IDA VISION FOR THE AUTOMOTIVE INDUSTRY DRIVING INDUSTRIAL DEVELOPMENT
4th February 2008 This publication was produced for review by the United States Agency for International Development. It was prepared by Steven Lee, a TAPRII Senior Consultant for Trade and Investment, and the Marketing General Department of the Industrial Development Authority
IDA VISION FOR THE AUTOMOTIVE INDUSTRY DRIVING INDUSTRIAL DEVELOEEPMENT
TECHNICAL ASSISTANCE FOR POLICY REFORM II CONTRACT NUMBER: 263-C-00-05-00063-00 BEARINGPOINT, INC. USAID/EGYPT POLICY AND PRIVATE SECTOR OFFICE 4TH FEBRUARY 2008 AUTHOR: STEVEN LEE SUB COMPONENT ‘E’ INDUSTRIAL PARKS AND POLICY
DISCLAIMER: The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.
CONTENTS
EXECUTIVE SUMMARY FOR THE OVERALL REPORT….……………….4 - 9 Part 1 Market Research Study Results Part 2 Automotive Vision and Strategy Recommendations Part 3 Public Private Dialogue Recommendations Part 4 Automotive Investment Marketing Plan
Part 1 Market Research Study………………………………………….….10 - 40 1. Automotive Industry – World OverviewAn Overview Of Global 1.1 Production Trends In The Period 2002 – 2006 2. Shifting Global Production Automotive Oem’s And Components 2.1 Oem’s From Asia Invest In Central And Eastern Europe 2.2 Western European Oem’s Shift Production To Central And Eastern Europe 2.3 Eastern Europe’s Original Attraction To Oem’s From Western Europe And Asia 2.4 The Fundamentals Of National Location Choices In Central And Eastern Europe 2.5 Accelerating Wage Creep In Central And Eastern Europe? 2.6 Production Shifts From The EU To North Africa 2.7 Highlights Automotive Production Shifts From The EU And Asia To Turkey 3. Overview Of The Egyptian Automotive Industry 3.1 Brief Summary Of The Sector 3.2 Egypt’s Efforts To Stimulate Vehicle And Component Production Investment 3.3 A Summary Of Egypt’s Automotive Production 2002 – 2006 3.4 Exports Of Vehicles And Automotive Components 2002 – 2006 3.5 Re-Evaluating Egypt’s Automotive Sector Paradigm And Ida’s Role 3.6 Data Snapshot Of Egypt’s Automotive Production Sector 3.7 Quality Standards And The Recent Achievements Of The Sector Focus On Homologation 3.8 The Logistics Chain And Egypt’s Speed Of Access To Export Markets 3.9 The Role Of Incentives In The Attraction Of Foreign Direct Investment 3.10 Destination Of Exports By Country: Split Between Aftermarket And Oem Suppliers 4. Lessons From South Africa And Turkey 4.1 Turkey’s Key Automotive Industry Milestones 4.2 South Africa’s Key Automotive Industry – An Overview 4.3 Some Lessons From Turkey And South Africa
ANNEX I : Decree 9007, 2005
ANNEX II : AUTOMOTIVE OEM INDUSTRY SURVEY EGYPT 2008
ANNEX III: South Africa’s Import and Export Regime Subsidy Regulations to 2012
IDA’s Vision for the Automotive Industry i
Part 2 IDA Automotive Strategy Recommendations…………………..41 -43 Background IDA’S Twenty Recommendations For Development Of The Egypt’s Automotive Industry Strategy
Part 3 Public Private Dialogue Recommendations...... 44 - 50 A Drive to Attract Multinational Automotive Investment The Example of Egypt’s ICT Sector Economic Growth Needs Formal Public Private Dialogue A Proposed PPD Mechanism for the Automotive Industry Structure of Implementation Buy-in from Stakeholders Facilitation Promotes Dialogue Monitoring and Evaluation Accountability Private Sector at the Heart of Enterprise Development Highlighted Areas of Risk Summary
Part 4 IDA Automotive Investment Marketing Plan……………………51 - 61 1 Marketing Plan Vision 2 The Current Market Position 3 The Product for Promotion to Overseas Investors 4 IDA’s Promotion of the Investment Proposition 5 The Marketing Team 6 Processes 7 Physical Evidence and Image 8 Market Overview 9 SWOT Analysis 10 Summary of SWOT Analysis 11 Competitor Analysis Morocco, Tunisia and Turkey 12 Key Assumptions 13 Objectives 14 Expansion of the Customer Base 15 Strategy to Attract Automotive Investment • Target Markets for the Automotive Sector • Positioning Statement • Branding Strategy • Product Strategy • Pricing Strategy • Promotional Strategy • Public Relations Strategy • Advertising Strategy 16 Resource Requirements 17 Evaluation and Control 18 Implementation Plan for 2008
ANNEX I: PROPOSED MARKETING BUDGET 2008
ANNEX II: TIME SCHEDULE
IDA’s Vision for the Automotive Industry ii
ACRONYMS
AGHADIR Free trade agreement: Egypt, Jordan, Morocco and Tunisia CBU Completely Built Up – finished vehicles CEE Central and Eastern Europe CKD Completely Knocked Down – vehicle kits COMESA Common Market for Eastern and Southern Africa CLU Cost of Labour Units – labour cost divided by valued added per worker DFID Department of International Development, the United Kingdom EAFA Egyptian Automotive Feeder Association EAMA Egyptian Automotive Manufacturers Association ECS Egyptian Commercial Service EFTA European Free Trade Area EU European Union EU8+2 New EU accession states since May 2004 excluding Cyprus and Malta Eu25+2 25 EU members plus most Jan. 2007 accession countries Bulgaria and Romania FDI Foreign Direct Investment FTA Free Trade Area FTZ Free Trade Zone GAFI General Authority for Foreign Investment and Free Zones GAFTA Greater Arab Free Trade Area GM General Motors HCV Heavy Commercial Vehicle IFC International Finance Corporation – World Bank Group ITIDA Information Technology Industry Development Agency IMC Industrial Modernisation Centre LCV Light Commercial Vehicles MCV Medium Commercial Vehicles MCIT Ministry for Communications and Information Technology MIDP Motor Industry Development Plan, South Africa NIDS National Industrial Development Strategy, Egypt OECD Organisation for Economic Cooperation and Development OEM Original Equipment Manufacturers – used to refer to vehicle manufacturers OICA International Organization of Motor Vehicle Manufacturers PPD Public-Private Dialogue SEZ Special Economic Zone SIEPA Serbian Investment and Export Promotion Agency SWOT Strengths, Weaknesses, Opportunities and Threats UNCTAD United Nations Committee for Trade and Development UNECE United Nations Economic Commission fro Europe USD United States Dollar
IDA’s Vision for the Automotive Industry iii
EXECUTIVE SUMMARY
IDA STATEMENT This document consists of four separate integrated pieces of work that are designed to provide an overall strategic approach to the attraction of automotive investment to Egypt.
IDA is building the capacity of its Marketing Department in order to deliver the marketing plan and increase industrial investment in selected sectors. In this document IDA proposes the need for defined industrial sector strategies formulated and implemented within a process that goes beyond consultation and provides sustainable dialogue. For Egypt to own highly competitive comparative advantage is not enough: potential investors need to know about this in a language that they can understand and in which they are able to take investment decisions that will make profitable use of Egypt’s advantage.
IDA presents this document to all its stakeholders for discussion and to receive their comments so that implementation can begin.
STRATEGIC PLAN BACKGROUND The results of the market research study were undertaken over a three-month as a practical exercise in developing the Market Research dept of the IDA’s Marketing General Department. This study is the foundation for the Promotion dept to deliver its marketing plan and begin contacts with potential investors to attract them to a Site Visit. A Site Visit is a key milestone towards attracting an investor to commit to investment in Egypt.
Recommendations for the development of an automotive vision and strategy and the infrastructure for its formation, implementation, monitoring and evaluation, and institutional sustainability are delivered in Part 2. The Executive Summary sets out seven principles underlying the Twenty Recommendations contained in the Strategic Plan. IDA is preparing sector marketing plans based on market research for all agreed industrial sectors; recommendations for a proposed Public Private Dialogue (PPD) mechanism are set out in Part 3.
Part 4 of this Strategic Plan is the Automotive Investment Marketing Plan for 2008. This has a twofold purpose: firstly as a plan for the Promotion’s dept to take Egypt’s automotive value proposition to the market to attract new investment. Secondly this plan will be used as the basis for developing IDA’s three year marketing plan, due in February. This Executive Summary follows the style of the Strategic Plan: Part 1 Automotive Market Research Study Results
Part 2 Automotive Vision and Strategy Recommendations Part 3 Public Private Dialogue Recommendations Part 4 Automotive Investment Marketing Plan
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PART 1: AUTOMOTIVE MARKET RESEARCH STUDY RESULTS Over the period 2002 – 2006 world demand for vehicles grew at an overall rate of 17% to reach approximately 69,000,000 vehicles. Growth was not evenly spread with passenger car production witnessing phenomenal increases in Asia-Oceania of 50%, and Central and Eastern Europe of over 75%. Egypt’s vehicle assembly remains focused on import-substitution with CKD production taking an ever smaller share of the expanding domestic market. Exports have faltered since 2004 and in 2006 made up approximately 1% of total CKD unit production. Looking forward to the attraction of new investment to this sector Egypt’s attention is focused on those markets to which it is both proximate and has secured preferential access, through free trade agreements; namely the European Union, the Arab World, and Eastern and Southern Africa. Regionally the largest increase in capacity in passenger car assembly has been the 15 new plants in Central and Eastern Europe from 1990 to 2006. The CEE countries initially attracted new investment for 3 main factors: • Competitive Unit Labour Costs, initially a fraction of Western Europe‘s, underwrote low manufacturing costs • Availability of skilled labour • Anticipated or actual free market access to the EU These attractive indicators were reinforced during regional competition by aggressive financial incentives. Specifics of offered packages are kept secret by parties to the deal.
This large number of car assembly plants in turn attracted scores of auto-feeder factories. Today a well-developed supply infrastructure reinforces the original attractive factors of production exists in Central and Eastern Europe. The pressure of a flood of new FDI projects, skills emigration, deteriorating demographics since 1990 and a tightening of the labour market has led these countries to experience accelerating Unit Labour Costs which since 2006 have forced a serious re-evaluation of their attractiveness to car assembly plants and car components production.
Perhaps a first sign of this was Renault-Nissan’s decision in September 2007 to establish their new Logan mass production assembly plant in Morocco, an investment of 600 million euros attracted by EU market access and the leading-edge logistics infrastructure developed in the North of the country. Renault officials have already said the Tangier’s plant will be more competitive than the company’s production in Turkey and Romania and at least as inexpensive as Nissan’s current operation in China. The ground-rules for automotive investment were changed over-night: Egypt now has the opportunity to join the ranks of volume car manufacturers without relying on a protected domestic market. It is proposed that IDA’s role develops in-line with its mandate, to present Egypt’s automotive sector competitiveness to selected OEM assembler investors and to all component producer investors on the look-out for a new profitable manufacturing cost base. This marketing approach will be targeted, relying on a deliberate process of follow-up to identify serious potential investors and attract them to Egypt for Site Visits.
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Is the next stage about Egypt competing with Morocco and Tunisia as key regional adversaries or about working together to attract the next generation of regional assembly plants to these three countries? Egypt’s competitive Unit Labour Cost is assured because of favourable demographics and macro-economic stability; however Egypt will have to work hard to ensure supplies of skilled labour and cutting-edge logistics. IDA’s Automotive Marketing Plan has been written in a vacuum of domestic policy uncertainty: the current policy recommendations for the Minister of Industry and Trade are a good start in a process of engaging automotive industry stakeholders. However this process will not deliver a private sector stakeholder inspired Vision and a critically developed Strategy to assure the investment environment for the coming period. Nor does IDA assume that the current policy recommendations, to be presented to the Minister on February 10th, will provide the outward looking policy recommendations that IDA will require to attract new foreign investors and encourage existing investors to aggressively export their products.
PART 2 AUTOMOTIVE VISION & STRATEGY RECOMMENDATIONS The automotive market research study reported in Part1 was undertaken without the reference point of a sector Vision and Strategy, with stakeholder buy-in. In January 2005 the IMC completed an automotive strategy, but although it contained some useful recommendations, it was not widely adopted. Whilst the issues addressed in the IMC strategy remain much the same today the Government’s determination to invigorate the automotive sector provide an impetus for policy reform.
However current moves towards a new policy for the automotive industry, are taking place in a strategic vacuum; the proposed policy changes to be announced on the 10th February 2008 will be in the context of proposals to ‘gradually’ alter ‘announced’ changes to local content rules and customs tariffs, not a sector Strategy and Vision. Today IDA is concerned that policy recommendations to the Ministry of Trade and Industry take place within a framework that provides investors with predictability, transparency and uniformity. It is IDA’s recommendation that a sector strategy be developed over the next 6 months and be launched to an international audience. One such opportunity would be EAMA’s hosting of the annual international congress of national car manufacturers associations in October 2008
This process will require two elements: a national strategy and a mechanism for public- private dialogue.
In this section of the Strategic Plan, IDA makes recommendations to guide the first element: the formulation, implementation and monitoring and evaluation of a national automotive Strategy, based on a private sector inspired Vision. Part 3 of this Strategy document proposes the second element. IDA’s Automotive Vision and Strategy contains Twenty Recommendations, these are based on the following seven principles:
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Principle One: All policy changes need to be predictable, transparent and uniform and should support the attraction of automotive foreign direct investment to Egypt.
Principle Two: A paradigm shift that permits investors with complete information to make investment decisions based on Egypt’s competitive cost-base, improving business environment, and market access and logistics capability. These international competitiveness factors, supported by aggressive marketing, to determine industrial investment flows to Egypt.
Principle Three: The marketing campaign will be based on two tenets: Egypt as an effective regional export-base; and Egypt as the most profitable manufacturing base in the Middle East. Principle Four: All of Egypt’s free trade agreements are made effective to permit high volume exporting of automotive products across diverse markets. Principle Five: The attraction of industrial investment to Egypt will be promoted by sector according to each sector’s international competitiveness. Principle Six: A sector’s international competitiveness is strongly promoted as the main attraction to industrial investment in Egypt, with the support of transparent incentives and where necessary tailored packages for significant investments. Principle Seven: Automotive investment promotion will rely on attracting selected passenger car OEM’s from China, India, Japan, the United States and Western Europe and Tiers I, 2 and 3 automotive component producers, building on existing investors.
PART 3 PUBLIC PRIVATE DIALOGUE RECOMMENDATIONS IDA requires each industrial sector attractive to foreign direct investment, to own a Vision and Strategy, on which IDA can base its sector marketing plans to attract new investment. As already noted each sector Strategy requires a mechanism for formulation, implementation and updating, supported by a process of monitoring and evaluation. This proposal is based on the key assumption that consultation with industry or with industrial sectors is not an adequate mechanism for Government. Public Private Dialogue (PPD) is not a new subject but it has only been documented recently in 2007 by DFID/World Bank/IFC/OECD and published as The PPD Handbook. PPD mechanisms are defined as structured dialogues between Government and private sector stakeholders aimed at improving the investment climate. In fact a PPD initiative only gives a formal structure and expression to the common desire of businesses and Government to create conditions in which the private sector can flourish. Whilst the Dialogue helps to reveal to Government the likely micro-economic foundations for growth, it also creates a sense of ownership of sector-specific reform programmes among the business community which makes policies more likely to succeed in practice. The original model was designed to provide a general platform for industry dialogue. This proposal recommends its adoption by individual industrial sectors, starting with the automotive sector.
