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International car manufacturers have to fight used car imports in Nigeria

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International car manufacturers have to fight used car imports in Nigeria

While there are no extended data, the consensus is that many Germans only use their cars for as long as five to ten years after purchase. With the cars well-serviced in Germany and good quality road network, it means that even a 10-year-old German car can be expected to work well for at least a few years.

Many of these cars “shed” by German drivers are sold in Eastern Europe but a huge number ends up in Africa – in used car markets in Nigeria, among others. Nigeria’s former Minister of Industry, Trade and Investment, Okechukwu Enelamah, said last year that Nigerians spend $8 billion importing these “tokunbo” vehicles annually.

Consumer spending rising but not for new cars

In recent years, the average revenue of the African population has risen. This rise shows in the spread of smartphones and various related services, like Netflix, Betway, and others setting up shop in African countries recently.

But it has not shown in car sales. According to a recent study, Africa with its 1 billion inhabitants is only responsible for around 1% of new car sales in the world, and 85% of them were bought in South Africa. The African car market, in general, and the Nigerian one, in special, are distorted by a massive influx of used cars, especially from Europe, Japan, and North America.

According to a report published last spring by the United Nations Environment Programme (UNEP), used cars accounted for around 80% of all vehicle sales in Nigeria and Ethiopia. The same report stated that in 2017, the ratio of the Nigerian fleet of automobiles was 1 new car for every 131 used cars roaming the streets. All this in spite of Nigeria’s tax hike on used car imports in 2014.

Several major international car manufacturers have joined forces to get a foothold in Africa, creating the African Association of Automotive Manufacturers (AAAM) to “unlock the economic potential of the African continent by promoting a policy environment that is conducive to the development of the automotive sector”, as Ford’s CEO for the Sub-Saharan Africa Region and AAAM Chairman Jeff Nemeth said. “As the African continent becomes increasingly important within the global economy, it is crucial that we develop an auto sector strategy backed up by incremental investments in infrastructure, skills development, and in-market localization programs. This will make new vehicles more affordable, boost the industrialization of the economy and lead to the growth of middle-income households, which will be the main driver for new vehicle sales.”

The AAAM has identified Nigeria as one of the most promising markets from this point of view, especially due to its demographics. Last year, Volkswagen signed a Memorandum of Understanding (MoU) with the Nigerian government to develop an automotive hub in the country.

And the government is playing along: the car manufacturers who aim to set up shop in the country will receive tax holidays of up to 10 years and duty exemptions for their part imports, among others.

The biggest challenge: When you ask the big automakers however, why they have been unable to set up shop in Nigeria despite the perceived large market, the first thing they will say is that they are not certain of the commercial viability. Producing new cars in Nigeria, despite the FG concessions, will be expensive, and they do not think ordinary Nigerians have enough funds to buy new cars. High interest rates make it unattractive for Nigerians to get bank loans to purchase cars as is obtainable in other countries. If enough Nigerians are not buying, then setting up expensive plants to build new vehicles in the country is counterproductive for automakers.

Solving that puzzle is the responsibility of policy makers. The Nigerian government must think through policies that can be implemented to make the prospect of setting up plants in Nigeria attractive. Otherwise, automakers will continue to sign conditional MOUs but never take the important step to implement.

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