ISBN : 9780974211428
2012 Cambridge Business & Economics Conference
Competitiveness Targeting: Automotive Industry in Egypt
Randa Hamza
Economics Researcher
The American University in Cairo (AUC)
Phone # 01114001889
Shadwa Zaher
Economics Assistant Lecturer
The British University in Egypt (BUE)
Phone# 01020514442
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June 27-28, 2012
Cambridge, UK
ISBN : 9780974211428
2012 Cambridge Business & Economics Conference
Competitiveness Targeting: Automotive Industry in Egypt
ABSTRACT
In the early 1960s, Egypt like many developing countries at that time experienced a shift from an
agricultural based to an industrial based economy. One of the main industries that constituted a
major window for growth and development was the automotive industry. The automotive
manufacturing sector is one of the sectors that have witnessed continuous growth. Egyptian
Automotive Manufacturers Association (EAMA) data show total vehicle demand in the Egyptian
market increased from 70,834 units in 2003 to 227,488 units in 2007; an increase of over 200%
in 5 years. Cars assembly production continues to increase and has reached 101,319 vehicles in
2007; increasing by 118% from 46,422 units in 2003. With few successes and many failures over
the past five decades, the car industry in Egypt developed as an assembly operation rather than
manufacturing. This paper investigates the potential competitiveness of the Egyptian automotive
industry as a regional hub for manufacturing and exportation; and the strategies and plans it
needs to develop to achieve this goal. The paper will use descriptive policy analysis to evaluate
policy effects on the growth of this sector. It pinpoints the main obstacles the industry faces and
will propose policies and solutions to overcome them. It analyzes the effect of decreasing tariffs
on car components on the competitiveness of the industry. This comes on the same line with
examining the effect of technological advancements on the manufacturing process of cars. The
paper concludes that the Egyptian auto industry has potential to enhance its competitiveness
through capitalizing on new exporting ventures, encouraging local component producers and
enhancing technological transfer and development.
Key Words: Competitiveness, Automotive Industry, Sectoral Linkage.
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2012 Cambridge Business & Economics Conference
The Evolution of the Automotive Industry
After the Egyptian revolution in 1952
There was ambitious vision by the free officers who ruled the country after the 1952 revolution
to build a new modern state. With the mind set that was popular among newly liberalized
developing countries, they believed that the optimal path to achieve the dream was
industrialization. A rigorous plan for import substitution industrialization was thus developed
and adopted with the aim to double national income in 10 years. This was to be achieved by
creating national state owned heavy industries to big push the country’s development.
Automotive industry was viewed to have a great potential to enhance development as it included
many feeding industries and meanwhile provided a big number of employment opportunities.
Accordingly, the State established a huge complex to inaugurate car industry in 1960 with a
national capital of LE 30 million on 36 thousand squared meters in Hilwan desert area, Wadi
Hoof. Although automotive industry in Egypt dated back to 1951, when Ford Motor Company
established an assembly factory in Alexandria. (Gazarine1, 2005), it was not until the operation
of Al Nasr Company that car manufacturing rather than assembly started.
During the first five years national plan and until the late sixties, the leadership was fully
supportive of the industrial sector, and injected huge capital to enhance its performance.
Although political interferences affected the steadiness of its operation, it continued to be the
main catalyst for economic growth. The country’s GDP achieved an annual growth rate of 6%,
an annual increase in investments at 18% and in domestic savings at about 14% until 1967 (WB
Report 76). Al Nasr automotive Company was viewed as one of the leading companies in the
1
Adel Gazarine is a pioneer in car industry in Egypt. He was the former CEO of Al-Nasr Automotive Company and is
currently the CEO of the Committee to Rerun the company.
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2012 Cambridge Business & Economics Conference
new Egyptian industry due to the number of component and feeding industries associated to it.
However, Al Nasr as well as most other public sector companies experienced drastic investment
shortages after the defeat in 1967. The government adopted war economy plans where most of
the national resources were directed to military operations and rebuilding the army (Hegazy2,
2009).
