STRATEGY: Is Africa the new China?

The future car buyers of Nigeria. Picture © Devesh Uba, all rights reserved.

Africa is progressively shedding its image of a continent embroiled in poverty, corruption and never-ending wars. Yet the dramatic Ebola outbreak in Western Africa is a harsh reminder that the road to development is a long and tortuous one. Three years ago, I created the Africa Project to jump start the collection of new car sales data in a region that remains very secretive. From only a couple of countries in 2012, official sales data for Africa on BSCB now covers 23 nations, and its scope is expanding every month. New car sales on the continent are still for the most part in their infancy, making Africa the last frontier in terms of automotive development. If the economic growth we have witnessed in the past decade continues at the same rate, could Africa become the new China and replace it as the world automotive sales engine of growth? As is often the case in such generalist questions, the answer is multi-faceted, and some carmakers are already in a much better place to benefit from future African development.

Street scene in Djenne, Mali. Picture © Leonid Plotkin, all rights reserved. 

1. Economic and demographic background

In 2014, roughly 1.9 million new vehicles were registered in Africa for 1.1 billion inhabitants, that’s only 1.67 new vehicle per thousand inhabitants (NVPT), to be compared to 2.56 in India and 18.16 in China. Geographically, the market distribution is however very uneven: 8 out of 10 new cars are sold in just four nations (South Africa, Algeria, Egypt and Morocco), the remaining 50 countries adding up to less than 400.000 registrations, equivalent to the number of vehicles sold in China in… 6 days. Among the 30 African markets with available total market data, the NVPT rates vary greatly: from 30.63 in Reunion and 17.19 in Botswana to just 0.04 in Ethiopia and Burundi. So we are still very, very far from even the notion of emerging market as far as Africa bar a handful of countries is concerned, but by 2030 its importance will have improved drastically.

Top 20 largest African new car markets in volume – Full Year 2014:

Source: OICA

Africa is now regular around 5% annual GDP growth rate, and despite a predicted oil-related 2015 slowdown to 4% in sub-saharan Africa, countries like Nigeria, Ethiopia, Ghana, Ivory Coast, Kenya, Tanzania, Mozambique, Uganda and Zambia are slated to post average annual GDP growth of between 6% and 8% over the next decade. According to an Emerging Markets Private Equity Survey published by Coface in 2014, sub-saharan Africa is now the most attractive investment destination in the world ahead of South East Asia and Latin America ex-Brazil, whereas it lagged in 8th place only 3 years earlier. The last piece of the puzzle is demographic: the African population will grow from 1.1 billion today to 2.4 billion in 2050, compared to 1.66 billion in India and 1.3 billion in China by then. This will include over 400 million souls in Nigeria alone (almost as much as in the U.S.) and 278 million in Ethiopia (90 today), and an urbanisation rate doubling from 26% today (290m) to 50% in 2050 (1.2bn).

Strong and regular economic growth + more wealth + four times the population in cities mean we can serenely expect an explosion in new vehicle sales. In this context more and more voices in the business world have started to pose the question of Africa as the future engine of growth of the world economy, including in the automotive sector.

Chefchaouen, Morocco. Northern Africa currently accounts for half of African new auto sales.

2. Which African regions will act as locomotives?

As opposed to the single entities that are China and India, Africa’s main handicap is its fragmentation into a multitude of countries with immense development disparities and the near-absence of flowing trade inside the continent. The key to its economic and automotive growth as a whole is the creation of internal exchanges through free-trade zones, grouping countries with similar development levels that can then act as pulling forces for the remaining nations. African countries need to develop their transport infrastructures and energy networks in collaboration with each other and start matching their laws and currencies so business and wealth can bloom. We can see some of this sprouting out already: 8 countries in Western Africa and 6 in Central Africa now use a single currency (the CFA Franc) and the South African Development Economical Community is developing. In this context, which African regions can we start to draw upon as future African engines of automotive growth?

Kenya and Eastern Africa

This region of Africa is the closest to taking off, partly because three relatively well connected countries (Kenya, Ethiopia and Tanzania) are reaching GDP per capita levels that have been statistically known to unlock motorisation: US$ 2.500. It is also home to the African equivalent to San Fransisco’s Silicon Valley, dubbed the Silicon Savannah in Nairobi – Kenya. There, according to the Economist it is easier to pay a taxi fare by mobile phone than it is in New York as over half the Kenyan population already uses the M-Pesa mobile payments system. As Mail & Guardian Africa notes, if “Nigeria and South Africa have for a long time been the economic giants of Africa due mainly to their natural resources, Kenya has future-proofed itself by focusing on financial services and telecommunications” and will become one of Africa’s most dynamic new car markets in the next couple of decades.