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There are some underlying principles which define the PPD: • The structure of implementation • A Sector Vision and Strategy and a Sector Action Plan • Buy-in by Stakeholders • Facilitation • Monitoring and Evaluation • Quarterly Reports - Accountability The output is a sustainable mechanism that delivers a business environment whose hallmark is integration between the objectives of Government and the private sector, which is able to anticipate and resolves business impediments. This provides the investor with the predictability, transparency and uniformity that aggressive investment decision making requires.
PART 4 AUTOMOTIVE INVESTMENT MARKETING PLAN The implementation of this proposed Plan is intended as another important building block in the development of the Industrial Development Authority’s marketing department capabilities; enabling the attraction of industrial foreign direct investment to specific sectors from targeted markets.
The Government’s National Industrial Development Strategy of 2004 projects industry’s role of leading structural change to Egypt’s economic growth rates: to be achieved by realising above average industrial growth to pull up Egypt’s overall economic growth rate. The NIDS includes the automotive industry as a key driver towards this objective. In December 2005, Decree 907 saw Government policy for the first time begin to reflect the facilitation of production for the export market beyond the traditional objective of encouraging local production to meet domestic demand.
In January 2008 the Ministry of Trade and Industry’s policy consultation with the automotive components and vehicles sector suggests that raising local production volumes is now a priority in order to meet export market competitiveness requirements. IDA has undertaken its market research against this background of uncertain official objectives for the sector; without a clear sector Vision, Strategy and Action Plan. IDA’s market research has revealed that whilst this dynamic industry continues to grow globally, the axis of leading manufacturers is changing; China is quickly emerging and became the third largest national vehicle producer in 2007. Since 1990 the countries of Central and Eastern Europe – now member states of the European Union – have attracted significant vehicle and component investment from Western Europe and Asia. CEE production has helped maintain Europe’s overall share of world production, whilst Western European production had been falling or, at best, stagnating. The competitiveness factors that attracted these original investments have been enhanced, others have deteriorated. In particular Unit Labour Costs are experiencing rampant
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increases. This is due to a combination of demographic factors, skills migration, market rigidities and major inflows of new investment to industrial and service sectors.
This trend in CEE member states is causing the automotive industry in the European Union to look to North Africa for alternative lower cost bases that share EU market access and proximity, and outward looking economies. Whilst Egypt has a similar competitiveness profile to Morocco it has missed the efforts of a dedicated institution promoting the attraction of industrial investment. This Marketing Plan sets out the steps for IDA’s Marketing Department to promote the automotive sector and attract multinational investment to Egypt.
The plan relies on five principles: • The promotion of individual industrial sectors, according to specific competitiveness factors; • Market research is used to target investors; • Dedicated promotion and customer-care staff use proposition targeting to proactively pursue investment opportunities and follow-up individual investment leads to attract investors to make Site Visits; • Transparent incentives package will be supported by tailored incentives for major investments. • Coordination with GAFI and other key organisations such as the IMC and the Commercial Counsellors. IDA’s Marketing Department will target selected passenger car OEM’s and all global component producers by writing to them and then interacting with them at a series of events in 2008, both in Egypt and abroad. The approach will be personal and designed to ensure close follow-up of individual companies. In due course IDA plans to tailor its approach to individual companies with profitability scenarios. IDA will develop its marketing campaign around two themes: ‘Egypt Your Export Base for Europe’ and ‘Egypt Your Profitable Middle East Base’.
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PART 1: MARKET RESEARCH FOR IDA’S AUTOMOTIVE INVESTMENT MARKETING PLAN
1. AUTOMOTIVE INDUSTRY – A WORLD OVERVIEW The current market position is one of dynamic growth where care assemblers continue to shift production capacity to countries with an attractive cost base that have proximity and access to growing markets.
1.1 AN OVERVIEW OF GLOBAL PRODUCTION TRENDS IN THE PERIOD 2002 – 2006 In this period global automotive industry production grew significantly with annual production reaching approximately 69,000,000 vehicles in 2006; an increase for the period of just over 17%.
Passenger cars are the largest unit vehicle category: their production increased by over 19% during this period, registering nearly 50 million units in 2006.
In addition to this significant increase in global production the distribution of passenger car production changed over the 2002 - 2006 period with both Asia-Oceania and Eastern Europe (now classified as EU8+2) seeing remarkable increases of 49.22% and 77.58% respectively.
This market study has focused on 4 comparator countries: Morocco, South Africa, Tunisia and Turkey. The attraction of FDI to the automotive sector in Morocco and Tunisia has produced positive results; however standardised production data for Tunisia is not available because it does not belong to The International Organization of Motor Vehicle Manufacturers (OICA). Egypt is represented by the Egyptian Automotive Manufacturers Association (EAMA).
In the period of our study Turkey increased passenger car production from 204,198 units in 2002 to 545,682 units in 2006; an increase of 167%. The increase in their production of vehicles was even more impressive: beginning the period at 346,565 units and reaching 987,780 units by 2006; an increase of 185%.
Egypt has preferential access to a market of over 1 billion consumers. The largest market for preferential market access is the European Union: Egypt’s market access agreement was ratified in 2004 1.
Automotive exports have tariff and quota free access to the EU member state markets. By contrast import tariffs will not start to reduce on completely built-up passenger car units until 2010. This tariff reduction programme will be completed by 2019.
1 The Egyptian European Union Association Agreement
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Over the period 2002-2006 production of vehicles in the member states that constitutes the EU 25 + 2 has risen by only 2.39% to reach in 2006, 18,580,954 2. This is well below the period’s global vehicle production growth rate of 17%. In addition this EU rate of growth masked the fact that production in the EU15 fell by 3.87%, whereas vehicle production in the member states that now constitute the EU8+2 new members, grew by 81.71% during this period.
Production in the EU8+2 member states reached 2,362,608 in 2006 3. This was fuelled by FDI from Western Europe, principally Germany, France and Italy; with additional factories being established by pioneering Japan manufacturers and latterly Korea.
In Egypt vehicle production over the last five years has increased dramatically as the domestic market has expanded, particularly following import tariff reduction in 2004. Local vehicle production reached 81,997 units in 2007 having stagnated from a low of 43,857 units in 2002. A previous production high of 77,127 units was reached in 1997.
In that year local market demand started to decline due to a depreciation of the Egyptian Pound, which affected the cost of imported CBU vehicles and CKD kits for assembly. This negative trend was reversed in 2003 and has accelerated since Decree 907 of 2005, following the adjustments 4 the previous year of import duties on passenger cars of less than 1600cc and local content rules which permitted exports to substitute for local content quotas.
2. SHIFTING GLOBAL AUTOMOTIVE PRODUCTION OEM’S AND COMPONENTS
2.1 OEM’S FROM ASIA INVEST IN CENTRAL AND EASTERN EUROPE The largest volume increases in global production took place in Asia-Oceania with production of vehicles rising from 14,852,099 passenger car units to reach 22,162,000 units in 2006; an overall increase of 7,364,101 passenger car units in the five-year period. 4,131,434 units of this additional production, or 56%, were manufactured in China.
During this period both Japanese and Korean companies re-emphasised their global market perspective by deciding to set up new factories in Eastern Europe, separating product development and design from production. Table 1: Asian OEM vehicle production capacity in Central and Eastern Europe OEM’s Country Region Year Capacity Suzuki, Hungary Esztergom 1990 200,000 GM/Daewoo Romania Craiova 1996 22,000 Daewoo FSO Poland Warsaw 1996 150,000 PSA/Toyota Czech Republic Kolin 2002 300,000 Hyundai/KIA Slovakia Zilina 2004 300,000 Hyundai Czech Republic Nosovice 2006 300,000 Source: PricewaterhouseCoopers Automotive Institute, February 2007 Eastern Influx: Automotive manufacturing in Central and Eastern Europe Decisions to establish these new factories were based on a combination of Central and Eastern European competitiveness factors: − Closer attachment to the European Union: as prospective or new member states the Central and Eastern European states possessed the right of freedom of movement of goods and
2 http://oica.net/wp-content/uploads/2007/06/worldprod_country-revised.pdf 3 http://oica.net/wp-content/uploads/2007/06/worldprod_country-revised.pdf 4 Decree 907, 2005 (See Annex I)
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services in the Single Market 5. Thus production could be delivered across EU borders, tariff and quota free. − Low Unit Labour Costs: this resulted from a combination of historically lower standards of living, low demand for labour and recently liberalised labour markets 6.
2.2 W. EUROPEAN OEM’S SHIFT PRODUCTION TO CENTRAL & EASTERN EUROPE In 1989 the fall of the Berlin Wall led to regime-change across the countries of the Eastern Bloc; states that had been political and economic satellites of the Soviet Union, which started its own process of political liberalisation during Gorbachev’s perestroika in the mid-1980’s 7.
In 1990 Suzuki was the first OEM to decide to set up a passenger car factory in Central and Eastern Europe (CEE), choosing Hungary with a projected capacity of 200,000 units.
Since then another fourteen OEM’s chose to invest in the CEE. The seven western European companies are identified in Table 2. Table 2: European OEM car production capacity in Central and Eastern Europe OEM’s Country Region Year Capacity Renault/Revoz Slovenia Novo Mesto 1991 180,000 Fiat Poland Bielsko-Biala 1991 250,000 VW/Skoda Czech Republic M. Boleslav 1991 450,000 Audi Hungary Gyor 1992 40,000 Volkswagen Poland Poznan 1993 120,000 Volkswagen Slovakia Bratislava 1993 350,000 Renault/Dacia Romania Pitesti 1995 100,000 GM/Opel Poland Gliwice 1998 120,000 PSA/Toyota Czech Republic Kolin 2002 300,000 PSA Peugeot Citroën Slovakia Trnava 2003 450,000 Source: PricewaterhouseCoopers Automotive Institute, February 2007 Eastern Influx: Automotive manufacturing in Central and Eastern Europe Over a 13-year period all leading high volume European car producers made the decision to invest in new factories in the CEE: these new investments represented a strategic shift to countries with significantly lower Unit Labour Costs than could be found in Western Europe.
This represented an opportunity to not only move to a region of Europe with lower unit labour costs but one that it was anticipated would have competitive ULC’s for decades to come. From 1990 – 2003 this region experienced Unit Labour Costs estimated at around 15%-20% (or lower) of the level prevailing in Western Europe.
In addition it was recognised that some form of competition – from inside the European bloc – would help to pressurise the workforce in the unionised Western European factories to curb their Unit Labour Costs. It was hoped this would encourage the workforce to adopt more realistic work practices, including lower direct salary costs and longer hours of work.
5 Location, Cheap Labor and Government Incentives: A Case Study of Automotive Investment in Central Europe since 1989, Robert Werner Columbia Business School 2003 6 6Location, Cheap Labor and Government Incentives in Central Europe, Werner 7 http://www.ibiblio.org/expo/soviet.exhibit/perest.html
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In addition to significantly lower ULC’s at the time of investment decision-making, there was also the expectation that the CEE countries were likely to become full members of the European Union: as prospective or new member states they possessed the right of freedom of movement of goods and services in the Single Market; this meant that component assemblies or completely built up vehicles could be delivered to Western European end-users, tariff and quota free. As illustrated in table 3 these OEM investment decisions were made in phases: Table 3: Vehicle production capacity in Central and Eastern Europe
Country (no. factories) Year OEM’s Capacity Total capacity Hungary (2) 1990 Suzuki 200,000 240,000 1992 Audi 40,000 Slovenia (1) 1991 Renault/Revoz 180,000 180,000 Poland (4) 1991 Fiat 250,000 640,000 1993 Volkswagen 120,000 1996 Daewoo FSO 150,000 1998 GM/Opel 120,000 Czech Republic (3) 1991 VW/Skoda 450,000 1.050,000 2002 PSA/Toyota 300,000 2006 Hyundai 300,000 Slovakia (3) 1993 Volkswagen 350,000 1,100,000 2003 PSA Peugeot Citroen 450,000 2004 (Hyundai/KSA) 300,000 Romania (2) 1995 Renault/Dacia 100,000 122,000 1996 GM/Daewoo 22,000 Source: PricewaterhouseCoopers Automotive Institute, February 2007 Eastern Influx: Automotive manufacturing in Central and Eastern Europe The last decision by an OEM directly from Western Europe to invest in Hungary, Slovenia, Poland and Romania was made in 1998. Since then, only the Czech Republic and Slovakia have attracted new OEM investment during the period 2002 – 2006.
A combination of factors guided factories final location investment choices: − Most competitive Unit Labour Cost’s − Availability of a skilled workforce − Market access to the European Union − The location and availability of component suppliers – this factor only became relevant to the latter investments which found that a relatively mature auto feeder industry had become established. − Historical relationships – for example the purchase of privatised car assemblers such as Skoda by Volkswagen
2.3 E. EUROPE’S INITIAL ATTRACTION TO OEM’S FROM WESTERN EUROPE & ASIA
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Sections 1.2 and 1.3 of this marketing study identified the reasons why global car manufacturers decided to establish factories in the CEE states. A more detailed investigation 8 of the Visegrad 9 countries in the 1990’s reveals the following factors: − Favourable long-term economic prospects: a commitment to liberalising markets and providing favourable conditions for foreign investment. The association with the EU served to reassure investors’ concerns about investing in these countries. − Proximity to large markets: this represented low transport costs. − Skilled labour force: the Visegrad countries were able to offer highly skilled labour forces, with their emphasis on their German-style vocational training. − Considerable Wage Differential and a Closing Productivity Gap: in 2002 Central European labour costs in the automotive industry were about 25% of those in Germany and were significantly lower throughout the 1990’s as illustrated in table 4. Table 4: Labour productivity and Unit Labour Costs in the Transport Equipment Manufacturing Sector 2002 Wage-adjusted labour Unit Labour Costs productivity Level (%) % of EU avg. Level %of EU avg. EU-15 average 147.86 100 0.68 100 Czech Republic 345.7 234 0.29 42.8 Hungary 911.0 616 0.11 16.2 Poland 429.4 290 0.23 34.4 Slovakia 896.2 606 0.11 16.5 Source: Location, Cheap Labor and Government Incentives: A Case Study of Automotive Investment in Central Europe since 1989, Robert Werner Columbia Business School 2003 − Labour Market Flexibility: regulations governing work hours, compensation and vacation policy in this period were not as extensive as they are in Western Europe. − Access to EU Markets: proximity is not the same as access to it. In 1991 the Visegrad countries signed Association Agreements – which came into force in 2002 – promised to do away with impediments to trade through an asymmetrical phasing out of tariff barriers on all non- agricultural goods. Access to the Single Market permitted production to be delivered across EU borders, tariff and quota free. − In addition Western European OEM’s recognised that some form of competition, from inside the European bloc, would pressurise trade unions to adopt more realistic work practices, in terms of direct salary costs and hours of work and, most importantly, more flexible work practices. Since 2000 the attraction of investment to the CEE countries has changed from being a low cost manufacturing base with market access to the European Union to one with a well developed infrastructure for automobile production including component production with the additional feature of growing domestic demand.
However rising incomes which fuelling growing demand for vehicles has also meant accelerating Unit Labour Costs.
