Ignition time for Africa’s auto sector

Volkswagen production line. Net photo

Take a journey through any African city and it’s clear that the continent is permanently on the move.

Minibuses crammed with commuters weave manically through traffic, pickup trucks overflow perilously with construction workers, and decades-old Japanese taxis spew diesel fumes among roadside vendors.

Despite this sense of constant, exhilarating motion, the unfortunate reality is that African countries continue to suffer from rudimentary transport systems defined by dilapidated roads and outdated vehicle models long since abandoned in the rest of the world. Vehicle ownership remains the preserve of the few – according to Deloitte, in 2014 there were just over 42.5m registered vehicles in use in Africa, a continent of approximately 1bn people.

The continent’s motorisation rate of just 44 vehicles per 1,000 inhabitants that year, versus a global average of 182, hinted at the profound underdevelopment of the automotive market and manufacturing base in large swathes of Africa. With the exception of new vehicles built in the established hubs of North and South Africa, most of the continent makes do with imports of dubious quality from the developed world.

But that picture could soon be about to change. 

In January, German automotive giant Volkswagen already active in South Africa – announced that it will begin assembling vehicles at a new plant in Rwanda in May. The firm says that their $20m initial investment will offer new cars to compete with second-hand imports, and will enable the firm to launch a ride-sharing service in a country where Uber has yet to make its mark.

By producing the Hatchback Polo, the Passat, and possibly the Teramont, a sports utility vehicle, the firm aims to initially create up to 1,000 jobs, according to Reuters. “We are trying to break this pattern that Africa is poor; they can’t afford (new) cars,” Thomas Schaefer, chief executive of the firm’s South African operations, told a press conference.

Growing markets

VW’s move capitalises on a new economic rationale for the opening of auto manufacturing bases in Africa. As incomes rise across the continent and more citizens enter the middle class, consumers are increasingly on the lookout for safe, convenient and durable forms of transport.

With more cash in their pockets, consumers are also prepared to shell out for after-purchase servicing and vehicle upgrades. “In Africa you’ve got rising young populations, rising incomes and purchasing power, and going forward the opportunities in the automotive sector in less traditional areas are going to be big and increasing,” says Vaughn Harrison, partner at Hogan Lovells in Johannesburg. “Very soon you’ll have new technologies including driverless vehicles and electric vehicles.”

That rising consumer demand, allied to African governments’ willingness to offer generous terms to would-be manufacturers, means that companies are being doubly incentivised to enter new markets on the African continent. But while the prize on offer appears great, the risks of moving too soon with expensive capital investments remain. 

“OEMs [original equipment manufacturers] have been burnt in recent years by investing in Africa,” says Ryan Bax, senior industry analyst for mobility at Frost and Sullivan.

“The whole first mover idea has not shown much success in the new car market recently, and I feel that OEMs will take a tentative approach to new investments in sub-Saharan Africa. They will likely wait for success stories and proof of demand before investments will be made.”

Rwanda’s enabling environment

With just 12m citizens and a limited technological and manufacturing base, Rwanda might be thought of as a surprising springboard for VW’s bold push into East Africa. With its small-scale automotive assembly sector, strong infrastructure and solid growth rate, some may deem Kenya a more viable home for the expansion of an East African auto industry.

Yet the government of Rwanda is likely to have offered compelling financial incentives and pointed to its membership of the East African Community – a tariff-free trading block encompassing Kenya and other regional powers – when wooing VW.

“Rwanda has been selected by VW because of financial incentives, and the Rwandan government currently offers strong tax incentives to attract foreign direct investment,” says Harrison.

“Ordinarily, if one were going into East Africa you’d probably think of Kenya, first because of the longer establishment of that market and the size of the population. Another attraction for VW is that Rwanda has a young and tech savvy population.”

Against this uncertain backdrop, manufacturers will be keenly watching VW’s experiment in Rwanda and its strategy in the East African region. 

“This is a good sign for East Africa,” says Bax. “East Africa has been performing well over the past decade, showing consistent economic growth and sales of new vehicles. Rwanda represents an interesting proposition in East Africa with its relatively well-developed infrastructure and educated people… Ultimately, we see this VW model extending to other East African markets, depending on market readiness.”

Agencies

 

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