Tuesday, 12 March 2019

Coffee with Mohamed Abou Ghaly

CEO, Abou Ghaly Motors

Mohamed Abou Ghaly learned the business in Detroit, the birthplace of the automotive industry, before joining Abou Ghaly Motors  in 1994. As CEO, he has since led the business (founded by his father Maher Abou Ghaly in 1980) to become a self-styled provider of mobility solutions. While continuing to distribute brands that include Jeep, Chrysler, Subaru, KTM motorcycles and Petronas lubricants, Abou Ghaly is also the sole franchisee of Sixt Rent-a-Car and runs the London Cab service. The offering beyond car sales comes as the industry pivots toward a business model that includes financing (long a staple of western markets) and transportation services. In the latest edition of our Coffee with Enterprise series, we sat down with Abou Ghaly for a chat about the outlook for the industry in 2019 and beyond.

The key takeaways:

  • Consumer demand is strong and appetite for European cars has increased since the elimination of EU tariffs in January.
  • The auto market is expected to grow by 20-25% at least this year.
  • Interest rates at 7.5-8.0% would spur demand for capex and support growth in the industry.
  • Government should focus more on growing feeder industries than on manufacturing.
  • Kia’s decision to invest EGP 4.2 bn into Egypt in the coming five years and Mercedes-Benz coming resumption of domestic assembly are both very positive steps.
  • Abou Ghaly Motors will invest some EGP 250-300 mn in growth this year.

Enterprise: The perception among consumers is that cars in Egypt are, in absolute terms, substantially more expensive than they would be if bought in the US or Saudi Arabia, for example — anywhere from 30-70% more expensive. Is this sentiment fair or accurate?

Mohamed Abou Ghaly: It’s accurate, yes, because even after the European Union custom tariffs were taken off, there are still taxes, development fees and other charges that have been put on to essentially cap the inflow of vehicles until the market here has adapted. But still, the situation is much better than it was before, and most customers appreciate this. The reality is often quite different to what is portrayed in the media. You see this with the “Let it Rust” campaign. Is it affecting our sales? Not really. On the ground, people are still buying cars on a daily basis. The pace is definitely slower, but there is still demand and customers are still getting their needs met.

E: What is your sales mix of locally assembled vs. fully imported cars? What’s your top-selling vehicle?

MAG: Volume wise it’s 30-70%, but by revenue, it’s 45-55%. When it comes to our top-selling vehicle, there are actually two: the small, compact SUV Subaru XV and the locally assembled Grand Cherokee are hits.

E: Can you walk us through the price of a car brought in completely built up (CBU) from the European Union pre- and post- the phase-out of customs?

MAG: It’s quite straightforward. It’s the price of CIF (costs, insurance and freight), with — for EU manufactured cars — zero customs, but still you have development fees and VAT. Our customs are based on engine size. So a 1000 CC engine had a customs rate of 40% but a 2000 CC engine had a rate of 135%. They all pay different development fees and schedule tax but the same VAT. So now the elimination of tariffs for EU vehicles has of course made a huge difference. There were customs ranging from 62.20% to 278.87% that are now no longer applicable. I think before long, the Americans and Asians will also push for trade agreements. 

E: What are the tax / customs advantages now enjoyed by EU assembled vehicles, Turkish vehicles, and Moroccan vehicles compared with all other vehicles?

MAG: Moroccan vehicles fall under the Agadir Agreement, which was signed by Morocco with Egypt, Tunisia, and Jordan. Morocco happens to manufacture cars with certain components that allow the cars to be deemed Moroccan-made. So under this agreement, there have been zero customs on cars coming from Morocco, and I think this has been the case for 10 years.

In the case of EU-assembled vehicles, the tariffs have also been decreasing for at least 10 years, because the agreement with the EU came into force in 2004 (and has been applied in Egypt since 2009). There was a delay for a couple of years so when a reduction of 30% was applied suddenly, it felt more significant. But the decrease over the past 10 years had been 70%, so the impact wasn’t actually that dramatic. Again, the media was very selective in the story it chose to tell.

When it comes to Turkey, there is the Egypt-Turkey Free Trade Agreement, which was also delayed by one year. So currently, Turkish products are still subject to tariffs at 10%, but by January 2020 they will be zero as well. Egyptians don’t rush to buy Turkish vehicles but if the price is attractive, they might consider it.

