DAVID FURLONGER: Who will fund Africa’s 400% vehicle surge?
The dream is clear: develop a pan-African motor industry to service a new-vehicle market that will grow by 400% over the next 15 years. Multinational vehicle and components companies say they are prepared to invest billions of dollars to promote regional manufacturing hubs to service the world’s last great untapped continental market.
But there’s a hitch. Many African countries, including some of the most populous, lack credible banking systems that allow any but the wealthiest to finance the purchase of high-value goods.
So who will buy the millions of vehicles needed to justify motor companies’ investments?
The African Association of Automotive Manufacturers (AAAM) recently signed a memorandum of understanding with the Egypt-based African Export-Import Bank to finance the development of the motor industry in Africa.
However, in the words of Dhiren Vanmali, Ford’s government affairs director responsible for Africa: “Without unlocking consumer financing, you can’t unlock manufacturing economies of scale.”
On the face of it, those economies of scale should be a given.
As overseas analysts are always telling us, Africa’s estimated 1.3-billion population mirrors that of China, which has an annual new-vehicle market of more than 25-million, compared with Africa’s 1-million. The latter should seek to emulate the former.
Populations, however, are all they have in common.
China’s automotive growth is driven by a centralised, singular policy. Africa is a collection of more than 50 fractious nations, many with heavily protected economies. Though the incoming African Continental Free Trade Area agreement, signed by over 50 countries, will make a difference, it won’t happen overnight.
AAAM CEO Dave Coffey says the medium-term goal is to grow new-vehicle sales to 5-million by 2035. That will require a concerted effort to provide sustainable vehicle and asset finance (VAF) across Sub-Saharan Africa. Vanmali thinks it will also require a middle class of at least 50-million people.
SA is unique on the continent in the sophistication and range of its consumer offerings. Locally based banks are at the heart of efforts to take some of these to the rest of Africa.
Eugene Ochse, head of Standard Bank’s African VAF activities, says though the finance situation has improved in recent years, there are still opportunities for financial institutions, motor companies and dealers to collaborate further.
He says: “VAF operations are based on the complexity of the operating environment and the size of the market. Every market has its own set of unique circumstances, challenges and nuances.”
Some markets don’t merit anything because “the local economy, legal and regulatory environment might not be supportive”.
WesBank CEO Chris de Kock says some markets are simply too small. “As a bank, it’s hard to get sufficient scale to broaden your risk.”
Even where there is scale, it may be necessary to keep the product range simple.
Kevin Brooks, WesBank’s head of non-SA African business development, says: “Locally, some customers want options like full maintenance leasing. We don’t have products like that available in some countries. We stay away from things like end-of-contract balloon payments and residual values.”
This caution is understandable. Even for experienced banks, African vehicle finance can be a minefield. Dealing in nontradable local currencies is a big risk.
Then there’s the risk of disappearing assets. Johan Maree, CEO of First National Bank’s (FNB) non-SA African operations, says some countries’ legal systems make it hard to repossess vehicles when buyers default on payments. When banks persevere, “those vehicles simply disappear and you never see them again”.
Conversely, you may see more of them than you want to. In markets where economic difficulties have caused transport sectors to collapse, “owners have come in, handed us the keys to their fleets and told us we are now the owners”, says Maree.
Coffey says finance efforts may need to be concentrated on “hub-and-spoke” countries. He’s referring to AAAM’s desire to create regional Sub-Saharan African motor industries – one each in the south, east and west. One country (the hub) would manufacture vehicles while neighbours (spokes) provide components, technology and services.
These countries would have a vested interest in encouraging vehicle demand. For others, Vanmali says: “It may be difficult to expect countries to do the same if they are not participating in the value chain.”
Ochse says that in SA and surrounding countries, about 50% of vehicle buyers seek finance. In East and West Africa, the preference is for cash sales.
Most African markets are dominated by cheap, used vehicles dumped from developed countries. SA bans used imports so though there is a thriving demand for used vehicles, nearly all were originally bought new locally.
Maree says it’s understandable that instead of spending the local equivalent of R2m on a luxury new 4x4, someone outside SA might prefer to pay R200,000 for a dumped version.
Import duties can make new vehicles doubly intimidating.
He says new cars in Zambia are twice as expensive as in SA. “Even where there is finance, the purchase price alone will disqualify a lot of people from getting it.”
Unless uncontrolled dumping is reined in, the market for new vehicles will never justify manufacturing investment. Several governments have promised to do so but whether they have the political courage to cut off citizens from cheap transport remains to be seen.
In 2015, Nigeria, Africa’s wealthiest and most populous nation, announced plans for a high-volume vehicle manufacturing industry. At its heart was a strict limit on used imports. WesBank even signed up for a finance joint venture.
But after several motor companies created assembly plants, the government reneged on its policy and the industry collapsed. WesBank’s adventure never happened.
Ghana has taken on Nigeria’s status as the preferred West African industry hub. In response to clear policy direction from government, Volkswagen and Nissan are among companies setting up assembly operations. Banks are also talking of SA-style finance innovation. FNB VAF business development head Jacques van Zyl says: “It looks very interesting.”
None of this means banks won’t finance dumped vehicles. They will. But their uncertain provenance creates a risk not inherent in new vehicles or those with a local service history. Resale value, a key part of the finance formula, may be guesswork.
Whatever the challenges, Vanmali says the African motor industry must succeed. It is the only realistic catalyst for large-scale African industrialisation. SA vehicle and components manufacturers employ just over 100,000 people directly but another 800,000 indirectly in industries for whom the motor industry is a major customer. The same can happen to the north.
But people must be realistic. “It has taken decades for the SA motor industry to be what it is today – where Ford in the US recently announced a $1bn investment in its SA subsidiary. It will take time for the rest of Africa to do what we have but it’s imperative that we get there.”
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