2.4 NATIONAL LOCATION CHOICES IN CENTRAL AND EASTERN EUROPE Surveys by UNCTAD conclude that there is a lack of transparency in incentives practice and that there is widespread use of ad hoc incentives for major investment projects. This was the case in the
8 Location, Cheap Labor and Government Incentives: A Case Study of Automotive Investment in Central Europe since 1989, Robert Werner Columbia Business School 2003 9 Czech Republic, Hungary, Poland, Slovakia
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Visegrad countries where there was considerable interjurisdictional competition in attracting automotive FDI. Jurisdictional competition can be pursued through a number of different instruments: − Trade-related incentives: reversing a previous commitment to free-trade Hungary implemented a system of import quotas and tariffs as well as controls on the importation of second-hand cars. Most observers realised that this was closely tied to Suzuki’s decision in 1990 to locate manufacturing operations in the country. − Tax incentives in the form of preferable tax treatment: Hungary banned the use of tax incentives in 1993 as a tool to attract FDI in 1993, however in 1998 this ban was lifted and investment flows to the country increased significantly. An example of the tax concessions: · Eligibility for a corporate tax holiday once the investment rises above a certain level; · A reduction of wage tax rates; · A 100% value-added tax rebate on all exports;
2.5 ACCELERATING WAGE CREEP IN CENTRAL AND EASTERN EUROPE? Whatever combination of factors influenced OEM investor’s in their selection of the Czech Republic and Slovakia during the period 2002 until 2006, the trend of not just rising but accelerating ULC’s in the other CEE states will have played a role.
Labour costs in three of the six focus countries for automotive investments have risen dramatically in the period 2001 – 2005 10 ranging from 70.1% to 50%. Table 5: Actual increases of Euro earnings 2001-2005 versus forecast for 2006-2010 Actual 2001 – 2005 Forecast 2006 - 2010 Countries Total Yearly Average Total Yearly Average Czech Republic 28.2% 5.1% 45.7% 7.8% Hungary 70.1% 11.2% 29.3% 5.3%
Poland 10.6% 2.0% 41.8% 7.2%
Romania 69.0% 11.1% 41.2% 7.1%
Slovakia 50.0% 8.4% 48.6% 8.3%
Slovenia 11.1% 2.1% 23.9% 4.4%
Source: www.databasece.com Labour Costs Central and Eastern Europe – edition 2006 By contrast table 5 illustrates that the Czech Republic, Poland and Slovenia all experienced relatively modest increases in Euro earnings over this period of between 28.2% and 10.6%. The forecast however for 2006 - 2010 presents a more widespread picture of Euro earnings rises, ranging from 48.6% in Slovakia to 23.9% in Slovenia.
Table 6 measures Unit Labour Costs as a percentage of German ULC’s and demonstrates the relative cost of labour in the automotive sector.
10 www.databasece.com table: Actual increases of Euro earnings 2001-2005 vs. forecast for 2006-2010
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Table 6: Unit Labour Cost in the Automobile industry (in % of German ULC)
Visegrad Country 2000 2004
Czech Republic 42.3% 44.5%
Hungary 25.% 35.9%
Poland 61% 48.8%
Slovakia 29% 21.5% Source: The Automobile Industry in Central Europe, Marcel Tirpak, November 2006 The data in tables 5 and 6 demonstrates that whilst Visegrad member states ULC’s are rising, that they remain comfortably in a range of 21.5% to 48.8% of Germany’s equivalent ULC for the automotive industry.
However since 2004 some longer-term demographic trends have lead economists to re-appraise the level of comfort recorded in 2004 and the then wide distance from German automotive ULC levels. The key demographic trends are as follows 11 : − A severe stagnation in birth rates from 1990 onwards that still lingers today; − Migration outflows: this has particularly hit Poland and the Czech Republic; − Significant in-flows of FDI have supported rapid economic growth so that demand for skills is accelerating and unemployment is rapidly disappearing; − Labour market liberalisation was an early feature of Government’s reforms to attract FDI; however over the last five years some labour market rigidities have returned. The following is recent random evidence of the tightening labour markets: − Unemployment rates are dropping fast, for example the Warsaw-based Central Statistical Office said that Poland’s average corporate wages advanced an annual 11 percent in October, 2007 and employment grew a record 5 percent from 2006 12 . − In addition according to Romanian Labour Minister Paul Pacuraru, quoted in the newspaper Ziarul Financial, Romania needs at least another 300,000 workers to meet current needs and will need more than 1 million within a decade. The labour shortage, Pacuraru said, is caused partly by a migrating workforce and partly by a declining population, and is most acute in construction, and the textile, automobile and food processing industries 13.
2.6 PRODUCTION SHIFTS FROM THE EU TO NORTH AFRICA In September 2007 Nissan-Renault made the historic decision to establish a car factory in Morocco that would export 90% of its production to Europe. Up until all decisions to locate car assembly investment in North Africa were understood to be driven by access to the local market and market protection rules. It could be argued that this decision by Nissan-Renault in Morocco was in fact preceded in May 2004, by Nissan’s decision to invest in Egypt. An agreement was signed with Egypt’s then Prime Minister to establish a Nissan factory in Cairo: the intention was to develop a base for regional exports in addition to building for the domestic market. However a subsequent decision by the new Government, in September 2004, to reduce tariff protection for local car production of less than 1,600 cc and a change to local content rules, almost led to Nissan rescinding
11 Summary extracted from Running Out of Capacity in Central and Eastern Europe, Alpha.Sources blog, 10.7.07 12 http://polandeconomy.blogspot.com 24.12.2007 13 Timesonline 24 November 2007
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their decision to produce in Egypt. Subsequently they have not decided to look beyond the domestic market. The attraction of automobile OEM investment to North Africa has up until September 2007 presumed that the requisite conditions did not exist for the attraction of a car assembler interested in exporting to Europe. Nissan-Renault’s decision has changed this perception and therefore requires Egypt to understand the competitive factors that enabled Morocco to capture this investment of up to € 1 14 billion . This decision is viewed by some as part of a larger move in the European car industry attempting to 15 react to the low costs available to car manufacturers in Asia and in particular China . All four comparator countries automotive industries have focused their attraction of new investment on the creation of exports as well as supplying the domestic market. This has resulted in the attraction of investment by manufacturers that have seen their exports flourish to those markets providing unfettered market access – mainly the Europe Union. Nissan-Renault will target initial annual production of 200,000 units of the Logan after 2010 and 400,000 units annually thereafter. Renault officials have already stated that the Tangier facility, located in a Special Economic Zone at the city's port, will be more competitive than the company's plants in Romania and Turkey, and at least as inexpensive as Nissan's current operation in China; the trajectory for additional possible 16 endeavours by the automotive industry in the region is being widely discussed . According to Flour Global Services, an international site location company, Morocco is attractive to foreign investors for the following reasons: − An ample supply of skilled and highly educated workers − Geographic proximity to the growing European and Mediterranean markets − Political and economic stability − An attractive environment for direct foreign investment − A free trade agreement with the EU In addition according to John Sisson, Principal, Location Management Services: "Selecting a manufacturing base in Europe or Eastern Europe to be close to your customers can be a difficult decision. As Eastern European countries are being integrated into the European Union, their standard of living and labour costs are likely to increase in time in comparison with a country like Morocco. This makes Morocco a good alternative." Through the Emergence program announced in December 2005, Morocco intends to multiply special zones and multiply the number of FTZ’s; this includes designating the Tangier Port-Med for car and 17 electronics parts . Tunisia by contract has been focused on the attraction of investors targeting exports of automotive components to principally the EU. According to Mr. Gaby Lopez, Director of Zodiac Automotive Tunisia, Zodiac Group. In Tunisia we have found: − Engineers, managers and technicians of a very high level − Effective import-export logistics (a truck leaving Tunis on Saturday will be in Marseille on Monday) − Slow-growing labour costs, kept down to some 5% a year
14 Inter Press Service 1.10.07 North Africa a Launch Pad For Auto Markets By Michael Deibert 15 Deibert, Inter Press Service 1.10.07 North Africa 16 Deibert, Inter Press Service 1.10.07 North Africa 17 P. 81 A World Bank Country Study: Fostering Higher Growth and Employment in the Kingdom of Morocco, 2006
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− A network of local suppliers in a wide range of areas (tools, equipment, subcontracting, services, etc.) − Simplified customs procedures Another foreign investor is Leoni AG which was established in Tunisia in 1977; Leoni Tunisia was projected to employ almost 4000 people in 2004 and to post revenues of 80 million euros. Its key to success is ever greater quality, productivity, training and motivation according to Mr. Mohamed Rouis, Director General. The Tunisia Invest website also provides a list of other automotive component investors: Delphi Automotive Systems, Fiat, Lear, Polytech Netting, Sumitomo, Valeo, Volkswagen and Yazaki.
3. OVERVIEW OF THE EGYPTIAN AUTOMOTIVE INDUSTRY
3.1 SUMMARY OF THE SECTOR Since 1984 when General Motors was attracted to Egypt and set-up an assembly plant in the New Communities industrial zone of Sixth October, the automotive sector has been considered full of promise in Egypt. Today the Ministry of Trade and Industry remains firmly committed to the input the automotive sector can make towards the Government’s objective 18 of accelerating industrial expansion, making a firm contribution towards a higher rate of economic growth. Over the last 20 years the vehicle assembly sector has expanded from 3 assembly operations, which relied almost exclusively on imported components. Today effectively 16 businesses employ 26 assembly lines to manufacture a range of passenger cars, light commercial vehicles, trucks and buses and over 300 factories manufacturing a range of automotive components. Whilst there are minimum local content rules of 45% for passenger cars, since 2005 local content can be supplemented by vehicle exports. Bus production has reached a local content of above 70%, beyond current rules. Various OEM passenger car, pick-up and bus assemblers in Egypt have made efforts to export their products to the Middle East and Africa to take advantage of Egypt’s regional free trade agreements (GAFTA, COMESA and the Aghadir). Their experience has been mixed and will be examined in more detail in chapter 3 of Part 1. Vehicle exports, which peaked in 2004, are dominated by buses. Exports of automotive components are also more prominent than vehicles reaching USD 150 million in 2005; however these are dominated by the single automotive component foreign investor, Leoni AG of Germany. Approximately 70 component companies with a more dedicated automotive production are members of the Egyptian Auto-Feeder Association (EAFA). A majority manufacture for the domestic market supplying OEM’s and the after-market; a growing number export their products to Tier II components suppliers in Europe and to after-markets in the Middle East and Africa. Exports from the Egyptian component producers reached approximately USD 50 million in 2005. Over the last 10 years Leoni has had a positive experience in Egypt, exporting all of its production: it continuers to view Egypt as a source of long-term low Unit Labour Costs. As a result Leoni is planning to expand production in Egypt to replace capacity of other factories experiencing unexpectedly high accelerating Unit Labour Cost increases. Egypt’s automotive sector has grown-up behind protective customs tariffs and local content rules: it shares this experience in common with Turkey and South Africa. The difference is that unlike Egypt, both of the other two countries have managed to attract significant multinational investment and expand automotive exports.
18 National Industrial Development Strategy, published by the Industrial Modernisation Centre 2005
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Both Turkey and South Africa have built these industries with a focus on exporting and not import- substitution. In addition these sectors in both countries have been developed within the context of a clear vision and strategy, and the means for implementation including monitoring and evaluation.
3.2 EGYPT’S EFFORTS TO STIMULATE OEM AND COMPONENT INVESTMENT In contrast to Turkey and South Africa, Egypt encouraged import substitution through local content rules and import tariff protection to develop domestic vehicle assembly and component production. In 2000 the Government adjusted the rules again as summarised in Table 7. Table 7: Percent of Local Content and the related reduction in Import Tariffs Percent of Local Content Percent of Tariff Reduction 30% to 40% 110% of the local content percent Over 40% to 60% 115% of the local content percent More than 60% 120% of the local content percent, with a maximum reduction of 90% of tariff applied to CBU Source: Presidential Decree No. 429 for the Year 2000 Article No. 6 In September 2004 the Ministry of Trade and Industry delivered new policy initiatives to encourage growth in the local market: this reduced import duties on passenger cars of less than 1600 cc from 100% to 40%; import duty on cars of greater than 1600 cc was unchanged at 135%. The second initiative in late 2005, (Decree 907 attached in Annex I), delivered new rules for local content: this accommodated car assemblers unable to reach the 45% target, using a formula to substitute local content with the export value of CBU cars and automotive components. This change of rules had several effects: − Some OEM’s closed down their assembly business and transferred sales to imports; − In May 2004 Egypt attracted Nissan to reactivate production of passenger cars and pick-ups with the objective of establishing Egypt as a regional export base 19 ; Nissan subsequently suspended its regional export plans but eventually recommitted itself to production for the local market. − Some passenger car assemblers were able to avoid the capital investment necessary to manufacture body chassis, relying instead on imports. − The change of rules did not have the effect of encouraging a single assembler to ramp up production for export. The outcome of these decisions is that whilst the domestic market has increased to 182,486 units in 2007 it is being supplied by a smaller number of car assemblers targeting higher production volume. However domestic vehicle assemblers’ market share in 2007 has fallen to 45% from 70% recorded in 2001. In September 2007 Nissan-Renault changed the paradigm used by the global automotive industry, announcing their new investment in Logan production in Morocco. Although 90% of their planned production of 200,000 units by 2010 (to increase to 400,000 units) is planned for export to the EU, the surprise was that this investment was not located in Central and Eastern Europe. On January 2nd 2008, perhaps influenced by Renault-Nissan’s investment in the Tangier Special Economic Zone in Morocco, Egypt’s Minister of Trade and Industry initiated a new dialogue with vehicle assemblers and a limited number of component producers. The Minister committed himself to dialogue with sector leaders to create a new atmosphere for investment. The Minister will be presented with a series of policy proposals by February 10th, 2008.
19 Renault-Nissan Chairman, Carlos Ghosn, May 2004
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The final draft of these policy proposals is still under preparation; however the industry discussions, in which IDA participated, can be summarised as follows: − Increase the size of the local market for new cars: · The main proposal was a measure to restrict the age of cars in the population – there was no agreement on mechanisms, though environmental safeguards were mentioned. · No reference was made to IMC’s 2004 sector strategy proposal for Government stimulation of financial institutions to provide greater access to vehicle financing. − Measures to encourage existing assemblers to increase production to meet demand from an expanding domestic market and to export. It was proposed to: · Adjust the rules for local content and import tariffs in a manner that is predictable, transparent and uniform, broadly along the tariff reduction lines already agreed with the European Union · Introduce the homologation of international vehicle standards - UNECE Regulations according to 1958 agreement · Establish an internationally accredited lab for product compliance In the Executive Summary of this report IDA offer recommendations for new policies framed in the context of a sector Vision and Strategy and a new mechanism for public private dialogue. During market research for this report IDA met Nissan’s management. They commented that in the ten years since 1997 no new automotive component company had been set-up in Egypt; neither Egyptian nor foreign. The single stand-alone foreign automotive component producer remains Leoni. In 2006 Egypt’s decision to step-up its engagement of international automotive investors was symbolised by President Mubarak’s meeting with five automotive industry heads during his visit to Germany in May 2006, and the follow-up workshop in 2007. This effort involved the efforts of the Ministry of Trade and Industry, the Industrial Modernisation Centre, The General Authority for Investment and Free Zones, and the German-Arab Chamber for Trade and Industry In February 2007 recognition of Egypt’s international competitiveness in this sector was provided by TEMSA from Turkey, announcing their decision to build a $26.3 m. plant to manufacture buses and midi-buses. TEMSA operate the plant in a joint venture with Egyptian plastics manufacturer Lasheen Group and will target an initial annual production capacity of 500 buses and 500 midi buses. It is scheduled to become operational in Q1 of 2008. Exports are being targeted for those countries in 20 where Egypt has preferential trade access: North Africa, the Gulf countries and the Middle East.” TEMSA’s investment has also attracted some of its key component suppliers. IDA’s Marketing Plan intends to build on this effort to-date whilst adding its own energies and concentration on brining the fact of Egypt’s competitiveness in this sector to the attention of all international component manufacturers and selected passenger car OEM companies.
