The announcement had the effect of a bombshell. Earlier this month Mercedes Benz revealed it would exit the car assembly scene in Egypt. The move was so stunning that Mercedes had to issue an explanation that it was not exiting the Egyptian market in full but was closing its passenger car assembly line, and that such cars would be exclusively imported into Egypt. The reason Mercedes gave was that the implementation of reduced tariffs on European-made passenger cars, as stipulated by a free trade agreement between Egypt and the European Union, reduces the price of these cars on the market and consequently renders their local assembly economically non-feasible. In simpler words, this means that it would cost less to import a European car into Egypt than to produce it locally.
Duty-free by 2019
Despite public shock, industrialists and traders had known all along that the Mercedes move was bound to come, and that other local assemblers of European cars would follow suite. But this is not the brunt of the problem; European cars assembled in Egypt constitute an insignificant fraction of the Egyptian passenger car market. According to industry sources, Mercedes produces no more than 4000 passenger cars a year whereas the total production in Egypt comes close to an annual 100,000 cars. The real issue is that the reduced custom duties on imported European cars—according to the Egypt-EU Association Agreement, custom duties should be decreased 10 per cent every year until they are totally phased out in 2019—would significantly reduce their prices on the market, thus putting non-European cars at a severe disadvantage. Who would buy an Asian car, whether imported or assembled in Egypt, if its price would buy a German car, for instance? In a nutshell, the new custom duties look set to wreak havoc with the Egyptian car market.
The EU-Egypt Association Agreement, a free trade pact signed in 2001 and in force since 2004, aims at gradually eliminating duties on the agricultural and manufactured goods exchanged between the signatories. Customs have since been subject to an annual reduction of 5-25 per cent according to the nature of the product. As far as passenger cars of EU origin are concerned, they should sell on the Egyptian market duty-free by 2019.
Similar agreements were also signed between Egypt and both Turkey and Morocco, regional giants in the car production field.
Local producers of passenger cars have been vocal in their call to the government to do something about the situation. GB Auto, the largest car assembler and distributor in Egypt, voiced fears that the lower tariffs on cars imported into Egypt from Europe, Turkey, and Morocco will distort competition and squeeze local producers out of the market. Raouf Ghabbour, chief executive of GB Auto, called for lower tariffs on cars from the US and Asia, to balance the market. GB assembles Hyundai vehicles and distributes Mazda and Geely cars in Egypt.
Mr Ghabbour told the media that, as tariffs on European cars are progressively reduced, the car assembly business in Egypt will be completely loss-making.
“No one will ever think of investing in that field,” he said. He demanded that the government provide subsidies to local assemblers in order to help them move into car manufacture, thus creating jobs and generating hard currency. He estimated that such a move could secure Egyptian manufactured cars for 70 per cent of domestic demand by 2018, with the additional export of half the capacity of the local factories.
Mr Ghabbour did not expound on what he meant by ‘subsidy’, but analysts have widely taken it to express a package that balances custom duties and taxes, and involves favourable terms of land lease, marketing incentives, sales benefits, and other tools of favoured status treatment.
As matters stand, Mr Ghabbour said, a government policy that appears to favour imports over locally-produced cars could undermine Egypt’s efforts to raise the country’s foreign reserves which have been running low since the Arab Spring uprising in 2011, and are critical for the import of food and energy.
Yehia Zananiri, Head of the Customs Committee in the Federation of Egyptian Chambers of Commerce, says that the recent decision by Mercedes-Benz Egypt, (The Egyptian German Automotive Company EGA) to exit the car assembly business is bound to negatively impact the Egyptian automotive industry.
“Mercedes will lose nothing,” he says, “but Egypt stands to lose a lot.”
“Once Mercedes announces it is halting its car assembly operation in Egypt because of unfavourable conditions in the car industry sector, and that assembling cars in Egypt is no longer profitable, Egypt’s reputation on the global market will suffer.
“Yet we should use the current predicament to carefully diagnose what is wrong with the car industry and trade sector,” Mr Zananiri says. “The Mercedes decision constitutes a warning that existing industrial and commercial regulations need amendment; otherwise, many industries will follow suite. Tax-related or labour-related problems might have been factors that augmented the situation and finally worked to drive Mercedes out. These problems may point at investment impediments that need to be tackled,” he warns.
