Automotive and Supplier Industry in North Africa
What is behind the growing interest of car manufacturers and their suppliers in this region?
> Amor Dhaouadi
For more than a year and a half, low-cost cars have been rolling from Renault, the French car manufacturer’s line at the port of Tangier in Morocco in the direction of Europe. Soon, the manufacturer PSA with the brand Peugeot will follow Renault. At the same time, Renault and PSA Peugeot have announced plans to build further production sites in Algeria. The French are not alone. Car manufacturers VW, Ford and Toyota have also announced plans to set up factories in Algeria. What is behind this interest in the North African countries? What are the advantages for car manufacturers with this step? What kind of constraints are they subjected to to make them take this step? In this report, we will focus on these topics, among others.
Why North Africa?
When we talk about the countries of North Africa in this article, we are concentrating on the countries of Tunisia, Algeria and Morocco, where business activity in the automotive sector has intensified over the last years and will be expanded in the coming years.
The Investment Climate in The Region
The three countries are similar in some aspects but have though different profiles.
Due to their scarce natural resources such as oil and natural gas, Tunisia and Morocco have always opened their doors abroad in order to attract foreign capital into their respective countries while opening up foreign markets for their own products and services. Algeria, on the other hand, is rich in natural resources, compared to Tunisia and Morocco, and for this reason has not felt compelled to open its market. This is changing at the moment. As we shall see, the main cause lies in the fall in oil world market prices. Over the past decades, the following international agreements have been signed:
- Association Agreement with the EU since 1998.
- Since 1995, Tunisia has been a member of the World Trade Organization (WTO).
- Investment protection: Tunisia is a member of the International Center for the Settlement of Investment Disputes (ICSID). The country has also signed the Agreement on the Recognition and Enforcement of Foreign Arbitral Awards.
- Intellectual property: Is recognized in Tunisia, as the country is a member of the WIPO (World Intellectual Property Organization), the organization for the protection of intellectual property, and has signed the UNCTAD (United Nations Convention on the Protection of Patents and Trademarks).
- In its TI Corruption Perceptions Index (CPI) 2015, Transparency International ranked Tunisia as the 76th place in the global ranking of 168 countries.
- Association Agreement with the EU since 2000.
- WTO accession on 1 January 1995.
- Member of the World Intellectual Property Organization (WIPO) and a number of other international agreements for the protection of intellectual property.
- Investment protection: Morocco is a member of the International Center for Settlement of Investment Disputes „ICSID“, a member of the Multilateral Investment Guarantee Agency „MIGA“, a member of the Inter-Arab Organization for Investment Guarantee Corporation.
- In its TI Corruption Perceptions Index (CPI) 2015, Transparency International ranked Morocco 88th in the global ranking of 168 countries.
- The EU-Algerian Association Agreement was signed in April 2002 and entered into force in September 2005. However, this was suspended in early 2016 by the Algerian government.
- Access to the WTO: in 1987 Algeria set up a working group, the first meeting of which took place in 1998. To date, the WTO and the Algerian government are still negotiating, the end of negotiations are still open.
- Intellectual Property: Algeria has been a member of WIPO since 1975 and has since signed and ratified extensive agreements.
- Investment protection: In the Doing business ranking of the World Bank, Algeria is only 163rd out of a total of 189 countries. The enforcement of the Algerian government of the 49/51 corporate ownership rule also frightened investors.
- Algeria signed the constitution of the Paris-based International Center for the Settlement of Investment Disputes (http://www.worldbank.org/icsid) and ratified the accession (http://arbiter.wipo.int/arbitration) to the New Yorker Convention on Arbitration. Algeria is also a member of the Multilateral Investment Guarantee Agency (http://www.miga.org).
- Transparency: in the CPI ranking of 2015 Algeria ranks 88th (like Morocco) out of a total of 168 countries.
What Are The Reasons Behind The Interest of Companies in North Africa?