3.3 A SUMMARY OF EGYPT’S AUTOMOTIVE PRODUCTION 2002 – 2007 As illustrated by Table 8 from data supplied by the Egyptian Automotive Manufacturers Association (EAMA), total vehicle demand in the Egyptian market increased from 78,217 units in 2001 to reach 182,486 units in 2007; however it is only since 2004 that demand has grown significantly from 73,698 units at a rate of 150% to reach 182,846 units in 2007. However in this period the share of market demand met by local production has fallen from 70% in 2001 to a low of 45% in 2007; this reducing trend was consistent over the period even though local production increased in this period from 54,766 units to reach 81,997 units in 2007. Deliberations by the automotive industry in January 2008, under the instructions of the Minister of Trade and Industry will include as part of their policy recommendations, measures to increase the size of the domestic market. The expectation of the vehicle assemblers is that this growing market will
20 The Egypt Automotive Report, Business Monitor International 2007
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enable some of the assembly lines to achieve improved economies of scale and provide an opportunity to compete in export markets. Table 8: Egypt’s vehicle production 2001 - 2007 Vehicle Market 2001 2002 2003 2004 2005 2006 2007 Passenger cars 57,059 46,745 52,373 56.464 94,538 132,373 144,560 Truck 16,656 15,054 13,537 11,681 19,530 27,207 11,452 Buses 4,502 5,523 4,924 5,553 7,369 11,034 26,384 CKD (completely 54,766 43,857 46,422 44,951 64,502 88,791 81,997 knocked down) CBU (completely 23,451 23.465 24,412 28,747 56,935 81,791 100,489 built up) Totals 78,217 67,322 70,834 73,698 121,437 170,582 182,486 Source: Egyptian Automotive Manufacturers Association
3.4 EXPORTS OF VEHICLES AND AUTOMOTIVE COMPONENTS 2002 – 2006 Table 9 illustrates that vehicle export sales by units peaked at 2,447 units and as a percentage of local production in 2004 and have declined 847 units in 2006 or 0.93% of total vehicle production This decline has been largely due to disappointing bus exports which have fallen from a high of 1,081 units, or 35.42% of bus production in 2004 to 587 units, 10.4% of bus production in 2006. Table 9: Egyptian Vehicle Production and Exports (units) 2002 - 2006 Units 2002 2003 2004 2005 2006 Passenger cars Production 27422 32581 34591 43638 59462 Exports 16 250 646 125 127 Exports % of production 0.06% 0.77% 1.87% 0.29% 0.21% Light commercial vehicles Production 10590 10379 7424 14201 20845 Exports 50 34 82 0 52 Exports % of production 0.47% 0.33% 1.10% 0.00% 0.25% Heavy commercial vehicles Production 4109 4885 4540 2136 5578 Exports 962 221 702 223 81 Exports % of production 23.41% 4.52% 15.46% 10.44% 1.45% Buses Production 3052 2367 2780 2828 5633
Exports 1081 874 1017 791 587
Exports % of production 35.42% 36.92% 36.58% 27.97% 10.42%
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Total
Production 45173 50212 49335 62803 91518
Exports 2109 1379 2447 1139 847
Exports % of production 4.67% 2.75% 4.96% 1.81% 0.93% Source: Egyptian Automotive Manufacturers Association Heavy commercial vehicle exports have also fallen from a 45.6% share of exports in 2002 to a low of 9.6% in 2006. To illustrate how badly vehicle exports have fallen, car exports as a percentage of total vehicle unit exports reached a percentage high of 15% in 2006, although car unit sales actually fell to 127 units, from a high of 646 units in 2004. Table 10: Vehicle Production Exports Breakdown Vehicle exports % of 2002 2003 2004 2005 2006 total exports Passenger cars 0.76% 18.13% 26.40% 10.97% 14.99% Light commercial 2.37% 2.47% 3.35% 0.00% 6.14% vehicles Heavy commercial 45.61% 16.03% 28.69% 19.58% 9.56% vehicles Buses 51.26% 63.38% 41.56% 69.45% 69.30% Total 100.00% 100.00% 100.00% 100.00% 100.00% Source: Egyptian Automotive Manufacturers Association
3.5 RE-EVALUATING EGYPT’S AUTOMOTIVE SECTOR PARADIGM AND IDA’S ROLE The reluctant conclusion we have drawn from section 3.4 is that Government policies, which were designed to increase domestic vehicle production as a share of the market and to increase exports, have produced the opposite effect. This strong indicator validates the Ministry of Trade and Industry’s current position that a concerted plan is needed to develop automotive exports. If such an action plan is to be developed this should be based on a comprehensive automotive industry Vision and Strategy, with stakeholder’s buy-in. Little up to date data on the automotive component industry in Egypt is currently available from the Egyptian Automotive Component Association (EAFA). An IDA initiative to obtain a detailed overview of the OEM automotive assemblers and the automotive component producers through the collection of data through two industry surveys is being undertaken in close cooperation with EAFA and EAMA. Data collection will be undertaken by both business associations; all data will be filtered and survey results will contain no company names. Analysis of the collected data will enable IDA to have a more accurate understanding of: − Labour costs for different grades of production workers; − Plans for production expansion; − Export sales and target markets; − Training practices and quality standards; and − Impediments to export expansion;
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It is planned to have this analysis complete in March 2008. The questionnaire for the automotive manufacturers is attached in Annex IDA’s statutory connection to Egypt’s vehicle assemblers has developed many close relationships: they reveal that a first step towards increasing reliable local content for passenger cars, the following categories of production need to be attracted to Egypt: − Sheet metal parts: for example the hood, fenders, floor panel − Plastic parts: front and rear bumpers, door panels − Disc wheels − Tires − High pressure hoses − Pipes − Windscreen wipers − Headlining and sunshades − Front and rear lamp assembly’s − Batteries, sealed − Dashboard − Shock absorbers The attraction of new investment to establish the manufacture of these products in Egypt would enable domestic OEM car production to also buy from their production and increase their Egypt cost-based inputs and thus their international competitiveness. A second step will be to focus on more capital intensive products such as drive trains and steering assemblies.
3.6 DATA OVERVIEW OF EGYPT’S AUTOMOTIVE PRODUCTION SECTOR This report has not focused on this data; instead it would recommend the reader to the Industrial Modernisation’s Strategic Study to Upgrade Egypt's Automotive Sector written by KMPG in 2004. − Number of firms – direct and indirect · According to IDA 21 there are 361 registered establishments employing approximately 50,000 workers. − Number of product categories · These companies are working in approximately 38 automotive component sectors, out of which 16 do not contribute as feeding industries, but are considered as spare parts for the after market 22. − Average annual rate of growth 2002 – 2006 of production value of vehicles and automotive components · The Egyptian market for vehicles since 2003 has grown 158% with the bulk of this expansion coming in the 3-year period, 2005 – 2007. Whilst local production expanded over the 5-year period by 77% to reach nearly 82,000 units, the market share supplied by local production shrank from 66% to 45% in 2007.
3.7 QUALITY STANDARDS AND SECTOR FOCUS ON HOMOLOGATION IMC’s 2005 Strategic Study to Upgrade Egypt's Automotive Industry stresses the importance of quality to the automotive industry, particularly in the passenger car and light commercial vehicle segments as product differentiation can no longer be gained through quality differences.
21 Investment Map for Motorcars Feeding Industries and Suggested National Projects, IDA, December 2004 22 Investment Map for Feeding Industries, IDA, 2004
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Quality is taken for granted and standards must be equally high for all companies. Globally, all suppliers to the big four manufacturers (Ford, General Motors, Toyota and Volkswagen) have to meet recognised quality accreditation standards. The majority of supply to these organisations comes through Tier 1 suppliers who will be quality accredited to ISO 9001, QS 9000 and more recently TS 16949. These quality standards will be demanded and enforced by the assemblers. The assemblers reported that on the whole, for the volume they produce, they are working to world class quality standards. They reported that GM for example, achieved a quality award for the best factory in the Group. Typically, the joint venture arrangement in Egypt has used the quality standards and arrangements of their mother companies to put robust quality procedures in place.
3.8 THE LOGISTICS CHAIN AND EGYPT’S SPEED OF ACCESS TO EXPORT MARKETS In a global economy speed of movement of containerised trade is crucial to the outsourcing of selected production to a country, or its region, that can offer attractive competitive advantage. In order for Egypt to be a player in global supply chains it must have companies set up to deliver efficiently to end-users factories, warehouses or retail outlets in the markets of preferential access. Business activity must be complemented by a trade and logistics environment in Egypt that facilitates efficient container movement. In the World Bank’s Doing Business Report 2008, Egypt recorded a major improvement in its Trading Across Border indices, moving 60 positions to reach a ranking of 26; reducing its ‘Time for Export’ from 20 to 15 days, the ‘Time for Import’ from 25 to 18 days and costs of importing/exporting a container by 30%. Compared to regional comparator countries of Morocco, Tunisia and Turkey and continental competitor South Africa, Egypt is improving its competitive position; however we highlight from Table 11, two areas that need close attention: − Reduce ‘Documents preparation’ to the benchmark provided by Morocco and Turkey, from 10 down to 6 days’; − Reduce the cost of ‘Inland transportation and handling’ in line with the approximately 30% - 40% share of total costs, experienced by Tunisia and Turkey Table 11: Export Procedures in Days and USD compared to Egypt’s neighbours
Export Procedures - Days Egypt Morocco Tunisia Turkey South Africa Documents preparation 10 6 11 6 15 Customs clearance & technical 1 2 2 3 4 control Ports & terminal handling 2 2 2 3 9 Inland transportation and handling 2 4 2 2 2 TOTAL 15 14 17 14 30 Export Procedures – Cost USD Egypt Morocco Tunisia Turkey South Africa Documents preparation 104 50 20 165 50 Customs clearance & technical 90 100 50 200 75 control Ports & terminal handling 170 350 230 220 198 Inland transportation and handling 350 100 240 280 764 TOTAL 714 600 540 865 1087
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Source: Doing Business Report 2008, World Bank Egypt’s high costs of ‘Inland transportation and handling’ as a total of overall costs, is shared by South Africa: their awareness of the importance of logistics was reflected in their Transport White Paper of 1996, which provided the vision for the Moving South Africa Forward project of 1997. In 2004 South Africa launched its First Annual State of Logistics Survey – followed in 2005, 2006 and 2007. It developed mechanisms to measure the total cost of logistics and to monitor annual improvement. Information provided to IDA by Maersk Egypt revealed inconsistent shipping times from East Port Saied to potential automotive destinations in Central and Eastern Europe. IDA will be meeting Maersk in February to understand why for example shipment to Constanza, Romania is 5 days and Prana, Czech Republic is 24 days; and what structural changes may be necessary to effect improvements?
3.9 INCENTIVES AND THE ATTRACTION OF NEW FOREIGN DIRECT INVESTMENT The Visegrad 23 countries of Central and Eastern Europe competed against one another in the 1990’s to attract automotive FDI 24: “Given the magnitude of the winning incentive bids there was considerable interjurisdictional competition in attracting automotive FDI”. Jurisdictional competition can be divided into trade incentives, taxation incentives and a combination of the two. Trade incentives: − The imposition of customs tariffs; − Import licenses − Import quotas − A ban on imports of accident-damaged cars Taxation incentives: − A 100% corporate tax holiday based on conditions: the level of investment and the numbers creation of new skilled employment; − VAT rebates on all exports; Trade and tax incentives combinations; status of an industrial zone provides an opportunity to: − Deliver special incentives: tax concessions and customs duties exemptions; − Exemption from corporate, real estate and personal income tax; competitive land prices; free assistance with bureaucracy and employment training grants. Morocco’s Plan d’Emergence stresses a combination of natural resources, logistics and a qualified workforce; these assets are reinforced by specific incentives for companies that establish within dedicated industrial zones. This includes − Overall income tax at 20% (in addition to the corporate tax relief in Morocco’s Investment Charter: zero corporate tax for 5 years and 50% relief thereafter); − VAT exemption for exports and 2.5% customs duties; − A training subsidy, of up to USD 7,000 per Moroccan recruit, over the first 3 years of hire. Egypt’s incentives by contrast are not so transparent and do not reflect internationally accepted norms which are typically based on trade and taxation incentives or a combination thereof. Using information available from IDA Egypt’s incentives are summarised as follows: − Flexible payment terms for land in industrial zones; − Simplification of administrative procedures and cancellation of administrative charges; − Technical upgrading of company; IMC subsidy up to a project value of € 200,000;
23 Czech Republic, Hungary, Poland and Slovakia 24 Robert Werner 2004, Columbia School of Business: Location, Cheap Labour and Government Incentives: A Case Study of Automotive Investment in Central Europe since 1989.
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− Export Support: financial subsidy as a percentage of export value in selected sectors; − Free Zone: many of the stated incentives are historically anomalous and could no longer be classified as investment incentives e.g. no limits on the nationality of capital, free transfer of profits of capital and profits abroad, inadmissibility of nationalization. − Sector Incentives: For the automotive sector the Government has committed to support 5% of the investor’s investment cost in the development of the Components Park Technology Centre with a cap of US$500,000 per company.
3.10 DESTINATION OF EXPORTS: OEM PRODUCERS & AUTOMOTIVE COMPONENT IDA has not yet obtained reliable export for automotive components or cars. It has relied on anecdotal data from 2005 that exports of components were USD 150 million: of this total Leoni exported USD 110 million and the domestic auto-feeder industry USD 40 million. In order to achieve accurate data IDA will access UNCTAD’s International Trade Centre, TradeMap website. To accomplish this all the HS codes relevant to the automotive sector had to be assembled from data inside IDA; this was followed by a tricky exercise to convert these codes into the Standard International Trade Codes used by UNCTAD. It is planned to access this data in February 2008.
