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Commentary: India’s Automobile Sector Breakdown Causing Economic Distress

Over the past few months, a lot has been said about the shrinking automobile sales in the Indian market. Touted as one of the key drivers of India’s economic growth, the automobile industry is facing the worst slowdown in two decades as production and sales numbers continue to drop month after month sending the sector in a slump. While the government has made efforts to improve the situation, it will take more than just policies and measures to flip the status quo and bring the industry back on the growth path.

Indian automotive industry witnessed a period of growth during the first term of Modi government – we wrote about it in our article Commentary: Indian Automotive Sector – Reeling under the Budget in February 2018. However, over the past year, the auto sector is in shambles and far from recovery. The sector that contributes 49% of the manufacturing GDP in the country (and more than 7% to the country’s total GDP) has shown decline in growth in the past 18 months as the numbers continue to fall each month. The slowdown is so severe that it has affected all aspects of the business leading to piled up inventory, stalled production lines, decelerating dealership sales, delayed business investments, and job loss.

Quintessential factors that triggered the slowdown

There are various reasons that have plagued the auto industry in the recent months. One of the key factors is the inability of NBFCs (Non-Bank Financial Companies) to lend money. NBFCs, which largely depend on public funds (mainly in the form of bank borrowings, debentures, and commercial paper), have been facing liquidity crunch in the recent past as both public sector and private sector banks have discontinued lending money. This had a double effect on the auto sales – firstly low liquidity has restricted NBFCs ability to finance vehicles, thus having an adverse impact on sales, and secondly, the limited availability of funds bulleted the cost of financing vehicles thereby making them relatively more expensive, further worsening the sales scenario.

In October 2018, the Supreme Court of India announced that no BS-IV cars shall be sold in India with effect from April 1, 2020 (all automobiles should be equipped with BS-VI compliant engines, with an aim to help in reducing pollution in terms of fumes and particulate matter). Owing to this, consumers have delayed their plans to purchase vehicles expecting automobile companies to offer huge discounts in the early months of 2020. And to clear out their existing stock of BS-IV vehicles, it is highly likely that the companies will offer massive concessions before the deadline hits. Delay in purchase of vehicles on consumers’ end has contributed to the overall low sales.

Additional factors that add to the downfall include changes in auto insurance policy (implemented in September 2018) under which buyers have to purchase a three-year and five-year insurance cover for car and two-wheeler, respectively (as against annual renewals), inclusion of additional safety features (including airbags, seat-belt reminders, and audio alarm systems) in all vehicles manufactured after July 1, 2019 adding to the manufacturing cost for the OEMs, and stiff competition from growing organized pre-owned vehicle market which has doubled in size in less than a decade (the share of the organized channel of the pre-owned car market has increased to 18% in 2019 from 10% in 2010). Customers have been passive on buying new vehicles as the total cost of ownership goes up due to an increase in fuel prices, higher interest rates, competition from used cars segment, and a hike in vehicle insurance costs.

Government initiatives to help the auto sector recover

To boost demand for automobiles and offer some respite to the businesses operating in the space, the government announced a number of measures and policies. These include lifting the ban on purchase of vehicles by government departments (the ban was introduced in October 2014), which is hoped to result in loosening of stocked-up inventory and getting sales for automakers, component manufacturers, and dealers. Government also announced additional 15% depreciation on new vehicles for commercial fleet service providers acquired till March 2020 with the aim to clear the high inventory build-up at dealerships.

Other than lifting the ban and price reductions, the government also announced that all BS-IV engine-equipped vehicles purchased until March 2020 will remain operational for the entire period of registration. This will have a two-fold effect – firstly, automakers will be able to push out their stock without having to upgrade existing models and make them BS-VI-complaint (since no more BS-IV-complaint vehicles will be registered post March 2020 and manufacturers will have to upgrade to BS-VI from BS-IV emission standard on the old stocks) thus clearing old inventory, and secondly, consumers can expect much higher discounts. This is expected to provide enough movement within the auto sector, both in terms of sales and revenue generation.

Government has also taken steps to stabilize the NBFC crisis where a separate budget of US$ 14 billion (INR 100,000 crore) has been announced to refinance selected NBFCs. While it is clear that these limited funds will not last long, currently, any step taken to recover from the situation is welcomed.

