The situation of anticipation among the workers in the automotive sector extended to parliament over the past year, pending the long-awaited issuance of the strategy for the automotive industry from the Ministry of Industry after the introduction of new amendments. The automotive industry strategy is one of the most important issues to be resolved in 2018.
With the input of a German consulting office, the long-awaited draft strategy for the automotive industry is now being finalised.
The anticipation is not limited to workers and dealers in the automotive sector, but is also extended to parliament, which will discuss the bill after receiving it.
The auto industry strategy is currently being prepared by the foreign advisery office, and is expected to be released before the end of the second quarter (Q2) of this year, according to governmental sources.
The sources added that after the completion of the strategy by the Ministry of Industry, it will be sent to the cabinet for approval and then sent to the State Council for legal review. At the final stages, it will be discussed in parliament, which makes its completion during Q1 unlikely.
Ahmed Samir, chair of the industry committee of parliament, said that the committee is waiting for the government to send it the automotive industry strategy during Q1 this year.
He added that the government has assigned a large international office to introduce some amendments to the draft strategy to deepen the car industry in Egypt, taking advantage of the experiences of other countries in this regard.
According to parliamentary sources, the political leadership met with former Ministry of Industry officials to explain the details of the draft strategy and asked for a detailed memorandum about the future of the car industry in Egypt, with reference to the international agreements signed.
Tarek Kabil, minister of trade and industry, after launching a project to develop Imbaba car training centre, in partnership with the Ghabbour Auto in mid-December, announced that the strategy of the automotive industry will come to light in early 2018, noting that it is the German consulting firm that is formulating strategic sections of the plan, in light of the remarks made by parliament and the Ministry of Industry.
The drafting of the auto industry strategy bill, drafted by the automotive industry and the government authorities concerned with the industry, has been based on the imposition of a 30% industrial development tax on cars of 1600cc, 100% on cars from 1600cc to 2000cc, and 135% on cars larger than 2000cc.
The proposed strategy will stimulate the automotive industry and car components sector, in addition to exporting them through exempting local products or importers from the value of industrial development fees.
The expected strategy requires at least one of three axes.
The first axis is the strategy of deepening domestic manufacturing, which depends on increasing the percentage of local components in the manufacture of passenger cars and larger transport vehicles of up to 16 passengers, over eight years, from 45% to 60%, according to approved plan.
The axis also includes increasing local components of smaller pickup vehicles, over eight years, from 45% to 70%. The products will be exempted from the industrial development tax if the increase in production strategy is achieved. This axis requires the production of 60,000 cars per year as a strategic commitment, according to the adopted plan for cars with capacities less than 1600cc. Vehicles with capacities greater than 1600cc have a minimum limit of 8,000 units per year as a strategic commitment, while semi-pickup trucks have a minimum of 50,000 units annually.
The third axis is to exempt producers from the industrial development tax, if the export promotion strategy is achieved, which requires the export of components with a value starting from 25% to 40% of the total value of the local production of the factory or the import value of companies that do not have local factories.
According to Rafaat Masroga, honourary chairperson of the Automotive Marketing Information Council (AMIC), according to the expected growth rate until 2024, the car market can accommodate some 340,000 cars, of which 170,000 are locally produced, including 115,000 mass transport vehicles and 55,000 pickup trucks.
He explained that the number of factories currently operating in the production of passenger cars are six, while the number of factories operating in the production of pickup cars is only four factories.
The average share of the production of a passenger vehicle factory is about 19,170 cars, while the average production of a pickup car factory is about 13,750.
In order to motivate local car factories to increase the volume of production, he said that the sought production is not based on rational marketing studies, and it can be said that the strategy took into account only the existing factories, and it is not in its ambitions to attract new plants.
He attributed this to the fact that the car market in Egypt will not accommodate more than 200,000 cars during the current year, assuming that the share of locally produced cars will be 100,000 at best.
Masroga said that the most capable passenger car factory would not exceed 40,000 sales in 2024, thus producing 60,000 cars a year would be illogical.
The more fortunate light truck factory will only have 35,000 cars in the same year, so 50,000 a year will also make no sense.
These figures show that no factory is able to achieve the target production in the strategy, and the draft law did not provide for the entry of any new factories unless they are intended for export only.
Masroga said that the principle of motivation adopted by the strategy is not in the interest of the consumer and is directed at the car factories after achieving the target. Therefore, the premise of benefiting the consumer, who is the main party in the demand equation, is impossible.
He pointed out that exports from existing domestic factories or car dealerships are not expected, since the parent companies, with the exception of one brand, have not granted approvals in this regard, and the car factories or feeder factories will not have the ability to compete in price or technology if companies continue to produce vehicles through licensing from parent factories, and not in an actual partnership in which the parent company has a majority stake.
The increase of the local component to 45% increases the cost of production and hence increases prices, and will have a negative impact on the export capacity to foreign markets, because the increase of the local component requires a distinct price advantage for serious competition.
Masroga denounced pricing locally produced cars at the price of exported goods from their parent companies, even if 45% of local components is reached.
He said that the ideal solution for exports is that the parent companies manufacture themselves in factories within the free trade areas on Egyptian soil.
On the feasibility of the stimulus mechanism and the creation of an industry support fund, Masroga said: “Taxes on the development of the automotive industry will not be charged to the cost of production and will not be borne by the consumer.”
He added: “It is assumed in the draft law that the factories or facilities participating in the programme will pay the industrial development tax in advance according to the values specified by the law, which is higher than it will meet by meeting the requirements of the plan and the rest will be transferred to the state treasury, and that factories and participating facilities should pay 0.5% of the total sales value to the fund for the development of the automotive industry and feeder industries”.
According to Masroga, the process of stimulation is a kind of burden borne by those who work in the vehicle industry and its importers and has been emptied of its content. He added that the establishment of the fund for the development of the automotive industry and its feeder industries is a negative addition to the process of development efforts, as a burdensome bureaucratic and financial impediment.
Importers paying half a percent of the value of sales to the industrial development fund would not be acceptable, as the return on the industry would not provide the potential for the rapid development required.
Masroga called for abolishing the rules for the protection of local products as an advanced step in the strategic thinking of the country, which will have positive repercussions in the near future, including a reduction of customs duties to 10%.
He added that this would be a positive step for the benefit of the state while at the same time benefiting consumers, but clearing it of its contents by imposing the industrial development tax at the same customs values as the prevailing ones would manipulative and cause the state to lose its credibility, especially in front of the European Union and the Agadir Agreement countries.
He hoped that the strategy will begin to determine the targeted car market size from this year to 2024.
He also called on the strategy to address the steps required to enable the market to absorb the volume of cars to be marketed and to motivate consumers at the point of purchase.
Masroga said that the Industrial Development Authority (IDA) should declare clearly and transparently how to calculate the percentage of local components, otherwise this may be an entry point for corruption that affects any current or future development.
He also believes that the strategy should be accompanied by a comparative study of the results of applying the planned stimulus when achieving the planned local component ratios, and compare it with the cost of alternative opportunities available.
Moreover, the strategy should clearly show the real local value added in the components that are agreed to be manufactured. The higher the percentage of the local component, the lower the price will be either for the domestic market or for export, otherwise the real opportunities for competition will be lost.