4. LESSONS FROM SOUTH AFRICA AND TURKEY
4.1 TURKEY’S KEY AUTOMOTIVE INDUSTRY MILESTONES − The Turkish automotive industry began production in the 1950’s. − Turkey’s automotive industry has been closely integrated with the EU automotive industry since the 1960s. The Ankara Association Agreement of 1963 envisaged the gradual establishment of a Customs Union between Turkey and the EU. − In addition to a gradual liberalization of the importation of cars, tariffs on cars started to be reduced in 1980. − Import duties were lowered from 72-150% in 1989, to 39% in 1993. − An agreement between EFTA states and Turkey was signed in Geneva on 10 December1991. It entered into force on 1 April 1992. − An economic crisis in 1994 caused industrial production to decrease around 39%. − A new round of restructuring began in the Turkish automotive industry following the Customs Union Agreement with the EU, signed in 1995. − In 1999, the Marmara earthquake negatively affected the automotive industry. In addition high interest rates caused domestic demand to take a dive. − Vehicle production increased erratically over this period, experiencing continuous growth from 2001 till 2006.as follows:
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Table 12: Vehicle Exports 1998 - 2006 Year 1998 1999 2000 2001 2002 2003 2004 2005 2006
Passenger 239,937 222,041 297,476 175,243 204,198 294,116 447,152 453,663 545,682 cars Trucks 31,823 12,785 28,114 6,683 12,295 19,041 31,790 37,227 37,026 Pickups 45,517 37,551 68,807 76,672 116,872 195,606 301,563 349,885 369,862 Buses 3,040 2,327 4,213 2,501 2,684 4,490 14,742 12,155 14,282 Mini 13,910 12,894 20,597 6,486 6,139 13,835 28,161 26,162 20,728 buses Midi 10,275 6,176 11,506 3,000 4,377 6,534 9,903 7,109 8,263 buses Total 344,502 297,862 430,943 270,685 346,565 533,622 823,408 879,452 987,580 Sources www.istanbulbusiness.com Automotive Manufacturers Association (OSD) Vehicle production declined over the period 1998 to 2001 to reach 270,685 units from a period high of 430,943 units in 2000. However in 2002 production recovered and by 2006 it had increased by 184% to reach 987,580 units. − The production of auto parts reached 2,526 Million Dollars in 1999 compared to 3,178 in 1998. − On June 17, 2003 the new "Foreign Direct Investment Law" came into force. Over the following 4-year period the number of companies with foreign capital increased. − The IMF provided macro-economic management for the Turkish economy before and after the crisis, delivering $20.4 billion of financial assistance between 1999 and 2003. − The post-crisis economic adjustments were overseen by the Justice and Development Party (AKP), which came to power in the November 2002 elections. − Post-2001 growth was above historical levels: the annual rate of real GNP growth averaged 7.8% over the period 2002 - 2006. − Since January 2006 the Central Bank followed an open inflation-targeting framework. Rampant consumer and producer prices were brought under control by 2004. Achieved inflation targets were 5% in 2006 and 3% in 2007. − The automobile Industry of Turkey became profitable to the country's economy, according to research written on May15, 2007. − This fact is reflected in the expansion of motor vehicles exports: in the period 2002 to 2006, exports increased by 170% to reach 696,688 units. See Table 13. Table 13: Turkey’s Vehicle Exports 2002 - 2006 Year 2002 2003 2004 2005 2006 Exports 257,775 346,830 508,409 552,838 696,688 Source: OSD (Units)
4.2 SOUTH AFRICA’S AUTOMOTIVE INDUSTRY – AN OVERVIEW The Motor Industry Development Programme (MIDP) 1995 – 2012 Key Objectives of the MIDP: − To improve the international competitiveness of the South African automotive manufacturing and associated industries − To improve vehicle affordability in the domestic market − To encourage growth in the vehicle market and in the component manufacturing industry particularly in the field of exports
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− To stabilise employment levels in the industry − To create a better balance between the industry’s foreign exchange usage and foreign exchange earnings The MIDP was extended in 2007 until 2017. The programme has resulted in a significant growth of vehicle production reaching 587,719 units in 2006 compared to 407,036 in 2001; 6-year growth of 44%. The industry’s share of GDP also grew over the 7-year period to 2006 from 5.5% to reach 7.6%; a period increase of 38%. Table 14: Automotive share of GDP Year 1999 2000 2001 2002 2003 2004 2005 2006 Share of GDP 5.5% 6.0% 6.4% 6.4% 6.8% 7.0% 7.5% 7.6% Source: NAAMSA (National Association of Automobile Manufacturers of South Africa)
Table 15: Production across all categories 2001 - 2006 Year 2001 2002 2003 2004 2005 2006 Passenger Cars Units 270,538 276,499 291,249 300,963 324,875 334,482 Light Commercial Units 123,340 113,655 113,290 132,827 172,522 219,618 Vehicles Heavy Commercial Units 12,321 13,239 15,948 20,308 26,683 32,268 Vehicles Buses Units 837 1,048 848 954 1,147 1,351 Total 407,036 404,441 421,335 455,052 525,227 587,719 Production Units
Source: NAAMSA, International Organization of Motor Vehicle Manufacturers (OICA)
The rules governing the export credit mechanism and the import duty off-set mechanism is summarised in Table 16 in Annex III: − Duties progressively reducing to 25% on imported vehicles and 20% on imported original equipment components by 2012, from 115% and 50%, respectively, pre 1995. − Duty-free import of original equipment (CKD) components of 27% of ex-factory price of vehicles produced locally
4.3 SOME LESSONS FROM TURKEY AND SOUTH AFRICA − Both countries recognised the importance of the automotive manufacturing industry as a potential engine for economic growth. − Programmes designed to support the growth of the automotive industry also focused on tapping into foreign markets: this made the promotion of exports a key objective in addition to the domestic market. − Both countries had or still have measures that protect domestic production. In South Africa the industry development programme till 2012 shows a progressive reduction of the support mechanisms; in 2007 this programme was extended till 2017. − Making use of preferential market access has allowed both countries industries to break a reliance on the domestic market and build the infrastructure targeting international markets, for international homologation of automotive industry products.
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PART 1 ANNEX I : Ministry of Trade and Industry Decree 907 Registered on: Dec. 12th 2005
Decree no. 907 of 2005 by the Minister of Foreign Trade and Industry concerning the percentage of local manufacturing in the industry of automotive assembly After reviewing the Presidential decree no. 21 on 1958 concerning organizing and registering the industry in Egypt, And decree no. 24 of 1977 concerning the industrial registry, And the presidential decree no. 55 of 1958 concerning the executive regulation of the decree no. 21 of 1958. And the presidential decree no .226 of 2004 concerning the organizing of the Ministry of Foreign Trade and Industry, And the presidential decree no. 350 of 2005 concerning the establishment of the Industrial Development Authority, And the decree of the Minister of Industry, Petroleum and Mining no. 186 of 1978 concerning the executive regulation of decree no. 24 of 1977, And the decree of the Minister of Industry and the Mineral Wealth no. 775 of 1983 concerning types of industries that are subject to the rules of the decree no. 24 of 1977. His Excellency the Minister of Foreign Trade and Industry decided the following: (First article) − To issue a license to an automotive assembly plant, the plant is committed to achieve the following : 1- Percentage of local content in the industry of auto assembling must be not less than 45%. 2- If this percentage is less than 45%, then the deficit must be supplemented by exporting local components of fully – manufactured automotives. (Second Article) A committee is formed and headed by the head of the Central Administration of Local Industrialization and development in IDA, and the membership of: − 2 specialists of IDA named by the Vice–Chairman of IDA. − A representative of the Foreign Trade sector. − A representative of Chamber of Engineering Industries. − A representative of the Exporting Council of Engineering Industries. − A representative of League of Egyptian Automotive Manufacturers. This committee is responsible for: − Setting the rules of calculating the percentage of local content in the auto assembly industry. − Suggesting amendments of the percentage of local content. − Studying the complaints presented by the automotive assembly plants. The committee’s decisions will be submitted by the Minister of Foreign Trade and Industry. (Third Article)
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Automotive assembly plants are committed to present to IDA lists of both local and imported parts and local content percentage according to the assembly line contribution that proves it follows the rules of Article (1) of this decision .these lists are to be presented on a quarterly basis of each Gregorian year . These plants are committed to present to IDA any additional information of data, and access to documents and files that enables IDA to verify the plant’s commitment to the rules of article 1 of this decree. (Fourth Article) The calculation of the percentage of the local content or what is exported according to the rules of the first article at the end of each Gregorian year starting from the first of January till the end of December. The assembly plants are committed to present customs data that proves the completion of the actual exporting of the components or fully-manufactured automotives that completes the decided percentage of the local content. (Fifth Article) The verification of the commitment of automotive assembly plants by the rules of the first article of this decree is assigned to IDA. In case IDA faced a condition where any of these plants did not follow these rules, it has to send a letter on the address mentioned in the industrial registry file of the plant to allow it to present its defence in a written response within fifteen days of date of the receiving the announcement letter. If the plant’s justifications are proved to be invalid, required arrangements mentioned in the seventh article of this decree are to be taken. (Sixth article) A decision by the Minister of Foreign Trade and Industry concerning the amendment of the percentage of local manufacture content in the automotive assembly industry is to be submitted. The decision will be implemented within six months of the date of putting it into effect. (Seventh Article) License of the automotive assembly plants that breaks the rules of this decree will be cancelled according to the rules of Article (3) of decree no. 21 of 1958, and its registry in the industrial registry is cancelled according to the rules of decree no. 24 of 1977. (Eighth article) Automotive assembly plants that exist at the time of the execution of this decree are committed to follow the rules of it, and have to prepare itself within six months of the date of putting it into effect. (Ninth article) This decree is to be published in Al-Wakaea Al-Masria, and is put into effect starting from the next day of publication.
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PART 1 ANNEX II AUTOMOTIVE OEM INDUSTRY SURVEY 2008
Contact Information
Company Name:
……………….. …………………………………………………………………………………….
Head Office Address:
……………………………………………………………………………………………………….
Telephone: Fax:
……………………………………. ……………………………………………………
E-mail:
……………………………………………………………………………………………………
Website:
…………………………………………………………………………………………………..
Contact person: …………………………………………………………………………………..…
Position: ……………………………………………………………………………………………...
Telephone: ……………………………………E-mail: ……………………………………………..
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1. What automotive production does your company manufacture? (Tick box) Passenger cars Buses - Mini Trucks > 5 – 10 MT
Light commercial vehicles Buses – Midi + Large Trucks > 10 MT
2. Are your vehicles homologated to meet export requirements?
Yes No Specify which authorities provided homologation
1) …………………………………………………………………………………….. 2) …………………………………………………………………………………….. 3) ……………………………………………………………………………………..
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3. Is your company currently exporting?
Yes No
IF YES: Please list top 5 export markets with USD sales
Top 5 Export 2002 2003 2004 2005 2006 2007 Countries 1. 2. 3. 4. 5.
4. What percentages of your annual sales were exported in 2007?
(Tick box) 5-10% 15-20% 30-40% 50-60%
10-15% 20-30% 40-50% 60-70%
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5. Which new countries has your company targeted for export in 2008-2010?
2008 2009 2010
State if your company experiences any impediments to export
1. ……………………………………………………………………
2. ……………………………………………………………………
3. ……………………………………………………………………
4. ……………………………………………………………………
6. What decisions does your Company or the Government need to make in order to increase your company’s exports? Tick boxes (more than one) Strength Sales Management Appoint an export manager Meet homologation standards of target export market Increase the production capacity Increase working capital Increase export marketing budget Extend Export Support scheme to complete vehicles Egypt to sign 1954 Geneva Convention on automotive industry standards
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7. What are the three key objectives of your company's a business plan?
1. …………………………………………………………………………………
2. ………………………………………………………………………………...
3. …………………………………………………………………………………
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8. Do you have any plans for expansion of production?
Yes No
IF YES: Brief description of planned investment in production over the period 2008-2010
* US$ Value o f Investment or Tick Year
Describe Planned Investment 2008* 2009* 2010*
9. What are the expected employment implications for this planned investment?
Potential New Employment
2008 2009 2010
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10. How frequently do train your production workers?
Monthly 6 monthly Yearly
11. What type of training do you need?
Type of Training In Egypt At Mother Company Quality Standards
Maintenance
On-the-Job Other……….
Other……….
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12.What is the breakdown of worker per skill-level in the Manufacturing Department? In addition, their salary level including bonuses/overtime/allowance but excluding social insurance and taxation deductions?
Skill Level No. of Workers Gross Earnings
Senior Engineer
Engineer
Skilled
Semi-Skilled
Manual
13. Do you find the required skilled production workers without difficulty?
Yes No IF NO: Specify the skills that are the most difficult to source
1) …………………………………………………………………………………
2) …………………………………………………………………………………
3) …………………………………………………………………………………
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14. Is there a vocational training center for the automotive industry available to your factory?
Yes No
15.What is your company’s Research and Development budget as a percentage of annual turnover in 2007? 0 % < 2% 3% 4% > 5% Rely on Mother Company
Thank you for your cooperation. This data is being collected by EAMA in collaboration with the Industrial Development Authority in order to present an accurate industry profile for domestic & foreign investors. The results will be provided to IDA and all stakeholders without names in order to ensure the confidentiality of each company’s participation.
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PART 1 ANNEX III
Table16: Provisions of the Car/LCV and MCV/HCV Motor Industry Development Programme (MIDP) through 2012 Value of Qualifying Import Duty Export PGM Ratio of Exports against Imports Performance Content Components, Components Vehicles Built-up Heavy Motor &Tooling Year Vehicles& Catalytic Vehicles & Built-up Original Exported: CBU Light Components Tooling Light Equipment Converters Components, Motor Exported: Vehicles Components (excl. Heavy Vehicles Exported CBU Light Vehicles and tooling) Motor Vehicle Tooling Imported Imported 1999 50.5% 37.5% 100% 90% 100:75 100:100
2000 47.0% 35.0% 100% 80% 100:70 100:100
2001 43.5% 32.0% 100% 60% 100:70 100:100
2002 40.0% 30.0% 100% 50% 100:65 100:100 2003 38.0% 29.0% 94% 40% 100:60 100:100
2004 36.0% 28.0% 90% 40% 100:60 100:100
2005 34.0% 27.0% 86% 40% 100:60 100:100 2006 32.0% 26.0% 82% 40% 100:60 100:100
2007 30.0% 25.0% 78% 40% 100:60 100:100
2008 29.0% 24.0% 74% 40% 100:60 100:100
2009 28.0% 23.0% 70% 40% 100:60 100:100
2010 27.0% 22.0% 70% 40% 100:60 100:100
2011 26.0% 21.0% 70% 40% 100:60 100:100
2012 25.0% 20.0% 70% 40% 100:60 100:100
The duty-free allowance remains at 27% through 2012 and the production asset allowance of 20%, in the form of a duty credit, will apply for the foreseeable future .
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PART 2: IDA’S AUTOMOTIVE STRATEGY RECOMMENDATIONS
1. BACKGROUND The Automotive Strategy commissioned by the IMC in 2004, has not been implemented. The policy recommendations are summarised as follows: − Increase the size of the domestic vehicle market; − Encourage key countries to invest in Egypt; − Encourage and facilitate Egyptian exports; − Enable Egyptian products to be price competitive; − Give Egyptian companies access to international buyers; − Allow the Egyptian companies to gain internationally recognised quality standards; − Use leading international production processes. Although the issues today remain much the same as those summarised 3 years ago, today the Government’s determination to invigorate the automotive sector provide an impetus towards not just strategy recommendations but a full proposal, which includes: a detailed plan for investment attraction based on the reality of Egypt’s strong international competitiveness; and the implementation of the infrastructure for an automotive sector Vision and Strategy with a sustainability mechanism. Current moves towards a new policy for the automotive industry, are taking place in a strategic vacuum. This is despite the fact that the specific policy changes to be announced on the 10th February 2008 will be made in the context of proposals to ‘gradually’ alter ‘announced’ changes to local content rules and customs tariffs. It is IDA’s recommendation that a sector strategy be developed over the next 6 months and be launched to an international audience. One such opportunity would be the annual international congress of national car manufacturers associations in October 2008, hosted this year in Cairo by the Egyptian Automotive Manufacturers Association.
