Competitiveness Targeting: Automotive Industry in Egypt Randa Hamza Economics Researcher The American University in Cairo

Competitiveness Targeting: Automotive Industry in Egypt

In the early 1960s, Egypt like many developing countries at that time experienced a shift from an agricultural based to an industrial based economy. One of the main industries that constituted a major window for growth and development was the automotive industry. The automotive manufacturing sector is one of the sectors that have witnessed continuous growth. Egyptian Automotive Manufacturers Association (EAMA) data show total vehicle demand in the Egyptian market increased from 70,834 units in 2003 to 227,488 units in 2007; an increase of over 200% in 5 years. Cars assembly production continues to increase and has reached 101,319 vehicles in 2007; increasing by 118% from 46,422 units in 2003. With few successes and many failures over the past five decades, the car industry in Egypt developed as an assembly operation rather than manufacturing. This paper investigates the potential competitiveness of the Egyptian automotive industry as a regional hub for manufacturing and exportation; and the strategies and plans it needs to develop to achieve this goal. The paper will use descriptive policy analysis to evaluate policy effects on the growth of this sector. It pinpoints the main obstacles the industry faces and will propose policies and solutions to overcome them. It analyzes the effect of decreasing tariffs on car components on the competitiveness of the industry. This comes on the same line with examining the effect of technological advancements on the manufacturing process of cars. The paper concludes that the Egyptian auto industry has potential to enhance its competitiveness through capitalizing on new exporting ventures, encouraging local component producers and enhancing technological transfer and development.

There was ambitious vision by the free officers who ruled the country after the 1952 revolution to build a new modern state. With the mind set that was popular among newly liberalized developing countries, they believed that the optimal path to achieve the dream was industrialization. A rigorous plan for import substitution industrialization was thus developed and adopted with the aim to double national income in 10 years. This was to be achieved by creating national state owned heavy industries to big push the country’s development. Automotive industry was viewed to have a great potential to enhance development as it included many feeding industries and meanwhile provided a big number of employment opportunities. Accordingly, the State established a huge complex to inaugurate car industry in 1960 with a national capital of LE 30 million on 36 thousand squared meters in Hilwan desert area, Wadi Hoof. Although automotive industry in Egypt dated back to 1951, when Ford Motor Company established an assembly factory in Alexandria. (Gazarine¹, 2005), it was not until the operation of Al Nasr Company that car manufacturing rather than assembly started.

During the first five years national plan and until the late sixties, the leadership was fully supportive of the industrial sector, and injected huge capital to enhance its performance. Although political interferences affected the steadiness of its operation, it continued to be the main catalyst for economic growth. The country’s GDP achieved an annual growth rate of 6%, an annual increase in investments at 18% and in domestic savings at about 14% until 1967 (WB Report 76). Al Nasr automotive Company was viewed as one of the leading companies in the new Egyptian industry due to the number of component and feeding industries associated to it. However, Al Nasr as well as most other public sector companies experienced drastic investment shortages after the defeat in 1967. The government adopted war economy plans where most of the national resources were directed to military operations and rebuilding the army (Hegazy², 2009).

1973 and the OPEN-DOOR policies

During this period the government diverted its attention from the public sector towards attracting foreign and private investments. In spite of the end of war and the diversion in policy, the government continued to ignore public sector. Al Nasr Company continued to operate with its almost obsolete machinery, lines of production and surplus labor. No funds were injected to revamp the production lines or to enhance research and development in the already operating licenses. The management of the company proposed three joint venture plans to enhance the company’s productivity and invite foreign capital and new technology to the ailing facility. These efforts failed again because of political interference in decision making (Gazarine, 05).

Many foreign companies entered the market of car industry in the 1980’s. With the flows of the foreign capital and the continued protection of the automotive sector, they reaped lucrative profits. Meanwhile, Al-Nasr Automotive continued to be a key player in the sector as it assembled vehicles under several acquired license from international brands as Chrysler, KIA, Peugeot and LLC (Economy Watch). Temporarily, the dream of producing a national car was still present in the minds of the management team in the firm. Yet, due to the lack of capital, they decided to utilize the company resources in creating and developing new models. With the joint efforts of Cairo University's academic research and the engineers in Al Nasr Company, another license was locally acquired through developing the old truck models into a new modern line. This initiative did not only revive the dream but proved it to be both feasible and economical. When the leadership in the company changed, no further development to this venture was pursued and the production line of the new national truck model continued to operate with the old design for about 25 more years until it became archaic (Abdel Wahab³, 2004).

With the beginning of the 1990's, Egypt adopted the Economic Reform and Structural Adjustment Program (ERSAP). The government restricted investments in public sector companies. More foreign corporations entered the market and established assembly lines and factories. Yet, due to the small size of the market, the distortion in market prices and the over protection of the sector, these companies worked only at 30% of their capacities (Abu Zeid⁴, 2005). In 2000, Al-Nasr was divided into four companies to restructure their debts and sell them to the private sector. The first three companies were designated for assembly and service lines. The last one, where all industrial units were allocated, bore debts of all the four divisions thus crippling any potential for its growth. Before the Egyptian revolution in January 25^th 2011, and in the latest official statement by the Ministry of Industry, Egypt was planned to be a regional hub for car industry and exports (SIS). A year later, this statement needed thorough policy analysis to weigh its viability in the regional setting and in a highly competitive sector largely driven by technological innovations and competitiveness.

