February 22, 2019 (Ezega.com) - South Korea’s Hyundai Motor Company is the latest vehicle manufacturer to set up camp in Ethiopia after Volkswagen. The plant, which is expected to assemble more than 10,000 vehicles annually, is the first in East Africa region.
Despite second-hand vehicles dominating the country’s market, Hyundai is optimistic locally-assembled cars will be attractive due to the costly nature of imported vehicles, where high duties are levied.
According to Haile Gebrselassie--- the former Olympic gold medal champion who’s partnered with the South Korean company--- the assembly plant will produce trucks and passenger hatchback cars.
“Some of the cars will be exported to the region. This plant is big enough (to assemble) for Kenya, Ethiopia, Somalia, Djibouti, Eritrea, and Sudan, “said Gebrselassie.
So, why are vehicle manufacturers finding the African market space lucrative?
The ever-growing population:
In Ethiopia and most of the African countries, as the size of the population grows, more people move to the cities. This migration demands a reliable means of transporting people and their goods.
The road remains the most dominant means of transport on the continent, and the demand remains focused on buses, trucks, and cars.
According to research conducted by McKinsey & Co, Africa is home to more than one billion inhabitants, with 40% residing in cities and urban areas. In the next 40 years, the population is expected to double to 2.3 billion by 2050. This growth will increase the demand for vehicles by up to 300%.
Fast growing economies:
Hyundai’s Chief Executive Won Lee said Ethiopia’s economic growth is what attracted them to the region.
Ethiopia’s economy is the fastest growing in the region, and with this growth comes a rise in the income levels. As a result, many people, government and businesses can afford and are purchasing vehicles.
The global economy is expected to grow by 2-3 percent between 2011 and 2020. During this period Africa’s economy is expected to grow by 6%, making it one of the fastest growing economies globally.
This trend is expected to usher in close to 300 million Africans into the middle class and is likely to drive huge spending on cars.
According to data from the Ethiopian Investment Commission (EIC), since 1998, 31 foreign vehicle investment projects (mainly Chinese and European Companies) and 73 local vehicle assembly ventures have been registered.
Put differently, a total of 104 companies have been licensed to assemble vehicles in the country in the past two decades alone. But only a handful of these is operational, with the majority being licensed at the pre-implementation phase.
In the last decade, several leading international automobile companies carried out market surveys to determine the viability of Ethiopia as a vehicle assembly hub. But due to the limited market size, large-scale investments by these companies never materialized.
Lack of defined local content:
A number of the vehicle assemblers in the country source some components like the tires locally. But Ethiopia lacks a well-defined local content requisite. Automotive producers have decried the directive issued by the authorities that the local content must be approximately 30% so as to qualify for the 30% incentive.
Furthermore, Ethiopia’s tax system subjects vehicles to tax based on their engine size rather than their origin or age. In this regard, it’s economical to import a second-hand vehicle with a similar engine capacity than to assemble it locally.
In this regard, it will be wise for the state to re-assess some of the taxes levied in the automotive industry, especially at a time when international companies like Hyundai are willing to set-up assembly plants in the country.
Though Ethiopia’s home to Africa’s second largest population, its automotive market is small for current and prospective producers and assemblers. However, the government is committed to supporting the sector and the development of auxiliary industries.
Availability of labor isn’t an issue to worry about, plus the government is developing infrastructure (both physical and economic) that will make the country favorable for automotive manufacturing in the long term. In this regard, Ethiopia will be able to service its domestic and regional markets with vehicles that demand competitive prices.
Vehicles aren’t affordable either due to the high tax rates, bearing in mind a huge percentage of the population are low-income earners. This restrains the huge potential of the vehicle retail market. But the solution lies in financing options.
Industry stakeholders should explore avenues of vehicle financing to encourage vehicle ownership. Simultaneously, the taxes should be revised to offer incentives for locally assembled automobiles.
By Solomon O. for Ezega News