Today IDA is concerned that any policy recommendations to the Ministry of Trade and Industry take place within a framework that provides investors with predictability, transparency and uniformity. To enable this there are two elements: a national strategy and a mechanism for public-private dialogue. In this section of the Strategic Plan, IDA makes recommendations to guide the first element: the formulation, implementation and monitoring and evaluation of a national automotive Strategy, based on a private sector inspired Vision.
Part 3 of this Strategy document proposes the second element: a mechanism for dialogue between the private and public sectors.
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2. IDA’S RECOMMENDATIONS FOR DEVELOPMENT OF A NATIONAL AUTOMOTIVE SECTOR STRATEGY • IDA’s industrial development mandate is expressed through the following Twenty Recommendations that need to be addressed in an Automotive Sector Strategy: − IDA Recommendation I: that current policy changes strengthen, not weaken, Egypt’s automotive investment proposition and be framed in the context of a defined automotive industry Vision and Strategy − IDA Recommendation II: That a new Automotive Sector Strategy facilitate IDA’s attraction of new investment to passenger car assembly, vehicle assembly and the manufacture of automotive components; primarily for export to international markets. − IDA Recommendation III: A paradigm shift that sees Government halt the attraction of new investment using parameters reliant on increasing local content in a protected domestic market. This approach should be replaced by marketing the location of Egypt to new investors enabling them to manufacture in an internationally competitive cost environment, with boosted exports and profits. − IDA Recommendation IV: That Egypt adopt two key selling proposition for the automotive sector: · Egypt’s position as a regional export base for markets in which Egypt has preferential access, ‘Egypt Your Export Base for Europe’; · Egypt’s position as the most profitable manufacturing base in the Arab World, ‘Egypt Your Profitable Middle East Base’. • Today the EU is the sole export market where Egypt passenger car exports have realisable preferential access for large volume sales. − IDA Recommendation V: Permit Egyptian companies to competitively meet EU Rules of Origin (total local content of not less than 60% 25 ) through Cumulation by facilitating the sourcing of originating production from Egypt, the European Union and Aghadir. • Promoting use of the regional export base paradigm, Egypt’s attractiveness to automotive investment has several dimensions: − IDA Recommendation VI: Encourage existing assemblers, particularly the joint ventures with their OEM parents and 100% foreign-owned producers, to deliver exports to the Arab World, and Eastern and Southern Africa. − IDA Recommendation VII: Attract new OEM and automotive component investment to Egypt to benefit from its low-cost manufacturing platform and its access to markets of the EU, Arab World and Eastern and Southern Africa. − IDA Recommendation VIII: In order to make the regional export base paradigm meaningful, Egypt must focus on ‘debugging’ the obstacles to practical application of both the COMESA and GAFTA trade agreements. The Government must consider the non-practicality of these two agreements to be a major impediment to the development of this sector of the industrial economy. − IDA Recommendation IX: Activation of the Aghadir Treaty for trade in automotive products would be of immediate benefit to Egypt’s attraction of new investment and would encourage Morocco to reciprocate. − IDA Recommendation X: Egypt’s market access to the European Union faces no practical obstacles and should be recognised as a magnet for new investors seeking access to Europe’s markets from Egypt’s low cost base. − IDA Recommendation XI: That Egypt re-focus the attraction of foreign direct investment by promoting specific industrial sectors using industrial best practice that complements GAFI’s generic approach to investment attraction. • Chapter 2 of Part 1 explains why the CEE countries were originally attractive to automotive FDI. However since 2006 accelerating Unit Labour Costs (ULC) reveal opportunities for Egypt to position itself as a meaningful alternative to car assemblers and component producers targeting the EU market.
25 Egyptian EU Association Agreement, Annex II to Protocol 4, Chapter 87
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− IDA Recommendation XII: Position Egypt in competition with Central and Eastern Europe, which since 1990 successfully attracted 15 car assembly factories and scores of component producers to supply assembly plants throughout the European Union. • The CEE member states did not attract investment based solely on their factors of production competitiveness; according to the size of a potential investment, offers were backed up by negotiated incentive packages. − IDA Recommendation XIII: Egypt must develop a transparent incentives offer, backed–up by a secret package, developed for ‘large’ investors. • Typically OEM assemblers in Egypt benchmark their auto-feeder suppliers in Egypt against global supplier prices: although Egyptian component producers have little automation with labour-intensive and low volume production lines, they meet these global benchmarks. Egyptian CKD assembly manufacturing cost is the lowest in the world. − IDA Recommendation XIV: Investment promotion will persuasively represent the reality of Egypt’s automotive manufacturing cost competitiveness. Special investment incentive packages should be a last resort as they represent a trend towards foregone tax revenue, market distortions and bidding wars. • The Ministry of Trade and Industry’s Export Support is a short-term tool to encourage the automotive component sector to export. Government should be cautious when using this mechanism to attract new investors manufacturing high volumes on automated production lines. − IDA Recommendation XV: Investment attraction must provide complete information on Egypt’s competitiveness, to enable the investor to maximise their advantage from Egypt’s competitive cost base through a calculated combination of labour and capital. − IDA Recommendation XVI: Export Support extension to vehicle exports is questionable. It should not be used to bridge a supposed gap between an OEM’s competitiveness in Egypt’s still protected domestic market and the achievement of volume levels for international competitiveness; unless OEM’s can provide verifiable evidence that a ‘gap’ needs to be bridged. • The automotive industry globally relies on Just-In-Time deliveries. Egypt improved its “Trade Across Borders” ranking in the World Bank’s Doing Business Report 2008 by 60 places from a year earlier. However delivery times to CEE member states range from 5 – 25 days, which is not acceptable compared to regional comparators. − IDA Recommendation XVII: Using the example of South Africa’s experience, Egypt should develop logistics indicators that measure improvements of the delivery cycle as well as creating a mechanism to monitor and evaluate these indicators annually. − IDA Recommendation XVIII: That Egypt pursue the attraction of automotive component production investment from the full range of Tier I, II and III component producers, without regard of the level of labour intensity required for their international competitiveness. − IDA Recommendation XIX: That Egypt aggressively pursue the prioritised attraction of automotive OEM assembly in Egypt with the objective of attracting investment from China, India, Korea, Japan, the United States and Western Europe. − IDA Recommendation XX: That the promotion of international investment attraction to Egypt’s industrial sectors be coordinated by IDA. These recommendations for inclusion in the formulation of an Automotive Industry Strategy have been drawn from IDA’s market research process. These are a not conclusive and issues will continue to develop until the Public-Private Dialogue process can commence.
At this stage the process of Dialogue will enable the private sector to provide their detailed proposals for review by Government organisations in the context of national interest including the attraction of foreign direct investment. The resulting Strategy will have commitment from both private sector and Government stakeholders, who will have taken ownership through the Strategy formulation stage.
This process of Strategy formulation and implementation is addressed in detail in Part3.
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PART 3 PUBLIC-PRIVATE DIALOGUE RECOMMENDATIONS
AUTOMOTIVE SECTOR: A MODEL FOR PUBLIC-PRIVATE DIALOGUE
1. DRIVE TO ATTRACT MULTINATIONAL AUTOMOTIVE INVESTMENT The attractiveness of the automotive sector lies in its potential to make a significant contribution to industrial growth: this is the experience of countries globally with a strong industrial sector. The automotive industry in the EU is estimated to account for close to 8% of total manufacturing value added (ca. €120 billion) and about 6% of total manufacturing employment (over 2 million employees). It is also estimated to provide indirect employment to 10-11 million people.
In 2006 Egypt’s decision to upgrade its engagement of international automotive investors was symbolised by the President’s meeting with heads of five important companies’ during his visit to Germany in May 2006 and the follow-up made in 2007. This not only involved the efforts of the Ministry of Trade and Industry, but included the Industrial Modernisation Centre, The General Authority for Investment and the German-Arab Chamber for Trade and Industry.
An important pillar of IDA’s three-year strategic plan includes the attraction of new investors to the growing number of new and planned general and industry-specific industrial zones: this will require IDA to strengthen its capacity to represent the automotive industry and other key industrial sectors. The IDA’s marketing department capacity building, which began in October, 2007 has adopted a practical approach using current sectors of importance, beginning with the vehicle and automotive components sector. Egypt’s positive message of seeking to attract new automotive sector investment has not always accorded with its actions. In September 2004, the Government cut import tariffs on passenger cars with engines of less than 1600 cc from 100% to 40%: this decision reduced vehicle import costs and eased consumer pain caused by a devalued Egyptian Pound.
However it sent a contrary signal to investors: some of whom are still wondering why and how this decision was made.
It is well-recognised that far reaching decisions, which affect the landscape of all or individual industrial sectors need to be predictable, transparent and uniform. This paper is predicated on the position that in order to meet these conditions the public and private sectors must engage in a process of dialogue with one another. In order for this dialogue to succeed there must be a context that permits measurement of the dialogue’s progress.
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This process requires a sector vision, a strategy and at a minimum, an action plan for each industry with deliverables and clear KPI’s to enable monitoring and evaluation.
This paper is promoting the process of Pubic Private Dialogue and its facilitation and sustainability within an institution. Such mechanisms are not new to Egypt: they already exist in the ICT sector; since 1999 the sector-dedicated Ministry for Information and Communications Technology made the difference to the sector’s development.
2. THE EXAMPLE OF EGYPT’S ICT SECTOR Progress did not happen over-night but now the mechanisms exist: − Public Private Dialogue: · The Software Export Council, and the Electronics, Information Technology, Software Alliance (EITSAL) hold regular meetings with ITIDA to address industry capacity building in the context of the IT Industry National Development Strategy Targeting Export Growth − The institution: · In 2004 the Information Technology Industry Development Agency (ITIDA) was established to implement and enforce the e-signature law and to develop the IT industry. − A vision, strategy and action plan: · The “IT Industry National Development Strategy Targeting Export Growth” announced in June 2006, is based on eight components including the Capacity Building component. − Sector capacity building: · In 2005, the Industrial Modernization Centre (IMC) and the Ministry of Communication and Information Technology (MCIT) launched a pilot project “Capacity building for 50 ICT companies”, this ended in July 2006. · Currently in 2007 ITIDA is launching the “Enterprise Capacity Building Program for IT/ITES companies”, to target 200 eligible companies that are exporting, export oriented or possess a potentially exportable product/service and are committed to embracing the upgrading process. Whilst results are still too early to assess this process, the key indicators targeted for 2010 are: − Grow exports from $200M (2005) to +$1.4B − Create +60K new jobs − Generate FDI investments of $500M 3. ECONOMIC GROWTH NEEDS PUBLIC-PRIVATE DIALOGUE In 2007 the DFID/World Bank/IFC/OECD published The PPD Handbook: A TOOLKIT FOR BUSINESS ENVIRONMENT REFORMERS (Operational Guidelines for the Charter of Good Practice in Using Public-Private Dialogue for Private Sector Development). PPD mechanisms are defined as structured dialogues between the government and private sector aimed at improving the investment climate. In fact a PPD initiative is only giving a formal structure and expression to the common desire of businesses and governments to create conditions in which the private sector can flourish. Dialogue helps to reveal to governments the likely micro-economic foundations for growth, but it also creates a sense of ownership of reform programmes among the business community which makes policies more likely to succeed in practice. This paper is proposing that Egyptian industry develop the model of using PPD to develop individual industrial sectors in order to maximise their competitiveness and that it be based on the recent experience of Egypt’s ICT sector. It is further proposed that this dialogue take
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place in the context of a clear understanding of the needs of Egypt’s customers in target markets: those customers that buy Egyptian industrial exports or that wish to invest in new manufacturing capacity in Egypt in order to enhance their company’s competitiveness. The most fundamental requirement for a successful PPD is having the right atmosphere: unless both the public and private sector are ready and willing to talk to each other constructively, any PPD process is unlikely to be successful. The second most important ingredient is the political will to implement decisions that arise from a PPD process.
IDA realises that both these conditions exist in Egypt today providing an opportunity for the reorientation of existing mechanisms within the Ministry of Trade and Industry, to create this dialogue.
4. A PROPOSED PPD MECHANISM FOR THE AUTOMOTIVE INDUSTRY There is general agreement that this mechanism must be sustainable and in order to achieve this there must be a provision for the mechanism to be institutionalised. Table I summarises a proposed mechanism for public private dialogue that builds on the positive experiences to-date and draws lessons from international experience.
Table 1: Proposed Mechanism for Public Private Dialogue in the Automotive Sector
S A U Objective Working S T T Groups S E A O S C M E K O Time Lines Enhanced E T E T C I C O H T V Facilitation Business T R O E O O L R A B R D U Key Environment C S E Performance S I T R Indicators V N Delivers New T I E I S R O B S S Monitoring A N U And Exports and I F T Y Evaluation O O E P R U FDI N G L I A M Accountability Y N N S I
There are some underlying principles which define the PPD: − The structure of implementation - Sector Vision and Strategy − Buy-in by Stakeholders − Facilitation − Monitoring and Evaluation
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− Quarterly Reports - Accountability Once the PPD principles are addressed there are three issues to be tackled: − The Private Sector at the Heart of Economic Development − Areas of Risk − Summary
4.1 STRUCTURE OF IMPLEMENTATION It is necessary that implementation of sector dialogue is driven by the private sector. It is proposed that the forum for private and public sector interaction will be the Sector Business Councils. These will address implementation of the Action Plans and the identified policy and regulatory reforms. One of the implications of this sector approach is that sector business associations/industry chambers/export councils will become the key organisations involved in driving achievement of the Goals defined in each Action Plan. In turn, each sector business association will become the main thrust of dialogue with the GoE when addressing specific sector business environment policy and regulatory impediments. Turning specifically to the automotive sector, key private sector players are represented in the related business groupings: the Egyptian Automotive Manufacturers Association, the Egyptian Auto-Feeders Association, the Chamber of Engineering Industries and the Engineering Export Council. The formation of an Automotive Export Council is urgent. Dialogue between the automotive sector and Government will be used to address and resolve specific sector business environment policy and regulatory impediments; the Ministry of Trade and Industry will take responsibility for resolving these impediments.
Table 2 illustrates how Table 2: Proposed Public-Private Dialogue public and private stakeholders can interact in a Ministry of Trade and Industry
Public-Private Dialogue. Chamber of Engineering Industries Addressing the formulation, EAFA Automotive Business Forum EAMA implementation and Engineering Export Council monitoring of the Executive Board automotive sector strategy
and the principal business Facilitating Secretariat environment impediments through working Groups. Reform Skilled labour Domestic market Preferential local content, The key for success the development expansion market aceess customs duties regime process is driven by the private sector working Working Group I Working Group II Working Group III Working Group IV in partnership with Government stakeholders.
The sector Action Plan will include goals that have been assessed as necessary for the achievement of current sector economic objectives such as foreign investment or exports growth over a three year period; these will evolve and change as the sector becomes more ambitious in response to developing market opportunities. Inevitably new laws and regulations issued by Government will have the potential to harm the automotive sector’s competitiveness. This will require a response from the Automotive Business Council and the embracing of new stakeholders to address additional reforms. The Automotive Sector Council will consist of relevant stakeholders lead by the Minister for Trade and Industry; a deputy Chairperson, preferably from the private sector will be appointed by the Minister.