Regional Competition

For the government to plan to make Egypt a regional industrial hub for car manufacturing, it needs to consider many factors that determine competitiveness. According to OECD, a country's competitiveness is "the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term". Egypt's potential therefore relies on the ability to produce competitive cars that would meet local and international qualities at economic prices without protection to the market and with progressive technological innovations. In the following section, the challenges that meet the country in realizing this potential will be analyzed in details.

The Middle East is one of the regions with the highest demand for vehicles with a high car per household ratio. This is mainly attributed to the high income standards and the economic prices of energy in the Gulf area where almost all the demand is met through imports. Thus, the market is open and highly competitive to capitalize on this demand and manufacture high standard cars that meet the quality required (Frost, 2005). A number of countries in the region already started to foresee short term and long term opportunities in this sector; namely, Iran and Qatar.

According to the Organization Internationale des Constructeurs d'Automobiles (International Organization for Motor Vehicle Manufacturers) OICA, Iran was classified the fifth country internationally in the growth of car production after China, Taiwan, Romania and India. The country also ranked 12^th in car manufacturing worldwide (Fars news, 2010). Iran has two main public sector companies producing national cars; Iran Khodro Company (IKCO) and SAPCO. Although, the first car company started in Iran in 1962, the success of producing a national car with a high ratio of local components developed in 1994. With the development of the 8 years plan to produce a national car, the country imported high technology production facilities of international lines and established its own Research and Development units that supported the technological advancement in the country (Murphy, 2002). By 2009, 75% of car components were produced in Iran, and car exports reached 1 billion US dollars (Payvand News, 2008). Car production increased by 445% between 1998-2008 (Atieh Bahar).

Recognizing the vitality of R&D to the advancement of auto industry, Iran organizes an annual conference for "Innovation in Automobile Industry" where R&D units in car manufacturing companies and Iran University of Science and Technology collaborate in foreseeing and pursuing future technological developments in the industry (INTIC, 2009).

The second country that adopted a long term plan to become the regions' number one producer of technologically advanced car components by 2020 is Qatar. Inspired by this national ambition, a local investor, Ghanim Al Saad, is establishing a multi-billion dollars industrial city called Qatar Ag that aims at specializing in the design, production and exports of advanced component parts for car manufacturing. Local R&D units will be established where international industrial experts will lead and teach national staff into building "knowledge based industries". With the huge investments the country is able to provide to this project, the cheap labor they are able to import, the economic prices of fuel, the focused specialized plan it is adopting and the strategic location among the open high demand markets of the Gulf area, Qatar has a great advantage in becoming a regions main competitor in car feeding industries.

Evaluation of the Current Situation

The Egyptian automotive industry continues to be vulnerable in nature during this period. The industry faced a couple of challenges that risk its ability to remain competitive and to grow. The value of the car assembled in Egypt is higher by around 30% in price than imported cars. Although the demand on passenger cars increased to reach 52290 during 2004-2005, the depreciation of the Egyptian pound by 44.0 percent during 2004 raised the cost of imported vehicles and locally assembled vehicles that use imported components (IMC, 2005). The value of assembly abroad is of a much lower cost than it is in Egypt, yet the high value of tariffs on imported cars keeps the assembly sector operating and profiting. However, as Egypt is part of the international free trade agreements, the automotive industry will completely be unprotected by 2019 which will result in the closure of at least 17 operating factories in the country. This was evident when the UNCTAD decreased tariffs on imported cars, assemblers found it cheaper to import assembled cars from abroad rather than continue assembly operations in their plants (Gazarin, 2012). In 2010, local manufacturers were only able to acquire 45% of the market, while foreign companies enjoyed the remaining 55%. Moreover, there are now over 20 companies and about 16 factories with a capacity of producing 225,000 vehicles per year but they only operate with 30% of that capacity.

Motor vehicles and car parts represent 3.7% of all manufacturing output, reflecting the capital intensive nature of the industry, its share of manufacturing employment was almost half that at 1.8%. Individual assembly plants are currently producing at most 6000-7000 passenger cars per year. Despite the increase in production during 2009-2010 than in 2004-2005 in both motor vehicles and auto components, this production is under full capacity and cannot compete internationally (Report of the Ministry of Foreign Trade, 2004). The vehicle industry needs to reach a certain size in order to be able to support economies of scale and compete in the international market. Such existence of low levels of investments revealed sunk costs which were significant when compared to competing foreign companies.

