Driving African industrialisation: Establishing a Sub-Saharan African Automotive Pact

Prof. Justin Barnes, Executive Director, Toyota Wessels Institute for Manufacturing Studies, and Associate Professor, Gordon Institute of Business Science

For the KwaZulu-Natal Export week

15th October 2019

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Status Quo of the SSA automotive industry

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34 million adults in SSA earn over $10,000, 4% of the total adult population

48 million adults in SSA earn over $8,000, 10% of the total adult population

Total vehicle demand of 1.5 million vehicles in 2017

596,260 vehicles produced in SSA in 2016, of which only 24,307 produced outside of South Africa

SSA had automotive sector trade deficit of $6.7 billion in 2017

SSA vehicle demand projections to 2035• Vehicle demand is set to reach 2.1m units by 2035 >> approx. 900,000 new (650,000 in SA) and

1.2m pre-owned

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The opportunity• Establish an automotive masterplan for Sub-Saharan Africa (SSA)

• Automotive industry plays a disproportionately smallmanufacturing role in the region (outside of South Africa), with pre-owned vehicle imports and a plethora of small, disconnected domestic markets ensuring limited scope for the creation of a sustainable, large scale automotive industry

• Key to the realisation of the plan is unlocking automotive value addition within the SSA economy, and substantially growing vehicle and associated automotive component production in the region

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The opportunity

Establish a SSA Auto Pact around 3-4 nodal points and a spread of value adding activity to regional economies that participate in the VC based on comparative and dynamic competitive advantages

Pact to be implemented within the context of the proposed AfCFTA >> need to link well designed and integrated TRIMs in the nodal production economies, and then extend these to create a more comprehensive regional auto development dynamic

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Hub and spoke regional value chain model

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SADC example of regional value chains

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• South Africa as vehicle assembly hub and other SADC countries as spokes

• SADC spoke countries provide inputs and components into vehicle assembly

• A range of regional value chain opportunities are likely to emerge once a regional market and production dynamic have been established

Comparison with India

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SSA vs Indian automotive profile

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SSA has more adults with income above $10,000 per annum and thus should have a greater demand for new vehicles

Source: World Bank, 2018

SSA vs India’s vehicle sales (units)

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India bans pre-owned vehicles >> new vehicle domestic market of over 4m units in 2017 vs SSA’s 1.5m units

Source: OICA, 2018

Automotive trade

balance

• The growth in investment and production has had a positive effect on India’s trade position, with the auto industry operating at a trade surplus of $7.1bn in 2017, with this expected to grow to $13.3bn by 2035

• In contrast, the SSA auto industry generated a trade deficit of $6.7bn in 2017 (excluding South Africa), with this potentially deteriorating to $11.2bn by 2035

11Source: World Bank, 2018

What are SSA’s binding constraints?

Lack of a common market

Lack of economies of scale

Pre-owned vehicle imports

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Scoping the size of the SSA automotive opportunity

through to 2035

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Scenario 1: Status quo

The SSA automotive demand model developed shows a relatively non-dynamic SSA automotive market to 2035, reaching 933,000 units by 2035

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2019 2021 2023 2025 2027 2029 2031 2033 2035

Kenya 12 440 13 020 13 627 14 262 14 927 15 623 16 351 17 113 17 911

Nigeria 28 550 30 005 31 534 33 141 34 830 36 605 38 471 40 432 42 494

Ghana 4 386 4 561 4 744 4 933 5 130 5 335 5 548 5 770 6 001

South Africa 566 018 576 511 587 199 598 085 609 173 620 466 631 969 643 685 655 618

Total: SSA 758 767 778 075 798 024 818 641 839 954 861 993 884 790 908 377 932 789

This would represent regional growth of around 200,000 units on 2017 levels.

Scenario 2: Adjusted vehicle marketIf pre-owned vehicle imports are eliminated, we estimate that the demand for new vehicles in SSA will reach 1.9m units by 2035 with 1.0m in Kenisa (Kenya, Nigeria, SA)

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Nigeria is in a high potential category of its own (277,000 vehicles), with Kenya second (98,000

units), followed by Tanzania, Cote d’Ivoire, Cameroon, Ghana and Ethiopia. These countries have

domestic market potential above 50,000 vehicles in 2035

Scenario 3: Market related production equivalency in SSA (per new vehicle demand of 1.9m units in 2035)

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Vehicle demand would be further bolstered as auto GVA would increase by US$6.8bn and 192,935 well paid jobs would be added through the SSA Auto Pact by 2035

Production measures 2019 2023 2027 2031 2035

Annual units of demand 1,411,363 1,512,382 1,622,623 1,743,032 1,874,658

Base production value ($m) 21,686 23,422 25,309 27,362 29,596

Total GVA - $m (40% per unit) 8,674 9,369 10,124 10,945 11,839

Direct SC employment ($44,000

GVA/employee)197,147 212,924 230,080 248,744 269,058

OEM employment (@33.33%) 65,709 70,968 76,686 82,906 89,677

OEMs’ component supplier

employment (@66.67%)131,438 141,957 153,394 165,837 179,381

Aftermarket component

employment (20% OEM supply)26,288 28,391 30,679 33,167 35,876

Total modelled employment 223,434 241,316 260,759 281,911 304,935

Total investment - $m ($10,000 per

unit of annual production)14,114 15,124 16,226 17,430 18,747

SSA AUTOMOTIVE PACT ARCHITECTURE

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Trade Related Investment Measures (TRIMs)• A TRIMs is an agreement that is based on the trade in goods which focuses

on investment measures that discriminate between imported and exported products and/or create import or export restrictions (WTO, 2019).

• Building block of the SSA Auto Pact is to incentivise OEMs and component manufacturers within the SAAM to invest in other Auto Pact economies

• In exchange participants to enjoy expanded SSA market access

• Recognition and support for specified investments in Pact economies is key

• Possible recognition of SKD kits, CBU exports and components sourced from and traded within Pact members

• Also key: Harmonising of standards, customs administration, pre-owned import restrictions, government procurement agreements, investment support and facilitation; finance support, etc.

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Estimated potential for CKD-based vehicle production in Sub-Saharan Africa

Country Vehicle production potential Regional focus (to 2035)

South Africa 1,400,000 SADC, SSA, broader exports

Nigeria 400,000 ECOWAS, SSA

Kenya 150,000 EAC, SSA

Ghana 100,000 ECOWAS, SSA

Total 2,050,000

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Heads of Agreement for an Automotive Pact

TRIM partners

Cooperation partners

Regulatory and accreditation

Customs administration

Value chain cooperation

Pact administration

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