Though considered temporary, the relief measures offered by the government have gained traction in the industry and players believe that these provisions will have a positive impact on the buyers’ sentiment, even if for a short period of time.

Implications of the auto industry crisis

The slowdown is expected to have a negative impact across all aspects of auto business, especially in the short term. Drop in sales has led manufacturers to decrease production (and even stop production for a certain period of time), cut down overall costs, and reduce headcounts thus weighing down the overall automotive sector.

The months leading to reduced sales did not only impact the production capacities but also resulted in the loss of more than 350,000 jobs. In the coming months, many more risk losing their jobs owing to plant shutdowns, dealership closures, and small component manufacturers going bankrupt.

The cost of vehicle ownership has also increased. Automobiles attracts the highest GST slab of 28%, and this, coupled with the varying road and registration charges imposed by state governments, makes the upfront cost of the vehicle exorbitant for a large segment of consumers (especially the working middle class for whom a two-wheeler or a small segment car is a basic necessity rather than a nice-to-have convenience) making it almost impossible for them to but it.

Given that the automobile sector works in conjunction with other industries, the current slump in auto sales will pull down ancillary industries including parts and components, engines, battery, brakes and suspension, and tire, among others. Considering the fact that the sector contributes nearly half to the country’s manufacturing GDP, if the issue at hand is not addressed immediately, it will further add to the ongoing economic crisis within the country worsening the situation altogether.

EOS Perspective

Policies announced by the Modi government to revive the tumbling automobile sector only seem to mitigate the negative sentiments circling about the future of the industry. However, at this stage, what the industry really needs is a stimulus package in the form of tax incentives or liquidity boost to immediately change things on the ground level.

There is an urgent need of a remedial course of action on the government’s part to stop the vehicle sales from dropping further. As an immediate relief to boost sales and invigorate the auto sector, the government should implement a GST cut on vehicles. This would kick-start vehicle demand almost instantaneously that would work in favor of the automobile industry – manufacturers (to resume halt production), dealers (to clear inventory), and parts makers (to resume small parts and component manufacturing), help resuscitate lost jobs, and contribute, to a small extent, to strengthen country’s slow economic growth.

However, with the government turning a blind eye to industry needs (lowering the GST slab), there is only so much the business owners can do. Under this current scenario, unless the government takes some drastic measures that ensure validation in backing automakers, auto ancillary businesses, and dealers, the sector is unlikely to recover soon. Provisional policies and short-term measures can offer momentary relief but not the survival kick the auto industry is in dire need of.

by EOS Intelligence EOS Intelligence No Comments

Commentary: The Suzuki-Toyota Partnership – Are Such Partnerships Here to Stay?

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In February 2017, Suzuki and Toyota signed a memorandum of understanding (MoU) for business partnership. The two Japanese carmakers drafted framework for collaboration on future technology development, joint manufacturing, and market development projects. Both companies agreed to share their R&D, product portfolio, infrastructure, and dealer networks in India.

The collaboration includes mutual supply of passenger vehicles between the two companies for the Indian market. Maruti Suzuki (Suzuki’s Indian subsidiary) will supply Toyota with between 30,000 and 50,000 units of Baleno and Vitara models, while Toyota will provide Suzuki with 10,000 units of Corolla annually. These vehicles will be marketed nationally through their respective sales networks. In addition, Toyota and Denso Corporation (owned by Toyota) will offer technology transfer to Suzuki for developing a compact and highly efficient powertrain. Toyota’s Indian arm, Toyota Kirloskar Motor (TKM) will manufacture models developed by Suzuki for sale in India, Africa, and other emerging markets via their global sales networks. Further, in November 2017, both companies announced plans to co-develop and introduce electric cars (EV) in India by 2020. For this, they are setting up a lithium ion battery plant in the Indian state of Gujarat.

What does it mean for both OEMs?