One of the proofs that this region is about to get fast-tracked to automotive development is the creation of Mobius Motors, a car designed by Kenyans for Kenyans that we will be studying in more detail further down. The big unknown at the moment is the exact path entry-level car buyers will take in the region. As opposed to China where the culture is reticent to used cars, in the whole of Africa the obvious entry-level choice so far has been used imports from either Europe or Japan – however these sometimes reach the price of a locally-assembled new car due to high import duties. The new car market may take longer to set in but once unlocked, Kenya, Ethiopia and Tanzania should display explosive new car sales annual growth rates, lifting the first two to above 300.000 annual new units and the latter to above 200.000 by 2030.

Nigeria and Western Africa

This is the African region with the both biggest untapped potential at the moment, and the highest level of uncertainty about future development. Nigeria is the most populated country in Africa with 183 million inhabitants, however its new car market currently stands at an insignificant 53.900 annual units. A local automotive manufacture industry has failed to manage a successful transplant so far, something the Nigerian government is trying to change with its “new automotive policy” offering significant tax breaks for car manufacturers establishing a factory in the country. This won’t be enough, and illegal tariff practices by government bodies inside the country will need to be abolished for an auto industry to start flourishing.

If and once on its way this region could become one of the fastest-growing new car markets in the world. Boosted by Nigeria, Ghana, Cote d’Ivoire, Senegal and Cameroon will then act as relays of growth towards nations bridled until now by war and disease, such as Liberia, Sierra Leone and Guinea Bissau. By 2030, Nigeria alone will count 274 million inhabitants and the region close to 500 million. All planets aligning, 1.3 million annual new cars should get registered in Western Africa by then, vs. less than 100.000 today. Nigeria will continue to dominate with almost 600.000 annual new sales with Ghana coming second at 233.800 and Cote d’Ivoire, Senegal and Cameroon all approaching 200.000 annual units.

Southern Africa

Today, South Africa represents two-thirds of all light vehicles produced in Africa and one-third of all new light vehicles sold on the continent. Its market structure is approaching maturity, with over 50 brands present in the country, a strong prevalence for pickup trucks and a very interesting fondness for low-cost cars originally designed for India, such as the Toyota Etios, Datsun Go and Ford Ecosport. Through direct exports and fluid business routes, South Africa has already lifted neighbouring markets such as Botswana and Namibia, however their limited population (just 2 million inhabitants each) will prevent them from having a true impact on the overall African totals of tomorrow. Instead, and with the help of a carefully managed free trade zone, South Africa will extend its area of influence further north to pull Angola, Zambia and Mozambique in its wake – Zimbabwe unfortunately staying out of the picture for now due to its unpredictable political situation. As a result, while South Africa should still tower at 1.1 million annual new vehicle sales, by 2030 Angola should be able to approach 300.000, with Zambia around 150.000 and Mozambique at roughly 75.000.

Northern Africa

Home to 52% of all African new car sales in 2014 at just under 1 million units, Northern Africa is traditionally separated from the rest of the continent, both geographically by the Sahara desert but also statistically, as it is usually fused with the Middle-East when the rest of the continent is dubbed Sub-Saharan Africa. With their sights firmly set on Europe, Algeria and Morocco are fast becoming auto assembly and export heavyweights, notably through the settling of the Renault Group (Dacia and Renault factories) and PSA Peugeot-Citroen who recently announced they would build a new factory in Morocco by 2018. Tunisia follows in their wake development-wise, although remaining an all-importing country for now which will logically change within less than a decade.

Egypt for its part has had an auto manufacturing activity for decades and due to its population, set to reach 133 million by 2030, has the biggest sales potential, but also the most unpredictable in the region given its frequently unstable political situation and proximity to highly sensitive Israel. New car sales growth in the area won’t be as explosive as it could be in other regions because it is starting from a much higher base, but Egypt (1.2m), Algeria (almost 850.000) and Morocco (450.000) should remain within the Top 5 largest African new auto markets by 2030, with Tunisia and Libya a notch below. The development path in this region will spread inside each country from the coastal, more developed areas into the interior, also potentially spreading into Libya that remains very secretive about its auto market but will be the richest country in the region by 2030.