In January 2010, the Ministry of Trade and Industry announced that new schemes and quality standards will be applied within a period of 8 months on imported car components. These plans were detained because of the economic slowdown after the January 25th revolution. The Market of the automotive industry failed, as most of the import oriented industries, to reach the size that can support economies of scale. The Egyptian consumers purchase around 90,000 cars per year; this local demand was in line with the level of demand in other countries in the region with the same income level. Nevertheless, the industry was not able to fulfill domestic production as to say not to compete as well (Ibid, 2004). Gazarin however, saw the picture in a brighter way. He believed that since by 2019 all tariffs will be removed, Egypt still has a last chance to improve this industry and start a competitive national production immediately. He argued that with local car consumption increasing from 5000 during the 60s to 60,000 in 2010 a window of growth is available for future advancements in the sector.

In ten years time, the Egyptian market for motor vehicles could be very different than it is today. With a large population, limited purchasing power, and low vehicle registrations at present, small increases in income could result in much higher automobile sales. Table XX below indicates what the market might look like over the next ten years (Ministry of foreign trade,2005).



Future Prospects

After the 2011 revolution and the dynamic change in the country, Egypt has a potential to plan for a progressive industrial and economic advancement. Public policy is constantly at review now to realize the country's aptitudes and challenges to be able to craft a successful path to utilize its competitive edges and capture future prospects.

Although some countries in the region took huge leaps in car manufacturing and became key players, Egypt still has a valuable chance in carving its space in the world of auto industry. Many changing factors in the future of this industry provide windows of opportunities to developing countries. Production and consumption maps are expected to alter significantly. These are affected by both the advancing requirements in mature markets in developed countries on one hand and the changing economic and social standards that created new markets in developing countries on the other hand.

In the developed world, the new competitive edge in car production and demand will be driven by the swift evolution in technology. Alternatively, in emerging markets, the economic value of cars along with the facilities they provide would guide the choices of many new car owners (The Transformation to come). Egypt thus has a growing market potential for car sales nationally and internationally.

In the local market, the growing demand has already reached encouraging levels at 150,000 vehicles per year (Gazarine, 2012). With the decreases in tariffs and the reduction in car prices, local demand is expected to reach 500,000 vehicles per year, surpassing the economic incentive for local car production which encourages manufacturers to benefit from economies of scale. Car producers can increase the capacity of their production and target the growing local market. They will still enjoy government protection for more than seven years until the GATT is completely adopted and the car industry becomes entirely unprotected. This will enable domestic producers to have a competitive edge over foreign companies during this period.

A great potential for exporting to developing countries is also available. Egypt is strategically located close to many developing countries with open markets for car imports. Local producers can target these markets and serve customers' needs with designs that combine economical prices and contemporary designs. The location of the country will also affect the cost of transportation, which will give Egypt an edge over more distant exporters.

Another factor that will affect the map of future production in this sector is the shift towards more green and environmentally friendly energy sources to substitute traditional fuels. This transition holds the opportunity for new producers to invest in the research for new technologies that can capture new sources of energy as green substitutes. Electric vehicles are now introduced in some developed countries. Also, France developed an automobile that operated with air. Egypt can invest in the development of energy sources that it is advantaged with as the solar energy. This can put the country on the competitiveness map in even the developed mature automotive markets.

On the other hand, the projected expansion in local production can create a valuable opportunity for the expansion of the component and feeding industries. This sector has been affected with the relatively small local market and the inability to compete in international markets due to the high specifications required. When domestic car factories expand production, the component industry will follow up with higher capacity. Meanwhile, factories can provide technical assistance to feeding industries to encourage their abidance by the international requirement.

However, the expansion in both the local production of automobile and component industries are dependent on the incubation of research and development units to service and push the advancement of the sector. There is no prediction or ceiling to what technology can provide in this sector that is highly reliant on innovation. According to the former minister of industry, Mohammed Abdul Wahab, the main obstacle that Egypt has faced since the 1970's was the negligence to R&D as the major factor for sustaining an edge in industry (Abdel Wahab, 2004).

CONCLUSION

The motor vehicle sector in Egypt does make an important contribution to the economy. It represents 3.7% of Egyptian manufacturing output and 1.8% of manufacturing employment. Thus, changes in trade policy in this sector can have a significant impact on the overall economy. Moreover, developments in this industry can have important spillover effects on other sectors in the economy. Therefore, the government should play a more influential role in determining and planning its expansion as it enjoys a high potential of competitiveness. This can be achieved through creating the right incentives to encourage foreign companies to produce rather than assemble domestically. Also, the country should provide support for local manufacturers to increase local production.

The Auto industry in Egypt possesses a highly professional caliber of engineers and skilled labor. It has huge production facilities and plants, a big part of which is idle because of either the lack of capital or the mismanagement. In order for the country to become a future icon in the industry, Egypt should utilize its strengths and strategically treat its deficiencies. This is to be achieved by encouraging R&D for car production in scientific institutes and universities, expanding local production, achieving economies of scale, encouraging feeding industries and target the needs of local as well as international markets.

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June 27-28, 2012

Cambridge, UK