The political, economic and social conditions in all three countries are very different. While Algeria has natural resources of natural gas and oil, Tunisia and Morocco are not blessed by this “luck”. In times of low oil prices, however, these decades of blessings are turning out to be a curse. While Morocco and Tunisia have continuously diversified their economies for decades, the Algerian economy has been heavily dependent on oil and natural gas exports.
The following GDP (gross domestic product) outline clearly illustrates the differences between the three countries in the diversification of their economies.
Tunisia: agriculture 9.9%, industry 29%, services 61.2%
Morocco: agriculture 13.8%, industry 29%, services 57.2%
Algeria: agriculture 10.3%, industry 46% (almost exclusively the petroleum industry), services 43.7%
While Tunisia and Morocco have been working to diversify and develop their industries further for many years, albeit to a varying extent, but through similar developments when it comes to results, Algeria has fully focused on oil and natural gas industrial sector. Among other things, the diversification in Tunisia and Morocco happened through the establishment of industry clusters and offshore zones. Even in the agricultural sector, Tunisia and Morocco are much more advanced than Algeria, which must import 45 percent of its agricultural products from abroad.
As mentioned at the beginning, Algeria closed an Association Agreement with the EU in 2002 with the aim of attracting foreign investment capital into the country, promoting the transfer of know-how and potentially opening up the European market for its own products. Ten years after the agreement came into force, the Algerian government has expressed its dissatisfaction with the overall results of this project, which has actually only been used by the EU and has not brought the hoped-for economic effects into Algeria.
According to a detailed balance sheet analysis of the economic relations with the EU, the Algerian government, therefore, decided in February 2016 to unilaterally abolish all free trade agreements with the EU and Arabic countries. This draconian measure led to a lot of irritation among the importers in the country, because by taking this step the price for imported goods rose by up to 40 percent. As a further measure, the government reinfored the existing 49/51 law, after which foreign investors are only allowed to hold a maximum of 49 percent shares in an Algerian company. 51 percent of the company’s shares are to be held in local hands.
According to the Algerian authorities, the balance sheet after 10 years of association agreements with the EU is devastating. While the cumulative imports from the EU reached 195 billion Euros between 2005 and 2014, Algerian exports totaled only 12.3 billion Euros; a ratio of one to sixteen. In the area of European investment in the North African country, just 316 projects were launched between 2002 and 2014, with a total value of 77.7 billion Euros.
The Level of Maturity of The Automotive and Supplier Industry in North Africa
As described so far, all three North African countries have different profiles regarding their economic development. While Tunisia and Morocco have largely opened themselves up through the free trade agreements with the EU, Algeria remained a rather closed and at the same time a very difficult market.
In Tunisia, the majority of companies have been established, producing amongst other things, cable kits, wiring systems and construction or rather spare parts for the automotive industry in the European countries. The companies Leoni (with four production plants and a total of 12,000 workstations), Dräxelmeier (with four factories and 9,000 employees in Tunisia) or the Marquardt Group (production of automotive systems and applications as well as electrical tool switches, device switches, snap-action switches and sensors) are some well-known and renowned companies that have been based in Tunisia for decades. Even during the unrest in the North African country in 2011, these companies have remained faithful to the location while other foreign companies have turned their backs on the country and moved towards Europe or Morocco.
These companies enjoy special tax advantages in Tunisia and have access to cheap and highly skilled workers (with partially subsidized training). The infrastructure in the regions of its production facilities is also very well developed. Another advantage is the geographical proximity to Europe (the capital Tunis can be reached in only two flight hours from big European cities). In addition to the cost advantages, the companies are benefiting from the increasingly stable political situation in this North African country. The international agreements provide for the legal framework for the protection of their investments and their intellectual property.
In the long term, however, the country will need more efforts to succeed in developing mature ecosystems for the complete manufacture of motor vehicles for the foreign markets. The country is lacking the necessary supplier base.
