Asian automotive companies on the hunt for growth in Africa

The author, Richard Li, is a Singapore-based partner with Steel Advisory Partners, a management consulting firm that serves clients across industries. This article was produced for the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation.

The stellar economic growth in the African continent over the last decade has propelled a large segment of the population to become more affluent. According to the World Bank, there are 25 African countries within the middle income category in 2016, representing a potential market of more than 650 million people. As for the automotive industry, Africa represents a big potential market. According to 2016 data from the International Organisation for Motor Vehicle Manufacturers, there are only 42 vehicles per 1,000 inhabitants in Africa, compared to the global average of 182.

Most of the global automotive companies are present and have been trying to capture a bigger market share in Africa. While Japanese manufacturers have the biggest market share, the other global companies are racing to expand their reach by investing in new factories. However, there is also a wave of relatively unknown Chinese and Indian companies hunting for growth in Africa.

China’s “big four” in Africa

China sold 28 million vehicles in 2016 within its domestic market and is now the second-biggest automotive market behind the United States. Despite the fact that China is the world’s-biggest manufacturer with 28.1 million vehicles produced in 2016, it still does not have a globally recognised automotive giant. This is because most of its biggest companies are in fact contract manufacturers or joint ventures with global car manufacturers. The “big four” Chinese automotive companies are ChangAn Automobile Group, Dongfeng Motor Corporation, FAW Group and the SAIC Motor Corporation.

Because of higher technology and regulatory requirements, brand recognition and other barriers, the vehicles manufactured by these Chinese companies under their in-house brands have not made significant inroads in the developed markets. Therefore, they are targeting the emerging markets, like Africa, where they are offering products that seem to be more affordable and value for money. South Africa, the biggest African automotive market, is the main destination for most of these companies.

Under the impetus of the Chinese government to internationalise, all the “big four”, as well as other smaller entities, are exploring the African markets. However, at the moment, the results of these Chinese companies in Africa have been relatively mixed. While the ChangAn Automobile Group failed in its attempt to set up and sustain a plant in South Africa, it is still marketing its vehicles in Algeria, Angola, Egypt and Nigeria. As for SAIC Motor Corporation, its local South African importer has halted the marketing of its MG and Maxus branded cars, but in Nigeria, its Hongyan trucks, built with technology from Iveco, are rolling out of its assembly plant.

Selling at very competitive prices, some Chinese heavy trucks are gaining popularity among some African countries. With the support of the China-Africa Development Fund, the FAW Group has set up an assembly plant in Coega, South Africa, with its first commercial vehicle rolling out in 2014. Moreover, it has also gone into a joint venture with Algerian company Arcofina in 2013 to produce 10,000 vehicles, but the deal has still not realised due to financial and regulatory constraints.

Another Chinese company, the Beijing Automobile International Corporation (BAIC), is planning to invest more than US$800m in a South African factory to produce up to 50,000 vehicles. Its subsidiary, Beijing Automobile Works (BAW), has also invested about $15m in a minibus assembly plant. In addition, BAIC is assembling its popular Foton trucks in Johannesburg.

A smaller Chinese company, Li Fan Motors, has taken another route, by-passing the South African market and has instead set up an assembly plant in Ethiopia for the local market. While all these efforts are commendable, it will indeed take time before any of these Chinese companies have a firm foothold in the African markets.

Indian automotive companies

Similar to China, the large Indian population has led to the development of many local automotive companies, producing vehicles for the local market. Including the two- and three-wheeler segments, the Indian automotive market is one of the biggest in the world. In terms of private cars and commercial vehicles, the Indian market represents 3.7 million vehicles sold in 2016 and the market has been steadily increasing. Some of the biggest Indian automotive companies are Ashok Leyland, Eicher Motors, Mahindra & Mahindra and Tata Motors, among many others.

Like the Chinese companies, they are marketing products that look more affordable and more value for money. South Africa is also the main destination for these companies to market their in-house branded vehicles. Tata Motors and Mahindra & Mahindra are commercialising their light commercial vehicles, while Eicher Motors is using the larger commercial trucks manufactured by VECV, its joint venture with AB Volvo, to penetrate the South African market. Ashok Leyland is also exporting its commercial vehicles to Africa and it is planning to invest in assembly plants that will target the various African regions.

For Tata Motors, it has some manufacturing in South Africa, as well as assembly operations in Kenya, Nigeria and Tunisia. Mahindra & Mahindra is still mulling about investing in a factory in Africa. In the meanwhile, some of its local partners are assembling their completely knocked down vehicles for the local markets in Egypt, Kenya, Nigeria, South Africa and others.

So far, while Africa looks very attractive, a clear and long-term strategy will be needed for the Indian companies, especially about investing further in a major integrated manufacturing plant for the African markets. This is because not only will a manufacturing plant require massive investment, but also, to justify this investment, a greater market acceptance and recognition of their products will be needed in Africa.

Global Japanese and South Korean manufacturers

Unlike the Chinese and Indian automotive manufacturers that focus mainly on their own large domestic market, the Japanese and South Korean companies design and build their products targeting the global markets right from the start. This is because they have outgrown their domestic markets. Moreover, their scale and global reach provide them better insights to come out with better designs and products. Besides, they invest massively in branding and marketing so that their products have better appeal to the global consumers. Hence, they are perceived as more premium products.

According to Brand Africa, among the 2017 top 100 brands in Africa, there are three Japanese automotive companies – Toyota, Honda and Nissan. In fact, Toyota is among the top 10 most admired brands in Africa. As a result, it is not surprising that Toyota has the biggest market share in Africa. Both Toyota and Nissan have an assembly plant in South Africa, while Honda is assembling its cars in Nigeria and its motorcycles in Kenya.

South Korean car manufacturers are also making inroads in the African markets. In fact, with its global brand recognition, Hyundai has also gathered a significant market share. It is assembling some of its commercial vehicles in South Africa and its cars with a local Nigerian company. As for KIA Motors, it is also targeting the South African market and using local partners in Ethiopia and Nigeria to assemble its cars.

Long-term market and investment strategy needed

Although Africa is a very big continent, its local markets are relatively small and very fragmented. Hence, for automotive companies to make further inroads, there is a need to improve their supply chains and distribution of their products. This strategy also applies for any company in Africa.

Even if Toyota is the market leader and present in all African countries, it is constantly striving to improve its reach and distribution network. In 2012, the trading arm of the Toyota Group, Toyota Tsusho Corporation, acquired the French company CFAO, that has an extensive distribution network in Africa for automotive as well as other products. As a result, CFAO will indirectly support the distribution of Toyota vehicles, as well as others within its portfolio.

In spite of the fact that most Africans may not be able to outright purchase new vehicles, they are very brand conscious and have a high awareness of the global brands. For the Chinese and Indian companies, although they may be offering good value for money products, they definitely need to enhance their brand image and invest massively in their marketing so that there is a higher recognition of their product brands in Africa and globally.

The African markets have indeed great potential. However, Africa is not a homogeneous market where one solution fits all. Therefore, the successful companies will be those that are able to recognise these differences and tailor their products according to the needs and preferences of that particular local market.

Richard Li is a Singapore-based Partner with Steel Advisory Partners, a management consulting firm that serves clients across industries. Having spent his working career in strategy consulting, he worked with various global clients and covers themes such as Corporate Strategy, Transformation, Digital Innovation and Risk Management. He can be contacted via the Steel Advisory Partners site. This article was specifically written for the NTU-SBF Centre for African Studies.