Automotive Sector Development Strategy

Strategic Study to Upgrade Egypt's Automotive Sector
Executive Summary & Overview
January 2005
Strategic Study to Upgrade Egypts Automotive Sector
Overview
The IMC has commissioned KPMG to prepare a strategic study to upgrade Egypt's automotive sector. The study is one of twelve sectoral strategic studies prepared to support the development of an overall Egyptian industrial strategy. The main objectives of this study are to: Develop greater understanding of Egyptian automotive sector dynamics and performance Identify lessons to be learned and implemented from other comparable countries Determine implications for development of Egyptian automotive sector Create a pragmatic action plan to enable sustainable growth Enhance investor awareness and generate public and private support The study consists of 4 phases, namely: 0,1,2 and 3. Phase 0 report aims to provide an overview of relevant worldwide industry trends and understand the structure and dynamics of Egyptian automotive industry The scope of this phase covered qualitative strategic research to identify key issues, including: industry segmentation, industry participants, ownership, size (sales and employees), customers, position on value chain and international trade. The outcomes of this phase include: implications and key issues for the Egyptian industry, detailed interview plan (interviewees, questions, focus) and an initial list of potential product areas for in-depth assessment Phase 1 report aims to include a detailed assessment, benchmarking and action plan for vehicle assembly and Tier 1 suppliers. The scope of this phase has comprised a focused interview programme in Egypt and automotive decision centres (e.g. Germany, France, UK), interviews with international vehicle assemblers and Tier 1 suppliers (inc. car, bus, truck, LCV) with a presence in Egypt and in a comparable country (up to 10 companies). For each company, interviews were be conducted with relevant decision makers overseas (manufacturing strategy and procurement) and senior management in Egypt. The outcomes of this phase are: an assessment of location decision criteria for own manufacturing and sourcing, the perception of Egypt as an assembly location and benchmark comparison with relevant countries, an identification of critical gaps, a final list of product areas for Phase 2 and a preliminary action plan for assembly and Tier 1. Phase 2 report aims to cover a detailed assessment, benchmarking and action plan for Tier 2 and Tier 3 suppliers. The scope of this phase has included the identification of suppliers in Egypt for each of the four product areas, interviews with senior management of Egyptian based suppliers, the corroboration of draft benchmark data from Phase 1 interviews with vehicle assemblers and Tier 1 suppliers. The outcomes of this phase has concluded a competitive positioning of Egyptian suppliers in four selected product areas, a strategy to enhance future performance and an initial action plan for Tier 2 and Tier 3 suppliers
Phase 3 report aims to propose a clear vision for the Egyptian automotive industry, based upon which development strategies were identified and a feasible action plan for implementation is proposed.
Executive Summary of the Study (with focus on the future strategy)

The Egyptian automotive industry currently appears too fragile to withstand its surrounding and upcoming challenges. Few of the foreign vehicle makers have significant sunk costs in their local operations, mainly because the Egyptian market has never been large enough to justify investment in a wholly owned plant. Barriers to exit are low and assembly operations will be closed down as soon as they no longer represent the most profitable way of selling vehicles in Egypt. If this happens, Egyptian component companies will suffer tremendously, as most of them are entirely dependent on the local market for their sales. Without their big local customers, the majority of Egypts suppliers would simply disappear. Another vulnerability for Egypt is the near absence of direct investment from foreign automotive component producers. A solid base of foreign owned component plants would provide a valuable link to the global automotive industry, and would be less vulnerable to the challenges facing the rest of the sector in Egypt. The risks outlined above all relate to a common weakness: the Egyptian automotive industry is not sufficiently integrated in the global automotive supply chain through exports and foreign direct investment. The isolation of Egypts automotive industry, while contributing to its early growth, now represents the single greatest risk to its survival as current protective mechanisms disappear. Despite these risks, there are also opportunities that may allow the Egyptian automotive industry to master the transition to full liberalisation. The Middle East and North Africa (MENA) region has always been an attractive market for international vehicle makers. However, it remains a fragmented market that is approached on a country-by-country basis. In other regions of the world, integrated vehicle markets have developed within the free trade areas of the European Union, NAFTA, Mercosur and ASEAN. In each of these areas, a few countries have emerged as the hubs for assembling and supplying specific types of vehicles for the regional market. This has not happened in the MENA region, and there is potential for Egypt to assume that role and to become a regional centre for the production of certain vehicles. For Egypts bus makers, steady demand for buses in the MENA region could provide attractive export opportunities. Another opportunity for Egypt is the growth of global sourcing, as automotive companies and other buyers have intensified their efforts to search around the world for the lowest cost suppliers of various components. Egypts component companies could benefit from this, provided that they are able to provide quality products at globally competitive prices. Cost pressures are also driving many international component companies to move labour intensive production processes to low cost countries, and Egypt could benefit by positioning itself as a location for this type of investment. For each of the opportunities outlined above there is a corresponding threat. A number of countries, notably Turkey, Iran and South Africa are positioning themselves as the MENA regions vehicle assembly hubs. Many others, including Tunisia, Morocco and Abu Dhabi, are also vying for automotive investment, especially in the components sector. Other countries in the region have bus makers that represent domestic competitors to Egyptian exports. In the
global components market, Egyptian companies are competing with numerous efficient, lowcost suppliers from countries like India, Turkey and China. Competition in the global automotive industry is intense, and many other countries are seeking to exploit the very same opportunities that represent the best chances for Egypt. In order to survive the exposure to full competition, Egypts automotive industry must swiftly address the most pressing issues facing it today. Failure to do so will prevent the industry from taking advantage of the opportunities described above, and from weathering the challenges that confront it. It is no exaggeration to say that Egypts industry is at a crossroads between survival and failure. Any strategy for Egypts automotive industry should therefore not be focused on lofty goals or long term aspirations, but on the practical and immediate necessities of survival. The immediate goal for the industry is to reach a sustainable position. While it is still being shielded from full competition, the industry must be strengthened sufficiently to enable it to compete without protection. This means focusing on the issues that have the greatest impact on the industrys ability to compete, and not dwelling on other factors that, while important, have less of an influence on the industrys continued existence. The automotive industry is highly complex, and it is possible to get distracted by topics that are not fundamental to its overall performance. According to the schedule of the EU-Egypt Association Agreement, the tariff reductions affecting the automobile industry will take effect between now and 2019, when tariffs on all automotive products, including all vehicles and components, should have been removed. By 2010, the components and truck sectors will have started feeling the effects of reduced protection and tariffs on cars and buses will start to be reduced. By that time, Egypts industry should be prepared to face the open market. The development strategy for Egypts automotive industry is therefore to reach a sustainable position by 2010.
The elements of this strategy, and the vision for Egypts automotive industry, can be summarised as follows: Egypt must develop a viable vehicle assembly sector, producing for both the local and regional markets. This will require international automotive companies to select Egypt as their regional base for assembling specific vehicles and models. These companies must be convinced that it is worthwhile to really make a commitment to Egypt, and to incur the necessary investments for establishing wholly owned plants that are integrated in their global production networks. Egyptian component companies must free themselves from their dependency on the local market, including both assemblers and aftermarket. The most promising companies must move beyond their domestic status to become independent, modern and internationally active suppliers. To do so, they must be in a position to compete with suppliers around the world on the basis of quality, price and reliability. Egyptian bus companies must build upon their current skills to become more efficient and cost competitive, making Egypt a leading country in the region for bus production. Egypt must attract a diversified base of automotive component foreign direct investment on the basis of low labour costs and other advantages. These companies will bring skills and technology, further strengthening the Egyptian automotive industry and increasing its integration with the global automotive industry. They will also contribute to Egypts exports and its reputation as an automotive location.
Achieving the elements of this strategy will not be easy. It will require commitment and a concerted effort from all stakeholders in the industry. Collaboration is crucial to achieving the strategys objectives. Various parts of the industry must understand that they share the same interests and that focusing only on the benefits of their individual sector will damage the ability of the entire industry to survive. The situation faced by Egypt is by no means unique. Other countries around the world have faced similar challenges and many have responded successfully. South Africa, Turkey, Brazil Thailand, Romania and Australia are just some examples of countries that have managed the transition from protection to liberalization, and whose industries have become integrated in the global industry through trade and investment. While no other country can provide a perfect blueprint for Egypt, each of them offers practical lessons that can be applied to Egypts own efforts. By 2010, Egypt should have implemented the actions and changes necessary to achieve the goal of a sustainable industry that is able to compete without the benefit of protection. The dismantling of tariffs will undoubtedly still cause pain to some sectors, but the overall survival of the industry should not be at risk. Achieving this goal will provide a solid basis upon which to build further, by specialising and enhancing technology, increasing capacity and moving to the next level of development. This study focuses on the key issues affecting the competitiveness of Egypts automotive sector and the prerequisites for developing a sustainable industry by 2010. It outlines the actions that are necessary to meet these prerequisites and shows how other countries have overcome similar challenges. The time for action in Egypt is now, and strong leadership is required to ensure a sustainable future for Egypts automotive industry.
Contents of Reports Phase 0 Global Review

1 2 3 Introduction and Objectives Part A: Global Automotive Industry Review Part B: Egyptian Automotive Sector 1 2 26
Phase 1 - Assembly
1 2 3 4 5 Introduction Characteristics of the Egyptian Vehicle Assembly Industry Vehicle Assembly Industry Summary Future Vehicle Industry Scenario Appendix 2: Strategic Map of the Egyptian Auto Manufacturing Industry 3 4 35 37 40
Phase 2 - Components
1 2 3 4 5 6 Introduction 3 Current State of the Egyptian Automotive Components Industry 4 Likely Development of the Egyptian Automotive Components Industry 12 International Industry Developments 15 Implications and Opportunities for the Egyptian Automotive Components Industry 28 Summary and Next Steps 32
Appendix 1 Analysis of Components with Potential for Egypt Appendix 2 Egyptian component company and international company interviews
Phase 3 Development Strategy and Action Plan