Top 10 largest African new auto markets by volume – 2030 forecast:

NVPT: New Vehicles Per Thousand inhabitants sold annually. This forecast was calculated by BSCB based on official 2030 GDP forecasts by the International Monetary Fund, World Bank, KPMG and African Development Bank Group, official 2030 population forecasts by the United Nations Population Division and internal BSCB methodologies linking GDP per capita and car purchase tipping points.

Picture © redahida. Low-cost brands such as Dacia have a bright future in Africa.

3. Which manufacturers are best placed for an African takeoff?

Carmakers who have a solid experience in low-cost manufacturing are better placed to benefit from African new car sales taking off because of two distinct cultural traits: a decades-long habit of importing used cars en masse and a tendency of the population to purchase less ostentatious vehicles than they can afford so as not to attract the attention of taxation offices. Africa’s fondness of used cars contrasts with psychologies visible in China, Japan and to a lesser extend India and means that pending lower import tariffs, car ownership will be among the most affordable in the world, with 20 to 40 year-old used European and Japanese vehicles readily available to purchase. As Ben Longman from African trend analysis firm Trendtype points out, distrust of government taxation offices and their arbitrary and illegal practices has made African consumers very coy about displaying ostentatious signs of wealth that could make them an obvious target for tax. They tend to choose cars in the lower-end spectrum even if they can afford more expensive vehicles. In that manner, Africa is the total opposite of India where consumers tend to bypass lower-end vehicles that wouldn’t appropriately enhance their status.

These two cultural traits are a fertile ground for new low and ultra-low cost cars, offering an affordable alternative to untrustworthy used cars and fitting right into the discretion African car buyers cherish. Enter the notions of frugal engineering and bottom up innovation I explained in my April 2014 article “STRATEGY: Understanding the Indian market”. These skills, perfected by manufacturers in India to no avail so far, certainly won’t be lost on the African car buyer and Indian experience will turn out to be capital for African success. Bottom up innovation has enabled the appearance of $150 laptops or $10 smartphones in Africa and applying these principles to car making will enable ultra-low cost offerings that, although originally designed for an Indian audience in the case of the Tata Nano, Datsun GO and Renault Kwid for example, will fit right into African tastes.

A straight road ahead for Toyota in Africa?

Toyota and Japanese manufacturers

Toyota is currently #1 in Africa at roughly 15% market share, with an estimated 39 African nations having a Toyota as their best-seller – mainly the Hilux, #1 in 30 countries – and that’s not even taking into account the blanket of used Toyota Corollas of all generations going back to the early eighties that is currently covering the continent. However brand loyalty is low in Africa and carmakers are among the least trusted brand categories according to Trendtype, so this is no guarantee for future domination. In fact, Korean manufacturer Hyundai is already outselling Toyota in four major African markets: Algeria, Egypt, Morocco and Angola. To sustain and further enhance its domination, Toyota will need to move towards simpler technologies as illustrated in Libya where Chinese ZX Auto pickups replaced the mighty Hilux during the Arab Spring.

Toyota has already been trying its hand at selling low-cost in southern Africa with the Etios, reaching its highest world rankings in South Africa (#4 in 2013), Namibia (#3 in 2014) and Lesotho (#2 in 2014) as well as the Corolla Quest, a previous generation Corolla ranking #4 passenger car in Namibia in 2014, #5 in Lesotho and #6 in Botswana. A future Toyota factory assembling previous generation, simpler Toyota Hiluxes in Africa for Africa would make a lot of sense and capture a large swath of any future growth in the region.

The low-cost Datsun GO has launched successfully in South Africa.

Building on the low-cost observation has Datsun as the next Japanese manufacturer set to enjoy potentially outstanding sales in the region. A complete failure so far in India due to its lack of status, the GO has started a very satisfying career in South Africa and there is no reason why this could not be replicated in future African markets. Suzuki through their Indian subsidiary Maruti is already able to offer ultra-low cost models and as a result is #1 in Angola. The rest of the Japanese have been rather discrete as they mainly count on their pickup offerings such as Mitsubishi with the L200 and Nissan with the Hardbody.

Hyundai sells a 2003 Verna as new in Egypt, to great success.