In this regard, Morocco is a bit more advanced, even if the country pursued a strategy similar to its neighbor. The country began to advance its industrialization strategy in the 1960s.
In recent years, a rapid acceleration of this process has taken place in Morocco. The Moroccan government has defined the automotive industry as a key industry for export, along with aerospace, pharmaceuticals, renewable energies and cable industries, in its 2014 „Industrial Acceleration Strategy“ program.
Already in early 2012, the French motor vehicle manufacturer Renault got on the bandwagon and opened its factory in the industrial region of Tangier-Med. In addition to its plant in Casablanca, Renault hopes to be able to produce 400,000 vehicles annually. This corresponds to approximately one-tenth of the world’s total sales. This increase in the production capacity of Renault was also the motive of its important suppliers to also relocate production sites to the Kingdom. The second major automobile manufacturer in France, the Peugeot PSA Group, has announced plans to build a plant in Kenitra, another industrial hub in the country.
The reason for this trend is, on the one hand, the tempting advantages offered by the government (tax exemption, subsidies for employee training, modern infrastructure, power supply, cheap land). At the same time, the personnel costs are very low compared to other countries such as Slovenia, Russia, Turkey or Romania, where Renault has production facilities. In addition to financial incentives, the Kingdom offers political stability in comparison to its neighbors in North Africa.
By implementing this strategy of industrializing the country, Morocco has succeeded in increasing its foreign exchange revenues from the autoexport to 4.0 billion Euros in 2015. The car industry has thus become the most important export sector in the country. The labor market also benefits from this development. By 2020 the government wants to create 500 thousand jobs.
As already described above, the Algerian market has been closed compared to Tunisia and Morocco. For the past two years, however, we have noticed that many automotive manufacturers such as Volkswagen, Ford, Peugeot and others are interested in an engagement in the country. What are the reasons and objectives of these companies, despite this country’s difficult conditions?
The economy of the country has depended very much on the oil and gas industry, and for a long time. The automobile industry already withdrew from the country in the seventies of last century.
In 2014, the French car manufacturer Renault, based on the very good relations between Paris and Algiers, opened its factory in Oran in the east of the country with a production capacity of 25,000 cars per year. The Renault Algérie Production is a joint venture between Renault (49 percent) and the Algerian state (51 percent). Despite this step, it will not be possible in the foreseeable future to build up an ecosystem for the production of complete vehicles in Algeria. The large suppliers of Renault will not settle in Algeria, as the sales volume is still too small. Added to this is the existing ownership law in Algeria, according to which foreign companies may own no more than 49 percent of the shares. The missing labor force in the country is also a major obstacle for foreign companies that want to settle in this country.
All three countries have different profiles and frameworks. At the same time, they face challenges that they must master in order to successfully attract foreign investors. At first glance, Morocco seems to be the country with the best conditions for a successful investment in the automotive and supplier industry. However, the Kingdom has a major problem with regard to qualified workers. At the second IHK-Mediterranean Economic Conference in Augsburg at the beginning of June 2016, Marco Wiedemann, Member of the Board of the German Foreign Trade Chamber, said that 49 percent of young people in Morocco leave school early. He advised companies to plan special training courses for their workforce in Morocco in their business plans in order to avoid having to look for qualified workers for a long time.
This problem does not seem to be in Tunisia. The Tunisian government has set up a project (CORP) with the German government and the AHK (the German chamber of foreign trade) in Tunis to better train unemployed graduates and prepare them for the labor market. In addition, the Ministry of Education wants to integrate the dual education system in Tunisia in order to offer better opportunities for pupils and trainees. All these efforts by the governments of the North African countries bring jobs for young workers. For the economy, however, they still do not bring the jobs that generate the highest added value in value creation, such as jobs in research, development and design. There is much potential for the foreign companies in the region, which is by no means exhausted by the demographic change in Europe.