Sunday, 27 March 2022

The automotive strategy is imminent. How is it being received by local players?

Gov’t is about to launch the automotive strategy. How do local players view it so far? Earlier this month, the Madbouly cabinet reviewed the latest version of a new automotive strategy — which has been in the works for years and is expected to be unveiled imminently. The strategy, which was expected last year, aims to increase local vehicle manufacturing and assembly and increase the sector’s competitiveness to become a regional manufacturing hub and bolster export volume. The full details of the strategy — now formally named the Egyptian Automotive Industry Development Program (AIDP) — have yet to be announced, but cabinet gave a sneak peek on the specifics.

It’s been a long time coming: The strategy has been on the government’s to-do list since 2016 but was scrapped in 2018 after it drew criticism from the EU for breaching the trade terms of the agreement to have 0% customs duties on cars imported from the bloc. The government then began looking at a new program that was approved by cabinet in 2020, but was soon shelved again due to the pandemic.

As the details trickle out, what are auto players hoping to see in the AIDP? Executives in the automotive industry we spoke with want to see incentives that make the sector more competitive, such as tax and customs breaks, as well as measures to support local component manufacturing and pave the way for local EV manufacturing. And they all agree that the strategy is critical to making local manufacturing and competitive assembly a reality.

Industry players are broadly optimistic that these issues will be addressed in the strategy, based on what information we know so far. But as the specifics are yet to be determined, most are adopting a wait-and-see approach.

For starters, the government wants automakers to gradually meet a 45% local component quota — but this is redundant for some and too ambitious for others. Several players already surpass the 45% local component quota with some car models. Currently, around half of GB Auto’s sales come from completely knocked down (CKD) vehicles, which are assembled in Egypt and should qualify under the strategy, GB Auto’s Investor Relations Head Marina Kamal told Enterprise. On the other hand, Elsaba Group Vice President Alaa Elsaba told us he thinks this quota is expecting too much in too little time.

Introducing a tiered incentive benefit system would encourage companies to do more, Khaled Saad, head of the Egyptian Association of Automobile Manufacturers and the deputy general director of Bavarian Auto Group, told us. An important pillar is to introduce incentives that are split into different tiers according to the percentage of local content used in the vehicle’s production, Kamal said. However, it’s unclear at this point what the brackets would look like and what incentives they would entail, she added.

The strategy needs to allow for fair competition when it comes to imports: As it currently stands, imported European cars are around 3% cheaper than cars assembled in Egypt, because of taxes and customs tariffs, Abou Ghaly Group COO Tamer Kotb told Enterprise. For every imported component, manufacturers pay customs duties and VAT, Al Amal Auto Group Chairman Amr Sulaiman explained. After the car is assembled and sold, additional taxes are paid on the sale.

This seems a likely scenario: The strategy will introduce a tariff system that should facilitate customs release procedures for participating firms, which Kotb says could mean that auto companies will receive bonuses or incentives on imported vehicle kits and components to buy them at lower prices.

The ‘how’ is yet to be determined: One possible route is a points system that manufacturers and assemblers can use to import components, but the government is still assessing the value of these points and how to redeem them, our sources tell us. In the future, auto players could also sell their points to other manufacturers if they have a surplus, Kotb added. Further export-based incentives — such as direct subsidies, direct paybacks, low-cost loans, or tax exemption on income from exports and international advertising — proportionate to local component input could also be introduced, Kamal poses.

And we need our local components to be up to par — and competitive: The components sector needs more regulation to ensure quality products, which could be enforced by requiring feeders to hold certificates such as ISO, Kotb said. It’s less costly to use imported components than local ones due to the higher cost of domestic components, Saad said. The biggest gap in previous automotive strategies is support of component manufacturing industries, Saad and Sulaiman told us. That looks set to change as the strategy indicates component manufacturers will get support, although the details there are scant. Support could include tax incentives or easier access to capital through bank loans or the like, Kotb believes.

Especially since foreign auto companies will need to ensure locally manufactured cars are up to global standards before they can be exported, Kotb explains. Meanwhile, the government could specify a minimum component requirement for auto companies to be eligible to export abroad, possibly 60%, he added.

Auto execs are also hoping to see the strategy include tax restructuring: All our sources agreed that taxes need to be restructured to reduce costs across the value chain while also streamlining procedures. “The government should allow us to pay all the taxes at once — the same way vehicle importers do — instead of being burdened with them at every step of the process,” Saad said. Meanwhile, tax exemptions or reductions on VAT, income tax, or corporate tax can be applied to auto firms and component manufacturers, Kamal posed.

A more long-term approach to the strategy could also include procedural incentives, including decreasing licensing fees from the traffic department, providing subsidized financing for capex investments, and offering capex refunds for new plants, Kamal said.

Meanwhile, automakers are hoping for a clear path for local EV manufacturing in the strategy, which they stress is essential to keep Egypt competitive amid the strong global push. “There’s huge potential for Egypt to establish itself in the EV scene as operations start from scratch,” Saad said.

But the infrastructure isn’t ready for EVs yet, the auto players agree. Even with the EV infrastructure push, charging stations are not widespread geographically enough to make them practical for Egyptian drivers.

Consumers are being handed incentives to purchase EVs: AIDP will provide incentives of up to EGP 50k for buyers of locally-assembled electric vehicles, the statement indicated.

But they may not be enough: EVs are generally more expensive than fossil-fuel cars and the government has not introduced large enough incentives to make the trade-off lucrative for the consumer, Elsaba said. This is particularly important to consider in light of recently-issued EV charging tariffs, which would make the cost/benefit analysis for buying an EV lacking in motivation, Sulaiman added.

Your top industrial development stories for the week:

  • Bakery chain TBS is looking to spend EGP 500 mn to add a new production line at its factory that will allow the company to double its annual sales to EGP 1 bn.
  • Manufacturers don’t want to add expiration dates to products: Manufacturers want the Consumer Protection Agency to reconsider its recent decision requiring companies to include expiration dates on product labels from May.
  • Another green ammonia plant in the SCZone? France’s EDF Renewables and Egypt’s ZeroWaste are one of six international consortiums currently in talks with the SCZone to establish a USD 1 bn green ammonia plant that would produce green fuel for ships.

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