1 2 3 4 5 6 7 8 9 Introduction Objective 1: Attracting Foreign Direct Investment Objective 2: Increasing Exports Objective 3: Modernise Egyptian Industry Impacts Action Plan Timing Beyond 2010 Next Steps 7 13 24 34 42 43 48 51 53
Phase 0 - Global Automotive & Egyptian Industry Review
January 2005 This report contains 59 pages
Industrial Modernisation Centre Egypt Strategic Study to Upgrade Egypt's Auto Sector Phase 0 - Global Automotive & Egyptian Industry Review
Contents
1 2
2.1 2.2 2.3 2.3.1 2.4 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 2.4.6 2.5 2.5.1 2.5.2 2.5.3 2.6 2.7 2.7.1 2.7.2 2.7.3 2.7.4 2.7.5 2.8 2.8.1 2.8.2 2.9 2.9.1 2.9.2 2.9.3 2.9.4 2.9.5 2.9.6 2.9.7 2.9.8 2.10 2.10.1 2.10.2 2.10.3 2.11
Introduction and Objectives Part A: Global Automotive Industry Review

Summary Introduction: The Global Industry Context Objectives of Part A Global Status Supply vs. Demand Drivers for Change New Entrants Buyers and Customers Substitutes Suppliers Competition Business Environment Dynamics of Key Regional Markets North America Europe Asia Pacific Refocusing Global Challenges Global Supply Industry Vehicle Assemblers / OEMs Tier 1 Tier 2 Tier 3 Tier 4 Tier Two Players Components Industry Development Opportunities Tier 2 players Some Example Countries Exporting Components Poland Hungary Morocco Turkey Romania Czech Republic Slovakia Tunisia New Global Order Tier 1 Tier 2 Sub Assembly Development Trends Implications and Conclusions
1 2
2 3 3 3 4 4 5 5 6 6 7 7 8 8 9 9 11 11 11 12 12 12 13 13 14 14 15 16 17 18 19 20 21 22 23 23 24 24 25
3
3.1 3.2 3.3 3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 3.3.7.1 3.3.7.2 3.3.8 3.3.9 3.4 3.4.1 3.4.2 3.4.3 3.5 3.5.1 3.5.2 3.5.3 3.5.4 3.5.5 3.6 3.6.1 3.6.2
3.6.3
Part B: Egyptian Automotive Sector

Summary Introduction: The Challenge for Egypt Objectives of Part B Automotive Industry Overview Introduction Demand Supply Assembly Industry Structure and Key players Component Industry Structure and Key Players Regulatory Background International Trade Agreements The EU-Egypt Association Agreement Regional Free Trade Agreements Policies Investment Incentives Market Trends Vehicle Production Volume (1997-2003) Vehicle Sales Volume (1997-2003) Vehicle Export Volume (1997-2003) Segment Analysis Passenger Cars Sector Characteristics Market Dynamics Market Share by Brand Major Drivers Surrounding Environment Segment Analysis Buses Sector Characteristics Market Dynamics Market Share by Brand Surrounding Environment - Buses Segment Analysis Light Commercial Vehicles Sector Characteristics Market Dynamics Market Share by Brand Segment Analysis Medium & Heavy Commercial Vehicles Sector Characteristics Market Dynamics Market Share by Brand Surrounding Environment Segment Analysis Components Sector Characteristics Market Dynamics Surrounding Environment Summary and Preliminary Findings
26
26 27 27 27 28 29 31 32 34 35 35 36 36 36 37 37 38 38 40 40 41 41 42 42 43 43 43 46 46 47 47 47 48 48 48 48 49 50 50 50 51 52 52
3.6.4 3.7 3.7.1 3.7.2 3.7.3 3.8 3.8.1 3.8.2 3.8.3 3.8.4 3.9 3.9.1 3.9.2 3.9.3 3.10
II
Index of figures and tables

Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12: Figure 13: Figure 14: Figure 15: Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Table 11: Table 12: Table 13: Table 14: Table 15: Five Forces Model of the Developing Global Automotive Industry Share of Production by Product Actual Production by Product (1997-2003) Total Sales by Product (1997-2003) Vehicle Export Volume (1997-2003) Levels of Imports (CBU units), Local Assembly (CKD units) & Exports 2001-2003) Share of Local Assembly of CKD units, by Brand Levels of Imports (CBU units) Local Assembly (CKD units) & Exports 2001-2003) Exports of Egyptian Buses, 2003 Share of Local Assembly of CKD units, by Brand Levels of Imports (CBU units), Local Assembly (CKD units) & Exports (2001-2003) Market Share by Brand Light Commercial Vehicles Levels of Imports (CBU units), Local Assembly (CKD units & Exports (2001-2003) Market Share by Brand Egyptian Component Exports Excess installed Manufacturing Capacity, 2003 Value-chain structure of the global automotive industry Sub Assembly Development Trends Demand for Vehicles Range of Products, Installed Manufacturing Capacity & Actual Production, 2003 Domestically Assembled and Imported Brands in Egypt, by Vehicle Type Examples of Automotive Component Companies in Egypt Percent of Local Content and the related reduction in Tariff Major Vehicle Export Destination Countries (1997-2003) Levels of Imports (CBU units), Local Assembly (CKD units) & Exports (2001-2003) Custom Duties and Sales Tax-Passenger Cars Levels of Imports (CBU units), Local Assembly (CKD units & Exports (2001-2003 Export Volume by Destination county - Buses Custom Duties and Sales Tax Levels of Imports (CBU units), Assembly (CKD units) & Exports 2001-2003) 4 30 37 38 40 41 42 44 45 46 47 48 49 50 52 3 11 25 28 30 32 33 34 39 41 43 44 45 46 47
Table 16: Table 17: Table 18:
Levels of Imports (CBU units), Local Assembly (CKD units) & Exports (2001-2003) Custom Duties and Sales Tax Medium & Heavy Commercial Vehicles Egyptian Automotive Components Markets (in US$ millions)
49 50 51
II
This KPMG Deutsche Treuhand-Gesellschaft AG report is the product of an assignment commissioned by the Industrial Modernisation Centre Egypt. This study may be quoted and/or used as a reference conditional upon citation of IMC. We have indicated within this report the sources of the information provided. We have not sought to independently verify those sources unless otherwise noted within the report.
III
Introduction and Objectives
This report summarises the results of Phase 0 of the IMCs Strategic Study to Upgrade the Egyptian Automotive Sector. The initial objective of this first phase of work is to identify worldwide trends and changes in the overall automotive industry (both for vehicle manufacturing and assembly as well as components sourcing and manufacturing) that are most relevant to the development of a strategy to upgrade Egypts own automotive sector. The second objective of Phase 0 is to develop an initial understanding of the Egyptian automotive industry, which will serve as the basis for more in-depth analysis in subsequent phases of the project. This report is therefore structured in two parts: A. Global Automotive Industry Review Part A provides an overview of significant developments in the global automotive industry that are shaping the way the industry operates, both for vehicle producers and assemblers as well as the various tiers of component companies that supply them. The automotive industry is truly global in nature, characterized by a multitude of linkages among operations and companies located throughout the world. If the Government of Egypts objective is for its automotive industry to be integrated globally, it is essential to develop an understanding of global dynamics to determine how Egypts industry can become part of the international structure. B. Egyptian Automotive Sector Part B of the report provides an initial overview of the Egyptian automotive industry, including vehicle assembly and components. The report covers such aspects as the structure of the industry, including its size, participants and other basic parameters. This can be defined as a static analysis, based on secondary research using a variety of sources identified by KPMG. This initial overview is therefore not intended as a detailed assessment, but serves a foundation for the more in-depth analysis of the different segments of the industry in Phases 1 and 2 of the project.
2
2.1
Part A: Global Automotive Industry Review

