neighbouring countries. For those that come through the ports, you have to ask yourself a question: If we want to develop a market for 54 companies that have got licenses with 410,000 capacity plants and we import a huge number of used vehicles, how are they going to support vehicles being assembled, since the one assembled locally will be more expensive? Naira is weak, interest rates are high and the banks have taken collateral and they want their money. I need to recoup my investments as quickly as possible. The cars are already expensive ab nitio and I am now competing with cars that are one-thirds to one-fifths less the price?” Bambo Adebowale, chairman, Auto and Allied Sector group of LCCI, asks.
He wonders why Nigeria is promoting the manufacture and assembly of combustion engine vehicles when the original owners of these vehicles have announced plans to phase them out.
Which way Nigeria auto industry?
Adebowale suggests that there is a need to review the policy. He maintains that car dealers and auto assemblers must come together to review the policy in order to have a win-win situation.
On his part, Pelletier suggests that Nigeria needs an auto financing scheme for both the buyers and the assemblers.
He stresses the need to incentivise local assemblers to enable them come up with cheap vehicles.
“Without structural reforms, poor infrastructure will impede Nigeria’s ability to leapfrog and adopt emerging global trends. Consequently, Nigeria risks being a dumping ground,” PwC recent report says.
Tags: Auto industry