After the Arab Spring: Part 1 – the outlook for car markets in North Africa
The Middle East and North Africa (MENA) region has three distinct geographic and economic zones: North Africa, The Levant and the Persian Gulf.
North Africa stretches over 2500 miles between Morocco and Egypt, has a population of over 150 MN and, excluding oil-rich Libya, has an income per head between $5,000 to $10,000. Across the region between 15% and 25% of the population survive on $2 per day.
The Levant fringes the eastern Mediterranean over a distance of 1,100 miles, with a population of 162 MN, including Turkey. Income per head is higher at $6,000 to $14,000 and wealth is spread more evenly. Less than 5% of the population earn under $2 per day.
The ‘jewel in the crown’ is the Gulf where a small population of nationals own two-thirds of the world’s hydro-carbon wealth. The population is around 70 MN, including ex-pats, and income per head – excluding Yemen – ranges from $43,000 to $130,000. The 2016 average was $33,005.
What is the outlook for vehicle markets in the MENA region?
Faced with contrasting economic fundamentals – broadly, those who have oil and those who have not – the impact of the global financial crisis has varied between countries and MENA zones.
It revealed structural weaknesses in both US dollar and Euro sovereign debt which increased the flight of investment funds into commodities, leading to higher prices – in gold, grain, oil and many others. In turn inflation, unleashed across the world, hit the poor hardest and North Africa has plenty of them.
The relentlessly volatile oil price shows how bumpy the economic ride may yet be. It’s estimated that, just to meet the financial costs of social reform, Saudi Arabia – and many other OPEC members – need an OPEC price of $90 a barrel to avoid a national budget deficit. That equates to 4.4%+ of global GDP. In 2008 – with a break- even price of $59/b – oil took just 3.3% of world GDP. With OPEC looking for a 30%+ larger slice of global income, the requirement is for inexorable and sustained rises in crude prices. These feed through to other materials – steel, energy and so on. It’s likely that vehicle raw materials – steel, tyres, plastics – will also rise sharply. However, with the OPEC basket price down to where it was in 2006, the oil producers face an unclear economic outlook.
The Arab Spring
Some suggest that high food prices and youth unemployment were the primary triggers for the recent Arab revolutions, rather than repression and corruption. Whatever the causes, the consequence for trade in general – and vehicle sales in particular – has been especially severe. Tunisia, Algeria, Bahrain, Libya, Morocco, Syria and Egypt were all added to Palestine, Yemen, Iraq and Iran as disrupted markets. Pakistan, which fringes the region, was added to Afghanistan as a ‘no-go-area’ for all but the bravest exporters.
Yet, while times appear difficult now, the future could be much brighter – if social change can be made to feed through into economic development.
The MENA region has advantages in population demographics and geographical position that it could exploit. North Africa is a good example. It could develop into a hub for car makers who need an entry into the wider African region. With uncertainty currently surrounding industrial policy in Egypt during the transition of power there are opportunities for Algeria and Morocco to win investment, which may have been previously intended for the larger market. Both Morocco and Algeria have valuable domestic sales growth potential as well, with average annual growth of at least 7% from 2011-2015 forecast in Algeria and 4% in Morocco.
Global Car Market
On present trends the global car market is splitting in two: in Western Europe and the US the market is just about holding its own, buffeted by problems of sovereign, banking or personal debt, low consumer confidence and volatile financial markets. In contrast, volumes are surging in the ‘BRIC’ emerging markets . Analysts at Scotiabank expect sales to match the developed markets by 2013 at 35MN units each. Fuelling this growth are demographics and income profiles highly supportive of gains in car ownership.
In demographics the entire MENA region shares many of the same features. Unfortunately, it isn’t yet the case for income distribution and vocational skills. North Africa has seen wealth concentrated in the hands of a few, while the Gulf has seen few young people willing to shoulder the burdens of work in the private sector. Instead the Gulf States rely on an army of ex-patriates to work in their place. Analysts have asked for decades why the Gulf region in particular hasn’t taken off a similar way as South Korea, Malaysia or Singapore. Perhaps, in future, it just might.
The North Africa Car Markets
With a population of 150 MN, relatively fast economic growth and a car market above 700,000, North Africa offers significant medium term potential. It has a young population and GDP per capita equivalent to between $5,000 and $10,000, excluding Libya. Not only is the population growing; so too are the economies – or at least they were prior to the Arab Spring.
With a fast growing market in 2011 (+9%) and 2012 (+19%), Morocco seemed set for sustained growth in its car market. It has not disappointed the analysts. New car and van registrations exceeded 163,000 units in 2016, out-performing Business Monitor Internationals (BMI) conservative expectations of 4% pa growth up to 2015.