By tapping into Toyota’s under-utilized manufacturing capacity in India, Maruti Suzuki will get access to the much needed extra production bandwidth. The OEM has so far relied heavily on Fiat for its diesel engines. With the new collaboration, it will have access to Toyota’s superior diesel engines that will help Suzuki to improve its brand perception in the Indian market. The partnership will also provide Maruti Suzuki with a chance to take a stab at the executive sedan space by offering Toyota’s Corolla via its sales network. Lastly, Suzuki will leverage Toyota’s technology and EV expertise, an area where the OEM is relatively weak and definitely needs improvements.

The partnership will give Toyota access to Suzuki’s expertise in India. It will hopefully help it to penetrate the low-priced compact cars market, a segment it has failed to crack so far. The OEM relies mainly on diesel car sales in India. However, the new partnership will help Toyota to fill the current product gaps, broaden their portfolio with petrol cars from Suzuki, and achieve higher sales in India.

What does it mean for Indian automotive industry and customers?

At present, both carmakers have started sharing a few of their models with each other. However, there is a potential for more models in pipeline, followed by joint product development and manufacturing platform sharing (shared engineering and production efforts for different vehicle models). This is likely to lead to the introduction of new cars in various market segments. The co-developed cars are promised to have Toyota’s technological sophistication as well as Suzuki’s affordable ticket price, providing customers with broader and better options. In addition, the partnership can be expected to make both carmakers compete with each other for performance improvement, this will result in enhanced products and services for customers.

From an industry perspective, the joint manufacturing will result in creating more local jobs. Volume production will mean that both OEMs will also look to source components locally for cost savings. This will provide some boost to domestic components industry and government’s Make in India initiative. Suzuki’s size, scale, market knowledge, as well as unrivalled supply chain in India, along with Toyota’s global expertise and technology know-how, make this tandem a great fit in the context of kick-starting, promoting, and meeting the Indian government’s ambitious 2030 EV targets. In the EV space, the partnership will contribute to manufacturing more efficient cars and aid in development of the automotive and ancillary industries.

Are such partnerships here to stay?

Since growth opportunities in developed automotive markets are confined, global carmakers have set their eyes on emerging markets as these are projected to represent around 60% of the total global auto sales by 2021. India is on a fast track towards becoming the world’s third-largest auto market thanks to the rapidly growing passenger car market. According to IHS Markit estimates, annual new car sales are expected to reach 5.1 million in 2020, an increase of about 30% from 2016-2017 figures. Therefore, it looks like a logical move for global OEMs, such as Toyota, to look at all possible collaboration avenues to capture the growth opportunities in these markets.

The global automotive industry is constantly evolving triggered by rapidly rising new technologies, changing customer preferences, and multiplying sustainability policies. Carmakers globally are faced with massive costs to develop new technologies for highly energy-efficient cars. To remain competitive in such rapidly changing industry, OEMs need to increasingly look for strategic collaborations that will enable them to work together and leverage their shared expertise to optimize cost as well as performance. As a result, increasing number of alliances are seen where carmakers collaborate by sharing platforms and joint manufacturing for cost savings in R&D, manufacturing, and components procurement. This is especially true in emerging markets where growth opportunities are ample, but own set of challenges exists, and such alliances are increasingly becoming catalysts for growth. Recent examples include five MoUs signed between Mahindra and Ford to jointly develop new products in India and other emerging markets, or a similar alliance between China’s Geely Group and Daimler.

While the coming together of two Japanese OEMs with two different working cultures may pose its own challenges, both carmakers need this collaboration to succeed for their own reasons. For Toyota, the reason is to increase its presence in a country that is soon to become the world’s third-largest auto market. Suzuki’s reason is the much needed technical know-how to enter the EV space. While the success of this partnership at present remains uncertain and it will be interesting to see how this partnership pans out in the next few years, one thing that is certain is the fact that one can expect more such collaborations in the near future, as carmakers will look for partners to better penetrate new markets, develop new products to grow, at the same time optimize their R&D, manufacturing, and procurement costs.

by EOS Intelligence EOS Intelligence No Comments

Africa’s Struggling Auto Market Set for Modest Recovery in 2018

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After a challenging 2016, most African economies experienced modest recovery in 2017, aided by a recovery of oil and commodity prices. The 2016 economic downturn and a decline in oil prices in Africa impacted some of the largest economies in both Sub-Saharan Africa and North Africa, including Algeria, Angola, Nigeria and South Africa. A recovery in oil prices to US$65-70 per barrel, from as low as US$30 in 2016-2017, has resulted in these economies rebounding after a period of low economic growth, and recession in the case of Nigeria. The World Bank expects economic recovery to continue over the next couple of years, and predicts African GDP to grow by 3.2% and 3.8% in 2018 and 2019, respectively. While economic conditions continue to ease, a negative sentiment has set in the African consumer markets, which has changed the outlook of the automotive industry significantly across the continent.

