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State of Nigeria Automotive Industry: An Opportunity To Diversify The Economy And Create Jobs

By: LUQMAN MAMUDU (Director of policy&Strategy, NADDC)

[dropcap]N[/dropcap]igeria has once leveraged on the multiplier effect of the automotive industry to successfully better the lot of its people. And there is no better time than now to consolidate efforts and make it sustainable.

Luqman Mamudu: "A modest level of employment has already happened and this will continue."
Luqman Mamudu: “A modest level of employment has already happened and this will continue.”

The four-year Reconstruction and development plan launched in 1971 shortly after the civil war, provided for the establishment of two car plants, which became operational in 1975.

Five years later, four commercial vehicle plants were established and became operational in 1980. The plants had a combined annual output of 141,500 vehicles. General Motors and SCOA Nigeria had additional annual capacity of 19,500 units. 122,000 vehicles or 80% capacity utilization was achieved by 1984 for the sector.

Components and parts manufacturing emerged such that items, including batteries, tyres, wire harnesses, radiators, break systems, exhaust pipes, windscreen, glass, seats, seat belts, paint and some trim items of global standards were made locally. Peugeot Kaduna, for instance recorded nearly 40% local content by value. It had over 87 local parts suppliers. Direct and indirect employment reached six digits. About 89% of investment was government owned, although multinational companies like SCOA, R.T. Briscoe, CFAO were active.

Nigeria was ahead of many countries that have today developed their industry to enviable level. The industry thrived for about 10 years before decline in capacity utilization in 1984/85. The repositioning of the Nigeria economy without regards to its infant industry triggered the decline. But the imperfections in the underlying structure made it vulnerable. Now the country imports nearly $8billion of automotive and related products annually. This trend is being reversed. But it cannot be done overnight.

Lessons learnt from the industry’s past missteps have been useful in the ongoing intervention. There was neither specific policy nor institutional framework to guide implementation. A  Committee in the then Federal Ministry of Industry (Standing Technical Committee on National Automotive Industry) was responsible. Insufficient protective and incentive measures were put in place within the frame work of tenured technical agreements with an all European Original Equipment Manufacturers (OEMs): Peugeot of France, FIAT of Italy, Styre of Austria, Leyland of Britain, Mercedes and Volkswagen of Germany.The OEMs were merely encouraged to persuade their traditional parts suppliers to locate in Nigeria. There was no robust rebate program for value addition. Market competiveness took the back seat to Government patronage.

In seeking to diversify Nigeria economy, the automotive industry remains one of the key strategic choices. But it must be properly articulated. The industry is known to lead technology for other sectors, including agriculture and mining.  It creates quality jobs massively and can account for as much as 10% of a nation’s GDP.

quote-2Luckily for Nigeria, most of the facilities established in the 70s still exist. This has been instrumental in the current quick build-up of installed capacity. The launch of an automotive policy in 1993 and the establishment of National Automotive Council (NAC), now National Automotive Design and Development Council (NADDC) as the institutional framework for its implementation was the initiative of stakeholders in 1992. They included Nigeria Automotive Manufacturers Association (NAMA), Automobile Local Content Manufacturers Association of Nigeria (ALCMAN), Nigeria Society of Engineers (NSE) and Manufacturers Association of Nigeria (MAN). The NADDC board is chaired by a Presidential nominee, with the following as members: Nigerian Society of Engineers (NSE), Nigeria Automotive Manufacturers Association (NAMA), Automotive Local Content Manufacturers Association of Nigeria (ALMAN),Standards Organization of Nigeria (SON), Raw Materials research and Development Council (RMRDC), Motorcycle Manufacturers Association of Nigeria (MOMTAN) and the Federal Ministry of Industry Trade and Investment.

Designed to attract domestic and foreign private investment, the policy implementation kicked off in essence with government divestment from all plants in which it owned shares in 1995. However, until 2013, application of the right level of protective and incentive measures promised to new owners of the plants were delayed. The prevailing tariff differential of 15% (average) was not attractive enough to foreign investors, because countries from where they exported to Nigeria offered export incentives high enough to override Nigeria’s low tariff barrier. The industry also suffered a setback when, in 1995/96, Nigeria signed the ECOWAS Common External Tariff (CET) agreement. For instance, the Nigeria tire industry established since 1963 and which easily met 90% of local demand vanished. Today we meet all our tire needs from imports.