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The other Council members will consist of relevant public and private stakeholders identified in the sector Action Plan. In addition the Action Plan will identify policy and regulatory impediments that are necessary to the achievement of an enhanced business environment. It is the addressing of these impediments which provides the platform for the work of the Council. The facility to bring new subjects to the table will be presented through an official agenda that is compiled by the Facilitator with contributions made by each Council member. It is proposed that the Council agenda begins with a review of the previous meetings Minutes and also includes an item of ‘Any Other Business’. The Council is planned as an executive body representing all the sector’s interest groups. It is proposed that the Objectives of each Goal be prioritised and be addressed by a Task Force, which is responsible for delivering each of the defined Objectives. Task Force members will be limited to immediate stakeholders crucial to achieving the stated objective of reform. They will meet more frequently than the Council, and elect its own chairperson. The resolution of sector business environment impediments from each Sector Action Plan will be prioritised, time driven and have measurable outputs; quarterly reports will ensure stakeholders accountability.
4.2 BUY-IN STAKEHOLDER WORKSHOP It should not be presumed that all stakeholders automatically buy-in to the automotive Action Plans with its defined Objectives and steps to implement each Goal. A deliberate process of buy-in by all stakeholders to proposed financial targets such as indicators of new exports, investment and employment will be needed. If buy-in cannot be achieved at the first meeting of the Automotive Business Council, then this should be supplemented by a retreat for relevant sector stakeholders. The purpose of the retreat is to enable stakeholders, who may have preconceived ideas about their public or private sector counterparts, to have an opportunity to become personally more familiar and start to build the relationship foundation for the coming intensive dialogue. The outcome of this retreat should be that all stakeholders fully understand the automotive Vision, Strategy and Action Plan with each organization’s responsibilities identified. If there is potential resistance from an organisation or an individual this should be noted for the next quarterly evaluation report.
4.3 FACILITATION PROMOTES DIALOGUE The process of dialogue needs to be facilitated in order to ensure progress. Meetings need to be arranged, participants invited, to be persuaded of the value of attending and momentum maintained through the inevitable difficulties and changes. This facilitation could be grouped under the heading of a Secretariat. The key functions that need to be carried out by the Secretariat include accepting the facilitator as head of the Secretariat. The facilitator will keep track of all on-going PPD activities and in particular the technical Task Forces. During the PPD meetings, public and private representative’s suggestions need to be made workable to ensure that the original Action Plan’s objectives can be met. Other important functions of the dialogue facilitator include: - Consulting with stakeholders to foster broad private sector participation; - Working behind the scenes to lead the dialogue; - Liaising with development partners on the provision of necessary technical inputs to build dialogue capacity; - Continuing injecting energy and developing the dialogue agenda and vision;
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- Keeping accurate and transparent records and providing timely and impartial summaries of meetings.
4.4 MONITORING AND EVALUATION A process of monitoring and evaluation will be needed to identify why a bottleneck has arisen in the implementation process thus upsetting the agreed time frame. The report will explain how the bottleneck has arisen and what needs to be done to enable implementation to return to the original time track. It is proposed that monitoring and evaluation be undertaken quarterly using the indicators set out in the automotive action plan. The quarterly report will become a crucial feedback tool to assist in management of the process of implementation as well as helping to improve the quality of dialogue.
4.5 ACCOUNTABILITY Management level accountability during implementation of the automotive action plan will require some level of sanction for any individual or group which deliberately impedes progress. Accountability is the single most difficult element of the implementation of the automotive action plan as this implies holding organisations, and thus individuals in those organisations, responsible for their actions. The Ministry of Industry and Trade will play a key role of ensuring accountability.
5. PRIVATE SECTOR AT THE HEART OF ENTERPRISE DEVELOPMENT Implementation of the automotive action plan through the mechanism of public-private dialogue provides an opportunity to re-assert the place of the private sector at the heart of enterprise development economic decision-making. This proposition is made in the context of an international trend over the last 10 years – and actively acknowledged in Egypt since 2004 – where the public sector passes responsibility for job creation to the private sector.
The key to implementation of this action plan is the delivery of the identified reforms. This process will rely upon the private sector engage through dialogue with the Government. The Automotive Business Council is designed to deliver a sustainable process of reform that will require institutionalisation.
Each private sector representative should be firmly representative of their sector and not from some generally representative body that lacks deep roots in the automotive sector. The preferred private sector representatives should be active participants in the previously identified business associations.
6. HIGHLIGHTED AREAS OF RISK Some stakeholders react negatively to the Business Council and the Sector Action Plans.
The process of sector development is dynamic and therefore a mechanism will be needed to ensure that new Goals can be identified and that buy-in by all stakeholders takes place.
It has been agreed that the role of the private sector needs to be addressed on a sector basis which means a pronounced role to be played by sector business associations. The importance of building capacity in business associations has already been noted.
In order to provide effective facilitation as well as monitoring and evaluation an independent rapporteur needs to be identified. The quarterly reports will be sensitive. Although not designed to be ‘finger
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pointers’ and allocating blame, their job will be to identify where blockages are occurring and how they can be addressed. By definition the reports will need to be detailed and constructive.
Accountability is a key to the process of policy and regulatory reform and this will rely on a degree of oversight from the Minister of Trade and Industry.
It has been identified that in order for representative private sector participation in public private dialogue to be sustainable this right of participation needs to encapsulated in law.
A successful process of public private dialogue needs to be institutionalised in order to be sustained.
7. SUMMARY Key OEM stakeholders have recently informed IDA – at meetings on 5, 6 & 9 Jan. 2008 – that the starting point for their plans for new investment is the enunciation by Government of their policy for the automotive sector. This requirement was reiterated at the Automotive Sector Consultations in January 2008.
With willing stakeholders Public Private Dialogue will deliver a process that not only provides a Vision for the sector but also supports the development and implementation of a sector strategy. Implementation will take place within a defined time-plan for the delivery of the Action Plan with commitments to the delivery of actions related to new investment and sector-specific policy reforms. The outputs will be measured using indicators of new exports and employment growth.
The PPD will also provide the mechanism for monitoring and evaluating sector strategy implementation and the carrying out of sector-specific business environment reforms
Once this process proves successful for the automotive sector, it could be adopted for use by all industrial sectors.
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PART 4 IDA’S AUTOMOTIVE INVESTMENTMARKETING PLAN
1. MARKETING PLAN VISION Attract new investment to a regional export base for automotive components and assembled vehicles that positions Egypt as a leading economic force in the MENA region and beyond.
2. THE CURRENT MARKET POSITION The attraction of FDI to Egypt’s automotive sector is work in progress, which is well documented in Part 1 of this Strategy. To-date new investment in automotive components has depended exclusively on the expansion of existing component production by domestic manufacturers as the domestic market grew and export opportunities were realised. A single foreign investor, Leoni AG, set-up in Egypt 1997 and have since expanded their operations.
Investment in car assembly was attracted to Egypt in order to sell to the domestic market. No OEM car production has been set up to specifically address export markets.
Bus production supplies both the domestic and exports market. A Turkish factory was set-up in 2007 to specifically meet export demand in the markets covered by Egypt’s regional trade agreements with the Arab World (GAFTA) and Eastern and Southern Africa (COMESA), in addition to the domestic market.
3. THE PRODUCT FOR PROMOTION TO OVERSEAS INVESTORS IDA’s market research has revealed that Egypt does possess competitive advantage in the automotive sector, compared to neighbours such as Tunisia, Morocco, Turkey and Central and Eastern Europe.
The major region close to Egypt that has attracted significant automotive OEM investment since 1990 has been Central and Eastern Europe. Several key factors attracted FDI: commitments to liberal economic reforms, low Unit Labour Costs, skilled workforces, proximity and access to the EU market, and tailored incentive packages.
Today Egypt is in a position to replicate this attractive proposition.
4. IDA’S PROMOTION OF THIS INVESTMENT PROPOSITION IDA will supplement GAFI’s generic promotion of FDI attraction to Egypt by promoting competitiveness indicators from individual industrial sectors in which Egypt possesses international competitiveness.
IDA’s promotion of the automotive industry will be a proactive campaign that makes its case for attracting investment by repeated market visits to targeted investors. Each visit to the market place will be preceded by contacting identified potential investors using electronic communications, supplemented by an interactive website specific to a targeted sector’s investors.
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Promotional literature will be published that communicates industry-specific factors of investment profitability and, where possible, supply reliable data reflecting the economics of doing business in that sector.
The on-going success of Tunisia in the attraction of automotive component investors and Morocco’s recent success in attracting Renault-Nissan’s car assembly to Tangiers can largely be explained by their effective investment promotion agencies, employing aggressive targeted investor attraction techniques.
5. THE MARKETING TEAM The Marketing General Department consists of three departments – Customer Care, Promotions and Research - integrated to deliver new industrial FDI to Egypt. The three department teams will collaborate to achieve agreed marketing objectives and each team member will be responsible for specific deliverables.
These deliverables will be formatted as indicators for the delivery of the Management by Objectives; these will also be the reference point for the earning of individual performance bonuses, increments and job promotion. Illustration 1: Staffing of the Marketing Dept – as of Jan. 17 th 2008 Publications Marketing General Department IT Department (ITGD) Department (PGD) (MGD)
Design portal on Design marketing Manager Mr. Hussein Osman IDA website for pack, website attraction of
Customer Care Promotions Department Research Department (RD) Department (CD) (PD)
Abdel Fattah Ali Ahmed Mostafa, Amr Nazmi, Aziza Hussein ElShaimaa Ahmed Doha Hussein Eman Abdel Hakeem Et al Fayez Michel Mohamed Gharram Mohamed ElBanna Mohamed Zaki Et al Nadia Hussein
License facilitation Implement investor Research for preparation Investor facilitation communication strategy of specific marketing Investor Aftercare Implement events plans strategy Coordinate with sector
6. PROCESSES Capacity building is an on-going process of on-the-job training, coaching and mentoring. This process will be supplemented by writing down procedures for all business activities: these will be collected into a manual that will provide procedures, templates and other guides.
7. PHYSICAL EVIDENCE AND IMAGE The appearance of staff and the premises are of importance as IDA is in direct contact with actual and potential investors. How staff present themselves has an impact on the image projected to investors who will assess Egypt from a series of impressions, including IDA’s marketing team.
8. MARKET OVERVIEW The market for the attraction of investors to the automotive sector will be focused on the categories of investors that have already made investments in the Central and Eastern European member states in order to export their production to the EU. There are three types of investors:
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• Western European automotive sector companies with that continue to experience downward cost pressure and new medium term competitive pressure from India and China. These countries include: Germany, France, and Italy; • Asian countries: in this sector FDI in the CEE countries came initially from Japan and latterly from Korea. • Non-traditional Asian countries: both China and India have significantly expanded their automotive industries over the last 10 years. Producers will have to decide where to locate new assembly operations in order to penetrate European markets. China in particular has expanded passenger car production from 703,521 units in 2001 to 5,233,132 units in 2006 and 22% market expansion is forecast for 2007. Last year, 2006 car exports of 340,000 units were forecast to rise another 100%.
9. SWOT ANALYSIS The conclusion of this SWOT analysis is that the Egyptian automotive sector is exposed to a global business: this presents many threats and opportunities, which are part of this dynamic industry.
For Egypt to successfully attract FDI to this industrial sector it must make the most of the opportunities provided through its location: both proximity and access to regional and international markets. In addition Egypt’s attractive manufacturing cost base and low Unit Labour Costs must be promoted in the context of Egypt’s long-term commitment to implementing economic reform.
Egypt is attractive to investors seeking a competitive export manufacturing base with preferential market access to the European Union, the Arab World, and Eastern and Southern Africa.
9.1 STRENGTHS 1. Low overall manufacturing costs 2. Low Unit Labour Costs 3. Healthy demographics with a birth rate of 25.38 births/1,000 population, which is projected to reach between 120 – 150 million by 2050 4. Vigorous economic liberalisation since early 1990’s, reinforced by the EU Association Agreement 5. Proximity and market access to the Arab World, Eastern and Southern Africa, and the European Union 6. Government’s commitment to the development of the automotive sector through foreign investment 7. IPA capable of targeting automotive industry investors
9.2 WEAKNESSES 1. A majority of Egypt’s component industry dependent on supplying domestic OEM assemblers 2. The relatively small size of the domestic Egyptian market which reached 170,614 vehicles in 2006 3. Lack of comprehensive data on companies belonging to the automotive industry 4. Nearly 100% of vehicle production – with buses excepted – is sold in the domestic market, demonstrating a lack of integration to the global industry 5. Whilst improving, bureaucratic procedures for investor industrial licensing remain 6. Lack of infrastructure for international standards of vehicles and components homologation 7. With the exception of one manufacturer there is no international automotive component investment in Egypt 8. Lack of national strategies for all export development industrial sectors with stakeholder buy-in during and after strategy formulation with a clear Vision delivered by the privat6e sector.
9.3 OPPORTUNITIES
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1. A growing international market 2. Continued pressure on international automotive assemblers and component producers to reduce costs 3. CEE member states have not attracted car assembly investment since 2004 4. Since 2006 Unit Labour Costs in the CEE member states have accelerated as unemployment continues to plummet, aggravated by worsening demographics and skills migration 5. As China and India continue to grow their exports, both countries will seek a manufacturing base close to the EU 6. CEE member states have not attracted car assembly investment since 2004 7. Since 2006 Unit Labour Costs in the CEE member states have accelerated as unemployment continues to plummet, aggravated by worsening demographics and skills migration 8. As China and India continue to grow their exports, both countries will seek a manufacturing base close to the EU 9. Current policies that are being proposed to expand Egypt’s domestic market 10. The potential to improve Egypt’s logistics chain amid plans of companies such as Maersk Egypt to develop East Port Saied as a regional logistics hub 11. Begin car exports to Jordan, Morocco and Tunisia with follow-through on the Aghadir Treaty
9.4 THREATS 1. Morocco is a serious competitor to the attraction of new FDI to North Africa. It has a comprehensive Plan d’Emergence for the development of its economy. The industrial zones are being used to drive economic growth in the regions: centred on Casablanca, Rabat and Tangiers 2. Morocco and Tunisia both have well established and effective investment promotion agencies focused on sector investment attraction strategies. 3. Egypt, Morocco and Tunisia have roughly similar competitiveness profiles. Egypt must secure its attractiveness to investors not only by promoting low Unit Labour Costs but address market- led demand for labour skills enhancement. 4. Egypt’s automotive industry is not sufficiently integrated in the global automotive supply chain through exports and FDI. This isolation represents the single greatest risk to its survival as current protective mechanisms disappear. 5. Egypt’s cycle of dependence on the domestic market through import tariffs and local content rules, distort the market and challenge new FDI 6. Egypt’s status as a non-signatory to the 1958 Geneva Agreement on Automotive Standards. 7. A number of countries, notably Morocco, Turkey and Iran are positioning themselves as the MENA region’s vehicle assembly hubs. 8. Car exports to GAFTA are inhibited by a ‘negative list’ and access to COMESA is inhibited by lack of customs transparency.
10. SUMMARY OF SWOT ANALYSIS: • Favourable long-term economic prospects: a commitment to liberalising markets and providing favourable conditions for foreign investment helped Egypt improve its macroeconomic performance during the 1990s. Egypt's steps toward a more market- oriented economy have prompted increased foreign investment which reached USD 11.1 billion in 2006/7. • Proximity to large markets: this represents potential or actual low transport costs and the possibility of Just-In-Time deliveries. • Skilled labour force: Egypt has a history of developing advanced engineering industries in both the public and the private sectors; there is strong awareness of the need to continue the development of industry-specific vocational training.
