By Anthony Black, Professor of Economics at the University of Cape Town [1]
With a large and growing middle class, Africa has huge potential as an automotive market. Vehicle ownership rates across the continent are low, at just 45 per 1 000 persons compared with a global rate of 203 per 1 000. Even more striking is the low level of production: the continent accounts for less than 1% of global vehicle output. Outside South Africa and Morocco, production is minimal: most small national markets are supplied by imports, consisting mainly of used cars shipped primarily from Europe, Japan and the US.
Historically, this huge global industry has played a major role in the economic development of some countries and regions. Many countries have tried to support it, with positive and negative results. South Africa and Morocco are important exporters globally and South Africa also exports to other African countries. However, South Africa’s automotive imports from elsewhere in Africa amount to less than USD 100 million per annum, just 1.1% of its total imports of cars and parts, reflecting the weak development of trade and value chains within the region.
There is growing interest in a number of other African countries to develop their automotive sectors. These include Algeria, Egypt, Ethiopia, Nigeria, Ghana and Kenya. In many smaller producer countries, automotive programmes usually allow for semi-knocked down assembly. This involves only the final production of semi-assembled vehicles and adds little value.
Given this low level of development, can regional integration and, in particular, the African Continental Free Trade Area (AfCTA), with its USD 3.4 trillion market and population of 1.38 billion, help galvanise automotive development?
The sector is a textbook case of both the huge benefits that can be derived from regional integration as well as the challenges that it poses. The automotive industry is characterised by large economies of scale in assembly and parts production. It is important to remember that the value of a car consists primarily of the production of parts. Reasonably large-scale assembly is required to attract investment in component production. Small-scale plants should therefore not be encouraged.
By enlarging the market, regional integration offers major benefits and is essential for the development of the industry. African economies are small and even large markets such as South Africa and Nigeria do not have a domestic market sufficient to justify large-scale investment in the sector.
One of the key policy challenges is used car imports. These provide a cheap means of transport but make it very difficult to develop a new car market large enough to attract investment in assembly. Automotive-producing countries in the developing world, including South Africa, generally restrict used car imports. But in most African countries, used car importing is very well established. Countries without prospects of vehicle assembly will be reluctant to give up the right to import inexpensive used cars. Why, for example, would Uganda forego the right to import used cars in order to buy more expensive new cars assembled in Kenya?
The African Association of Automotive Manufacturers is a group of global car companies promoting a single African market. They have proposed a ‘hub and spoke’ model in which assembly takes place in ‘hub’ countries such as South Africa, Morocco, Nigeria and Kenya with parts supplied by neighbouring ‘spoke’ countries. This is unrealistic in the short term given poor transport links between countries. The reality is that the industry tends to cluster in a limited number of locations. In the African context, it makes little economic sense to try to spread the industry through all or even most, countries. Regional integration will lead to expanded production in the region but these gains will be unevenly spread.
There are a number of routes to automotive development. Morocco has successfully integrated into the EU and its large modern plants mainly supply that market as well as North Africa. However, this is not an option for most aspiring producer countries on the continent. Regional integration has the potential to create a viable ‘automotive space’ through a regional market of sufficient size for the industry to develop assembly on a larger scale.
Other options for growth include aftermarket parts, which are already reasonably well established in some countries. Motorcycles might hold interesting opportunities. Many countries in west, east and north Africa have large motorcycle markets; once these markets are combined, they become very significant. In fact, more motorcycles are imported into Africa than to any other continent. The technology of motorcycle production is simpler than that of cars. Also, used imports are less of a problem. Across a number of countries in Asia, motorcycle production helped lay the foundations for the vehicle industry.
In short, regional integration is necessary but not sufficient to spur automotive industry development in Africa. It will need a host of complementary policies and actions. Countries will also need to put continental interests ahead of their own.
[1] Learn more about how developing regional value chains can support a sustainable recovery from COVID‑19 in Africa’s Development Dynamics 2022 (overview) .
Photo: South African automotive factory. SAPhotog/Shutterstock