Summary Introduction: The Global Industry Context
In recent years, the industry has been characterized by the continued consolidation of Original Equipment Manufacturers (OEMs) in response to overcapacity and profitability concerns. Although the number of OEMs has decreased to less than twenty major companies, the industry is still plagued by overcapacities and intense price competition. As a result, the worlds automakers have been forced to cut costs, streamline processes and focus on maintaining margins to remain profitable. Simultaneously, consumers are demanding ever-higher levels of quality, safety and functionality. The OEMs have responded and now use these attributes to differentiate their products from those of their competitors. However, the emphasis on product quality can also be explained by the potentially disastrous effects of quality problems on an OEMs or suppliers sales, image and legal liability. The industry has also become more geographically mobile, as OEMs expand outside of their traditional bases in order to supply international markets and seek cost advantages in lower cost locations. Despite the significant capital expenditures required to establish new production facilities, automakers are willing to invest heavily in markets they consider to be of strategic importance to their future performance. Countries such as Brazil, Mexico or the Czech Republic are clear examples of this increased mobility and have all attracted large amounts of automotive investment. Most recently, China has been the primary beneficiary of the drive to exploit new markets and cost differentials, and the country has captured massive investment from all major OEMs. At the same time, OEMs are also quicker than ever to reverse previous investment decisions, and to close those operations that are no longer considered to be cost-competitive or of strategic importance. The same challenges and responses have been passed through to the various levels of automotive industry suppliers, from the large tier 1 suppliers through to other suppliers as well as providers of raw materials and manufacturing services. The industry as a whole has become increasingly driven by the need to reduce costs and increase efficiency, while enhancing quality and seeking proximity to key markets. These changes have also been reflected in the industrys choice of locations for production and other operations. Both OEMs and suppliers have become more critical in their evaluation of potential locations, and are extremely sensitive to labour disputes, political instability, trade barriers, regulatory burdens, exchange rate fluctuations and other factors that can impact the profitability and quality of their products. Nevertheless, the number of potential locations for automotive operations has grown significantly over the past few years. Numerous countries and regions around the world have responded to the industrys requirements and automotive companies have a larger choice of locations for their investments than ever before. Nevertheless, the primary driving factor behind any automotive investment decision continues to market size or potential, as OEMs seek to diversify their revenue base outside of traditional European or North American markets, while their suppliers are compelled to follow their customers into new regions and countries.
2.2
Objectives of Part A
For Egypt to play a more substantial role as a growing manufacturing and assembly base for vehicles and components, it is important that key industry players and policy makers have a clear understanding of the dynamics, trends, regulatory environment and other aspects of the international markets in which they operate. In this way, strengths and weaknesses can be recognised, business opportunities can be identified, and actions taken to address issues, overcome weaknesses, and support & exploit strengths, to grow the industry and increase its contribution to the Egyptian economy. The objectives of this global industry review are therefore to: Review the automotive markets and industries both globally and in the Europe, Middle East and Africa (EMEA) region, highlighting key trends and the key drivers for change. Examine the changing patterns of business in the global automotive industry (for example, manufacturing and sourcing strategies). Consider developing opportunities within the components sector with potential implications for Egypts own automotive industry.
2.3
2.3.1
Global Status
Supply vs. Demand
Globally, there are about 650 million vehicles in operation. In 2002, sales of cars were some 42 million units plus a further 17.5 million commercial vehicles and production was just over 59 million. In 2003, the provisional production figures were 60.6 million units in total. It is conventional wisdom that manufacturers have some 20-25% excess installed manufacturing capacity globally. Table 1 indicates that the excess installed manufacturing capacity is widely distributed and the situation is further confused by the rapid growth in new capacity in China. Europe Japan: North America: Global: Table 1: +25% +45% +20% +20-25% Excess installed Manufacturing Capacity, 2003
The components industry is considered to have perhaps 30-35% excess installed manufacturing capacity, with much of that excess being for simple, low cost components. China is difficult to measure in terms of supply or demand at present for both vehicles and components. As a vehicle market it is unsophisticated but with a significant demand for official cars. It currently lacks a well-developed infrastructure to support vehicle operations and the
legal framework too is unsophisticated. It is seen as a low cost producer of components, but may be part of a physically long supply chain. The Indian automotive manufacturing industry should not be ignored; it supplies a domestic market and is already supplying built up cars and commercial vehicles to the European Union (EU). There is also an established and growing components industry.!
2.4
Drivers for Change
The paradigm in Table 2.2 presents a simple Porters Five Forces model1 of the developing
global automotive industry.