The article was published as part of Automotive World’s Special report on Africa.
Click to read the full article

by EOS Intelligence EOS Intelligence No Comments

Commentary: Indian Automotive Sector – Reeling under the Budget

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The Indian automotive industry has been witnessing a period of recovery and growth over the past couple of years. Every year, automakers look towards the government to provide a stimulus in the form of favorable policies and budget allocations, to spur growth in the sector. A week has passed since the announcement of Indian budget for FY 2018-2019. We take a look at its short and long-term impact across the automotive value chain.

Supply-side scenario (component manufacturers and OEMs)

The current Indian government under Prime Minister Modi has been focusing on promoting domestic production of automobiles and auto components, as a part of its “Make in India” campaign. A 5% increase in customs duty on imported completely knocked down (CKD) cars and automotive components for assembly and sale in India is seen as another step in this direction.

While international OEMs such as Volkswagen and Skoda have been left reeling under the burden of additional costs, this provides an opportunity to spur growth particularly in the domestic components manufacturing.

Another positive news for domestic automotive components manufacturers, most of which are small and medium scale enterprises, is the reduction in corporate tax rate by 5% percentage points (for companies with a turnover of under INR 250 Crores / USD 38.83 million). These tax savings can provide companies with additional capital to invest in their business, aiding their long-term growth.

Investments in road and rural electrification infrastructure also encourage OEMs to bring new products, particularly electric vehicle (EV) portfolio, to the Indian market. However, lack of an established EV infrastructure means that this market development is likely to occur only over a long-term horizon.

Demand-side scenario (individual and corporate consumers)

The key factor impacting the demand for automobiles is perhaps how deep the consumers’ pockets are (or can be) after bearing all the tax burdens – in other words, how high the disposable income is in India. This is even more relevant for the lower-end of the market (or the so-called “mass spectrum”).

Minimal income tax incentives to individuals, coupled with rising inflation, are likely to limit the disposable income of most people (particularly in the low and medium income brackets), which form the largest consumer base for automobiles in terms of volume.

A booming stock market in India attracted several consumers in the middle income group to invest their capital in equities. Levy of a 10% long-term capital gain tax (LCGT) on returns from these equities (although grandfathered till INR 1 Lakh / USD1,553) is likely to put even further pressure on consumers’ pockets, especially for those looking to finance their automobile purchases by getting the most out of their investments.

Moreover, the knee-jerk reaction to this year’s budget was also observed on the equity market. The negative sentiment has led India’s two leading stock exchanges – BSE and NIFTY – witnessing a 5% decline within a 7 day period from the announcement of the budget, thereby eroding consumer’s wealth, which may further impact consumers’ short-term decisions to purchase vehicles.

On the other hand, the support provided to the agricultural sector is likely to spur demand for tractors and small passenger vehicles in rural areas, however this demand growth is dependent on the agricultural output, and derived from it incomes, in the coming year.

Aftermarket scenario (recyclers)

For the past couple of years, automotive companies as well as aftermarket recyclers have been expecting the government to bring in the scrapping policy, which would allow consumers as well as OEMs to benefit from voluntary replacement and scrapping of vehicles older than 15 years. However, lack of any announcements related to this policy has left the aftermarket recyclers and OEMs disappointed. They will need to wait to tap the demand expected to come from voluntary replacement of old vehicles in exchange of monetary benefits.

EOS Perspective

The scenario for electric vehicles (EVs) looks bright over a long term with significant investments going into development of rural electrification infrastructure, which will impact the development of the EV ecosystem beyond the metros as well. OEMs look at this as an opportunity, and this is evident from the number of EVs and electric concept cars to be unveiled at the Auto Expo 2018, India’s largest automotive exhibition. However, in a short to medium term, the adoption of EVs is likely to be limited to the corporate sector. General mass adoption is likely to lag behind due to vehicles’ high prices, and limited distance range/capacities offered by the current EVs available in the market.