E: Has the industry felt the impact of customs tariffs on EU vehicles falling to zero? 

MAG: It takes between four and five months for the cars to arrive from the EU, so if I make an order in January, I won’t see it on the ground before May or June. Within the first half of this year, the impact will be clear, and the demographics of the market will change, I believe, in the second half of the year. In the run-up to 1 January, nothing was certain. People are looking at European cars more than they were previously, but you will really see the figures in the second half of 2019. It’s reasonable to anticipate that growth in European car sales will lead the market this year. Before that, it was Koreans car sales. 

E: What is your outlook on the automotive industry for 2019?

MAG: The market will grow this year by 20-25% at least. The challenge to all of us is to be well-prepared to capture this expansion, or else you risk losing your market share and presence. You need to look to a host of different factors, such the method of selling, consumer thinking and the logic behind purchasing, the buying experience, and even the different people who affect the decision to buy. For Abou Ghaly Motors, we know that we need to expand our physical location and online presence in order to embrace this growth.

Growth will depend on rise in GDP per capita: Obviously, as GDP per capita growth will impact consumer purchasing power. If the GDP per capita grows by USD 600-1000, the car market will grow by more than 25% this year. The purchasing power of the lower middle class in particular will increase, in correlation with GDP growth, which is set to rise to 5.8% this year.

E: 2017 and 2018 were tough years for the industry as a whole. How did you manage the business through that?

MAG: 2017 was much tougher than 2018. 2018 was the comeback year. In concrete terms, the main challenge of 2017 was the devaluation of the EGP, which was a very hard decision for the government to take, but it was the best thing for the future of this economy. In the short term, it increased our challenges, but in the long term it will open up a lot of opportunities within the market that will impact us positively.

Adapting through pricing: The float forced us to to ask ourselves how we could be smarter in our pricing policies in order to absorb the shock. The answer was that you must do you must do it gradually. So after the float, we kept our prices exactly the same until December 2016, then gradually increased prices over the year to offer the customers some stability. We applied the increases four times in 2017.

We also gave our team raises immediately — starting in December 2016, and then again in June 2017 — and they were proper, good raises, particularly for blue-collar workers.

E: Where would you like to the direction of legislative reform here in Egypt going?

MAG: What would affect us directly is reforms to the Labor Act. Current labor laws do not support the growth of the private sector. These regulations need to be more dynamic and give me as an employer more flexibility to hire those who will be good at their jobs and let go of those who aren’t. I’m not saying that the government should take the side of the employer above the employee or vice versa. Just greater flexibility. 

E: How has your business been impacted by interest rates since the float of the EGP? Have you started to feel relief from the 100 bps cut?

MA: The first and most direct impact was our cost, which became higher on the spot. It clearly impacted our expansion plans because our normal return on investment would never cover these rates. Over the last two years, the impact of this has been decreasing — perhaps not as quickly as we would have liked, but obviously there are factors that have to be taken into consideration. We think that in 2020 it will be much better. We have, of course, started to feel some relief from the February interest rate cut.

E: Looking beyond working capital finance, is there an interest rate at which CAPEX becomes attractive to you?

MAG: For us, what’s important is the interest rate at which consumers can be spurred to buy. The boom of the market was in 2009-10, where interest rates were at 7.5-8%. This is where we would like them to be. I think it will take us 3-4 years to get there again. In order for this to happen, there are a lot of economic considerations, such as seeing FX reserves grow further. But I am optimistic that we will get there. It’s inevitable.

E: What can the government do now to encourage domestic manufacturing?

MAG: I wouldn’t use the term “domestic manufacturing,” but rather, local suppliers. The government should be helping local suppliers grow. For me, the issue is not about manufacturing an Egyptian car per se, but ensuring that the local suppliers are supported and the broader infrastructure is developed for manufacturers to supply national and global organizations, wherever they are. Make it easier for them to get components and export products. Let them compete on the same ground as the Indians and the Chinese.

Each manufacturer is focused on improving their lead time, their supply chain, and their value cycle. So, they need to have low inventory, they need to get all the components for the vehicle onto the assembly line on time, and they need the process to be as simple as possible. If we want Egypt to be a hub for this, we need to offer the same incentives for, and make use of the same practices as, manufacturers all over the world. We need to use to our advantage the fact that we are a cost-effective country to live in. This goes for assembling as well, as I don’t see manufacturing and assembling as separate, despite the perceptions of people.