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Figure 1:
Five Forces Model of the Developing Global Automotive Industry
2.4.1
New Entrants
There are principally two types of new entrant to the industry, who are influencing its future development and in particular bringing pressures to bear on existing players. These are as follows: New Low Cost Producers; OEMs have taken manufacturing/assembly to low cost countries and Tier 1 suppliers have, in some cases, also moved to low cost production countries or are sourcing from Tier 2 players in those countries. Both these sourcing actions are encouraging and promoting a range of new low cost suppliers to enter the market.
Michael Porter, Competitive Strategy, 1980, Harvard University Press
New Component Suppliers; these are primarily Tier 2 suppliers expanding their range of products by taking on outsourcing from (and working with) the Tier 1 players. Some of these are new Tier 2 players, others are existing suppliers expanding their manufacturing presence by investing in new lower cost bases.
2.4.2
Buyers and Customers
Buyers and customers are also changing their buying and sourcing criteria, putting pressure on industry participants in the following ways: High Expectations; manufacturers and dealers have driven up customer expectations, sometimes to unrealistic levels, through advertising and other promises. This is increasing the levels of quality, complexity and price competitiveness required from suppliers. Great Selectivity; customers are demanding exactly the product they want now and will not always accept a close match. This is creating problems in terms of inventory and manufacturing planning. Known Motoring Cost; until the last few years, there has been relatively little information available on the cost of vehicle operation, but manufacturers and independent sources now provide such data and prospective buyers look for low cost of operation as well as their other demands. This increases the pressure on component whole-life cost including not only initial purchase price but also maintenance and servicing costs. Suppliers face increasing pressure to underwrite the cost of their parts for life guaranteeing reliability and part life. Legislation; particularly consumer protection has become increasingly onerous and is creating issues to be resolved for both manufacturers and for dealers. Parts suppliers into the increasingly litigious US market, for example, are facing increasing product liability issues with the associated costs of recall, product replacement guarantees, legal insurance and other associated factors. Niche Products; OEMs have started to develop products and services to focus on specific market segments to escape from the claim of providing generic or commodity products. Part may be achieved by product and part by the associated soft services. This has also increased the number of different parts, decreasing average volumes and life-cycles decreasing in turn, economies of scale.
2.4.3
Substitutes
The overall demand for vehicles is also being influenced by an increasing range of active policies to replace the use of cars and other road transport by other means: Integrated Transport; road congestion in many urban areas is reaching crisis point so there are increasing moves to enhance public transport to reduce the need for private cars. New Ways of Working; video conferencing, mobile phones, and email are increasingly being used by businesses, and now by private individuals, to reduce the amount of driving required and so cut demand for cars. Restrictions on Uses; in some markets legislation or financial penalties have been introduced to seek to limit or reduce the use of cars, particularly private cars. Examples include: Singapores variable tolling system and the introduction of Congestion Charging in London. Singapore has a traffic charging system based on vehicle use and the congestion levels on the island. Thus, to use a car during rush hour in the morning or evening is more expensive than using a car in an off peak period, for example, late at night. Charging is electronic with
gantry based sensors and drivers buy in advance mileage use which is in the form of a magnetic card. London Congestion Charging is based on a central congestion zone in London, clearly marked on the roads. Car registrations are recorded automatically as they enter the congestion zones. A charge is paid either on a daily basis, booked by phone or bought through a local shop, or on a year/season ticket basis. There are zero charge periods during the night. In both cases there are sanctions against drivers/vehicle owners if they do not pay the charges.
2.4.4
Suppliers
The very structure of the supplier value chain is changing in a number of important ways that have direct and significant impact on the way in which Egypts own supply base could develop: Multiple Tiering; the last 5-10 years have seen OEMs seek to reduce significantly the number of suppliers they use and to enhance the responsibility given to Tier 1 suppliers so they now supply subsystems, may help to install them, and may be involved in product development and the management of Tier 2 suppliers. Globalised Tier 1 suppliers; to be a Tier 1 supplier, the components player has to be able to operate to the same quality and systems in North America, Europe and Asia and to be able to support their OEMs as required. Equally, they have to be able to manage and coordinate Tier 2 suppliers. Quality and Low Cost Tier 2 suppliers; while OEMs put considerable pressure on Tier 1 suppliers to reduce the cost of subsystems, the Tier 1 players increasingly pass on that pressure to the Tier 2 players, so they, in turn have to match the quality required and be able to reduce prices. Supply Chain / Logistics; given the demands to reduce cost and inventories, as well as to source extensively, there is growing pressure on supply chain and logistics both for reliable and cost effective sub assembly and component supply and in the distribution of finished vehicles. Specialist companies are taking over total logistics management on behalf of the OEMs. Sub-System / Vehicle Builders; OEMs are increasingly buying in sub systems such as engine management systems or complete dashboards or interior trims, and having the Tier 1 suppliers fit those sub systems. The Tier 1 suppliers are increasingly becoming, in reality, vehicle assemblers on behalf of the OEMs. Outsourcing; across the whole industry, there is a growing move to outsourcing, not merely to reduce overall cost, but also to ensure that the OEMs are achieving access to the most up to date technologies and ideas. Outsourcing is about far more than merely reducing cost. Geographically Mobile; logistics and supply chain management and the opening of borders mean that OEMs and Tier 1 players are able to look to wider sourcing bases and to look to source a growing proportion of their needs from countries that are also markets for the finished product.
2.4.5
Competition
The very nature of competition in the auto sector is also changing in often subtle ways, often led by technological changes, financial pressures and other factors, which drive changes in one or
two sophisticated markets first, but which spread quickly to other markets as global players homogenise their worldwide strategies and polices: New Channels to Market; in North America, Japan and the old members of the EU there is increased pressure to develop alternative channels to market, particularly the use of the Internet. This changes the dynamics of the marketplace. Volume and Profit Optimisation; manufacturer philosophy is moving from being volume oriented to one of profitability and value added, especially now that there is such a huge excess installed manufacturing capacity. Brand Focus; competition and the range of value added support services, as well as increased product reliability means OEMs are seeking to expand the product scope to embrace finance, warranty, insurance and other soft services. Total Product Provision; the more of the total product that can be provided, the less opportunity there is for other players to seek to sell their product proposition and so take part of the dwindling profit opportunities associated with the vehicle.
2.4.6
Business Environment
A range of other factors in the wider business environment are also affecting the auto industry. Although less direct or sector specific in their influence, they are important to understand and take account of in formulating an overall strategy for the sector: Technology; continues to advance and either offers technological competitive advantage or alternative materials or manufacturing methods to reduce cost. Political; the global automotive industry is considered far too important by politicians to be left to the professionals. Hence, there are continuing tradeoffs between OEMs and Tier 1 players and national governments over grants to support the building of new factories or to offer indirect support to retain plants that might otherwise justify closure. Economics; a healthy automotive industry, by its sheer size, can mean a healthy economy, or at least an industry; equally, the automotive industry is seen, globally, as a source of revenue to governments. Controlled Use Vehicles; increasingly the ethos is emerging that the number of units in operation may need to be controlled to contain further investment in roads and facilities for the motor vehicle. Various schemes are being tested worldwide. Environmental; the car is accepted as being a threat to the environment, however emissions can now be reduced significantly but in turn vehicles have to be maintained in good condition mechanically. Similarly, there are issues beginning to arise of disposal of vehicles and their cost effective recycling as manifested in the EUs End of Life Vehicle (ELV) rules.
2.5
Dynamics of Key Regional Markets
In the following paragraphs we highlight some of the specific issues to be addressed in the principal global automotive blocs both in terms of manufacturing activities as well as market developments.
2.5.1
North America
Government funded economic growth; the USA is, under George W Bush, enjoying a government-funded period of economic growth with massive borrowings from Japan and China. Given the escalation in oil prices, it will be important to watch the rate of growth in the future. Growing penetration by imports; traditionally North America used to buy domestic product; no longer. The Japanese have taken a significant slice of the market and are both challenging the traditional strongholds of the indigenous players pickups and 4x4s as well as manufacturing the product in North America. Japanese product is considered by many to be more interesting and tailored to customer needs than the jelly-mould product built in the millions by the big three domestic producers. Japanese challenge of Big 3 manufacturers; such has been the success of the Japanese manufactures in North America that they are regarded as indigenous by many customers and have started to outsell the traditional domestic producers. Zero Rate Finance; Ford and General Motors in particular moved into a costly zero rate finance strategy whereby customers could have up to five years zero rate finance with minimal deposit. Many customers accepted it; the problem is to move out of the vicious circle as those buyers are locked in unless they can find an equivalent package. Mature market new product demands; sophisticated buyers are looking for product that will meet their individual needs; this has been satisfied more effectively by the Japanese and by other importers. New Low Cost Plants; the big three domestic producers have traditionally focused their manufacturing capacity around Michigan and the area is strongly unionised with an aging workforce. New players have opened up primarily in the Southeastern part of the country where the work force may be younger and non unionised and there are cost advantages relative to other US locations.
2.5.2
Europe
Has been at / close to recession; although Germany has shown some signs of recovery in recent months, any economic recovery could be short lived. Overall, with the ten accession members to the EU some recovery might be expected. Single Currency and price transparency; the introduction of the euro means that the market within the EU has expanded considerably so there is a small, but growing, move to buy vehicles in lower cost markets. Price transparency and various organisations showing regular price analysis means that potential buyers can shop around with confidence and over time force down new car prices. Accession of 10 new low cost producers / markets; this should cause a growth in markets with investment crossing borders. However, a significant part of the expansion might be absorbed by used cars being moved across borders. Block Exemption implications; the EU has introduced changes to competition law to weaken the stranglehold that OEMs have had on the marketplace. This in turn may have an impact on new car prices, service and the provision of replacement parts.
2.5.3
Asia Pacific
This region has the potential for significant growth. Asia is undoubtedly the area for medium term growth particularly in China, Thailand and India among others. China must also be seen as a long-term growth opportunity. Several factors are influencing this growth, including: Different levels of aftermarket infrastructure; different markets have different stages of economic development and the aftermarket/service support must be considered to be weak in some markets. Special case of China and India; potentially the two largest automotive markets, the two countries are growing rapidly but both lack the necessary supporting industries in terms of market support and indeed, the roads infrastructure. Credit availability and financial sophistication; new car acquisition is typically funded by third party borrowings. While the funds may be available, it is necessary to have strong consumer credit legislation and the mechanisms in place to be able to collect payments. Such infrastructure is weak, and has been practically non-existent in China. Manufacturer migration; the global OEMs are now all represented in China, but as yet the profitability is not there. That could take some time and, in the meantime, is a drain on resources elsewhere. Consumer Legislation ; the consumer ethos for buying expensive consumer capital goods does not really exist yet, particularly in China, so there could still be some rough patches until the ethos has changed and economic realism has been accepted. Business Ethos; there is continuing concern regarding, among other issues, intellectual property, and there have been cases of copying and breaking copyright rules. As such, some high technology organisations have been reticent about moving to the area.
2.6
Refocusing Global Challenges
The OEMs are constantly seeking ways of reducing cost and increasing competitiveness; they are also seeking to increase profitability. They use Tier 1 and through them Tier 2 component suppliers to assist them in that task. An increasing amount of the task of developing and manufacturing cars is falling to the suppliers and their roles will become still more important. Strategically, there is a migration of component suppliers from high cost countries to low cost of production countries. Specifically, there are a number of trends that are becoming apparent in terms of global sourcing: Force profitability back into cars; for the last five years, there has been relatively little profitability in cars, particularly in North America and Europe. Reduction of zero rate finance deals, and the resolution of pensions and healthcare liabilities attached to cars in North America will help as will the refocus of product to meet niche demands. Reduce or relocate manufacturing capacity; excess capacity is difficult to close, particularly in the EU, USA and Japan where trade unions may have considerable power and where the costs of redundancy could be high. However, OEMs continue to seek to move plants to either low cost production locations, or closer to their markets. Focus production towards growing market locations; there has been growth in manufacturing capacity in the Tiger economies of the Far East while production or capacity
have been reduced in the traditional manufacturing countries. This has to be seen as a longterm strategy rather than a short-term action. Supply base reduction; is growing as OEMs seek to reduce cost and enhance quality by reducing the number of Tier 1 suppliers they use and, at the same time, acquire ever larger and more complex sub systems. This is leading in turn to the growth of supply hubs. Outsource / Form strategic alliances; a critical route to cost reduction is through the creation of outsourcing programmes, working with the most technologically advanced organisations or those that can offer product or manufacturing advantage for the OEMs. Similarly, more complex strategic alliances may be formed for the OEMs or higher tier players to be able to gain advantage from the Tier 1 and Tier 2 players. Component / sub-systems sourcing; to build flexibility, enhance quality and to speed up bringing new products and ideas to market, the OEMs are increasingly seeking to source sub systems and components both from quality suppliers and from low cost operators. At the same time, they seek to build reciprocal arrangements with producer countries that may also be markets for the finished product. Migration to low cost, quality producers; has been a phenomenon for several years now, but, coupled with the issues reviewed previously, there is a continuous pressure for quality enhancement, reliability and reduced cost. Become a brand and systems operator to protect total integrity; a widening and sharing of sub systems and components means that OEM products are becoming ever more homogenous; as a result, manufacturers seek to protect their product identity and integrity through branding. Similarly, if the OEM outsources more of the total manufacturing and assembly task, so their own flexibility may be enhanced. Japanese product re-positioning; traditionally the Japanese OEMs have focused on producing high quality, value added cars and smaller vehicles. However, over the last few years they have moved into luxury products, commonly sourced in Japan, so they can compete with the traditional luxury car producers and generate significant unit margins. They are now invading the last bastion of the US domestic players the 4x4 and luxury pickup markets. These products are selling equally well in Europe. Extending brands to enhance profitability; it may be significant that most of the global manufacturers have bought out their partners in vehicle finance and now manage their own financial services companies. The magnitude of the parent companies means they are frequently able to obtain a banking licence and so be able to access global cheap money. Similarly, they have introduced branded insurance and warranty products and have the benefit that they, through their dealers, know who are the buyers and can approach them. Developing new platform economics & new products; the experience of Nissan and Renault in sharing platform technology has paid off handsomely and it must be assumed that other players may seek to go down the same route. However, the reduction in product life cycles means that some of these benefits may be mitigated. It would appear likely that OEMs will seek to maximise on platform technology economics, merely re-skinning the exterior to develop niche products. Product quality; global challenges demand an ever increasing product quality. Without quality, the OEM is dead is not an idle threat. The demand for that absolute quality is passed to the first and second tier suppliers as well and it will become ever more important.
Quite simply, any organisation seeking to work with the OEMs and Tier 1 suppliers needs to be able to offer quality, reliability, stability and then at attractive and sustainable low costs.
10
2.7
Global Supply Industry
The global supply industry is generally characterised by a value chain with multiple-tiering (see Table 2 below). Each of these tiers, from overall vehicle assembler (or OEM), through each tier of the component and system supply faces its own different set of issues. In this section, we review each of these tiers, and their respective trends, dynamics, and issues.
G eogr aphi c! r each Gl obal Gl obal
V al chai posi i ue! n! t on V ehi e! cl assem bl ! er ( EM ) O Ti ! suppler er 1! i
Pr oduct Car ! s,LCV ,Bus! ! and! uck Tr M aj ! or syst s! em ( g.ant -ock/ot ! ake! e. ! il t albr syst s! em and! op! st cont ol r s) Sub assem bles! i and! com pl ex! com ponent s! ( g.br e. ! ake! subassem bles) i Basi com ponent c! s! ( g!yr ! t i ! ake! e. t es,bat eres,br pads) Raw ! at i s!e. ! eel!i ngs, m eral ( g.st ,lni ! hydr i fui aulc!l ds)
Ti ! suppler er 2! i
Regi onal
Ti ! suppler er 3! i Ti ! suppler er4! i
N at onal i I er i nt natonal
Table 2:
Value-chain structure of the global automotive industry
2.7.1