Korean and Indian manufacturers

Hyundai already outsells Toyota in four major African markets: Algeria, Egypt, Morocco and Angola, and will credibly challenge the Japanese manufacturer everywhere in Africa once it produces a no frills pickup – there are none on the horizon at the moment but trust Hyundai to react very quickly once it decides the time is right. The Korean manufacturer is already selling the Indian-made Grand i10 successfully in some African nations like Angola, but more interestingly in Egypt, it is offering a 2003 Verna as part of its new car lineup to great success as this is the best-selling passenger car overall in that market. Hyundai should and will replicate this concept as it expands into more sub-saharan countries. Indian auto makers Mahindra and Tata are also making significant inroads in southern and central Africa, and pending their survival at home they should not be discarded, Africa fast becoming one of the few regions where they still have a chance to establish a solid export presence.

Dacia Sandero in Marrakech. Picture © Elmar

French and European manufacturers

Cultural and economic ties make most of Africa the perfect playground for French manufacturers: the worldwide Francophone population will rise to 700 million by 2050, 80% of which in Africa. However, even though there is a decades-long heritage of French cars on most Francophone African roads and all French manufacturers still enjoy a solid brand image here, they have failed to fully capitalise on it so far. They are only dominant in northern Africa: since last year Renault manufactures in Algeria where it ranks #1 ahead of Peugeot, Renault-owned Dacia manufactures in Morocco where it leads the market with 27% share and Citroen is #1 in Tunisia with Peugeot at #3 and Renault at #4. Apart from these, Africa has for the most part returned to being terra icognita for French carmakers, an elephant-sized missed opportunity for them.

The Dacia lineup and its only-as-needed equipment philosophy seem like a perfect match for sub-saharan African consumers, in particular the recently unveiled Kwid small car for booming African cities already cramped with traffic. And Renault/Dacia can now count on a full decade of experience selling low-cost cars at every corner of the globe, an invaluable advantage over all other manufacturers when it comes to Africa as we’ve seen above. It took a while, but French manufacturers are now fully conscious of the low hanging fruit that is Africa, with Peugeot joining the ranks of Moroccan manufacturers in the coming years. The French will be a force to be reckoned with over the next couple of decades, as opposed to the quasi majority of other European manufacturers except perhaps Volkswagen, currently weak outside of southern Africa and in dire need of low-cost models such as the Polo Vivo it sells there if it wants a chance at a slice of future African growth.

Foton opened an assembly plant in Kenya in 2014 with a 3.000 annual unit-capacity.

Chinese manufacturers

Unbeknown to most, some Chinese carmakers already have a decade of assembling experience in Africa under their belt, with Chery starting in Egypt back in 2004 for example. As I studied in detail in my April 2014 article STRATEGY: How Chinese carmakers are setting themselves up for success, they have been working extra-hard under the radar to secure less developed markets that will form the bulk of the global car sales growth over the next couple of decades, namely South America and Africa. As a result, Chinese carmakers currently hold an astounding 20% market share in Kenya, Senegal and Ivory Coast, 15% in Egypt and 12% in Nigeria. Geely, Brilliance and Chery (with the Speranza brand) are strong in Egypt while Great Wall is making significant inroads in most of Africa, like in Namibia for example where the Wingle pickup ranks #10 overall in 2014. A wide coverage that goes against current perceptions of Chinese weakness in export markets.

But what makes the Chinese implantation in Africa unique is their government’s deep involvement in the infrastructure building of the continent for the past two decades, in essence since the fall of the Berlin wall and the loosening of Russia’s influence over the continent. Along with assembling cars, the Chinese are also building roads, rail tracks and airports (along with, oddly, soccer stadiums), prepping Africa to use their automotive products to their full extent. Chinese manufacturers lack the heritage that brands like Toyota, Peugeot or even Hyundai enjoy in Africa, however car manufacturers as a whole suffer from an extremely low level of consumer trust according to African trends analysis firm Trendtype, so it’s a blank page for everyone so to speak, which evens out the chances the Chinese have at carving themselves a significant slice of the African growth cake. Chinese carmakers are certainly the keenest to succeed here, and will account for one third of sales in a substantial list of African countries by 2030.

The Indian-made Ford Ecosport is well suited to booming African cities.