As a result of continuous consultation with industry and stakeholders, the NADDC drew up the National Automotive Industry Development Plan (NAIDP) based on the existing automotive policy. The 10-year plan (2014-2024) was endorsed by government for implementation in October 2013.

quote-01One of the key elements of the NAIDP is the tariff differential which was made high enough to over-ride export incentives of countries from where Fully Built Up Vehicles (FBUs) flowed into Nigeria. Other elements are market, manpower, standards, infrastructure and policy stability. The differential is 35% for Commercial Vehicles FBU and 70% for Cars FBU. Knocked Down kits are imported at 0% tariff at Completely Knocked Down (CKD) level while tariff applies at 10% for Semi knocked Down (SKD) kits. The 35% levy placed on new FBU cars is to fund the affordable Vehicle Purchase scheme by NADDC and to build capacity in the industry. Note that tariff structure is to be adjusted downward guided by continuous dialogue with ECOWAS as the industry matures over the period.

Investment based incentives (IBI) in form of Concessional imports to attract OEM has been largely misunderstood.  It is meant for assemblers to meet demand for other segments of the market while concentrating on limited models. It is also to improve their cash-flow position, stabilize prices of FBUs and quickly build up volume of new vehicles before restriction can be placed on used vehicle imports.  In addition, long production runs for Nigeria models will yield economies of scale and low price offer to Nigerians eventually. The concession is actually designed to prevent revenue loss to government. Preferential tariff on concessionary FBU imports for Assemblers are way above tariff rate for FBUs pre-NAIDP. FBU cars were between 20% and 35%, while FBU commercial vehicles attracted only 10%.

Concessionary import under NAIDP is 35% for Cars and 20% for commercial vehicles. So where is the revenue loss? The initial two years of the NAIDP allows concessionary import of two FBUs for every one vehicle assembled at concessionary rate, which means that if you were to import a lower value Ford Ranger worth N6m as SKD kit at 10% tariff for instance, revenue to government will be N600, 000. And if an Upper end N18, 000,000 Ford explorer FBU is imported as concession at 35%, tariff will be N6, 000,300! And if you import 2 as entitled, government gets revenue of N12. 6m.! Compare this to N600, 000. Yet, those opposed to concessionary imports argue that importing Lower cost Unit as KD kits and importing High value vehicles as concession is a loss of revenue to government. One would have thought that the reverse is the case.

The NAIDP package is sufficiently attractive to OEMs. But because of the fear of possible policy reversal, most have chosen to partner with Nigeria Entrepreneurs, including existing Assembly plants. The impression has been given by some quarters that assembly licenses issued under NAIDP, 41 by last count, are too many. This is not true. All the companies and brands under license in Nigeria deserve them. Perhaps the fear is that quality will be compromised, but this can hardly happens. The OEM technical partners are extremely vigilant about quality and pursue robust programs locally. NADDC and SON work closely with the industry. Brands assembled in Nigeria include HONDA, NISSAN, HYUNDAI, PEUGEOT, ISUZU TRUCKS, MAN TRUCKS, FORD, ASHOK LEYLAND BUSAN, INNOSON, SINO TRUCK, PROFORCE, KIA, SCHACMAN, FAW and ASTON.

The Chinese companies on the list sign technical partnership agreement with multiple Nigerian Entrepreneurs, and they all have to be issued separate licenses. The market will eventually determine which company or brands survive. But everyone complies with set criteria for licensing. The status of these OEMs can be verified by anybody. The team that recommends licenses is made up of the SON, The Nigeria Customs Service (NCS), Federal Ministry of Finance and the NADDC. The licensing requirements are simple: A technical agreement with an OEM, a space certified by the OEM as fit for its assembly, List of equipment certified by the OEMs, Parking list prescribed by NAIDP, then all statutory requirements like tax clearance, etc.

The build-up of capacity for vehicle assembly under the NAIDP has been very encouraging. Between 2013 and 2015, these companies have installed verifiable capacities to assemble 370,520 automobiles annually. It should be more, but most are still at the stage of mobilizing resources. However, only 15,119 units of vehiclesis recorded as having been assembled in Nigeria in 2015. This is less than 5% of installed capacity. But when output of 2000 Units of vehicles produced in 2012 is taken as a base line, 15,119 represent over 700% in 3 years. It is indicative of the direction. The fact that 70% of the assembling recorded is at SKD level does not diminish the gains. Firstly, the agreement with the OEMs with massive technical and financial muscle represents the opening of an investment pipeline to these Global OEMs and access to their resources.