The Arab Spring arrived relatively late in Morocco – 30 January 2011 – and ended early. By July 30 2011 the king had agreed reforms. In the interim there had been a series of mainly peaceful protests. Few Moroccans were seeking a revolution in any event; they appear mostly satisfied with their monarchy, but want it reformed into a constitutional one.
While the economy was shaken by the global financial crisis – new car sales declined between 2008 to 2010 – fundamentals remain strong. Inflation is around 1% and there is a clear economic strategy based on the country’s geographic position just south of Europe. Its motor industry, for example, has been developed as both an assembly location and a major component manufacturer. Morocco’s ambition is to be a politically stable, low labour cost member of Europe’s automotive supply chain. Recent events suggest that it is succeeding. In 2006 it produced around 30,000 vehicles. But there may be further growth potential: At 65 cars per thousand inhabitants,much lower than its neighbours – 140 in Algeria and 122 in Tunisia – and domestically built low cost Dacia’s on offer, the market has expansion potential.
But, if premium car sales are a measure, wealth has not spread very far. In 2010 a total of 206 premium cars were registered. BMW sold 53, Jaguar 40, Porsche 37 and AUDI 16 units). These numbers are unsurprising given import taxes of up to 75% plus VAT of 30% and 12.5% Sales Tax on top. Fuel costs are also important in Morocco. At today’s rate (£4 gallon/$7) they already include a hefty subsidy, which along with food subsidies, will cost the Moroccan government an estimated £3.8BN in 2011. With income per head of $12/day ($4,400 pa), a gallon of fuel takes over 50% of a single person’s daily income.
Algeria is an oil producer and owns around 1% of OPEC’s proven reserves. Oil sales of 1.1 BN barrels a year have provided the income needed to stave off the worst effects of the global financial crisis and continue infrastructure investment since 1999 while boosting income per head to $8,100+. The result has been a substantial fall in unemployment to under 10% of its 36MN population. There were violent anti-government protests in January 2011 but swift moves to compromise by the government has lowered tensions which, appeared to be motivated by economic rather than political concerns. Real GDP, that is after inflation, contrasts well with most of Europe, and is around 4%.
New car registrations have remained stable at the level of 210,00 to 225,00 per year and the market is skewed towards budget brands from China (Chana, Youejin, Youyi, Dengfeng and Fonton) as well as Europe and SE Asia (Skoda, Hyundai, Kia, Diamal and Dacia).
Premium brands fare about as well in Algeria as in Morocco. Figures are not regularly reported but, in 2007, Audi sold 156, BMW 352 and Mercedes-Benz 552 units respectively. But foreign carmakers remain keen on Algeria.
In March 2011, Daimler announced a new joint venture bus and truck assembly plant in Algeria as part of its North African expansion, reflecting the view that, as long as large-scale political upheaval can be avoided, Algeria is one of the most attractive growth markets for the auto sector in the region.
The project has been largely facilitated by Daimler’s Abu Dhabi-based stakeholder Aabar Investment, which has formed a JV with the Algerian government in Rouiba. The JV will have management control of the plant, while Daimler will provide the parts for production of trucks and buses. Exact vehicle models are as yet unknown, nor is the size of the investment.
In November 2010, French carmaker Renault said it had returned to a shelved plan to build a production plant in Algeria, after changing certain details of the project to secure the government’s backing. With one existing plant, and another in the pipeline, in Morocco, the North African region features heavily in Renault’s overseas strategy.
Similarly, Volkswagen (VW) has approached Morocco’s authorities as part of its goal to become the world’s leading carmaker by 2018. While Renault’s revisited plan looks set to win the approval of the Algerian government, planning is still in the early stages for VW, but there is a suggestion that the country would serve as a base for the wider region.
However, while in January 2011 Algeria became the first country after Tunisia to see unrest, it seems to be on a different track. Algeria is now watching from the sidelines as the Arab spring tries to bloom. Instead of a clamour for democracy, doctors and teachers, auxiliary police officers and transportation workers are taking to the streets of this energy-rich nation with demands for higher wages, while pointedly sidestepping calls for political change.
There are real problems: youth unemployment (about 21.5% unemployment in the 16-24 age bracket), and a chronic lack of affordable housing. But there has also been real progress. Total unemployment is down from 30% in 2000 to 10.2% in 2010 and the 2005 – 2009 National Plan built over 1 MN new housing units.
The ‘blueprint’ for the ‘Arab Spring’ revolutions was written by Tunisia when a young man died after setting fire to himself in the town of Sidi Bouzid, 265 kilometers from Tunis in December 2010. Students, young people and others took to the streets to protest against unemployment and the high cost of living. It was these violent street demonstrations led to the removal of long-time President Zine El Abidine Ben Ali, who fled into exile in Saudi Arabia after 23 years in power. After trying to cling onto power the ex-President’s political allies eventually conceded power at the end of February 2011.
