In August 2019, Toyota and Suzuki became the latest companies to formally commit to setting up car assembling plants in Ghana. This was after the Toyota Tsusho Corporation signed a Memorandum of Understanding (MOU) with the government of Ghana following a March 2019 announcement.
Toyota and Suzuki (of which Toyota Tsusho is a major shareholder as of August 29, 2019) joined Volkswagen, Nissan and Sinotruk as major automobile companies that have decided to make Ghana a home. These developments are seen as an affirmation of Ghana’s relative socio-economic stability over the past two decades, even with an election on the horizon.
Renault, which has not made a commitment yet, has singled out Ghana for praise and views Ghana as a gateway to the ECOWAS sub-region.
“Ghana is a very good place to operate a business. The economic infrastructure is here. The peace and political atmosphere are also good. We can reach all over West Africa from here,” said the Africa Vice President of Renault Trucks, Cyril Barille to Citi Business News in May 2018.
As appealing as a stable political and economic climate is, the potential tax breaks also have something to do with these developments. Ghana will offer tax holidays of up to 10 years to auto firms that set up the local assembling plants. The full 10-year tax break will only apply to companies building whole vehicles whilst a five-year holiday will be granted firms doing partial manufacturing.
When the plans are in place, the government intends to increase import duties on new and used vehicles from the current 5 to 20 percent to 35 percent. In the hope of encouraging the purchase of cars manufactured by the plants situated in Ghana. Most recently, Parliament indicated that there was some framework under consideration for the potential banning of the import of second-hand vehicles beyond certain ages and salvage vehicles.
With this blueprint, the question for the average Ghanaian will be how all these translate to relatable outcomes.
The establishment of these plants aligns with two agenda the Akufo-Addo administration has drummed home time and time again – jobs and industrialization.
With the announcement of Volkswagen’s intent to set up a plant in Ghana, eyes on the local scene shifted towards Rwanda which has had a $20 million plant set up by the German car manufacturer operational since June 2018.
There have been differing timelines for Ghana’s Volkswagen plant to come online. But like Rwanda, the assembly plant is expected to produce about 5,000 units every year. Production may eventually be scaled up depending on the market demand.
Toyata and Suzuki have similar outputs in mind.
“We are looking at an installed capacity of 5,000 units per year but hoping to expand as the demand increases. The products to be assembled in Ghana include the Toyota Hilux pickup, which is already popular in Ghana,” Toyota’s Chief Operations Officer said when the MOU with Ghana was signed.
Volkswagen’s assembly plant in Rwanda should also eventually create 1,000 jobs, the East African nation expects. The German carmaker also has plans to co-operate with a local company to establish a ride-sharing service in the country, which could see some more jobs and tax revenue for the State.
The VW assembly plant in Rwanda has been using components shipped from South Africa to Rwanda via Kenya. As well as building cars at a plant in South Africa. VW also builds cars in Kenya, Nigeria and Algeria.
We should bear in mind that it is the stagnant sales in developed economies that are forcing automakers like Toyota, Volkswagen, BMW, and Nissan to look at Africa, which is considered by observers as one of the world’s last untapped markets for new cars.
According to the Paris-based International Association of Motor Vehicle Manufacturers, in Africa there are on average 44 vehicles per 1,000 people compared to the global average of 180 vehicles per 1,000 people.
The keyword in this is demand, especially if we hope to maximize the benefits of these plants. It is assumed that Ghana’s growth as an economy is translating into pockets but evidence on the ground suggests a growing gap between the rich and the poor. This notwithstanding, if the average Ghanaian has more disposable income, they would be willing to say bye to trotros in favour of personal mobility, all things being equal. But are they going to troop to a VW showroom or turn to the second-hand car market?