American manufacturers

Linking low cost expertise to the carmakers best placed for future African growth does not currently favour American auto makers. Ford manufactures in South Africa and is faring well both in southern and northern Africa (#3 in Morocco) thanks notably to its Ranger pickup, #1 in South Africa so far in 2015. The Indian-made Ecosport has true potential in booming African cities, and is seemingly already a success in Ethiopia’s Addis Ababa. Further learnings from India will help Ford spread its success towards less developed African countries while it is mulling the opening of a Nigerian factory. Chevrolet also has a relatively strong presence on the continent, but it is mainly due to relatively fragile ties it has kept with Japanese pickup maker Isuzu, ties that have been severed in Australia for example. Chevy leads the Egyptian market outright mainly thanks to the TFR pickup, the best-seller overall which is in fact an Isuzu D-Max. In southern Africa, Chevrolet concentrates on passenger cars and uses the Isuzu brand for commercial vehicles with the D-Max (called KB) market leader in Zimbabwe and Swaziland. Chevrolet will need to prepare a no frills pickup back-up to the Isuzu option and import low-cost expertise from South America and China where it sells the Sail sedan at very competitive prices to count on a bright future in Africa.

Mobius II: the first car designed by Kenyans for Kenyans.

The big unknown: African manufacturers

In China, most domestic actors in the automotive industry didn’t exist 20 years ago and Wuling, founded in 2002, now sells almost 1.5 million annual units domestically. It isn’t therefore unreasonable to expect mid-size African carmakers to enter the local automotive scene in the course of the next 15 years. At the moment, most new African car brands popping up here and there are in fact just assembling a range of rebadged Chinese models, such as Mozambique’s Matchedje Motor, Ghana’s Kantanka Cars, and Ethiopia’s Holland Car, a short-lived joint venture with Lifan.

One exception: Kenya’s Mobius Motors, symbolic of the country’s entrepreneurial spirit. Mobius Motors aims at empowering entrepreneurs with the Mobius II, an off-road vehicle priced similarly to a 7 year old sedan. On paper, it indeed offers a solution to a two-pronged issue that is currently locking out entry-level car buyers and particularly entrepreneurs in need of a cost-efficient vehicle: the degradation of rural and peri-urban sub-saharan roads and the inadequacy of most used cars imported into the region from more developed countries (think a 1995 Toyota Corolla sedan), still relatively expensive to buy due to high import duties, but also expensive to maintain because they are old and not designed to an African environment. On paper only, as it will take a lot of convincing to entice Kenyan buyers to trust an unknown brand, even if it is a local one.

The joker: Hybrid and electric technology

An option not to be discarded, hybrid and electric cars will enjoy tremendous progress and see their price drop drastically over the coming 15 years, making it a potentially viable option for the growing African middle-class. With Africa’s transport, energy and communication infrastructures sometimes lagging 50 years behind that of developed or even developing countries, we have already witnessed a phenomenon called leapfrogging that could well apply to the hybrid and electric car technologies in the not so distant future. A lot of sub-saharan countries have leapfrogged the construction of a landline telephone network to directly install a mobile network, and as a result Africa will hit 1 billion mobile subscribers this year for a 1.1 billion population! (see How Africa’s mobile revolution is disrupting the continent) There will be a time where the cost of establishing a network of petrol stations that facilitates fast car ownership growth will have to be balanced with a potentially cheaper network of solar-powered charging stations.

It seems far-fetched now, but may not be in ten years time when the vast majority of sub-saharan countries still far from taking off, thus unable to finance large infrastructure projects. Couple this with potential low-cost electric car offerings by some manufacturers and the equation becomes a lot simpler to resolve. As of today the Japanese are best placed in this segment, but this may also change quite fast and all auto makers, notably the Chinese pushed by their government, will have perfected these technologies by the time Africa really takes off after 2030. As for many areas in this report, this is a completely open book and once again the carmakers that will be able to produce low- or ultra low-cost hybrid or electric cars by 2030 will be best placed to succeed, were this segment to leapfrog petrol cars in Africa.

The future car buyers of Senegal. Picture © Anthony Kurz 

In summary

Africa is growing and it’s doing it fast, but its new car market is still a long way off having a real impact on the worldwide automotive scene. I forecast 7 million annual units in Africa by 2030, that’s an additional 5 million annual units compared to today’s 1.9 million which is far from negligible. In the same timeframe, China (predicted 40 million) should add 15 million annual units, India (predicted 7 million) should add 4 whereas both the U.S. (18.5 million) and Europe (16.8 million) will essentially add nothing. The new China: perhaps not, but Africa is the last frontier in terms of development and therefore automotive sales, and will progressively become one of the world’s largest engines of growth in the next two decades. Car manufacturers neglecting the establishment of a dense sales network and production hubs in Africa will miss out on a huge chunk of sales and bear the consequences in the long term.

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