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Auto sector in Middle East: Loaming dreams and scattered hopes - Daily News Egypt

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Auto sector in Middle East: Loaming dreams and scattered hopes

Construction sector suffers short-term blow, Egypt’s heavy truck sales decline 8.4% y-o-y


A report issued by Fitch Solutions expects that the car market in Egypt will face negative profit margin during 2020, due to the deterioration in consumer and corporate morale.

The decline comes in line with the declining domestic and global economic expectations due to the spread of the novel coronavirus (COVID-19), which has forced countries into unprecedented closures to curb the virus’ spread. The agency reduced its car sales forecast for Egypt in 2020 from 9.7% to 8.2%.

The report highlights the scenarios in Egypt’s production and industry sectors, indicating that 2020 production expectations will be lacklustre as a result of suspended production, particularly in April and May.

The report focused on the latest developments in the Egyptian auto sector, among them the rise in risks due to the slowdown in demand as a result of the “Let it Rust” boycott campaign. The temporary halt in traffic licence renewals and issuance has also impacted the country’s auto sector.

Imported cars will remain relatively flexible during the upcoming period, with reductions in customs duties received by vehicles coming from the European Union (EU) and Turkey.

Fitch anticipates that the reduction in borrowing costs will contribute to a revival in sales from 2021 onwards.

The report indicated that the demand for commercial vehicles was exposed to short-term headwinds coinciding with the slowdown in corporate capital spending. At the same time, the country’s construction sector has been subjected to a short-term blow, which will contribute to a decrease in demand for commercial vehicles. In turn, the agency expects sales of heavy trucks to decrease by 8.4% during 2020, to 49,342 units.

Nevertheless, sales will recover again in the medium term as a result of Egypt’s goals to maintain its position as one of the fastest-growing construction markets in the world. The report also explained that the country’s energy and trains sector would outpace more as a result of economic diversification.

Egypt has increased its interest in the electric car industry, illustrated by the country’s Ministry of Public Enterprise Sector signing a memorandum of understanding (MoU) with China’s Dongfeng Motor Company.

The MoU will see a growing partnership between Egypt and China in the production of electric vehicles, with the El Nasr Automotive Factory’s primary production capacity set to reach 25,000 units.  At the same time, the Ministry of Public Enterprise Sector is also studying the feasibility of expanding the infrastructure for charging electric cars to public squares and garages across Cairo Governorate.

The Fitch report made note of Egypt’s attractiveness in terms of its vehicle assembly capabilities. This began with the arrival of Kia in March 2018, and its signing of a five-year investment contract with international trade company, Egyptian International Trading (EIT) to assemble Kia brand cars. The maximum output that would be reached, under this contract, would be 45,000 units if production facilities undertake continuous 24-hour work.

Likewise, Renault announced the possibility of establishing a production base in Egypt, which enjoys a strategic location between Europe and Asia. In February 2018, Belarus’ Minsk Automobile Plant (MAZ) opened a $5m production facility through a joint venture with Helwan Machinery and Equipment to produce heavy commercial vehicles in Egypt.

The MAZ production facility, which will supply Egypt and the rest of North Africa, has an initial capacity to produce 500 units per year, with the possibility of expanding this as demand recovers. Moreover, MAZ also aims to increase its localisation to 40% to comply with the Agadir Agreement, which allows for customs-exempted exports and car imports between member states provided that 40% of the value is added in the member’s country.

Meanwhile, Mercedes-Benz returned to Egypt in June 2019, after it signed a memorandum of understanding (MOU) with the Egyptian government to restore its vehicle assembly operations in Egypt. The resumption of the luxury German brand’s activities in Egypt came after a four-year hiatus.

Mercedes-Benz’ plan includes the local assembly of vehicles, and the establishing of a logistics centre in the Suez Canal Economic Zone to supply the Middle East and North Africa (MENA) region with auto components. This is in addition to its plans to expand its existing vehicle sales network and post-market sales services.

The Fitch report noted Morocco’s regional leadership role in vehicle assembly, with its geographical closeness to Europe representing an alternative production base for EU-based companies. Morocco also boasts a relatively low-risk and stable operating environment that has proven attractive to major car manufacturers.

With green energy increasingly an issue of global importance, car manufacturers are in turn looking to use renewable sources of energy, notably solar and wind sources, at their factories in Morocco.

With the US re-imposing sanctions on Iran, the latter country has witnessed a weak performance in car production, and a commensurate contraction in its auto sector as a whole. This has been attributed to the disruption of the supply chain in China resulting from the spread of the COVID-19 pandemic. Aside from Iran’s almost complete dependence on China for car components, the global drop in oil prices may ultimately lead to the collapse of the Asian country’s auto industry.

On the other hand, the GCC car sales market has struggled to return to its previous highs since the price of oil fell significantly in mid-2014 and 2015. The growth registered in 2019 and the introduction of value-added tax (VAT) in many markets have not helped the GCC face the challenges of another period of low oil prices and the global spread of the pandemic.

As a result, Fitch predicts that GCC sales will grow by only 1.9% in 2020, after an estimated increase of 11.6% in 2019.

Bahrain achieved the lowest growth rate of only 0.7%, down from previous expectations of 3.3% growth, which is in line with the agency’s risk team predictions. Bahrain and Oman are set to be the most vulnerable to the impact of lower financial revenues. Even before the pandemic, the continuous financial build-up pursued by the Bahraini authorities pushed many families to become more conservative and sensitive.

Car sales in Saudi Arabia witnessed the largest downward revision from growth of 5.8% previously, to only 1.7%.

The report indicated that the possibility of short-term recovery in areas of ongoing conflict, namely Iraq, Libya, and Syria, is unthinkable due to many of the challenges they face in particular. This includes the elimination of consumer bases in countries, destroyed infrastructures, and the low rate of vehicle ownership. Despite this, in the long term, conflict countries can recover if they are stable.

Topics: auto sector

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https://dailyfeed.dailynewsegypt.com/2020/08/11/auto-sector-in-middle-east-loaming-dreams-and-scattered-hopes/
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