Can AfCFTA boost Africa’s auto industry?

By Xolisa Phillip, in Johannesburg
Posted on Tuesday, 20 December 2022 12:55

VW T6 microbuses are pictured on a production line at a Volkswagen Commercial Vehicle plant in Hanover, Germany, June 16, 2022. REUTERS

The African Continental Free Trade Area (AfCFTA) Secretariat is finalising the rules of origin package for the auto industry to be reviewed at the Council of Trade Ministers sitting scheduled for February 2023 in Botswana, Secretariat advisor Themba Khumalo has said.

Key considerations include how Africa will stop the tide – up to 50% – of second-hand vehicle imports, which are cited as an impediment to the growth potential of the region’s new passenger car market, and the harmonisation of standards.

Khumalo, the advisor on industrial development at the African Continental Free Trade Area (AfCFTA) Secretariat, disclosed the information during a discussion on the auto industry at the recently concluded German-African Business Summit in Johannesburg.

VW South Africa Managing Director Martina Biene and Mercedes-Benz South Africa boss Andreas Brand were present.

“We’ve been negotiating rules of origin for some time now. The document we have, which is referred to as an AfCFTA autos package, is going to the Council of Ministers in February 2023 at a meeting that will be hosted in Botswana,” Khumalo says.

‘Sensitive industry’

He admits to a delay on the issue as “there has been a lot of back and forth” because “it’s a sensitive industry”.

Khumalo says the AfCFTA Secretariat plans to present the autos package to the February meeting with the expectation of adoption.

“We’re hoping we can use that meeting to, at least, move the needle. … It’s a[n] industry with a lot of potential to help us guide industrialisation.”

The Secretariat considers the AfCFTA Agreement an industrialisation instrument because it will push intra-Africa trade on the basis of what the continent produces.

“We have been looking at an AfCFTA Agreement package that is going to help us develop the auto value chain on the continent,” says Khumalo.

In order to do that, “we have to look at the issue of rules of origin [and standards].

“There is a need to reduce by 50% the import of used vehicles, which are flooding our market and will continue if we don’t act now considering that other continents are pushing out cars,” Khumalo says.

The AfCFTA Agreement covers a population of 1.3 billion people and constitutes a cumulative GDP amounting to an estimated $3.5trn, according to the secretariat.

Furthermore, the continent, excluding South Africa, accounts for 0.5% of the global auto market.

Economies of scale

Biene from VW South Africa agrees that the AfCFTA Agreement offers an opportunity to grow the trade of passenger vehicles and components within the region by reducing barriers.

“It [AfCFTA Agreement] would grow the market for new vehicles through targeted localisation and the development of a vehicle and components hub,” explains Biene, who is also the VW chairperson in South Africa.

The AfCFTA Agreement creates an open market with the required economies of scale which would make the continent self-sustaining and less dependent on external resources.

“We believe in this huge potential,” says Biene, adding, “[…] to give life to the AfCFTA Agreement, automotive policies in the different countries and regions [are important].

“It is about rules of origin across all member states [and are the harmonisation of standards].”

Such a coordinated approach creates room to develop regional hubs.

“It would be great in the negotiations of the AfCFTA Agreement that there’s a win-win between different states and regions,” she says.

“Let’s say the automotive hub in West Africa is Ghana. There must be a benefit for the rest [of the states in West Africa],” Biene says.

“We are seeing every country coming and saying, ‘We also want automotive manufacturing’. That doesn’t work in our business model.”

In addition, stimulating new passenger vehicle demand is crucial. “The one lever is to ban grey [second-hand car] imports,” Biene says.

The other essential component for the development of an auto value chain is addressing the affordability of vehicle asset financing.

Biene says there are positive developments in Africa, pointing to South Africa, where VW planted its roots 72 years ago and has created an established supplier base.

Morocco, Tunisia, and, recently, Ghana are other successes. “These examples show that it can work.”

Infrastructure challenge

Biene says another area that needs attention is infrastructure development on the continent because even though the automotive manufacturing process can be carried out at different levels of investment, it requires an extensive supply chain based on efficient logistics systems.

“There are huge challenges in Africa pertaining to infrastructure. [There is a] … need for improved fuel quality and road infrastructure – not only for our customers but also for logistics,” Biene says.

Brand also thinks “we have a good chance of localisation in Africa”.

“We believe that there is potential, but it must be reliable and operational.”

For that to happen, according to Brand: “We need a policy and a framework. We need to have a discussion on transport. …  [We] are seeking stability and vision.”

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