Vehicle Assemblers / OEMs
The highest tier in the supply chain is characterised by two key factors: Operate Globally; assembling/manufacturing a similar or the same products in a number of locations, or sharing design and common components and brands globally with an overarching business strategy. Common Systems, buying subsystems: reducing number of suppliers; to enhance efficiency and maximise the economics of scale they seek to operate to common standards globally and purchase from ever larger, but a reducing number of Tier 1 suppliers and a negligible number of Tier 2 suppliers. Quality and reliability are paramount, as is supply chain management to keep plants functioning.
2.7.2
Tier 1
These are the global players: they work directly with the OEMs to supply subsystems and to manage, on behalf of the OEMs, the Tier 2 players. To be a Tier 1 player the organisation requires, in practice, a multi billion dollar turnover and will be active globally in the countries where its OEM clients operate. While these players may supply more than one OEM, their systems will be integrated with, or at a minimum, totally compatible with their OEM clients. Two key factors characterise their future development:
11
Design and development; an increasing burden of design and development, often on a speculative basis, is being taken over by the Tier 1 suppliers. It means they have to have a close relationship with their clients, to have a strong design capability and the ability to be able to source quickly and cost effectively new designs once accepted by the OEMs. There is no option but to operate globally; even among Tier 1 players, there is a steady rationalisation to form still larger operations.
2.7.3
Tier 2
The Tier 2 players need to be able to offer increased added value and to provide subsystems for the Tier 1 players that build the larger subsystems for the OEMs. The successful Tier 2 players are often substantial businesses in their own right. The strongest characteristic of the Tier 2 suppliers is that they are regional players and focus on developing and manufacturing smaller sub-assemblies that will, in turn, be built into larger assemblies by the Tier 1 players, which will, in turn, coordinate the output of a number of Tier 2 operators. A key role of the Tier 2 players is to support their Tier 1 clients; if they fail, the Tier 2 players may have problems too. The Tier 2 is probably the most dynamic sector of the industry as it is here that many smaller changes and new product ideas/reengineering takes place in support of the higher Tier 1 activities. Historically, the relationship between Tier 1 and Tier 2 players has been an industry weakness they have tended to be adversaries rather than partners (with Tier 1s simply passing on the pressure they get from the OEM to the Tier 2 suppliers, rather than working with them to solve the problems). Tier 2 offers the greatest potential for growth in that Tier 1 players are seeking new and innovative ways of cost reduction and are also seeking to outsource to players operating in lower cost countries. However, reliability, quality and stability are key issues as is the ability to be supportive of the Tier 1.
2.7.4
Tier 3
Tier 3 players generally consist of a wide range of suppliers who supply the basic, relatively undifferentiated automotive components. They usually compete heavily on price, often being build to print i.e. responding to the design specifications of their customers, rather than differentiating on proprietary design of their own. Tier 3 component suppliers are often more nationally based being a low cost local source of components for local assembly customers. As these components are often customer specified (to customer design), they can readily be resourced to local industry i.e. to meet local content requirements. This is a double edged sword in that the precise ease by which these components can be sourced in different countries, means that export to other assembly customers may be limited, unless some proprietary design, or combination of internationally competitive cost/quality can be achieved.
2.7.5
Tier 4
Tier 4 components are generally commodity suppliers and raw materials, provided not only to the automotive sector, but a wide range of manufacturing industries, across a range of countries
12
or regions. The majority of companies in this sector have large economies of scale and supply high volumes of such raw materials, at undifferentiated, commodity prices on an international scale. As these components & raw materials are not specific to the automotive industry they are not included in the scope of this project. Nevertheless, access to these components and materials are important to the development of the industry players higher up the value chain, as well as to many of the suppliers.
2.8
Tier Two Players
Given the critical importance of the Tier 2 level for the strategic development of Egypts own supply sector, we review their role and the strategic developments in the sector in more detail below, then highlight some of the development opportunities that may be considered.
2.8.1
Components Industry
The components industry is migrating from high cost to low cost manufacturing countries but this is in part dependent upon the support services especially logistics and relative proximity to the Tier 1 players hub or to the plant where the products or sub systems will be utilised. The cost reduction obtained through moving from a higher cost of manufacture location to a lower cost of manufacture must not be absorbed in logistics costs. Similarly, there must be a careful risk assessment to ensure the move to a low cost of production area will not compromise the supply chain through any loss of flexibility, risk of logistics failure or reduction in quality. Tier 1 suppliers are involved in building subsystems, product design and management of Tier 2 suppliers. Historically, some Tier 2 operators have dealt directly with manufacturers; that is rarely possible under new manufacturing regimes and it can be counterproductive if Tier 2 players seek to bypass the higher levels in the supply chain. Some of the most successful Tier 2 players have sought to seize product development initiative and offer new and innovative solutions to their Tier 1 operators. An issue in the past has been the ability of the Tier 2 player to bring any successful innovation to the volume production required by the ultimate OEM, if the product is approved. Within the field of stability Tier 2 players in the UK and Europe have sought to capitalise on their geographic, economic and cultural similarities with their clients. Any new players seeking to enter the market on a prolonged and profitable basis will need to follow the same strategy and to build those relationships over time. Strategically there are ever increasing opportunities for lower cost providers to supply EU manufacturers as Tier 2 players. With the expansion of the EU on 1 May 2004, it must be assumed that costs in many of the accession countries will begin to rise as they become integrated into the EU and have to accept policies for health and safety, social charges and experience overall cost escalation. The Tier 1 players will, in turn seek to download part of their tasks to the current Tier 2 players who, in turn will seek to outsource away from the accession countries to new, reliable and stable lower cost producer countries.
13
2.8.2
Development Opportunities Tier 2 players
To be able to take advantage of the development opportunities that are opening up for new Tier 2 players, a number of critical issues will have to be taken on board and resolved. The OEMs and Tier 1 players could be considered to be playing hardball without any protection. New Tier 2 players will be expected to follow those same rules and will not be given any special treatment; the industry is too integrated and too competitive. To take advantage of the potential opportunities would-be Tier 2 players will need to examine a number of strategic issues. The principal ones are summarised in the following paragraphs. It will be critical to integrate systems with Tier 1 players simply to have the necessary information flows, production requirements and to be able to operate as an overall integrated unit. While this may mean an investment in new systems, and possibly new personnel, it is a critical step and cannot be avoided. Although potential new Tier 2 players may operate in countries where costs are currently low, it will be important to ensure those costs will remain competitive over time. That will mean investing in capital equipment and increasing the productivity of labour both on a continuing basis as OEMs and Tier 1 players will seek ongoing price reductions. For a sustainable future, any potential Tier 2 supplier needs to focus on value added components and sub systems rather than simply being able to produce the cheapest. As such they may need to form their own alliances to be able to bring together components and build subsystems as for example has been done with exhaust systems in South Africa. The higher the value added in a component or subsystem, the further it can be transported and still be competitive. The ideal setup for Tier 1 or Tier 2 players is to be able to build flexibility, quality and proximity to OEMs as positive benefits; however, this can be countered in a location that is more distant from the customer, by having the supply chain and logistics organised and resolved and providing the appropriate type/value added of components or subsystems for them to be attractive to the higher level in the supply chain. The aspiring Tier 2 player needs, in turn, to develop their own strategic alliances be they product and/or geographical to be able to provide the most attractive proposition to the supply chain. Similarly, the Tier 2 player needs to seek ideas to offer to Tier 1 players and the manufacturers to establish their credibility, even if those ideas are further refined further up the supply chain. It is also important to have the ability to bring ideas to market, in volume, quickly To summarise the situation, the potential Tier 2 supplier must seek from day one to move from offering a cost advantage which may not be sustainable over time to offering a value added relationship that can be evolved to take account of changing requirements and cost relativities.
2.9
Some Example Countries Exporting Components
In the following paragraphs the report identifies the component and sub system exports of a cross section of countries that have generated automotive components industries of their own
14
and export to the EU. (All export figures are for the year 2002 these being the latest currently available for all countries on a comparable basis).
2.9.1
M ar ket G er any m Ial t y Fr ance Bel um gi Ot s her Tot al
Poland
V al ue $629! ilon m li 167 141 76 381 $1. 394! li bilon Type Som e!ocus! f on dashboar ! ds, exhaustsyst s; ! em br ake! syst s! em and com ponent ! s, shock! absor s, ber ! som e! desi gn
Source: UN World Trade Statistics, 2002
Poland has developed a $1.3 billion components export industry with more than half of the exports going to Germany. However, it exports widely across the EU. Poland is now building a motor manufacturing capability to take advantage of a lower cost base than its near neighbours to the west. Poland in turn may become a significant importer of sub systems.
Sw eden
$46, 345, 000

Russi Feder i an! at on N et l her ands UK
$21, 060, 000
$18, 198, 000

G er any m
$40, 586, 000

Bel um gi $75, 989, 000 Fr ance
Pol and
U kr ne ai Czech! Rep.
$628, 763, 008

H ungar y
$22, 754, 000
$140, 822, 000
$51, 887, 000 $37, 521, 000
Spai n $41, 890, 000
I al t y
$166, 972, 000
W or d! 394, l $1, 440, 960
15
2.9.2
M ar ket G er any m U SA
Hungary
V al ue $543 138 72 63 337 $1. 153! li bilon Type Focus! sub on! assem bl y! i udi m ot s; ncl ng! or ! br ng aki syst s;st i em ! eerng! and! engi ne m anagem ent ! syst s em
U nied! ngdom t Ki Aust i ra Ot s her Tot al
Hungary has a $1.2 billion components export industry with half its exports going to Germany but with significant exports to other markets. It will be noted that a significant part of those exports must be considered to be value added sub systems.
U SA
$138, 431, 008
na $12, 629, 000 Chi
I an r
Japan
$6, 957, 000
$6, 057, 000
A ust ala! r i
$9, 536, 000

Sw eden
$6, 939, 000

UK
Russi Feder i an! at on
$72, 246, 000

G er any m 620, 032 N et l her ands $542, Pol and
$8, 283, 000
$43, 549, 000

Bel um gi
$32, 679, 000

Sl ovaki a
$49, 523, 000

Fr ance
Czech! Rep.
$27, 803, 000

A ust i ra
$13, 228, 000
$31, 805, 000
$63, 177, 000
H ungar y
Spai n
$12, 968, 000
I al t y
$29, 156, 000
W or d! 152, l $1, 913, 024
16
2.9.3
M ar ket Fr ance Spai n Ial t y Pol and Ot s her Tot al
Morocco
V al ue $22 m ilon li 7 3 2 1 $35 m ilon li Type Focus! seat ! on s, st i w heel ! eerng! s, ai rbags,el rc! ect i cabl es,shock! absor s ber
Morocco is not considered to be a significant components exporter but it has built up a relationship with France and focuses on a very small number of items.
U SA
$559, 245
Tuni a si
M or occo
$224, 898
Li bya
$272, 175
Bel um gi
Pol and
$121, 421
Fr ance Spai n
$2, 035, 471 $75, 542