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• Considerable wage differential advantage: Egypt shares not only low real wage costs throughout the work force; specifically average automotive production workers cost less than € 150 month. • Labour market flexibility: regulations governing work hours, compensation and vacation policy in Egypt are more flexible then they are in the European Union. • Access to EU markets: proximity is not the same as access. On June 1st 2004 Egypt’s Association Agreement with the EU came into effect: this removes impediments to trade through an asymmetrical phasing out of tariff barriers on all non-agricultural goods. Today Egyptian engineering products enter Europe duty and tariff free.
11. COMPETITOR ANALYSIS MOROCCO, TUNISIA AND TURKEY Of the three countries only Turkey can claim a globally integrated automotive industry. This has grown since the 1950’s in close alignment with its economic relationship with the European Union. Turkey has continued to develop its competitive edge and its attractiveness to FDI, but the key factor is EU market access.
Since concluding their EU market access agreements in the 1990’s Morocco and Tunisia have worked methodically to attract investment from the EU. Promoting their country’s as attractive cost bases which enable companies to extend their competitiveness and export production to European markets, quota and tariff free.
Both countries have successfully attracted automotive component investments. In September 2007, Morocco signed an agreement with Renault-Nissan to host a new Logan factory at the Tangier special economic zone with an investment estimated at € 1 billion.
12. KEY ASSUMPTIONS There are a number of key assumptions that need to be made: • That IDA will commit funding to the marketing plan for automotives and other industrial sectors. Even a targeted promotion campaign to attract investment is not assured of immediate results. • That the Government enterprise development institutions will work closely with the private sector to develop individual industrial sector national strategies and build better capacities. • That sector strategies will exist within the context of sustainable public-private dialogue (PPD). • That PPD will support strategy formulation, monitor implementation and resolve specific sector business impediments; these will be identified by the strategies as well as during strategy implementation. • That Egypt continues to improve its competitive position by implementing good reform policies that are predictable, transparent, and uniform. • Mechanisms are activated to address market-led demand for labour skills enhancement.
13. OBJECTIVES IDA’s automotive marketing plan objectives will depend on the achievement of the first objective: • IDA’s Marketing Department will target identified potential groups of automotive sector investors; selection of potential investors’ will be according to defined automotive sector criteria. Industry specific objectives: • The attraction of new automotive component investors targeting exports to the EU and regional markets.
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• The attraction of new passenger car OEM investment targeting expansion of exports to the EU and regional markets.
14. EXPANSION OF THE CUSTOMER BASE Over the next 24 months IDA will: • Be in contact with 400 potential investors • Attract 40 potential investors to site inspection • Convert 50% of the site inspections into investment in Egypt • Attract investment of USD XXXX million (????)
15. STRATEGY TO ATTRACT AUTOMOTIVE INVESTMENT • Target Markets for the Automotive Sector - These are divided between Western Europe Asia-Oceania and the Unites Stases of America, with market segments of automotive components and vehicle OEM assemblers. - The big five component producing countries are Germany, France, Italy, Spain and the United Kingdom. These same five countries dominate passenger car assembly with ranking Germany, France, Spain, the UK and Italy. - In Asia the leading passenger car assembly countries are ranked as Japan, China, South Korea, India and Thailand. - IDA will target all Tier 1, 2 and 3 component producers and selected car producers according to criteria designed to attract to Egypt the next generation of OEM’s from Asia- Oceania, and from Western Europe and the United States of America. - 73% of respondents voted in a survey by PWC Automotive in 2007 that “Low cost cars from developing cars will help automakers from developed countries to gain traction in developing markets”. • Positioning Statement - In order to efficiently target investors, IDA will build on existing Egyptian relationships with these countries through institutions such as: GAFI, IMC, Economic Counsellors (ECS), bilateral business associations and existing corporate relationships. - In addition IDA will communicate its product strategy to the Big Four accountancy practices, especially those with dedicated automotive consultants; as well as the large firms of Location Consultants. Both these service providers are key advisors to multinational companies. - The signature of our approach will be building a personal relationship with potential investors based on an understanding of their markets and their individual strategic corporate objectives. IDA will work hard to align these to Egypt’s attractiveness to investment. - In the case of a significant potential investor, IDA will negotiate with the Ministry of Trade and Industry to prepare a tailored offer of incentives. • Branding Strategy - IDA will build on existing image branding that stresses Egypt’s location and competitive cost manufacturing base, particularly its plentiful supply of skilled workers with low Unit Labour Costs.
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- However IDA will expand this image and brand Egypt as the most profitable manufacturing export base in the southern Mediterranean for exports to the EU. • Product Strategy - The long-term product strategy is to attract volume production of automotive components and vehicles assembly to Egypt. - This strategy will rely on Egypt’s attractiveness to investors through its competitive manufacturing cost base, plentiful supply of low Unit Labour Costs and skilled workforce coupled with Egypt’s proximity to major markets and the preferential access provided through trade agreements. • Pricing Strategy - Egypt’s cost base relies on macro economic indicators; keeping Egypt competitive will depend on institutional mechanisms and their awareness of market conditions. - Investment incentives provide the single mechanism for tailoring IDA’s offer to the needs of a major investor. Whilst IDA is aware of the potential distortion effect of incentives Egypt will need to reconcile itself to this reality. - The eventual alternative to regional incentive package rivalry is for IDA to strongly convince investors of Egypt’s competitiveness in individual industrial sectors: through cluster development and backward linkages; growing exports which confirm Egypt’s competitiveness; an increasing share of world trade; other indicators. • Promotional Strategy - IDA’s promotional strategy will depend on using direct marketing to target individual investors and attract them to attend dedicated country or industrial sector events. This approach will be followed up by individual contact from IDA with companies that have expressed interest in Egypt as an investment location. - This contact will be by email, letter and telephone as well as additional visits to the company’s country. At all times IDA will work hard to deliver professional answers to investors’ technical questions. - IDA will produce print publications for distribution to investors as well as an interactive website that will answer investors preliminary questions related to specific industries, with the eventual aim of enabling investor on-line registration. - The key part of the promotion strategy will be to attract investors to a Site Visit to Egypt; their visit will be considered a prelude to making a firm decision to invest in Egypt. • Promotional Strategy Implementation - The implementation of the strategy will follow 8 steps: 1. Component manufacturers: collect the contact details of all component producers from the 1st, 2nd and 3rd tiers: write to them setting out the sales proposition for their company. In addition to the target markets of Asia and Western Europe, look at attracting American manufacturers through their European headquarters. 2. OEM vehicle producers: repeat this exercise, especially for passenger car producers. Create criteria to select from amongst the Europeans and the Japanese and use a less targeted approach for the Chinese and Indian producers. 3. Coordinate their responses and invite them to an IDA event in June. This will generically inform them of the benefits of investment in Egypt (GAFI); the support provided to the automotive industry (IMC); and the attraction of developing an automotive industry export base focused on
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regional markets, in particular, the EU (IDA). On days two and three attendees will be invited to visit private sector industrial zones and the East Port Saied SEZ. 4. This event will also involve the Customer Care and Facilitation Dept and the Market Research Dept. 5. After the June event IDA will prioritise the interest of participating companies and undertake initial follow-up by correspondence, and address specific queries that were raised. This follow- up will be made within one week of the event’s conclusion. 6. Depending on the level of interest the Promotions Dept will organise follow-up trips to meet the most interested potential investors. 7. In support to these country missions the Research Dept will undertake company-specific research in order to assist the Promotions Dept to focus their arguments as to why a particular company could benefit from establishing a factory in Egypt. This analysis will be based on the dual marketing strategy of: ‘Egypt your Export Base for Europe’ and ‘Egypt Your Profitable Middle East Base’. 8. The follow-up will continue until serious investor’s are attracted to make a Site Visit to Egypt. • Public Relations Strategy - The American Heritage Dictionary describes public relations as “the art or science of establishing and promoting a favourable relationship with the public”. In IDA’s case there are two ‘publics’, the Egyptian public and the investment public. This marketing plan is concerned with projecting a positive image to investors: this is a long-term process whereby IDA will develop an image of reliability that investors will readily pass-on by word-of-mouth to fellow investors. - Conveying this image can be supplemented by a publicity plan which will capitalise on ‘newsworthy’ events and opportunities. This includes press and radio to promote IDA’s message to the target markets. • Advertising Strategy - IDA will promote the attraction of investment to selective industrial sectors; an advertising strategy will need to be targeted and cost effective in order to reach the target audience in each sector.
16. RESOURCES REQUIREMENTS The 2008 marketing budget detailed in Annex I is for approximately one million Egyptian Pounds (€125,000): this covers four scheduled events in Egypt and abroad and three proposed events in Egypt and abroad, with follow-up missions involving travel to the market-place. Table 1: Scheduled and proposed events in 2008
Activity Dates 2008
Sixth October: German Auto-Components Suppliers Conference 19th Feb Japan: promote FDI auto & mineral resource sectors 23rd April Sharm ElSheikh: World Economic Forum (May) 17 - 19th May Cairo: international automotive conference hosted by IDA late June Cairo: International Organisation for Motor Vehicle Manufacturers annual 25th Oct conference Activity A - travel 100 days TBC Activity B - another overseas event hosted by IDA TBC
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Activities C - local sector promotion event to attract foreign investors TBC
By way of comparison SIEPA – the Serbian Investment and Enterprise Promotion Agency – annual budget for 2006 was recorded at 500,000 euros; they employ 35 experts with University and Master degrees earned in Europe or the USA, with active knowledge of more than one foreign language, as well as extensive experience in particular industries and sectors. SIEPA’s budget contrasts with a similar agency in Czech Republic, which employs more than 200 people, is in operation for more than 15 years and the yearly budget is 20 times larger.
17. EVALUATION AND CONTROL The plan should be reviewed every quarter and evaluated so it can be adjusted as required. Information collected during evaluations can also be used in planning future marketing strategies and setting objectives. Evaluation will be undertaken by monitoring activities using Key Performance Indicators.
18. IMPLEMENTATION PLAN FOR 2008 The details set out in Table 2 in Annex II are built around the principles set-out in this marketing plan.
They assume that the business environment for the Marketing Dept will match the job expected of the Market Research dept, the Promotions dept and the Customer Care dept: this requirement is not an optional extra; it is a key requirement towards the delivery of the Plan.
The Plan is flexible but additions or subtractions need to be made 3 months in advance as a realistic minimum.
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PART 2 ANNEX I: MARKETING BUDGET FOR 2008
Table 1: Proposed events budget for 2008 Venue Persons Per Transport Activity Cost Activity Dates 2008 Details Days Activity Cost $ cost Qty Diems $ costs $ LE Sixth October: German Auto-Components Suppliers Conference 19th Feb - Japan: promote FDI auto & mineral resource sectors 23rd April 8 7 450 2000 39,200.00 Sharm ElSheikh: World Economic Forum 17 - 19th May 3 7 450 0 9,450.00 Cairo: international automotive conference late June proposed 5,000 0 200 0 0 5,000.00 Cairo: International Organisation for Motor Vehicle Manufacturers annual conference 25th Oct 3,000 3,000.00 Activity A - travel 100 days proposed 20 4 450 2000 44,000.00 Activity B - another overseas event hosted by IDA proposed 5,000 8 7 450 2000 44,200.00 Activities C - Egypt, sector promotion event to attract foreign investors proposed 3 10,000 30,000.00 Total cost 174,850.00 979,160.00
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ANNEX II TABLE 2: TIME SCHEDULE WITH MILESTONES Proposed IDA Marketing Department Promotion Plan fo r 2008
2008 February March April May June July AugustSeptember October November December Activity Category 1 2 341234123412341234123412341234123412341234 Send letters to automotive vehicle OEM's and compon ent manufacturers per target markets inviting them to Direct Mail attend IDA's June event and IDG's German Auto-Compo nent Suppliers Conference 19-20 February In case of serious enquiries invite the potential i nvestor to Egypt to participate in a tailored Site Visit itinerary Site Visit before June 19th Feb Industrial Development Group: German Auto-Component s Suppliers Conference - Sixth October Follow-up contacts from event and make sure any que stions answered. Respond within one week from Follow-up event. Invite attendance at IDA June automotive eve nt IDA Marketing Dept submission to the Chairman of a proposed plan for Japan event in April Proposal Prepare marketing plan for mineral resources extrac tion, conversion and manufacturer Address letters to: automotive vehicle OEM's and co mponent manufacturers in Japan; Japanese companies Direct Mail involved in mineral extraction and related to techn ology industries Marketing Dept to prepare presentation final copy f or JEBC Coordinate with the Egypt-Japan Business Council an d other parties: UNIDO; Egypt's Economic Counsellor , Coordinate Japan; Japan Investment Development Council, Cairo; Japanese Embassy, Cairo; JICA; Respond to interested parties and invite to attend Egypt-Japan Business Council sponsored by the Tokyo Respond Chamber of Commerce in April and provide with requ ested information In case of very serious enquiries organise a person al meeting with the company's decision-makers per a Meeting specific agenda Japan: promote FDI auto & mineral resource sectors 23rd April Follow-up contacts from event and make sure any que stions answered. Respond within one week from Follow-up event. Prioritise contacts and invite serious enquirers to make a Site Visit to Egypt Site Visit Prepare a return visit to Japan to follow-up with s erious potential investors Market Visit The Research Dept undertake company-specific resear ch in order to assist the Promotions Dept to focus Company- their company-specific arguments of the benefits o f establishing a factory in Egypt. Analysis based o n : specific ‘Egypt your Export Base for Europe’ and ‘Egypt Your Profitable Middle East Base’ research IDA Marketing Dept submission to the Chairman of a proposed plan for World Economic Forum, Sharm El- Sheikh Proposal Work with WEF to prepare IDA presentation of strate gic vision for promotion of industrial zones in Upp er Prepare Egypt and along the Suez Corridor presentation Sharm ElSheikh: World Economic Forum (May) 17 - 19th May Follow-up contacts from WEF and answer all question s. Respond within one week from event. Follow-up Prioritise contacts and invite serious enquirers to make a Site Visit to Egypt Site Visit IDA Marketing Dept submission to the Chairman of th e proposed IDA international automotive conference Proposal in June Preperations for Automotive Conference Follow-up international automotive company contacts generated since February and invite them to attend - opportunity to coordinate all previous contacts wit h foreign business associations Follow-up Cairo: IDA international automotive conference late June Follow-up contacts from event and make sure any que stions answered. Respond within one week from event. Follow-up The Research Dept undertake company-specific resear ch in order to assist the Promotions Dept to focus Company- their company-specific arguments of the benefits o f establishing a factory in Egypt. Analysis based o n : specific ‘Egypt your Export Base for Europe’ and ‘Egypt Your Profitable Middle East Base’ research Prepare a market visit to companies for follow-up o f serious potential investors Market Visit 25th Oct Cairo: International Organisation for Motor Vehicle Manufacturers annual conference Follow-up contacts from OICA and answer all questi ons. Respond within one week from event. The Research Dept undertake company-specific resear ch in order to assist the Promotions Dept to focus their company-specific arguments of the benefits o f establishing a vehicle factory in Egypt. Analysis based on : ‘Egypt your Export Base for Europe’ and ‘Egypt Your Profitable Middle East Base’ Prepare a market visit to companies for follow-up o f serious potential investors Market Visit
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Technical Assistance for Policy Reform II BearingPoint, Inc, 18 El Sad El Aali Street, 18 th Floor, Dokki, Giza Egypt Country Code: 12311 Phone: +2 02 335 5507 Fax: +2 02 337 7684 Web address: www.usaideconomic.org.eg