The Encyclopedia of Global Population and Demographics explains that vehicle sales in a region start to rise when local annual incomes reach half of the price of a new vehicle. In the US auto market, the average price of a new car in 2016 was approximately $34,000. The average price for a new subcompact car, like ones seen being used by ride-hailing services like Uber, was approximately $17,000. By this formula, local incomes would need to be at $8,500 per year for reasonable demand.
This doesn’t bode too well for our pockets. Turning our heads back to Rwanda, the cost of the locally assembled cars in that country is somewhat high compared to international markets. On the company’s global website, a VW Tiguan is priced at $24,295 which is about $10,000 less than the pricing in Rwanda while the Volkswagen Passat retails at $37,674 in Rwanda as opposed to $25,295 on the international market.
The high prices owe significantly to the importation of car parts for assembly. “Among the factors that prohibit growth is logistics costs. It’s quite costly to bring a container from Mombasa to Kigali,” Thomas Schäfer, the Chief Executive of Volkswagen Group South Africa said to Rwanda’s The New Times in 2018. He pegged the cost of transporting a container from Mombasa to Kigali at around $4,000.
But one thing Ghana can take note of is Rwanda’s attempt to engage local financial institutions to ease car financing terms for citizens. More insight for Ghana’s auto industry lay in Alec Erwin’s writing on the African auto industry in the Africa Policy review. One of his points could be a real challenge for Ghana given the whirlwind of sometimes disruptive change that accompanies any change in government.
“Any state intervention needs to have clarity of purpose, be consistent and sustained over many decades. An absence of policy consistency can cause the collapse of the assembly industry as has happened in Nigeria, Argentina and Australia over the last decades.”
Beyond this caution, Ghana also has to be thinking of elements to sustain an auto industry like energy, communications and logistics, advanced manufacturing capacity and access to markets. The latter point may be most important to the average consumer given Ghana’s energy situation has been relatively stable over the last three years.
“Attempting auto production in a small economy with a limited market will raise costs, reduce choice and constrict the nature of assembly,” Alec Erwin notes.
Because of the high fixed capital costs, the assembly plants in Ghana will do well to keep in mind economies of scale if they want Ghanaians to even consider ditching the used car market for some of the newly assembled cars.
Observers have pointed out that reducing the number of models produced in a plant will reduce tooling costs that would have been passed onto the consumer. It will also be more cost-effective to reduce the number of models produced in one plant in favour of increasing the number of plants in different locations.
The cost of imports will also invariably contribute to the final cost and on the surface, if Ghana toes the same line and ships in components from South Africa, like Rwanda does (for its VW plants), the Continental Free Trade Agreement should mean Ghana at least is offered some reprieve and the consumer benefits in the long run.
But South Africa will be competing with much larger exporting countries and it is unclear if the powers are going to sit by and let the rainbow nation reap the rewards of a growing auto industry on the continent.
If things don’t work out for Ghana’s auto industry, it will get nasty for jobs. In 2019, slumping sales of cars triggered massive job cuts in the auto sector in India, the fourth-largest industry in the world. Companies were forced to shut down factories for days and reduce worker shifts. Reuters reported that initial estimates suggest that automakers, parts manufacturers and dealers have laid off some 350,000 workers since April of that year.
Aside from the slowdown of the economy (which, granted is significantly larger than Ghana’s), one of the interesting points from India’s struggles has been the push to police emissions of air pollutants. India imposed BS-VI norms to regulate the output of air pollutants from combustion engines which require more investment in technology. There has also been a push towards electric vehicles which reduced the demand for internal combustion engine vehicles.
In a world becoming more sensitive to the environment, the government should be thinking about a green auto industry. As the major automobile players shift towards Africa and Ghana, questions must be asked of the government’s plan to align the sector with environmentally sustainable standards. But given the political expediency that accompanied Ghana’s mortgaging of bauxite in sensitive ecological zones, the government may be thinking more about the green of dollar bills, not of the environment.
The writer, Delali Adogla-Bessa, works with Citi TV/Citi FM/citinewsroom.com
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