As the mass automobile demand is expected to remain lull in the short term, the market will be driven by luxury and premium segments, which is largely unaffected by the budgetary challenges. A push is evident from OEM-side as well, with a number of premium, high-end products (such as SUVs, large displacement motorcycles, and luxury vehicles) launched at the Auto Expo 2018.

While the budget has left a lot to be desired, there are positives which bode well over the long term. The market is likely to witness a downturn in demand over a short term, as the consumers are likely to turn to preservation of wealth till the negative market sentiment prevails. Moreover, as the government invests in infrastructure projects, demand for both commercial and private vehicles is likely to pick up in the future.

It remains to be seen how soon the market witnesses a recovery in terms of automobile demand. One thing is certain, as always, when the budget comes next year, expectations will be high, partially fed by this year’s disappointments.

by EOS Intelligence EOS Intelligence No Comments

Breaking Bad, Building New: Customer Engagement Model for Automakers

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Digital transformation buzz has revolutionized the way companies operate and interact with their customers across virtually all industries. Automotive industry is no exception. Customer expectations today are more demanding than ever, primarily due to the service level benchmarks set up by the likes of Amazon, Uber, and Apple, as well as due to plethora of information customers can get through the internet and social media. The rise of digital channels is fundamentally transforming the entire auto retailing business. In order to stay ahead of the game, automakers will have to break their legacy systems and build new customer-centric marketing models.

The automotive industry has always been characterized by an extremely time consuming as well as complex sales processes that often result in an unpleasant customer experience. The industry notion “People love shopping for cars; they hate buying cars” precisely depicts the challenge auto retailers have to deal with and the need for industry players to rethink their sales and marketing models to enhance the overall customer experience. The Apple and Amazon retail ethos of seamless customer interaction, simple and streamlined sales processes, effortless and speedy customer services has become the benchmark for all retailers. Even in the automotive industry, changing customer preferences, digital transformation, increased connectivity are reshaping the entire retail supply chain, with major impact on the final parts of the chain involving direct customer interaction. The rise of cutting edge technologies, tech and information savvy consumers, and new market entrants are forcing traditional players to rethink and reinvent their entire business models.

The advent of technology has significantly lowered entry barriers for new entrants in the automotive retail segment, who have brought innovative business models and fresh ideas to help customers find, evaluate, and buy new vehicles. With slogans such as “Skip the dealership” and “Find deals. Not dealers!” new players such as Roadster or Rockar are transforming automotive retailing by offering a bargain-free and smooth car buying experience that can allow the customer to purchase a car and have it delivered to their doorstep within few hours. Traditional retailers have started to realize that, equipped with massive information at their fingertips, car buyers today are better informed than ever when it comes to car purchasing. One bad experience and customers will be very reluctant to ever come back to the same retailer. Despite this realization, many companies are still ‘moving metal’ the old-fashioned way using traditional media and other marketing approaches to attract consumers to their stores.

Statistics from many industry studies make it clear that with the mass proliferation of technologies, car buying journey is becoming increasingly digital, with most customers spending a significant part of their buying time online. Studies indicate that more than 65% of the information-gathering and decision-making process is already made prior to visiting a dealership. Therefore, it becomes vital for OEMs and dealers to rethink their entire marketing and customer engagement approach. They need to interact more effectively and engage consumers early and throughout their purchase journey.

OEMs and dealers need to understand that the whole process of buying cars is quite different from the process in some other retail segments. For example, to buy consumer electronics, many consumers visit the store to see/touch/feel the product and then buy it online because of the price benefits and other offers. In case of buying cars, most customers do their research and comparison online. They visit the local dealership to see/touch/feel the car and buy it there to benefit from special discounts and offers. Hence, it is very crucial to have an integrated and seamless transition across various channels in a frictionless manner.

