Africa’s middle class may be fast emerging, however, lower GDP per capita incomes, the small middle class and the used car imports dominating most of sub-Saharan Africa will continue to hinder new car sales on the continent.
“The big picture really is that the new car market is very small in Africa and unfortunately will continue to remain small for many years with unit sales growth seeing, at best, 10% per year and not much faster. This is particularly true for those countries where they are not experiencing a resource boom. The key is increasing the GDP per capita – and that is a slow process,” says Nicholas De Canha, CEO of Imperial Fleet Management.
“The thing that drives an economy is the middle class and although the middle class in a number of African countries is growing, this will take time. Realistically, GDP per capita needs to grow until it’s about US$5,000-$6,000 per person before we’ll see robust automotive markets across the continent, which essentially means that you have enough money in the economy for people in the country to have money to buy cars.”
Data released by the International Organisation of Motor Vehicle Manufacturers recorded new passenger car sales on the continent (excluding used vehicles) at only 1.2m units in 2013 – of the 62.6m globally. According to Tim Jaques, GM of AMH Africa: “The total of 1.2m vehicles for 2013 would constitute largely North African markets and South Africa, making the remaining automotive market on the continent even smaller than one would expect.”
De Canha explains that the African automotive market could be split and viewed in three sections: South Africa, North Africa (Morocco, Egypt, Algeria, Tunisia and Libya) and ‘middle Africa’ (everything in between). To further put this into perspective, if there are 100 new car sales in Africa, then about 60 of those sales would stem from South Africa, 35 from North Africa and between five and 10 sales would be generated from different countries within middle Africa.
“With that in mind, middle Africa has a massive import-of-used-car market – where used car imports are banned in South and North Africa. In fact, I would even suggest that the used car market in middle Africa is about 10 times the size of the new car market in the region, where 90%-95% of these used car imports are made up of passenger vehicles. That is part of the reason that there are so few new passenger vehicle sales in middle Africa (typically less than 20% of total market). In South Africa, and other more developed automotive markets, however, passenger vehicles make up around 65% of new sales and LDVs (light duty vehicles) 35%,” says Jaques.
A keen market example is Nigeria. The country’s population is three times the size of South Africa’s and if the economies are equal in size, as is now commonly reported, then Nigeria’s GDP per capita income would be one-third of the $7,000-$8,000 in South Africa. Add that to the markedly higher Gini coefficient, and this means that the small middle class in Nigeria then wouldn’t be able to afford a new Toyota Etios in South Africa, but they would be able to afford a $2,000 used small car from Europe or elsewhere.
“Even with the emerging middle class in Nigeria, vehicle sales for the country are around 20% of South Africa’s sales and this will continue to grow at a rate of about 10% year-on-year. Government policy must focus on ensuring their economy continues to grow so that more people will have more wealth. However, before the middle class will start buying new cars, the government would need to do something about the used car imports coming into the country,” indicates De Canha.
A good quality used car will enter the market at less than 50% of the cost price of a new car due to the depreciation in their original markets. There are also low duties on used cars and high duties on new cars. Jaques adds: “Though these vehicles aren’t sold with a warranty or service plan, people will take their chances because it is so much cheaper – and consumers will buy with a short-term view that is more concerned with an immediate requirement and less concerned as to how they will service the vehicle.”
This kind of model only works when people have little expendable income. As people become wealthier they expect warranties and other value added services. For instance, should Nigeria – like many other countries in middle Africa – change its tax duty structures for both used and new car imports to create a more conducive and competitive open market, then the new car market with grow rapidly and could even triple its current size within five years as is the experience in Angola.
“With these increases in new vehicle sales also comes more investment into the country through sophisticated market structures including the likes of proper dealerships and workshops, possibly even component manufacturing and assembly plants etc. Government intervention is certainly needed to either ban used car imports or at least adjust the tax duties to create a more even playing field between used and new car imports – and doing so with the realisation that a more robust automotive market also boasts greater potential industrialisation benefits for the economy,” concludes De Canha.