1973 and the OPEN-DOOR policies
During this period the government diverted its attention from the public sector towards attracting
foreign and private investments. In spite of the end of war and the diversion in policy, the
government continued to ignore public sector. Al Nasr Company continued to operate with its
almost obsolete machinery, lines of production and surplus labor. No funds were injected to
revamp the production lines or to enhance research and development in the already operating
licenses. The management of the company proposed three joint venture plans to enhance the
company’s productivity and invite foreign capital and new technology to the ailing facility.
These efforts failed again because of political interference in decision making (Gazarine, 05).
During1980s and 1990s
Many foreign companies entered the market of car industry in the 1980’s. With the flows of the
foreign capital and the continued protection of the automotive sector, they reaped lucrative
profits. Meanwhile, Al-Nasr Automotive continued to be a key player in the sector as it
assembled vehicles under several acquired license from international brands as Chrysler, KIA,
Peugeot and LLC (Economy Watch). Temporarily, the dream of producing a national car was
still present in the minds of the management team in the firm. Yet, due to the lack of capital, they
2
Abdel Aziz Hegazy was Egypt's Prime Minister from 1974 – 1975.
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decided to utilize the company resources in creating and developing new models. With the joint
efforts of Cairo University's academic research and the engineers in Al Nasr Company, another
license was locally acquired through developing the old truck models into a new modern line.
This initiative did not only revive the dream but proved it to be both feasible and economical.
When the leadership in the company changed, no further development to this venture was
pursued and the production line of the new national truck model continued to operate with the
old design for about 25 more years until it became archaic (Abdel Wahab3, 2004).
With the beginning of the 1990's, Egypt adopted the Economic Reform and Structural
Adjustment Program (ERSAP). The government restricted investments in public sector
companies. More foreign corporations entered the market and established assembly lines and
factories. Yet, due to the small size of the market, the distortion in market prices and the over
protection of the sector, these companies worked only at 30% of their capacities (Abu Zeid 4,
2005). In 2000, Al-Nasr was divided into four companies to restructure their debts and sell them
to the private sector. The first three companies were designated for assembly and service lines.
The last one, where all industrial units were allocated, bore debts of all the four divisions thus
crippling any potential for its growth. Before the Egyptian revolution in January 25th 2011, and
in the latest official statement by the Ministry of Industry, Egypt was planned to be a regional
hub for car industry and exports (SIS). A year later, this statement needed thorough policy
analysis to weigh its viability in the regional setting and in a highly competitive sector largely
driven by technological innovations and competitiveness.
Regional Competition
3
4
Mohammed Abdel Wahab, former Minister of Industry from 1984 – 1993.
Magdy Abu Zeid, former MD for Production and Marketing in Al-Nasr Automotive Company.
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For the government to plan to make Egypt a regional industrial hub for car manufacturing, it
needs to consider many factors that determine competitiveness. According to OECD, a country's
competitiveness is "the degree to which a country can, under free and fair market conditions,
produce goods and services which meet the test of international markets, while simultaneously
maintaining and expanding the real incomes of its people over the long term". Egypt's potential
therefore relies on the ability to produce competitive cars that would meet local and international
qualities at economic prices without protection to the market and with progressive technological
innovations. In the following section, the challenges that meet the country in realizing this
potential will be analyzed in details.
Car Industry in MENA Region
The Middle East is one of the regions with the highest demand for vehicles with a high car per
household ratio. This is mainly attributed to the high income standards and the economic prices
of energy in the Gulf area where almost all the demand is met through imports. Thus, the market
is open and highly competitive to capitalize on this demand and manufacture high standard cars
that meet the quality required (Frost, 2005). A number of countries in the region already started
to foresee short term and long term opportunities in this sector; namely, Iran and Qatar.
According to the Organization Internationale des Constructeurs d'Automobiles (International
Organization for Motor Vehicle Manufacturers) OICA, Iran was classified the fifth country
internationally in the growth of car production after China, Taiwan, Romania and India. The
country also ranked 12th in car manufacturing worldwide (Fars news, 2010). Iran has two main
public sector companies producing national cars; Iran Khodro Company (IKCO) and SAPCO.