Secondly, the investment capacity of Nigeria Entrepreneurs is limited but they should be praised for their courage.

Thirdly, SKD is better than importing Fully Built Units, which gives no opportunity for direct local employment, nor the chance to incorporate any parts that maybe locally available.

NADDC has already signed agreement with ROBERT BOSCH of Germany and the company opened an office in Nigeria for the first time. Bosch account for nearly 60% of global automotive technology. On the average, it cost $5Million to acquire SKD equipment set, apart from infrastructure cost. The SKD assembling phase is recognized worldwide as an entry point to automobile manufacturing. It is actually provided for in the tariff code. The OEMs really don’t like it, because it is cumbersome and may mean disassembling vehicles already built.  The OEMs, therefore, want to hurry up the value chain, as investment environment becomes right. They transit rather quickly to Completely Knocked Down (CKD) stage, and then unto Integrated Manufacturing stage, where significant percentage of components are locally sourced. The speed at which a country attains integrated manufacturing stage depends on its policy in terms of Infrastructural support, incentive packages, legal environment and market. Tariff barriers are no substitute. Apart from international trade regulation implications, it should only be used long enough to allow the industry gain traction. This is why the NAIDP provides for gradual reduction of the tariff differential within its first 10 year span to common levels.

The NADDC is active in the monitoring and evaluation of the NAIDP and continues to strategize to package it as an investment opportunity and at the same time ensure that its gains are realized without undermining the economy. Some have tried to present spurious statistics to scare government of revenue leakages arising from implementation of the policy. Figures like N300 billion loss due to diversion of Automobile imports to neighboring Ports have been mentioned by some unnamed group.

Their argument is flawed. Over 90% of Nigeria vehicle import are used vehicles. Under NAIDP, used vehicles are yet to be levied. So why would anyone divert vehicles? There is also no logic to the claim that licensed assemblers were importing FBUs under the guise of CKD and even if they did which is far from the truth, Nigeria Customs is vigilant. Besides, the total vehicular import including KD kits in 2015 was 15,199. 5% of total vehicular import that year which stood at over 400,000. Even if the entire imports of 15,199 units slipped through customs without paying duty, will it amount to N300billion loss?

The Minister of Industry trade and investment Dr Okechukwu Enelamah is quite determined to deepen the gains of the industry by addressing those concerns that have limited additional investments by OEM. A task force appointed recently will shortly complete its assignment. The issues to be addressed include: constraints to inflow of KD imputes through the ports; unrestricted inflow of used vehicles, which tend to limit market for newly built vehicles; and strategies to improve investors confidence in Nigeria.

NADDC is already equipping its automotive test laboratories located in Lagos, Enugu and Zaria in readiness for the industry’s need for quality assurance. The laboratories will be certificated by global accreditation agencies, because the automotive industry anywhere has to be globally competitive.

The local content objective of the NAIDP is being equally attended to, because, as the operating capacity grows and attains a critical mass, the component parts manufacturers will focus attention on Nigeria. So we should be ready. UNIDO will be undertaking a study of the defunct component parts manufacturing this year. And Kaduna and Osun state governments have granted NADDC Certificate of Occupancy (C of O) for a combined land area of 400 hectares to build automotive supplier parks.

A consultant to undertake outline Business case study has been appointed. As said earlier, NADDC is in partnership with BOSCH to develop human capital for the industry among others. It has scheduled first of a series of workshops for assemblers for the 10th of October 2016 in Lagos. The various OEMs also come with very robust training program for Nigerians. The ECOWAS has adopted the automotive industry as part of its region wide industrial policy and in discussion with NADDC to include sourcing of components parts from member countries with capacity.

NADDCThe Nigeria automotive industry has the capacity to lead the economic diversification process; we should all support it to gain its full potential. The import bill for automobiles is too high and may undermine Nigeria balance of payment position, if not gradually reduced through local value addition, which is what the NAIDP offers. The process requires patience, patronage and assurances to OEMs by all Nigerians. We may not all be able to buy cars immediately. But most Nigerian Haulage firms and mass transit companies will re-fleet with new vehicles for improved standard of living of Nigerians.

A modest level of employment has already happened and this will continue.

[tabs type=”horizontal”][tabs_head][tab_title][/tab_title][/tabs_head][tab]Luqman Mamudu is the Director, Policy&Planning, National Automotive Design and Development Council (NADDC), Garki, Abuja, Nigeria[/tab][/tabs]

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