Global auto giants battle used car dealers in African market

At the edge of Nairobi’s Ngong Forest, thousands of used cars glitter in the hot sun on a dusty field, waiting for buyers. Imported from Japan or the Middle East, they offer an affordable route to vehicle ownership in Kenya and have dominated the market for decades.

That is an obstacle big carmakers must overcome if they are to crack Africa, a market promising rapid growth as trade tensions threaten sales elsewhere. African consumers also still need conventional engines just as demand in more traditional markets is curbed by restrictions on carbon emissions.

Volkswagen, BMW, Toyota, Nissan and others have joined forces to lobby governments for steps that would reduce the imports that have made sub-Saharan Africa notoriously difficult terrain and allow local production to flourish.

“The question on Africa isn’t, ‘Is it a market of the future?’” Mike Whitfield, Nissan’s top executive for Africa, told Reuters. “It’s a case of when.”

Four years after forming the Association of African Automotive Manufacturers (AAAM) their efforts are starting to bear fruit. Carmakers that set up local assembly plants could get tax holidays of up to 10 years and duty exemptions in Nigeria, Kenya and Ghana, according to government plans seen by Reuters. Thomas Schaefer, who heads Volkswagen’s Africa business, said there is a potential market in sub-Saharan Africa for 3 to 4 million new cars, up from just 420,000 in 2017.

But that will require addressing the well-entrenched interests of second-hand car dealers, smugglers and lowering the price of new cars.

“It will largely depend on how successful the African governments are in limiting the amounts of second-hand imports and how price-competitive new vehicles can be with their tariffs,” said Craig Parker, Africa research director at Frost & Sullivan, a US-based market research firm.

Africa’s population and household incomes are rising rapidly. But its 1 billion inhabitants account for only 1 per cent of the world’s new passenger car sales, industry data shows. South Africans bought over 85 per cent of those vehicles.

The AAAM identified Kenya, Nigeria and Ghana as potential manufacturing hubs and helped draft legislation setting up standards and incentives.

Details of governments’ plans provided to Reuters demonstrate that African nations are keen to secure a spot as a beachhead for the industry.

Nigeria and Ghana are preparing to offer automakers tax holidays of up to 10 years and duty-free imports of parts and components used in local assembly. Nigeria also plans to double the levy on new, fully-built imported vehicles to 70 per cent to boost demand for locally produced cars, though the policy’s approval has been delayed.

In Kenya, automakers will pay no import or excise duties and get a 50-per cent corporate tax break.

For African nations facing massive demographic pressures, such concessions make sense if they create jobs, said Jelani Aliyu, of Nigeria’s National Automotive Design and Development Council.

“The multiplying effects are exponential,” said Aliyu, who foresees supporting industries developing around the plants.

Legislative and fiscal frameworks are being finalised, but companies are already investing millions of dollars in new plants.

VW and Nissan have set up operations in Nigeria, Kenya and Ghana or have pledged to do so. Honda and Peugeot have launched assembly plants in Nigeria, and Peugeot has done the same in Kenya. Carmakers sorely need the business. Their South African divisions, which typically direct operations elsewhere on the continent, face stagnating domestic sales and scant growth prospects in their main export market, Europe. A chaotic Brexit or US tariff hikes could further dampen sales.

Toyota South Africa’s chief executive Andrew Kirby said the strategy is: “Focus on Africa because Africa is going to grow significantly.”

A pivot to Africa could also help insulate automakers from the immediate effects of the electric vehicle revolution. The continent is ill-placed to join it at the moment due to the higher prices of EVs and unreliable power grids.

Just 66 electric cars were sold last year in South Africa - the continent’s most developed economy.

“Africa will most likely remain as the last bastion of internal combustion engines,” Parker said.

Nevertheless, industry officials say the biggest hurdle to developing the market for new cars is dumping from countries such as Japan, where strict vehicle inspections force cars out of circulation after just a few years.

They say this distorts the market by allowing dealers to buy the cars at scrap prices and export them to Africa.

Reuters