I al t y
G er any m
$21, 814, 820 $6, 971, 048 $2, 847, 697
W or d! l $35, 358, 128
17
2.9.4
M ar ket Fr ance G er any m Ial t y Fr Zone ee!
Turkey
V al ue $121 106 82 61 42 284 $695! ilon m li Type Castand!or ! f ged! par s t f ! eerng! orst i and! suspensi ! on, shock absor s, ber ! af er ar t m ket par s! g.br t -e. ! ake! pads
U nied! ngdom t Ki Ot s her Tot al
Turkey is an especially interesting exporter of components with a significant share of its business going to Germany and France. Turkey is also turning into a regional hub and certain manufacturers are focusing their eastern Mediterranean vehicle assembly there. This could be claimed to be the result of a planned, longer term strategy by the government to build a manufacturing industry.
U SA
U zbecki an st
M or occo
$15, 807, 460
$5, 545, 983

I an r
Chi na
$7, 559, 390

M exi co Al i ger a
$15, 653, 114
$23, 883, 404
$19, 036, 072

Sw eden Br l azi Russi an! Feder i at on
I a ndi $9, 190, 953 Egypt $16, 863, 778 $7, 970, 511
$4, 730, 265
$14, 833, 274

Sout A f i h! r ca
$9, 710, 070

UK
$8, 153, 648
$42, 494, 328

Bel um gi
N et l her ands
$6, 627, 638 $13, 183, 374

Fr ance G er any m
Pol and
$7, 342, 533
$106, 345, 216

A ust i ra
$121, 381, 144
$10, 355, 776

I al t y
Rom ani a
$6, 596, 496
Fr zones ee!
$59, 654, 520
Spai n
$18, 590, 456
$82, 311, 560
Tur key
W or d! l $694, 839, 936
18
2.9.5
M ar ket G er any m Aust i ra Ial t y P and Pol Egypt Ot s her Tot al
Romania
V al ue $160 26 15 9 6 68 $240! ilon m li Type Body par s/ t panel s, st i eerng! par s, t suspensi on! par s t
The domestic Romanian automotive component firms produce a wide range of components. Most of them were dependant on Dacia. However, since Renault took over the ownership of Dacia the domestic component suppliers are under threat from the multinational component suppliers. Some have formed joint ventures with European companies. Romania is starting to attract more component manufacturing foreign direct investment (FDI) and is developing new strengths in air bags and seat belts, shock absorbers and other steering and suspension parts, wheels and tyres.
U SA
I an r
$1, 066, 000
$1, 766, 000

Egypt
$5, 718, 000 Paki an! st $1, 314, 000

N or ay w
$2, 113, 000
UK
$4, 140, 000

Pol and G er any m Bel um gi $1, 409, 000 Fr ance
$9, 328, 000

Sl ovaki a
$160, 090, 000

A ust i ra
$1, 319, 000 $25, 928, 000

H ungar y
$2, 784, 000
$1, 820, 000

I al t y
Rom ani a
$15, 306, 000
W or d! l $240, 374, 000
19
2.9.6
M ar ket G er any m Sl ovaki a Fr ance Spai n Bel um gi Ot s her Tot al
Czech Republic
V al ue $1500 200 191 132 109 568 $2. bilon 7! li Type Wi r de ange of com ponent s: w ii rng,t es, yr br ake syst s! em and par s, t di !nj i eseli ecton! pum ps.
Focus on wide range of component types, ranging from relatively simple parts such as wiring harnesses, tyres, and lights, to more complicated products, such as braking systems and advanced diesel injection pumps. The combination of relatively low wages, close proximity to Germany, high skill levels and an engineering tradition has resulted in the Czech Republic being very successful in attracting FDI in the automotive sector. Several multinational component suppliers have set up R&D facilities.
U SA
Rep.ofKor ! ! ea Chi na
I a ndi
$31, 138, 860
$3, 549, 374

Japan
$7, 768, 471

Fi and nl Sw eden
$4, 238, 450
$26, 273, 732

Br l azi Russi an! Feder i at on
$9, 967, 036
$54, 820, 296

D enm ar k UK
$7, 616, 990

Sout A f i h! r ca
$14, 999, 953
$5, 753, 866
$88, 975, 752

Bel um gi
$6, 130, 950

N et l her ands Pol and
$108, 522, 920

Fr ance Por ugal t
$190, 689, 584 $12, 272, 951

Spai n
A ust i ra H ungar y 786, 916 $29, Sw i zer and$53, t l 267, 608 Sl oveni a $4, 661, 452 I al t y
Czech! U kr ne ai 029 Sl ovaki $7, a 805, $1, 497, 464, 192 Rep. $200, 070, 832
G er any m
$32, 161, 508
$84, 692, 104
$3, 165, 962
$39, 426, 112

Gr eece
Tur key
$131, 730, 184
$7, 884, 546 $5, 339, 900
W or d! 708, l $2, 157, 696
20
2.9.7
Slovakia
M ar ket G er any m Czech! Republc i Ial t y Fr ance H ungar y Ot s her Tot al
V al ue $393 79 24 20 19 87 $622! ilon m li
Type Cl ches, ut gear boxes, body! t par s, w ii rng
The components sector in Slovakia is less well developed than in the neighbouring Czech Republic. Most of the component suppliers that have set up in Slovakia have located to serve the needs of the VW Bratislava assembly plant on a just-in-time basis. These companies do not tend to export their parts out of Slovakia. They tend to have sister plants in the other European markets. Most of the exports by value from Slovakia are actually from VW, which ships gearboxes and other parts it makes in Slovakia to its other assembly plants in Europe.
U SA
$1, 114, 128

I a ndi
$4, 776, 482

Sout A f i h! r ca!
$912, 376
Sw eden
$6, 338, 831

UK
$8, 483, 082

N et l her ands
G er any m
$392, 718, 496 $14, 063, 275

Bel um gi $5, 167, 782 Fr ance
Pol and
Bel us ar
$4, 603, 218

Czech! Rep.
$1, 227, 409
$78, 797, 904

A ust i ra
Sl ovaki a
$19, 782, 196
H ungar y Sw i zer and $11, t l 326, 024 $19, 458, 580
$6, 602, 189
Spai n $13, 625, 822
I al t y
$24, 063, 756

Tur key
$2, 282, 820
W or d! l $622, 554, 560
21
2.9.8
Tunisia
M ar ket Fr ance G er any m Ial t y Spai n Iaq r Ot s her Tot al
V al ue $35 12 10 5 5 6 $73! ilon m li
Type W ii rng! har nesses, ! r ubber com ponent s, fler it s,br ake! pads and engi val ne! ves.
The majority of Tunisian automotive parts exports are of wiring harnesses, which account for about 75% of all automotive component exports by value. These harnesses go to the European car assembly plants. The remaining exports are of rubber components, brake pads, engine valves and filters that are mostly destined for the replacement markets in other African countries.
Sw eden
$115, 307
G er any m Fr ance $12, 485, 918 $34, 789, 888 I al t y Spai n $9, 925, 679 $5, 352, 803 Tuni a si I aq r M orocco $5, 399, 468 $441, 577 A l a geri Li bya $2, 049, 906 $939, 788
[ r A eas,nes??] !
$863, 756
A ust ala r i
$190, 242
W or d! l $73, 101, 552
22
2.10
New Global Order
The foregoing pages might be claimed to indicate that the world order in the automotive industry is changing. On the one hand, the automotive industry is developing; the mature markets of North America and the old EU members are becoming saturated. OEMs are looking to shift manufacturing and assembly closer to their developing markets primarily in Asia. Such dynamics are closing some opportunities and opening many new ones for those willing to exploit them. A key part of that exercise is to take assembly capacity closer to markets. Some of the strategies one might observe emerging would include; Close some excess capacity; politically difficult, but necessary Ford and the French manufacturers have already grasped the nettle. Some of those operations have been turned into supply hubs, working with Tier 1 players. Establish regional hubs; as can be seen in Turkey and at Dagenham in the United Kingdom where the OEM or its specialist logistics partner gathers sub assemblies, either for assembly into vehicles or for cost effective onward transmission. Eastern Europe/new EU members; low cost areas for manufacturing, close to traditional markets and with ample space to build/expand assembly plants. Developing strong parts supplier bases to support the assemblers.
2.10.1
Tier 1
Increased role of Tier 1 suppliers would appear to be growing as they and the OEMs establish even closer links. It would appear that a number of strategic developments are emerging: Design and development of major sub systems within the overall architecture of the vehicle is increasingly passing to Tier 1 players and they, in turn, are passing part of that role to the Tier 2 players as relationships and integration develop. Subsystem provision continues to grow as manufacturers seek to focus on the downstream operations and developing new markets, brands and essential architecture. Supply chain management is a developing role of the Tier 1 supplier and in some cases the logistics provider is becoming a tier one player in its own right.
The Tier 1 players are seeking to move increasingly into the high value added activities and the most sophisticated parts of the business and, in turn, are passing sub-system production to lower cost producers. Tier 1 suppliers may take an increasing role in vehicle manufacture and assembly as vehicles are designed for a more modular form of construction. Their role is developing in terms of; Subsystem provision; they bring together a growing number of subsystems to produce ever larger parts of the vehicle. Given the strategy of just in time production, such developments are likely to continue. Supply chain management again links into line-side delivery and inventory reduction. However, perhaps the biggest development in this area is the move of Tier 2 suppliers to low cost countries and the associated issues of establishing rigorous supply chains. Tier 2 coordination will continue to grow for the Tier 1 players and as more is outsourced, so this role will develop.
23
Quality Assurance; commonly the responsibility of the Tier 1 player to ensure a zero faults regime in terms of the major sub assemblies delivered to the line. Design is increasingly being sub contracted to Tier 1 players as they are the specialists and can design against the OEM specification. For many parts of the vehicle, the OEM no longer has the required technical skills or know-how to develop a state of the art sub assembly.
2.10.2
Tier 2
Tier 2 suppliers may provide value added sub-assemblies to the Tier 1 players and the following points should be noted; Provide value added components and sub systems as well as components, with that value added being provided through contact with the local sourcing patterns and innovative developments. Share expertise locally and build assembly relationships with local players, developing their own Tier 3 players and performing a local Tier 1 role Build international links to Tier 1 players and work with other local players to develop logistics and support capability. It is necessary, realistically, for Tier 2 players to focus on a small range of sub groups or sub systems rather than try to offer a broad spectrum. It is the role of the Tier 1 player to seek out and coordinate such actions.
Tier 2 suppliers are geographically mobile and need to be able to move or develop lower cost sourcing if necessary.
2.10.3
Sub Assembly Development Trends
The table on the next page highlights some of the key component/sub assembly groups which manufacturers might require and which over time have migrated to lower cost production areas. An increasing number of sub assemblies are migrating to low cost production areas and competition in terms of provision can be regional as well as global. The chart also suggests that transport costs can be key in terms of the ability of component sub assemblies to migrate. Such an analysis has been undertaken for a broad range of components and sub systems and the conclusion is that it is possible to identify sub assemblies that can be migrated to lower cost production countries.
24
Tr end Com ponent / G eogr aphi ! cal Sub! assem bl y! t end r A i! r Condi i ng! t oni condenser I t on! l gni i coi Br ake! um s dr D if ent al f er i Fuelt ! ank Low ! cost Low ! cost Low ! cost Cor e Low ! cost Com pet t on! ii t end r Regi onal Regi onal Local Regi onal Regi onal Tr anspor ! t cost M edi um Low Low Hi gh Hi gh V al added ue! Low Low Low Hi gh Hi gh
Source: CAIM / NBS; Centre for Automotive Industries Management Nottingham Business School; United Kingdom, 2003. Note: 1. For illustrative purposes simplified analysis 2. Geographical Trend denotes OEMs outsourcing purchasing policy e.g. towards lower cost sources of supply, however, in the case of Differentials, this is considered a critical component and not outsourced at all but kept in-house.
Table 3:
Sub Assembly Development Trends
2.11
Implications and Conclusions
In summary, the global automotive industry might be claimed to be in a state of flux with a shift towards new markets and lower cost of production countries. While those changes have been in progress for some time, they still have a way to go to restore a new equilibrium. The key mantra is still cost reduction as the OEMs and Tier 1 players seek to gain competitive advantage and enhanced profitability through lower cost of production and product/systems reengineering. To seek further cost reductions, while retaining quality, Tier 1 suppliers have moved, increasingly, to source a growing amount of ever more complex sub assemblies and components through Tier 2 strategic alliances, integration and sourcing from low cost of production countries. Those same Tier 1 players have taken on a wider product development responsibility and have started to involve those Tier 2 players with the necessary resources and capabilities. At Tier 2 level, players are establishing closer alliances with Tier 1 clients, to offer consistent quality to meet growing global OEM requirements in terms of product quality, flexibility, capacity and supply chain management, whether using their own, Tier 1 or third party logistics support. Equally, those Tier 2 players are being appraised on their financial stability, cost effectiveness, employee and management strengths. That in turn has led to growth in the formation of alliances to provide broader value added products and services to Tier 1 clients. In the next section of this report, we present our preliminary analysis of Egypts current automotive sector, with more detailed analysis of the specific strengths, weaknesses, opportunities and actions to follow in the later phases of this project.
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3
3.1
Part B: Egyptian Automotive Sector

