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We negotiate with EGA, BMAC to export components to Volkswagen Group: CEO of Kayan - Daily News Egypt

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We negotiate with EGA, BMAC to export components to Volkswagen Group: CEO of Kayan

Talks with ARTOC Auto, Skoda's former importer, failed

Kareem Al-Naggar, the CEO of Kayan Company, the Spanish brand SEAT’s and Skoda’s agent in Egypt, said that the company is negotiating with the Egyptian German Automotive Company (EGA) and the Bavarian Auto Manufacturing Company (BAMC) to sign agreements to manufacture components, such as brake pads in Egypt and export them to Volkswagen International Group.

Al-Naggar, who is also the head of the Egyptian Automotive and Trading Company (EATC), the local dealership agent for Volkswagen and Audi, said that Skoda has sent a delegation a few days ago to negotiate with ARTOC Auto, the former dealership, and try and solve the dispute—yet, the negotiations were fruitless.

He told Daily News Egypt in an interview that the previous agent sought to obtain a big compensation, while the international company retained its position, saying that the agreement with ARTOC Auto is merely a business relationship.

Yet he said that the Egyptian market is promising and described it as one of the cheapest markets in the world in terms of the value of currency and the wages of labour. However, he criticised the timing of the Automech Formula Exhibition this year.

Why is Kayan absent from 2017 Automech Formula?

Factors, such as the change in monetary policy, the exit of a strong segment of consumers and the significant decline in market sales that are influential in not joining the exhibition. Moreover, the timing itself was bad, since international companies are all busy with the world’s largest exhibition: the Frankfurt International Motor Show.

All this made it difficult for the parent company to send us a model for a new car or a premises to be set up. How can we have an automotive exhibition in Egypt when the whole world is focused on another bigger exhibition in Germany?

But I would like to emphasise that we will be present at the 2018 Automech Formula. We will be representing the four brands of Volkswagen, Audi, Skoda, and SEAT.

You have already announced that Skoda International will send a delegation this September to negotiate with ARTOC Auto to end the dispute. What are the updates?

The company did send a delegation a few days ago to negotiate with ARTOC Auto and try to solve the conflict. But it failed.

The aim of the negotiation was to bring their views closer together.

The former agent demanded huge compensation, while the global company was adamant that its relationship with ARTOC Auto was a business relationship, beginning with the contract and ending at the end of the contract term.

As a company, we found a divergence in the two positions. We tried to resolve the crisis by bringing the points of view closer, but the negotiations failed.

What did you reach with the company’s international delegation regarding Skoda’s plans?

Future plans have been put in place to be the largest importer of cars in Egypt. Skoda will be one of the bestselling European cars in Egypt in the coming year, but we have found that all the Ateca units are fully sold. I wanted to introduce the Kodiaq during the current Automech, but we found it hard to supply at the time. We will introduce the brand next year. We are also negotiating to introduce the Ayeti and the Ateca and found them to be hard to be supplied by next year.

Currently, we are negotiating with EGA and BAMC to sign agreements to sign partnership for the manufacturing of spare parts, such as brake pads, in Egypt and export them to the international Volkswagen Group.

What do you think of the investment climate of the state at the moment?

The investment climate is strongly linked to the country’s monetary policy.

Yet, this monetary policy is unclear to the automotive sector, and it is unclear what is required of it.

What is clear is the state’s tendency to reduce imports, and with the reduction of imports, state revenues from the customs of cars are cut down, even though it is one of the largest of the state’s customs resources.

Austerity policy to import cars has led to a 50% drop in market sales compared to last year, and thus insufficient liquidity to provide spare parts to meet customer needs.

The final problem is the lack of liquidity, which was caused by the monetary policy of the country, which raised the interest rate significantly on the pound, which led to the shortage in the market, because of the tendency of many to put deposits with high interest rates exceeding 20%/ There is no business at the moment that can make profits.

Meanwhile, the state is interested in national projects—and this is a good thing, but the return will be tangible in the future, not at the present time.

The state is interested in the poor class, but left the middle class suffering, which ousted a large segment out of the market.