The introduction of new business models (direct-to-customer) and customer experience strategies (highly interactive and pressure-free brand stores) created by the likes of Tesla, or Rockar, have caught the eyes of many traditional players, who have gauged the significance of realigning their marketing and customer engagement strategies as per demands of the rapidly evolving industry. Many OEMs and dealers have started to take a hard look at their entire customer lifecycle processes to assess the current gaps and address them. Companies are reconfiguring their touch points across channels by eliminating redundant processes and services. Recently, automakers such as BMW, Audi, and Mercedes have rolled out brand stores similar to Apple’s, where customers can visualize their cars, configure them to their own specifications, get experts to answer their questions, and even buy cars in a non-pressurized sales environment. Having already seen some positive results, these OEMs are likely to ramp up their efforts to roll out such brand stores on a larger scale across cities, states, as well as countries in the near future. While not all automakers have plans to launch such stores at present, it is expected that it will not be long before OEMs with no such current plans observe and eventually follow the footsteps of OEM players that have already reaped these rewards and showed what advantages such stores can offer.

EOS Perspective

As digital transformation continues to revolutionize the auto retailing landscape, there is no doubt that advancing technologies will make the car buying process increasingly digital for the years to come. We can expect a rapid surge of various online platforms that provide customers with the ability to easily research, evaluate, and buy cars. Operating within such a highly competitive marketplace with changing customer preferences, auto retailers will have to transform their business models to become more customer-centric and deliver on customers’ expectations. They will have to reinvent customer engagement frameworks to create ones that are built around customer needs, and are simple, frictionless, more transparent, quicker, and convenient for today’s savvy car buyers. On the one hand, this will help OEMs and dealers win more business, while on the other hand customers will benefit from an accelerated and hassle-free sales process, resulting in an improved customer experience.

Although transforming current customer engagement model seems inevitable, this will not come easy and will involve massive changes in existing marketing models. At present, majority of industry players lack the resources, infrastructure, and systems required to execute this transformation. In addition, as signification investments will be required, amid current business environment with high cost and competitive pressure, many automakers as well as dealers will still continue to engage in sales the old fashioned way or adopt a ‘wait-and-watch’ stance. At a dealer level, implementation of new customer engagement model will be much slower primarily due to capabilities and resources constraints.

In the end, one thing is obvious – in order to retain today’s customers and to win new ones, OEMs and dealers will have to reinvent their marketing and customer engagement strategies. To achieve this transformation, these players will have to work together to deliver rich brand experience and match the simplified and streamlined buying experiences set by Amazon and others. OEMs and dealers should take John F. Kennedy’s words to heart “Change is the law of life. And those who look only to the past, or the present, are certain to miss the future.”

by EOS Intelligence EOS Intelligence No Comments

The Return of Consumer Credit – What Does It Mean for Algerian Passenger Vehicles Industry?

(This post, along with recently published article on auto financing in Nigeria, formed a mainstay of a broader coverage article titled ‘Affordable auto financing essential for OEM success in Africa’, contributed by EOS Intelligence to ‘Guide to the automotive world in 2017’, Automotive World’s annual publication covering a gamut of articles by leading global automotive industry analysts and consultants. The report was published in January 2017)

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Banned in 2009 in order to curb the national import bill as well as the level of household debt, consumer credit was reinstated in Algeria in early 2016 to encourage the consumption of national products. In the local automotive industry, Renault Symbol is the only passenger vehicle currently available on auto financing, since Renault is the only locally assembled vehicle in Algeria. Can the return of consumer credit along with other policies provide the much needed boost to the nation’s passenger vehicle industry?

With a total population of approximately 40 million, Algeria is the second largest automotive market on the African continent. For the past several years, the country’s automotive industry has relied heavily on imports from Europe and Asia, importing nearly two million cars between 2012 and 2015. Today, the industry continues to be heavily dominated by imported vehicles, which account for approximately 85-90% of the total market. Passenger car manufacturing is limited, with Renault Algerie being the only domestic manufacturer (the Renault Algerie production plant is an assembly unit that builds the Symbol model from completely knocked down production for the Algerian market).

In 2009, all consumer loans were abolished by the government in an effort to reduce import bills as well as the level of household debt. However, in 2016, under the Executive Decree No. 15-114 of May 2015, consumer loans were made available on selected goods manufactured nationally. Under the scheme, car loans are available only on Renault Symbol, since it is the only locally-assembled vehicle.

