Entry Strategies For Automobile Companies In African Markets

The article discusses about how Indian Automobile companies should enter foreign markets with special emphasis on African markets. Strategies used by various automobile companies which are working in Africa have been mentioned. This will help other Indian companies to gauge the market potential in Africa and make their mark in that foreign market.

Indian Automobile Industry

With the emergence of BRIC nations as emerging markets, the situation of the automobile industry is getting better and better. These growing developing economies are the hub of  production of automobiles and auto spare parts. With the entry of global automobile makers in India, changes in the design of models and use of technology has made Indian automobile industry compete in the global markets.

Prior to mid 1990's, Indian automobile sector comprised of indigenous companies only. The automobile market in India was however, opened up to foreign investors in 1996. Reduction in the tariff on car exports, removal of minimum capital investment required from new investors and new policy in favor of reduction in excise duty for small automobiles have been affected by the Indian government.

The liberalization policies adopted by Government of India (from year 1991 onwards), resulted in huge investments from foreign companies. Now India is preferred by many countries as the best outsourcing destination. Automobiles as well as automotive components are not only made to meet internal but also external demands.

African Automobile Industry

Africa is the second largest and second most populous continent in the world. It consists of 54 countries and is very rich in natural resources. Africa accounts for less than 3% of global trade and only 10% of Africa’s trade is with other African country which can be increased.

Before 1980s, the rapidly growing vehicle market was successful in attracting many foreign firms which invested money in African automobile market. Most of the main vehicle makers were assembled in Africa although some of these operations were operated under license. But with inflow of foreign investment, the situation of vehicle manufacturers and component producers got improved.

1980s was a period of economic stagnation and political turmoil unattractive for foreign investment. Japanese firms had for many years been prohibited by their government from making direct investments in apartheid South Africa although many had license arrangements and there was large scale two-way trade.

In order to boost trade, various initiatives were taken up by African government like: Doha Development Agenda, Regional Integration, Free Trade Agreement (FTA) to name a few. In case of emerging markets like South Africa and India, companies prefer to produce automobiles and its parts in those markets either through JV or wholly owned subsidiaries rather than through domestically owned firms.  This not only helps to achieve economies of scale but quality levels are also achieved in the home plant.

Potential Markets

Low labor costs, cost of transport, communications and general living is lower in African countries as compared to other countries. South Africa being the richest country in Africa, Nigeria is also targeted as it is the most populous country of Africa. The GDP of South Africa was 2.8% in 2010 which increased to 3.7% in the year 2011. Besides these, Ethiopia, even though affected badly by droughts, is targeted to be a potential market as it is the second most populous country of the world. Also Algeria, Egypt and Kenya are some of the countries in African subcontinent which have been shortlisted on the basis of Gross Domestic Product (GDP), Purchasing Power Parity (PPP) and stable political environment as the ones with high market potential, and are target of most of the firms like Ashok Leyland. With the collapse of the regime of Hosni Mubarak it resulted in a prolonged period of political uncertainty, but a more stable system is expected to emerge in Egypt. There is huge potential in these markets for automobiles and automotive parts business. Business Monitor International (BMI) believes that African market offers the same opportunities for untapped growth that were available in China before it grew to its current status as the world’s largest car market, and this is perhaps what attracts Chinese brands to the region. (Source: European Intelligence Unit)

Because of the strong growth in middle class income group people and that of premium group segment, overall demand of automobiles, be that a car or a bike attained great heights. It has been speculated that Africa sells nearly 2.5 million bikes every year and that is the reason Indian firms are interested in African markets to a great extent.

Entry strategies used various Automobile companies in Africa

In 1980s an active international campaign encouraged disinvestment from South Africa, which was particularly effective against American firms and both Ford and General Motors transferred their ownership to local interests during this time. Brands such as BMW and Rolls-Royce achieved high sales in the region in 2010 and expanded as the consequence.

Four wheeler cars

a) General Motors (GM) is one of the automotive giant which set up its assembly plant in Egypt, with regional headquarters in South Africa (SA). GM has seen exceptionally strong growth in Mozambique, Zimbabwe, Angola and South Africa. The company has identified Nigeria, Angola, Zimbabwe, Ghana, Kenya and Senegal as the countries with the greatest potential.

b) BMW opened up a plant in Egypt, which produced BMW – 7 series, and it was the only BMW factory outside Germany. It was set up keeping in mind the growing demand in the country as well as that of international markets. BMW retained full ownership of its operations in South Africa.

c) Although Japanese carmakers are still producing in South Africa, the element of uncertainty regarding supplies poses a downside risk to its growth. Nissan SA is still not back to full production uptil now, whereas Toyota SA has continued its normal production and monitors the situation on day to day basis.

d) In 2009, Lifan invested US$300 mn in a new car assembly plant in Ethiopia, announcing in advance the plans for plants in Africa. Lifan is in the process of changing from assembling semi-knocked down kits to completely knocked down vehicles, which would mean 80% of a vehicle’s body will be locally produced. Similarly, domestic manufacturer Mesfin Industrial Engineering exhibited the new Geely Addis car, assembled through a JV with China’s Geely International.

e) Although Algeria has its own risks related to political stability, it is still attracting major companies, including Germany’s Daimler, which formed JV with Algerian government as part of its North African expansion strategy.

Indian companies

a) Tata Motors entered South African market in 2004 to open two production facilities to make small cars but its original intention was to take advantage of European Union’s Free Trade Agreement (FTA). Tata motors would use this to assemble and export its cars to European markets as its competitors like Toyota, Volkswagen and Ford were already doing. With the growing demand of cars among the country itself, the company targeted not only the local people but international markets as its targets as well. The distribution and marketing of Tata cars in South Africa was handled by Accordian Investments (Pty) Ltd., JV between the Imperial Group, Ukhamba Holdings (Pty) Ltd. and Tata Africa.

b) Mahindra and Mahindra entered the African market as Mahindra SA into JV with Renault on the terms that it will be the first right hand driver automobile manufacturer of its low cost Logan car.

c) Maruti Suzuki Udyog Limited (MUL) took the advantage of right hand drivers in South African markets to start its business in African subcontinent and is setting up its plant there.

Two wheelers

The Chinese counterparts are producing price sensitive two wheelers, which creates tough competition for Indian two wheeler makers. As of now, Chinese companies are the biggest share holders in African markets. Chinese companies also clearly see potential in Ethiopia.

Harley-Davidson’s interest in Algeria is also shared by other premium brands as Daimler announced a new JV assembly plant in the country in March 2011.

Indian companies

Bajaj, TVS and Hero Motors Corp are aiming to set up assembly plants in Africa in the near future, but as of now they are catering to the growing demands through exports only. Hero Moto Corp plans of launching CD Dawn at competitive prices and other bikes with 100 cc capacity.

Conclusion

Taking cues from the companies which settled earlier in Africa, it can be deciphered that the best options available for entering into African market are either JV or Strategic alliances. This will help companies gain roots in new markets and then keep on modifying the offerings for public according to Africa’s changing tastes. Due to sudden political issues in Africa, it is wise to delay the plans of establishing assembly and production plants rather than investing huge sums to build plants.  After political stability, if followed by economic stability, automobile companies can proceed with their prior plans.

This article has been authored by Anshul Kumar from Birla Institute of Management Technology.