People often make comparisons with Morocco, but the Moroccan experience is completely different. Because they are so close to Europe, the lead time is more or less the same as any European country. With the cheap labor, it is easy to understand that Morocco is both cost-effective and appealing for Europe. We shouldn’t compare ourselves to other markets in that way, but it’s instructive to look at how other markets have built their infrastructure and see if there are lessons that we can learn. India and China are both good examples of this. We shouldn’t reinvent the wheel, but adapt the principles to the Egyptian market.

E: There has been talk of the government moving on a scheme of incentives and special economic zones — with tax and customs breaks to assemblers, including exemptions for capital goods imported for assembly — to create an environment like that of Morocco or South Africa. Would you be in favor of this?

MAG: As far as I know, they have been studying this. It’s very positive and applicable. But when will it come out? How? We can talk positively about a lot of good things, but execution is the name of the game.

E: What are your thoughts on Kia’s decision to invest EGP 4.2 bn into Egypt in the coming five years?

MAG: It’s an important decision. Kia is one of the major players in the market and they will be able to capitalize on their size and resources, to have an efficient assembly line. Any investment in the Egyptian market will give an ROI quickly, and bring more opportunities, so I believe they took the right decision. Still, they need to prove success in terms of making their model operational here and creating a market. It’s not only about the financial investment — it’s about the marketing activities, marketing plan, price positioning, price bracket, what you are doing, how you are doing it.

E: And Mercedes-Benz is resuming local assembly.

MAG: It’s a very positive signal, not only for the automotive industry, but for the whole economy. Mercedes-Benz is a global player, a respected company and a powerful name. It is ranked one of the top 15 brands in the world. To have it returning to the market is very positive for everyone. For the automotive sector, it will create a hive of healthy competition that will attract others. I love the brand, their approach to the market, their vision.

E: How do you plan to grow the business this year and next?

MAG: We are putting in place a five-year plan to expand, both vertically and horizontally. Vertical expansion will take place within the brands; horizontal will take place within our physical and online locations. We are putting some very good investment plans in place, which will total something like EGP 250-300 mn. So our approach is really to have this strategy in place, and then business opportunities come along the way

Our vision since 2007 has been to provide customers with integrated mobility solutions. That’s why we’ve pursued partnerships — London Cab, Sixt Rent a Car — and created our own platforms. We do have an innovation and technology arm which, in January 2018, we established as a separate company, where we seek to sell our software beyond Egypt — maybe to Africa. 

We try to create platforms for usability rather than ownership, because that’s what the consumers are looking for. Yes, some do want cars but they don’t have the same passion I had at their age at all. So we need to look at other options, including things like car sharing. We have to localize the international and global ideas, so they can work in Egypt. One example of this is London Cab. We didn’t market it in Egypt as a taxi, because a taxi here is not at all the same as a taxi in the UK. We put it in a bracket here between the high-priced limousines and the cheap taxis. This was in July 2010, before Uber was even created. This is a creative product that is growing and we own the whole experience.

We’ve also put a lot of effort into the customer experience within our after-sales facilities. We have account managers for every set of customers, so when you come to buy a car you have an account manager who will take you and guide you from A to B. This is an idea we adopted from the banking sector and other sectors, because no one else was doing this in Egypt in the auto sector. Our account managers have updated devices, where they are connected on our SAP, and if they barcode your vehicle they can retrieve all its history on their devices immediately. We can even anticipate your visits according to your driving behavior, so it will be triggered as an order to meet your car as you arrive. It’s a very interesting business model, one which took us two years to bring to life.

E: What is the future for electric vehicles in Egypt? What about hybrids?

MAG: Electric vehicles are coming; there is definitely a future for them here. It might take time to build the infrastructure, but the market will push for it. It’s a supply-demand issue. At a point in time there will be no way to avoid it because the manufacturer will dictate to the market. Toyota has already said that in 2020 they will only produce electric cars and there are international agreements to curb carbon emissions. Hybrids are already here but they served as a bridge. Out of these two, it will be only electric cars that will grow in the market.

E: What about autonomous vehicles?

MAG: I will be able to answer that when I see them take off in the US. With their freeways, I think they will accommodate these vehicles more easily than they will in Europe or we will here. I do believe they will come eventually, but the question is when. When I see it happening in the US, I’ll be able to predict when it will happen in Europe and, accordingly, when it will happen here.

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