Although, the first car company started in Iran in 1962, the success of producing a national car
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2012 Cambridge Business & Economics Conference
with a high ratio of local components developed in 1994. With the development of the 8 years
plan to produce a national car, the country imported high technology production facilities of
international lines and established its own Research and Development units that supported the
technological advancement in the country (Murphy, 2002). By 2009, 75% of car components
were produced in Iran, and car exports reached 1 billion US dollars (Payvand News, 2008). Car
production increased by 445% between 1998-2008 (Atieh Bahar).
Recognizing the vitality of R&D to the advancement of auto industry, Iran organizes an annual
conference for "Innovation in Automobile Industry" where R&D units in car manufacturing
companies and Iran University of Science and Technology collaborate in foreseeing and
pursuing future technological developments in the industry (INTIC, 2009).
The second country that adopted a long term plan to become the regions' number one producer of
technologically advanced car components by 2020 is Qatar. Inspired by this national ambition, a
local investor, Ghanim Al Saad, is establishing a multi-billion dollars industrial city called Qatar
Ag that aims at specializing in the design, production and exports of advanced component parts
for car manufacturing. Local R&D units will be established where international industrial experts
will lead and teach national staff into building "knowledge based industries". With the huge
investments the country is able to provide to this project, the cheap labor they are able to import,
the economic prices of fuel, the focused specialized plan it is adopting and the strategic location
among the open high demand markets of the Gulf area, Qatar has a great advantage in becoming
a regions main competitor in car feeding industries.
Evaluation of the Current Situation
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The Egyptian automotive industry continues to be vulnerable in nature during this period. The
industry faced a couple of challenges that risk its ability to remain competitive and to grow. The
value of the car assembled in Egypt is higher by around 30% in price than imported cars.
Although the demand on passenger cars increased to reach 52290 during 2004-2005, the
depreciation of the Egyptian pound by 44.0 percent during 2004 raised the cost of imported
vehicles and locally assembled vehicles that use imported components (IMC, 2005). The value
of assembly abroad is of a much lower cost than it is in Egypt, yet the high value of tariffs on
imported cars keeps the assembly sector operating and profiting. However, as Egypt is part of the
international free trade agreements, the automotive industry will completely be unprotected by
2019 which will result in the closure of at least 17 operating factories in the country. This was
evident when the UNCTAD decreased tariffs on imported cars, assemblers found it cheaper to
import assembled cars from abroad rather than continue assembly operations in their plants
(Gazarin, 2012). In 2010, local manufacturers were only able to acquire 45% of the market,
while foreign companies enjoyed the remaining 55%. Moreover, there are now over 20
companies and about 16 factories with a capacity of producing 225,000 vehicles per year but
they only operate with 30% of that capacity.
Motor vehicles and car parts represent 3.7% of all manufacturing output, reflecting the capital
intensive nature of the industry, its share of manufacturing employment was almost half that at
1.8%. Individual assembly plants are currently producing at most 6000-7000 passenger cars per
year. Despite the increase in production during 2009-2010 than in 2004-2005 in both motor
vehicles and auto components, this production is under full capacity and cannot compete
internationally (Report of the Ministry of Foreign Trade, 2004). The vehicle industry needs to
reach a certain size in order to be able to support economies of scale and compete in the
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international market. Such existence of low levels of investments revealed sunk costs which were
significant when compared to competing foreign companies.
In January 2010, the Ministry of Trade and Industry announced that new schemes and quality
standards will be applied within a period of 8 months on imported car components. These plans
were detained because of the economic slowdown after the January 25th revolution. The Market
of the automotive industry failed, as most of the import oriented industries, to reach the size that
can support economies of scale. The Egyptian consumers purchase around 90,000 cars per year;
this local demand was in line with the level of demand in other countries in the region with the
same income level. Nevertheless, the industry was not able to fulfill domestic production as to
say not to compete as well (Ibid, 2004). Gazarin however, saw the picture in a brighter way. He
believed that since by 2019 all tariffs will be removed, Egypt still has a last chance to improve
this industry and start a competitive national production immediately. He argued that with local
car consumption increasing from 5000 during the 60s to 60,000 in 2010 a window of growth is
available for future advancements in the sector.
In ten years time, the Egyptian market for motor vehicles could be very different than it is today.
With a large population, limited purchasing power, and low vehicle registrations at present, small
increases in income could result in much higher automobile sales. Table XX below indicates
what the market might look like over the next ten years (Ministry of foreign trade,2005).