On a different note, Mr Zananiri explains that the inputs to car manufacturing have not been subject to the same process of customs elimination. While in the future Egyptian car shoppers can enjoy a wider selection of cheaper imported cars, the local car industry will face a huge problem as their manufactured cars eventually become more expensive than imported ones. “It is therefore important that the government listens to the complaints of car manufacturers and do something about the customs duty on the inputs to car production,” he advises.
US and Asian car companies operating in Egypt will also face problems since the reduced tariffs do not apply to them. It is important that Egypt should listen to them and come up with appropriate solutions.
Engineer Ali Tawfik, Head of the Egyptian Auto Feeders Union (EAFU), confirms that the ultimate elimination of customs on imported European cars is definitely a huge blow not only to local car manufacturers but to car feeding factories as well, and expresses concern regarding the future of the automotive industry in Egypt.
Mr Tawfik laments the fact that Egypt does not export locally produced passenger cars to Europe. Morocco and other African countries, he says, welcome the manufacture of European cars in their factories then export the cars back to Europe. “Why don’t we do the same in Egypt? Why don’t we open the door for European car manufacturers to invest in our market and export the manufactured cars to Europe? Wouldn’t this generously offset the consequence of eliminating customs on imported cars? Unfortunately, the Egyptian automotive industry focuses only on producing cars for the local market and does not aim at export,” he says.
“We call upon the government to reconsider the customs reduction and instead support local industries and promote competitive performance. Each locally assembled car provides on average six job opportunities; this is an advantage we cannot afford to overlook in a country that suffers from unemployment,” Mr Tawfik says. “We at EAFU have submitted a proposal to the Industrial Development Authority to bring into Egypt some international automotive manufacturer to set up a plant that would produce one million cars a year; half of them for export. The government should provide facilities for such investment in the form of allocating the required land at low prices or on extended instalment plans. The current system of local car production, which has been effective for the past 30 years, must be revised. Today, Egypt produces only 100,000 cars a year in 17 different car models.”
Mr Tawfik urges the Egyptian government to aim at the wide global automotive market. “Morocco is now a huge car producer that targets the European market. In the process, it is expected to recruit the best of our experts and workers in car production. How can we allow ourselves to be robbed of our best and brightest when they could serve us so much better at home? We should never let this happen, nor should we relinquish the opportunity of targeting new markets. It is of the utmost importance for us to promote car manufacture and export; this would also give a huge edge to automotive feeding industries.” As the Head of the EAFU, Mr Tawfik confirms that Egypt is capable of manufacturing the auto spare parts and all other car feeder accessories and appliances needed for the industry to take off.
Mr Tawfik furnished Watani with a copy of the EAFU’s proposal to set up a plant that would produce one million passenger cars annually, around half of which would be for export. The proposal begins with explaining that the minimum feasible car production stands at an annual 100,000 cars of any specific model. Egypt’s current production compares very poorly to this figure. It stands at some 30,000 cars a year per model out of a total 39 total models of passenger and commercial vehicles produced by 17 producers. The entire local car production does not exceed 140,000 vehicles. This at a time when other Arab countries have spearheaded lucrative automotive industries; Morocco alone is home to two Renault plants which produce 400,000 cars a year each, and Saudi Arabia is following close behind.
A million cars a year
The EAFU suggests that the Egyptian government should make an offer to international car manufacturing giants to build a plant in Egypt. The annual capacity should start at 100,000 cars in the first year, rise to 500,000 in five years, then on to an annual one million cars. The cars would be produced in two models of different engine capacity. Over the span of five years, the locally produced parts should reach 80 per cent of the final product. At least 50 per cent of the cars produced would be for export, meeting international standards in car production. The contract with the international manufacturer, the mother company, should stipulate that a team of Egyptian engineers would be part of the design and development crew of the model produced in Egypt, and that they should form the nucleus of a design and development centre to be established in Egypt.
The Egyptian government should actively support the project by offering the mother company 500,000 square metres of land provided with all basic infrastructure, to be leased for 50 years on favourable terms. Local manufacturers of cars and car components should be invited to participate in the project, each according to the required capacity.
The Egyptian government, police, and armed forces should exclusively purchase the locally produced car for all their needs, and should promote its sale among the Egyptian public and Diaspora by offering favourable terms of payment or endorsing sale through instalments. Incentives should be granted for the export of the cars or car components.
The proposal wraps up by citing the benefits to be reaped from such a project, not least among which would be investments of up to EGP3 billion in car manufacture and EGP5 billion in components, as well as the creation of some six million jobs.
6 May 2015