New study makes case for regional automotive industry

New study makes case for regional automotive industry
EIGHTY-FIVE per cent of the vehicles in the region are imported or bought used and only about 15 per cent brand new, with an average fleet age ranging from 15 to 20 years. This presents a potential for a regional motor industry, a new study indicates.

The study, conducted by BDO East Africa Advisory Services, a firm contracted by the EAC and the Japan International Cooperation Agency (JICA), indicates that in order to ensure development of automotive industry in the region, a realistic development path is needed.

The study named several drawbacks the region endures as a result of using ‘second-hand’ cars. For instance, the study says, such vehicles are prone to accidents, and emission of hazardous gasses while the industry is currently creating few jobs.

“EAC should have a well-designed systematic step-by-step strategy towards the promotion of automotive industry in accordance with international agreement such as WTO. Since automotive industry has a complex and multilayered structure, the strategy to promote it needs to be systematic,” reads part of the study.

“The systematic approach should have the sequence from premise to result and easy to difficult. The EAC’s approach should be to focus on development of motorcycles, followed by commercial vehicles and then passenger vehicles.”

Estimates indicate that there were about 2.2 million vehicles in EAC in 2014 with about 1.87 million originally entering as used vehicles and only about 330,000 as new.

The study, which lists a number of policy recommendations, is helping the East African Business Council (EABC) make a stronger case for the region to develop its own automotive industry.

According to EABC chief executive Lilian Awinja, supportive policies for an indigenous automotive industry can offer the region more jobs, cheap spare parts, increase in government revenue, road safety, technology transfer, and effective utilisation of local raw materials.

“Preferential treatment to local motor vehicle assembling plants can spur growth, promote local content and serve as a precursor to East Africa’s industrialisation,” Awinja said, noting that there is need for supportive policies such as tax incentives to make local motor vehicle assembly plants competitive.

The automotive industry has potential to contribute to more than 10 per cent of employment in an economy as well as tax revenue, it is noted.

Faraz Ahmed, managing director of Global Vehicles Rwanda, one of the used car dealerships in Kigali, told The New Times that promotion of automotive industries in the region is good for the regional economy in the long run.

Ahmed said: “It may affect us but for the people of Rwanda and the EAC, it can be good as jobs will be created and more opportunities availed to the local market.

“We could also find opportunities in the new business when it starts and adjust our old way of business. This is a long-term plan and we can also fit in.”

Among others, the EABC urges for full implementation of the 25 per cent duty as per the current EAC Common External Tariff (CET); tariff split between new and used vehicles in harmonised standard code; conclusion and implementation of harmonised regional motor vehicle assembly regulations; harmonisation of age limit for used vehicles and implementation of the JICA report on modalities for promotion of automotive industries in the region.

EAC is advised to, among others, harmonise vehicle age limit for all imports to the partner states, harmonise pre-shipment regional inspection standards for automobiles, conduct regular audits and sharing of information on pre-shipment inspection to enhance credibility and performance of approved inspection companies, and enforce road worthiness inspections.

The EAC motor vehicle sales are projected to grow to over 600,000 units by 2032.

Logical approach

Richard Ndahiro, a Rwandan economist, said a regional approach to growing the automotive sector is the best way to take advantage of economies of scale. The affordability aspect, he said, is important.

“Looking at the target market for the proposed motorcycles and public transport vehicles in the EAC, it is mainly people in the informal business sector and SMEs; segments that highly struggle to receive financing from financial institutions, mainly on grounds of volatile and untraceable income streams,” Ndahiro said.

“A conducive financing scheme to unlock market potential within the larger informal customer segment of the region is necessary.”

Andrew Mold, officer-in-charge of sub-regional office of the United Nations Economic Commission for Africa (ECA), said the car industry is an extremely important one from the point of view of catalyzing the industrialisation of the region, simply because it is an industry with intense linkages across the economy.

“It is also a pretty demanding industry in terms of quality standards, and creating a product that will be both economical and attractive to consumers. Global competition in the car industry is intense,” he said.

“The good news is that average incomes have been growing quite quickly in EAC over the last 10 to 15 years, making the region a more attractive proposition for establishing an EAC-wide industry for motorcycles, motor vehicles and lorries.”