Summary Introduction: The Challenge for Egypt
Although some minor vehicle assembly has been carried out in Egypt from the late 1950s, the industry really started to develop in earnest during the 1980s, when the Government introduced initiatives to encourage investment in the sector specifically lead by vehicle assembly. Today the automotive industry employs an estimated 46,000 people - 16,000 in vehicle assembly and 30,000 in the associated component supply and service industries. There are currently 29 vehicle assembly operations 12 for passenger cars, 9 for light, medium commercial vehicle and heavy trucks, and 8 for buses. The Egyptian automotive industry has been both a beneficiary and a victim of the global changes outlined in Section 2 above. On the one hand, Egypt has benefited from the desire of automotive companies to access new markets. Seen by some automakers as an important strategic location and market in its own right, Egypt has attracted investment from many of the worlds largest producers. Recent decisions such by companies such as Nissan or BMW to boost their activities in Egypt demonstrate the interest by global automakers in the Egyptian market. The degree to which high tariffs on imported vehicles may have played a role in these investment decisions will be evaluated later in the project. On the other hand, in recent years Egypts automotive industry has suffered from a combination of factors that risk constraining its ability to remain competitive and grow. According to the Egyptian Automobile Manufacturers Association (EAMA), domestic sales of passenger cars in Egypt are around 55,000 units in 2003, compared to 70,000 units in 2000. These figures include both locally produced and imported cars, and overall demand has been negatively impacted by both the recent recession in the Egyptian economy and the devaluation of the Egyptian pound. Similar declines are expected for sales of commercial vehicles in Egypt, as well as for exports of all vehicles to other markets in the region. Demand in Iraq, for example, which was previously estimated to serve as the market for 48% of Egypts automotive exports, has understandably plummeted. Other potential regional markets for Egyptian automotive exports are also facing economic troubles, and the prospects remain uncertain. The reduced local demand and limited export level has created overcapacities in the Egyptian automotive sector, making it more difficult for locally based producers and assemblers to generate the economies of scale needed to reduce prices. The Economist Intelligence Unit estimates that cars cost 20 to 30 percent more to assemble in Egypt than in larger markets, a cost difference that is passed on to consumers in the form of higher prices. However, lower prices are necessary to stimulate domestic and international demand for Egyptian-produced vehicles, and therefore to increase capacity utilization and investments by vehicle and component manufacturers in Egypt. Another factor contributing to the relatively high vehicle prices in Egypt is the level of tariffs on imported vehicles and components. These tariffs have become a doubleedged sword, which risk impeding the growth of the automotive sector by keeping prices high and curtailing local demand. However, they are also seen as an essential tool for protecting the Egyptian automotive industry from lower cost imports and encouraging investment by multinational car producers seeking to circumvent high duties. Along with local content requirements, tariffs have been the main measure for protecting local producers and component suppliers from lower-cost foreign competition while they develop the capabilities necessary to
26
compete internationally. Tariffs are therefore a key focus of any discussion regarding the future of the Egyptian automotive industry. The automotive industry is critical to Egypts ambitious economic growth goals outlined in the terms of reference for this study. The industry already generates significant employment and can play an important role in reducing unemployment. It is also an industry with great potential for attracting foreign direct investment and stimulating Egypts exports. Finally, it is a technologically advanced industry with many linkages that can enhance the skills and technology base of the Egyptian industrial sector. Although it is important to take into account the Egyptian automotive industrys historical development and current challenges, more important is the question of what will happen to the industry in the absence of tariffs and other forms of protection.
3.2
Objectives of Part B
In order to modernize the Egyptian automotive industry and improve its competitiveness so that it can be more closely integrated into the global market, it is important that key industry players, stakeholders and decision makers have a clear understanding of the current market structure, dynamics, trends, and major issues facing the industry in which they operate. The objectives of this initial industry review are to: Review the structure and characteristics of the Egyptian automotive industry. Identify the main market drivers. Identify the issues to be reviewed in more detail in subsequent phases of the study.
3.3
3.3.1
Automotive Industry Overview