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Future Prospects
After the 2011 revolution and the dynamic change in the country, Egypt has a potential to plan
for a progressive industrial and economic advancement. Public policy is constantly at review
now to realize the country's aptitudes and challenges to be able to craft a successful path to
utilize its competitive edges and capture future prospects.
Although some countries in the region took huge leaps in car manufacturing and became key
players, Egypt still has a valuable chance in carving its space in the world of auto industry. Many
changing factors in the future of this industry provide windows of opportunities to developing
countries. Production and consumption maps are expected to alter significantly. These are
affected by both the advancing requirements in mature markets in developed countries on one
hand and the changing economic and social standards that created new markets in developing
countries on the other hand.
In the developed world, the new competitive edge in car production and demand will be driven
by the swift evolution in technology. Alternatively, in emerging markets, the economic value of
cars along with the facilities they provide would guide the choices of many new car owners (The
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Transformation to come). Egypt thus has a growing market potential for car sales nationally and
internationally.
In the local market, the growing demand has already reached encouraging levels at 150,000
vehicles per year (Gazarine, 2012). With the decreases in tariffs and the reduction in car prices,
local demand is expected to reach 500,000 vehicles per year, surpassing the economic incentive
for local car production which encourages manufacturers to benefit from economies of scale. Car
producers can increase the capacity of their production and target the growing local market. They
will still enjoy government protection for more than seven years until the GATT is completely
adopted and the car industry becomes entirely unprotected. This will enable domestic producers
to have a competitive edge over foreign companies during this period.
A great potential for exporting to developing countries is also available. Egypt is strategically
located close to many developing countries with open markets for car imports. Local producers
can target these markets and serve customers' needs with designs that combine economical prices
and contemporary designs. The location of the country will also affect the cost of transportation,
which will give Egypt an edge over more distant exporters.
Another factor that will affect the map of future production in this sector is the shift towards
more green and environmentally friendly energy sources to substitute traditional fuels. This
transition holds the opportunity for new producers to invest in the research for new technologies
that can capture new sources of energy as green substitutes. Electric vehicles are now introduced
in some developed countries. Also, France developed an automobile that operated with air. Egypt
can invest in the development of energy sources that it is advantaged with as the solar energy.
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This can put the country on the competitiveness map in even the developed mature automotive
markets.
On the other hand, the projected expansion in local production can create a valuable opportunity
for the expansion of the component and feeding industries. This sector has been affected with the
relatively small local market and the inability to compete in international markets due to the high
specifications required. When domestic car factories expand production, the component industry
will follow up with higher capacity. Meanwhile, factories can provide technical assistance to
feeding industries to encourage their abidance by the international requirement.
However, the expansion in both the local production of automobile and component industries are
dependent on the incubation of research and development units to service and push the
advancement of the sector. There is no prediction or ceiling to what technology can provide in
this sector that is highly reliant on innovation. According to the former minister of industry,
Mohammed Abdul Wahab, the main obstacle that Egypt has faced since the 1970's was the
negligence to R&D as the major factor for sustaining an edge in industry (Abdel Wahab, 2004).
CONCLUSION
The motor vehicle sector in Egypt does make an important contribution to the economy. It
represents 3.7% of Egyptian manufacturing output and 1.8% of manufacturing employment.
Thus, changes in trade policy in this sector can have a significant impact on the overall economy.
Moreover, developments in this industry can have important spillover effects on other sectors in
the economy. Therefore, the government should play a more influential role in determining and
planning its expansion as it enjoys a high potential of competitiveness. This can be achieved
through creating the right incentives to encourage foreign companies to produce rather than
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assemble domestically. Also, the country should provide support for local manufacturers to
increase local production.
The Auto industry in Egypt possesses a highly professional caliber of engineers and skilled
labor. It has huge production facilities and plants, a big part of which is idle because of either the
lack of capital or the mismanagement. In order for the country to become a future icon in the
industry, Egypt should utilize its strengths and strategically treat its deficiencies. This is to be
achieved by encouraging R&D for car production in scientific institutes and universities,
expanding local production, achieving economies of scale, encouraging feeding industries and
target the needs of local as well as international markets.
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