What measures have the state taken to make the local market attractive for investment?

The Egyptian market is promising and is one of the cheapest in the world in terms of employment and currency exchange worldwide.

The state is working to attract new investments. The enactment of the new Investment Law will put Egypt on the global investment map. But the real problem is not in the laws, but the problem of the state lies in the application, not in the orientation.

The application is hampered by corruption that is spread across all the state, other than the obstacles facing any investor, which is dealing with the public servants.

The human element in Egypt does not have sufficient know how to deal with the investor and does not have the right to take a decision or sign the papers without fear of assuming responsibility. The ministers should review the system of consultants and employees.

In your opinion, what are the most prominent concerns of any investor entering Egypt?

The lack of vision, change of policies by changing the minister, and the security aspect, as well as the way how officials see foreign investors, which must change.

The foreign investor is always looking for profit and does not come courtesy of the state.

The investor first and foremost looks for profit, and if they find another market that provides them with more profitable means they will go, so the officials have to change their outlook towards the investors.

What is required of the government to attract new investments for the automotive industry?

To eliminate customs protection and give the investor incentives.

The protection programmes mean not moving forward in the industry, and this has been the approach of the state for decades to this time, and did not result into any real automotive development.

The state should set international standards for the automobile industry in Egypt and establish real rates of the local component according to the international rates in order to allow the exporting of products.

We have a company in Egypt that has monopoly over the market of a specific category. The company only manufactures for the local market. This is because we are the only country in the world that makes cars without accounting for the lowest safety standards.

As long as there are no specifications, and there are no specific percentages of the local component according to international standards, no car manufactured in Egypt can be exported.

In the bill on the development of the automobile industry submitted to the parliament, the state removes any customs protection against the imposition of an additional tax.

The draft law includes exemptions for those who meet the requirements of export or production quantity or increase the local component.

However, these proposals were met with objection, most of them came from European cars importers.

What was behind that objection?

Unfortunately, the bill, submitted to parliament for approval, extended the protection and did not remove it.

The strategy was based on protecting the local manufacturers at the expense of the importer by collecting the tax from the importer and giving it to the local manufacturer in return for their production.

The most prominent objections are that they are already a problem with the European partner, and we must know that Egypt’s largest trading partner is the European Union, not America, and the Egyptian-European partnership agreement aimed at opening the European markets to the Egyptian product and vice versa.

And the number of cars we import from Europe is nothing compared to the agricultural crops exported by the local market to the Union countries.

But when some see that tariffs will reach 0% on European cars in 2019, they seek to put in place other obstacles, and that drives us to lose our European partner.

We also need to set guidelines for European car prices, especially on the largest car importers to Egypt: Volkswagen, Mercedes, and BMW. We imported 3,300 units, including 1,500 from Volkswagen, 1,500 from Mercedes, and 300 from BMW during the first eight months of 2017.

Imports are expected to reach 5,000 by the end of the year.

The problem is that the Egyptian Customs Authority has refused the invoices submitted by the parent company to these vehicles and is making a new pricing for the vehicle.

The authority got the price of the car in Europe and deleted the tax there, considering that the result is the real price of the car and the tax is calculated on that basis.

The authority does not take into account the parent company’s tax bill, which represents a major dispute with the European partner. The price represents a relationship between the parent company and its agents.

What are the main objections to the draft strategy of the automotive industry?

The most prominent notes was that the state should put its policy towards the industry, not towards one of the car manufacturers, or serve certain people.

This objection was taken into account by the state, in addition to taking into account international standards in order to export cars manufactured in Egypt.

Furthermore, we should develop incentive programmes for factories, as the state did not provide any protection programmes to any party. They took those objections in the consideration of the government, and it is already preparing a new formulation of the strategy, taking into account these observations, as well as notes for the feeding industries.

The absence of a base for feeder industries in Egypt cannot create a real car industry, and we cannot export cars or export the products of the feeder industries.

The strategy is currently within the corridors of the Ministry of Industry and Trade and will be submitted to parliament during the month of November, which is a good thing.