Unlike in Nigeria and in several other African countries, where accessibility and affordability of car finance remain an immense challenge, in Algeria, a considerable part of the population can qualify for loans based on their monthly income level. As a result, major Algerian banks have seen a rapid surge of car loan applications. Although access to consumer finance has boosted car loan applications over the second half of 2016, this is not likely to significantly impact the industry growth, since consumers have no choice in selecting either brand or model. In addition, Renault’s current production volumes are very limited (25,000 vehicles per annum) and cannot meet the total local demand. However, due to the recently introduced reforms, the industry dynamics can be expected to change in the next few years.

EOS Perspective

The current economic environment, along with the implementation of licensing system and import quotas are likely to have a negative impact on the passenger vehicles industry in the short term. New vehicle sales can be expected to witness a decline to some extent in 2017. But the recent developments are also likely to push automakers to invest in setting up local production facilities. The arrival of major OEMs and their production projects is expected to serve as a growth catalyst for the local automotive industry over medium to long term. Once these projects become operational, local production volumes might increase significantly, which will provide consumers with more buying options. In addition, the ease of consumer lending could accelerate household spending, leading to increased bank lending in the automotive industry. As competition between banks intensifies, more innovative and affordable car financing solutions are likely to be available to consumers in Algeria, which can in turn attract many consumers across segments to buy new cars. The rising and young middle-class Algerians are likely to consider shifting from entry-level segment to the luxury segment, as they can spread their payments over a longer period of time (e.g. up to 60 months).

All of these efforts combined together – the recent industry reforms, auto manufacturing projects in the pipeline, and auto lending – can be expected to fuel growth in Algeria’s passenger vehicle industry.

by EOS Intelligence EOS Intelligence No Comments

Affordable Auto Financing – The Key to New Passenger Vehicle Sales in Nigeria

Since the announcement of the National Automotive Industry Plan in 2013, the Nigerian automotive industry has witnessed an increased interest from several global automakers. As a result of the Plan as well as recent reforms made by the Nigerian government, PwC predicts Nigeria has a chance of becoming Africa’s auto manufacturing hub by 2050. However, the passenger vehicles market in Nigeria remains heavily dominated by imported second-hand cars, mainly due to the various industry challenges, including lack of access to auto financing. Could affordable auto financing schemes drive growth in Nigeria’s new passenger vehicles market?


This post formed a mainstay of a broader coverage article titled
Affordable auto financing essential for OEM success in Africa’, contributed by EOS Intelligence to ‘Guide to the automotive world in 2017’, Automotive World’s annual publication covering a gamut of articles by leading global automotive industry analysts and consultants. The report was published in January 2015.


Nigeria’s new passenger vehicle sales are far behind sales in countries such as Egypt, Algeria, and Morocco, despite the fact that Nigeria is the most populous country in Africa. With a giant share of nearly 80%, Tokunbo vehicles (local name for imported used vehicles) heavily dominate the Nigerian passenger vehicles market.

Although there is a plethora of industry challenges that range from lack of cohesive government policies to poor infrastructure, one of the major growth constraints at present is the lack of affordable auto financing. Due to the limited accessibility and expensive financing options, new vehicles remain out of the reach for most Nigerians.

Nigeria Affordable Auto Financing

Nigeria Affordable Auto Financing

Currently, the cost of auto financing in Nigeria is exorbitant. Amid current economic environment and credit criteria, only a small segment of the population can obtain auto loans. Therefore, most Nigerians either buy used cars or save money over period of time to buy new vehicle for cash, stalling the new vehicle sales – retail customers accounted for less than one-third of all new cars sold in 2015.

This shows how lack of financing options is holding growth in a market segment with the highest growth potential. According to Lagos Business School’s research, an affordable vehicle finance scheme could boost Nigeria’s annual new vehicles sales to one million from 56,000 units at present.

Nigeria Affordable Auto Financing

Nigeria Affordable Auto Financing

EOS Perspective

Although the National Automotive Industry Plan and recent government reforms managed to attract some FDI in recent years, the Nigerian passenger vehicles industry still remains heavily reliant on imported used cars. As the government plans to curb the country’s auto imports, as a first step, the industry stakeholders should plan policies that can make new vehicle ownership more attractive to mass consumers.