Although the protesters who changed the regime cited unemployment, inflation and poor living conditions among their grievances, Tunisia has one of the highest GDP per capita – $8,000 in 2009 – and real economic growth averaged 5% between 2000 and 2009. Growth slowed to under 1% in 2009 as Tunisia’s export markets – 80% to the EU – faltered. However, the IMF predicted that in 2010 the economy would bounce back to 4% growth and 5.5% in 2011.
The car market grew by an average of 9.6% a year between 2005 and 2010, to 58,836 by 2010, with both European and Asian brands well represented. In contrast to western Europe and the US, the sector was resilient throughout the global downturn.
While figures for individual premium car brands are not available separately they are expected to be in the same order of magnitude as those in Morocco.
With fuel at 20p/litre and an oil-rich economy it’s unsurprising that Libya has a vehicle parc of 1.8 MN (2007). Under current circumstances detailed new car registrations are unavailable, however, the market is estimated at 150,000 to 200,000 cars a year. Market segmentation data is equally sparse, particularly because the Khadaffi regime imported thousands of cars each year which were provided as perks to party loyalists and civil servants.
With poorly maintained roads, no vehicle inspection programme and poor driver training pre-revolutionary Libya managed to gain 3rd place in the World Health Office global survey of road deaths per capita (40.5 per 000) It was bested by Egypt (41.6) and Eritrea (48.4).
After the anti-government protests of 17 February 2011, the so called “Day of Rage”, Libya has experienced an escalation of violence which has led the country into an armed conflict which persists at present , although close to conclusion.
The country is likely to pay a high price for the conflict, which has effectively paralysed the economy and led to a near halt of Libya’s oil production. With considerable oil revenues, a relatively small population and redistributive policies including an extensive social welfare system and subsidies for basic goods, Libya was enjoying the third highest Gross National Income (GNI) per capita and the highest human development index (HDI) in Africa. In 2010 the country was also enjoying a robust growth of around 7.4% and exhibited a high growth trajectory until the conflict erupted.
The Khadaffi government had announced plans to increase oil production capacity to 2.5 million barrels per day (bpd) by 2015, At the time of writing this post, and despite the persistence of uncertainty, GDP is expected to decline by a double digit figure in 2011, but to recover again sharply in 2012, assuming the political situation stabilises, signalling a large rise in vehicle imports.
Egypt has been on the brink of social and political turmoil since the new millennium, with evident signs of mounting frustration among citizens, mainly due to the severe socio-economic conditions, constraints on liberties and an uncertain political outlook. Inspired by the Tunisian revolution, Egyptians started a large-scale uprising on 25 January 2011 and after 18 days of protests, Mr. Hosni Mubarak stepped down, bringing to an end his 30-year rule as Egypt’s President.. Power was handed to the Supreme Council of the Armed Forces which became responsible for conducting the affairs of the State and leading the transitional period according to a constitutional declaration issued on 30 March, until the parliamentary and presidential elections are held towards the end of 2011.
While the Egyptian popular uprising has come with the promise of major political reform, it has led to the temporary disruption of economic activity, below-capacity production and a 55-day shutdown of the stock market. The adverse economic implications resulting will most likely be sustained throughout 2010/11, as the high uncertainty in Egypt will weaken foreign direct investment (FDI) inflows as well as tourism and Suez Canal receipts. Thus, the real GDP growth rate is expected to be only 1.6% in 2010/11, down from 5.1% in 2009/10. However, it is expected to re-bound to 4% in 2012.
With a population of 80,000,000 and a significant vehicle assembly industry (89,000 units in 2006) Egypt is the most important vehicle market in North Africa. With over 2.2 MN private cars registered, new car registrations were 192,000 in 2010, a strong recovery on 2009, when sales were damaged by the global financial crisis. However, If the economy does rebound new passenger car sales in 2013 could reach 220,000., although much will depend on external economic, as well as domestic factors. While there is an economically active young population and an emerging middle class, the IMF cautions that Egypt’s GDP per capita figures are overstated and that their important tourist industry has yet to recover.
Yet, the potential for car sales remains high in Egypt. Due to lack of public transport services personalized transport will continue to play a key role. Car density is only 27 vehicles per 1,000 inhabitants and should reach 55 cars per 1000 by 2020. And. while most Egyptians cannot afford a car, a growing middle class will underpin an increasing demand for up market and luxury cars. The Premium car segment, 80% dominated by Mercedes-Benz, reached 10,000 in 2010. By 2013 the forecast is 12,000 – 15,000.
Part 2 reviews the impact of the Arab Spring on the Levant car markets.