But Egypt is setting a strategy for a car industry that the world will stop manufacturing within eight or ten years, and the whole world is turning to the electric car industry.

What do you think of the statement of the Minister of Industry in his visit to China, that Egypt aims to produce 500,000 cars annually?

The minister’s declared numbers of targeting 500,000 cars and 100,000 exported units are imaginary figures. We, who are involved in the market, hope to see this materialise. But the truth is that we are thousands of years away from achieving them.

The state of optimism revolves around the sale of 100,000 to 120,000 cars imported and manufactured locally. How can we produce 500,000 units and sell them amid the despairing purchasing power?

Was the delayed adoption of the auto industry strategy the main reason for the low market sales? Has the delay in issuing the strategy affected your company?

No, the real reason for the low sales is the disappearance of purchasing power and the sudden surge in prices.

For example, on 3 November 2016, with the decision to liberalise the currency rate, the debts of the companies doubled. My indebtedness to the suppliers were at $9m since I import cars in hard cash at an exchange rate of EGP 8.80 before the flotation, which hiked to EGP 17-18 to the dollar in one day. This more than doubled my indebtedness and caused sales to drop by 50%.

Clients no longer like the prices and they cannot buy cars. As long as the exchange rate at customs remain at EGP 16 and the cost of getting hard cash amounts to EGP 25 (after calculating the commission of the bank) the prices will remain t the same rate and clients will remain unable to buy.

What are your expectations of car market sales this year?

Our real problem in car sales statistics in Egypt is that they are unrealistic.

The Automobile Market Information Council (AMIC) considers the sale of the car is done between cars’ dealer and the distributors, which is unrealistic.

The sales process must be calculated when the car is licensed and arrives to clients. So the current statistics cannot be true. This was the reason we exited AMIC, as they do not have any real power or credibility in front of any government authority.

If we predict sales according to the right method, they will be between 80,000-100,000.

Based on monthly reports, we import 3,000-4,000 units per month. All of these cars are not selling.

The year 2017 saw many companies reconsider their sales plans. Are you doing this too?

We have already done so.

First, for Volkswagen, it is divided into two categories: we have zero sales in the commercial sector (not a single car was sold) due to a decision by Volkswagen to ban the entry of its commercial vehicles to Egypt, because its cars are diesel-powered with a lead ratio of 1700 BB, but Egypt imports diesel and mix it with other components, so the lead ratio reaches over 4000 BB. This causes the burning of vehicle motors. For Mercedes, they issue cars with engines matching that ratio. For Volkswagen passenger cars, we target sales of 5,000 cars by the end of 2017 and currently we aim to reach 2,000 cars.

Audi cars have been targeted selling 1,000 cars since the beginning of the year. Currently, with the market in place, we have reduced our target to 800 cars only after the return of Mercedes to compete again in sedan sales next to BMW’s competition with Audi in the SUV category.

Our goal was to sell 2,000 SEAT cars in the beginning of 2017, and we have reduced this figure to 1,000 since then.

As for Skoda, we aim to sell 600 cars after we got the agency during the second half of this year. Skoda is the winning horse for us next year, and it is supported by the fact that the Volkswagen Group decided, after bearing the fuel crisis alone, to protect the rest of its other brands.

Skoda and SEAT can compete with Korean and Japanese cars. For example, Korean, Japanese, and Chinese cars account for 75% of the total market sales in Egypt. The group aims to reach 5% of imports of Egypt and make Skoda the biggest supplier of cars in Egypt.

The Volkswagen Group, with all its brands, plans to make 50% of its cars electric by 2030.

How do you see 2018, and what is the target of sales?

I am optimistic about 2018, and we hope to see the exchange rate appreciate and the automotive sector revive.

What are the company’s expansion plans during the coming period?

We opened the Seat Center in Abu Rawash in 2017 and are targeting the establishment of a new SEAT and Skoda Center in Abu Rawash. It is strange that we have not yet been able to determine the volume of investments in the two centres because of the fluctuating of prices and lack of required equipment, as we need 34 cranes.

But we set aside $12m for the two centres, including $5m to SEAT and $7m to Skoda.

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