The current credit facilities offered by banks are unattractive to many consumers due to cost and credit terms. In order to fuel growth in local vehicle manufacturing and new vehicle sales, the industry, along with the help of CBN, should develop more affordable vehicle credit purchase schemes targeted at the mass middle class population.

Further, as majority of consumers simply have little or no credit history, the current lending models are not going take the industry growth any further. By leveraging on alternative credit data such as payment data from utility and telecom companies, lenders should look beyond credit scores to segment a new customer base of creditworthy consumers.

For vehicle manufacturers and dealers, there is a tremendous opportunity to move up the value chain by setting up in-house financing with the help of the right partners. By offering innovative auto finance solutions, they can push the demand for new vehicles, especially among millennial and emerging middle class first-time buyers.

Whether Nigeria is capable of becoming the next auto manufacturing hub for Africa, only time will tell, but with better financing options, it can surely boost new car sales and help the local automotive industry to progress.

by EOS Intelligence EOS Intelligence No Comments

Driving Growth in Kazakh and Uzbek Passenger Vehicles Markets

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The past two years have brought a mixed bag of experience for both Kazakh and Uzbek automotive industries. Passenger vehicles sales volumes witnessed growth, however at a varied rate, affected by internal as well as external macroeconomic disruptions and regional developments. Amid these conditions, 2016 is likely to be an uncertain year for the automotive industries in both countries. Although growth is likely to be challenging, by re-thinking its current focus along with the help of the right government policies, growth prospects over the long term are promising.

While the Kazakh and Uzbek economic and automotive industries scenarios differ to quite an extent, and both countries have witnessed a varied growth in recent years, their macroeconomic and sector dynamics have continued to remain under a strong impact of the global slump in oil prices, volatile economic and political environment in neighboring regions, as well as currency devaluations. While Kazakhstan automotive industry, with sales volume CAGR of 67.8% during 2010-2014, was one of the fastest growing auto markets worldwide, the country’s GDP was witnessing a fluctuating y-o-y growth ranging from 7.5% in 2011 to 4.4% in 2014. At the same time, while Uzbek’s economy posted strong and steady GDP growth at around 8% annually between 2011 and 2014, its car sales volume grew at a mere CAGR of 1.4% during 2010-2014.

1-Fluctuating Economic & Automotive Industry Growth

Uzbekistan’s automotive industry is currently around twice the size of the industry in Kazakhstan, however its sales volume growth has recently stalled putting a question mark on Uzbek industry future growth dynamics. Kazakhstan might soon be seen to be catching up, with more than healthy sales volume growth rate, much of it supported by recent government reforms to boost local production and sales.

2-Automotive Industry Landscape

3-Industry Challenges & Opportunities

4-Industry Challenges & Opportunities


EOS Perspective

With Russia’s economy still struggling to recover amid Western sanctions, banking on vehicle exports is unlikely to take Kazakhstan and Uzbekistan any further. Passenger vehicles sales and production figures in most likelihood will continue to be impacted by internal as well as external macro-economic factors in 2016. In order to grow in the current environment, OEMs will have to look beyond their status-quo. Automakers will have to start focusing on domestic markets, which are still underserved with rapidly increasing demand for new cars.

The governments will have to work together with industry participants to create consistent as well as comprehensive industry policies that can attract more investments and stimulate growth. Measures such as financial incentives, special land allotment, creating SEZs, and various other schemes can significantly boost investor (both local and foreign) confidence. At the same time, reforms such as increasing local content requirement will drive more local producers to enter the industry. This might be a great help to the overall vehicle manufacturing and auto components industry in its development and growth trajectory.

5-What Can Drive Growth

With automakers trying to scale down their operations in Russia and Ukraine, growth opportunities are ripe for region’s manufacturers to capture and fill the market gaps in neighboring regions such as EEU and CIS. By leveraging their strategic location and proximity to European, CIS, and Asian markets, Uzbekistan and Kazakhstan could potentially attempt to reinvent themselves as the region’s next automotive export hub.

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