Introduction
Egypt's transport industry dates from the late 1950's when the government initiated two large projects for the production of railway rolling stock (SEMAF) and of passenger cars (NASCO, 1961). NASCO, whose technology agreement was concluded with Fiat of Italy, failed to achieve world competitiveness for several reasons including limited local demand relative to the scale necessary for efficiency. The inward looking and import substituting policies that ruled for twenty years prevented the company from moving dynamically. The Egyptian automotive market remains small in comparison with developing markets of a similar size. Sales are constrained partially by the high cost of vehicles in Egypt; the local assembling industry appears too small to achieve the economies of scale necessary to reduce costs, while imported vehicles face large import tariffs. Demand rose relatively quickly during the 1990s, but has since suffered as economic growth slowed markedly in recent years and the Egyptian pound has fallen sharply. The depreciation of the Egyptian pound has raised the local-currency cost of imported completed vehicles and those locally assembled, since they consist largely of imported parts.
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Domestic production is limited almost exclusively to the assembly of vehicles in joint ventures between Egyptian companies and international automotive companies. The main issue facing the Egyptian industry is what will happen to domestic assembly operations as Egypt lowers import tariffs significantly under its agreements with the European Union (EU).
3.3.2
Demand
Consumer demand rose steadily during the 1990s in response to the governments efforts to restructure the Egyptian economy with IMF backing. Efforts were directed to lowering external debt, unifying the exchange rate, reducing inflation and controlling fiscal deficits. The government then began a programme of gradually liberalizing the economy, developing private enterprises through privatization as well as revising the commercial legislation introduced under Egypts previous central planning system. GDP per head rose from US$ 640 in fiscal 1990 (July 1st 1989-June 30th 1990) to around US$ 1,500 in 2000 and private consumption per head increased from US$460 to US$ 1,100 over the same period. However, in recent years economic growth has fallen significantly, and business confidence has been negatively affected by a number of factors including the significant devaluation of the Egyptian pound. As a consequence, in dollar terms GDP per head declined to an estimated US$986 in fiscal 2003 and consumption per head fell to US$716. (Sources: USAID Country Health Statistical Report, Egypt, October 2003; Central Bank of Egypt; EIU Egypt Country Report November 2003). These unfavourable economic conditions have negatively impacted the demand for passenger cars in Egypt, which fell from a record of 82,176 cars per year in 1998 to about 46,509 in 2002, a decrease of 43%, according to the Egyptian Automobile Manufacturers Association (EAMA). Demand rose to 52,190 in 2003, which can be partly explained by purchases motivated by rapid decline in value of the Egyptian pound (i.e. consumers making purchases for fear that the currency would lose further value). Sales are expected to be flat or lower in 2004, according to the Egyptian Automobile Manufacturers Association (EAMA).
Demand For Vehicles
Figures are in Number of Vehicles
1997
1998 82,176 40,809 2,758 1,033
1999 68,595 35,681 2,271 1,033
2000 64,567 19,288 1,453 2,408 87,716
2001 56,939 13,891 3,660 4,486 78,976
2002 46,509 11,171 3,147 4,499 65,326
2003 52,190 13,377 4,810 1,628 72,005
Passenger cars Light Commercial Vehicles Medium and Heavy Commercial Vehicles Buses
Total Demand for Vehicles
52,601 30,551 2,892 1,172 87,216
126,776 107,580
Source: Egyptian Automobile Manufacturers Association (EAMA).
Table 4:
Demand for Vehicles
Demand for light commercial vehicles also fell from 40,809 units in 1998 (peak) to 11,171 units in 2002 recording a decrease of 73%. This has been a result of the slow-down in the economy, which negatively affected commercial activities in general and the sales of commercial vehicles in particular.
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On the other hand, demand for medium and heavy commercial vehicles increased from 2,758 units in 1998 to 4,810 units in 2003 recording an increase of 74%. However, sales are expected to resume a downward trend in 2004 as a result of the recent restrictions imposed by the government towards limiting its expenditures. A Ministerial decree was passed on April 25th 2004, prohibiting governmental entities from placing new purchase orders for passenger cars, commercial vehicles and buses and canceling the orders that were placed in early 2004 2. Buses experienced an increase in demand from 1,033 buses in 1998 to 4,499 in 2002; this increase was primarily due to the increasing demand from public transportation to partially replace the old fleet. However, in 2003 demand fell to 1,628, as a result of the recent restrictions imposed by the government towards limiting its capital expenditures. The Egyptian car market remains is small and underdeveloped by international comparison in terms of the level of vehicles for such a large population. Disposable incomes in Egypt are too low for the majority of the population to afford a new car, and car prices in Egypt are relatively high. There are significant import duties on imported vehicles while the price of locally assembled vehicles is not significantly lower than imported ones. The depreciation of the Egyptian pound has raised costs for both local assemblers and consumers, as imported vehicles and parts have become more expensive in local-currency terms. The demand for commercial vehicles has also suffered as a result of the general economic situation. Egyptian banks have started to offer consumer credit schemes for the purchase of cars while carassemblers have begun to develop schemes for the purchase of vehicles by instalment. One factor limiting passenger car demand is the high concentration of the Egyptian population and the resulting congestion (about 95% of the Egyptian population live on only 5% of the land). This density of population means that private minibuses can provide a fairly efficient informal transport network and that cars are not necessarily required to be mobile as in other countries with a more dispersed population. One stabilizing influence on vehicle demand are strict government controls on fuel prices.
3.3.3
Supply
The state-owned El Nasr Automotive Manufacturing Company (NASCO), assembling vehicles under technological alliances with foreign companies, had a monopoly on production until the late 1980s. Since the government liberalized the industry, it allowed foreign companies to establish assembly operations and enabled the development of a domestic automotive industry. Foreign companies were encouraged by the economic reforms introduced during the 1990 and many have established joint ventures with Egyptian partners. By 2003, there were almost 3 million vehicles in operations in Egypt, with some 29 automotive companies assembling passenger cars, light, medium and heavy commercial vehicles and buses. Most of these are joint ventures between local firms and international businesses, employing around 16,000 people (source: EAMA). Local assemblers produced around 50,000 vehicles in 2003, while the installed manufacturing capacity is estimated at 170,000 vehicles. This implies that manufacturers have around 70% excess installed capacity. The following table indicates the manufacturing capacity, actual production and capacity utilization of passenger cars, commercial vehicles and buses.
2
As reported by Eng. Salah El Hadary during the meeting held with him on May, 11th , 2004.
29
Products Passenger Cars Light Commercial Vehicles Medium & Heavy Commercial Vehicles Buses, Mini-Buses and Vans Total
No. of Facilities (Entities) 12 5 4 8 29
Installed Production Capacity Volume (Units) (Units) 124,500 25,800 14,580 3,800 168,680 32,581 10,663 4,401 2,367 50,012
Capacity Utilization (%) 26% 41% 30% 62% 30%
Table 5:
Range of Products, Installed Manufacturing Capacity & Actual Production, 2003
Passenger cars dominated automotive production with a 65% share in 2003. Light commercial vehicles captured a 21% share, while medium and heavy commercial vehicles including trucks had a 9% share, and buses, accounted for the rest.
Actual Production Classified by Product

5% 9%
21%
65%
Buses, mini-buses & vans

Light commercial vehicles
Figure 2:
Heavy commerical vehicles

Passenger cars
Share of Production by Product
International companies have set up assembly facilities in Egypt through joint ventures. Given the high tariffs on imported vehicles, these local assembly operations were required to be able to offer cars at affordable prices in the Egyptian market. Although Egypt lifted the ban on the commercial import of cars in 1993, tariffs have remained high to protect the local industry. (Please note that this report was written before the reduction in tariffs effected in September 2004). Although they are more expensive, imports still capture a large share of Egyptian car sales (38% in 2003) since many consumers are willing to pay a premium for what they perceive to be the higher quality of imported goods.
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Passenger car assemblers have to use a proportion of at least 45% local content in their vehicle assembly process in order to benefit from preferential tariff reductions. In effect, this amounts to a local content requirement as companies not meeting the 45% local content will face a competitive disadvantage relative to others that do meet the minimum. Local content generally consists of components that are less technologically demanding such as radiators, batteries and exhausts, while the more complex components such as engines, brake systems and vehicle bodies are imported. The proportion of local content in buses and trucks tends to be higher than for passenger cars. In addition to domestic assemblers, the automotive distribution system also includes agents, distributors and traders. Agents are the authorized dealers of foreign car brands and in turn appoint local distributors. Traders are independent sellers who are not affiliated to a particular automotive brand and do not provide after-sales service or spare parts.
3.3.4
Assembly Industry Structure and Key players
The structure of the vehicle assembly industry in Egypt is primarily in the form of joint ventures and licensing agreements between Egyptian companies and international automotive companies. The Egyptian companies assemble vehicles from Completely Knocked Down (CKD) kits imported to Egypt from the international company. A number of Egyptian assemblers also import certain vehicles in Completely Built Up (CBU) form from their international partners, while some brands are only available in Egypt as imports from licensed agents or dealers. General Motors began producing automobiles in Egypt in 1985, establishing Egypt's first privately owned automotive manufacturing company, General Motors (GM) Egypt. The company assembles passenger cars, sports utility vehicles (SUVs) and light and medium-duty trucks for the Opel-Chevrolet and Isuzu brands. General Motors Egypt is by far the market leader of light commercial vehicles with an 86% share in 2003. Daewoo Motors is the market leader for passenger cars with a 33% market share in 2003. NASCO, the state-owned Egyptian automotive company assembling cars under license from Fiat of Italy had a 19% share of passenger cars in 2003. Manufacturers of Commercial Vehicles (MCV) is operating under license from Mercedes to produce buses. MCV is the market leader in this segment with a 38% share of buses in 2003. IVECO/Nasr is the state-owned Egyptian automotive company assembling buses, and accounted for around 23% of the bus market in 2003. A number of other players are represented in the Egyptian market, either through assembly operations or imports. The following table provides an overview of the major motor vehicle assemblers and importers in Egypt, including a listing of the brands they assemble or import by vehicle type.
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Company
Passenger Cars
LCVs
Trucks Brands
Buses
Domestic Assembly Bavarian Auto Group Daewoo Motors Egypt Egyptian Automotive Manufacturing Egyptian German Automotive Co. Manufacturing Commercial Vehicles General Motors Egypt Hyundai Motors Egypt El Nasr Automotive Manufacturing KIA Motors Egypt Peugeot Egypt Suzuki Egypt Gorica Egypt for Industry S.A.E. Arab American Vehicles Ghabbour Group of Companies Nissan Motor Egypt BMW Daewoo EAMCO Mercedes Opel Hyundai Tofas KIA Peugeot Suzuki, LADA Jeep Mitsubishi Nissan Imports Abou Ghaly Motors Bavarian Auto Group Daimler Chrysler Egypt Egyptian Automotive Co. Egyptian German Automotive Co. Manufacturing Commercial Vehicles Egyptian International Motors Engineering Automotive Co. Futaimisr Trading Co. Hyundai Motors Egypt IVECO KIA Motors Egypt Peugeot Egypt Ragab Import & Export Suzuki Egypt Gorica Egypt for Industry S.A.E. Arab American Vehicles Subaru BMW Chrysler, Dodge VW Mercedes Renault Seat Honda Hyundai KIA Peugeot Daihatsu, Ford Suzuki, LADA Jeep Mitsubishi, Volvo Mitsubishi, Volvo Mercedes Chevrolet Mercedes Chevrolet Mercedes Hashim, Wahab Hyundai EAMCO
Suzuki MAN Gorica
VW Mercedes Seat Hyundai IVECO KIA Peugeot Daihatsu, Ford Hyundai IVECO KIA Hyundai KIA Mercedes Mercedes
Suzuki MAN
Table 6:
Domestically Assembled and Imported Brands in Egypt, by Vehicle Type
3.3.5
Component Industry Structure and Key Players
There is very limited information available on the Egyptian components industry, and the following analysis is based on a variety of local and international sources, as well as KPMG estimates.
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The origins of much of the current automotive component industry in Egypt can be traced to the development of car production by NASCO in 1961, which led to the development of local feeding companies to produce parts for needed for domestic vehicle assembly. As the first major international automotive investor in 1985, General Motors also played a significant role in developing the local components industry, and many Egyptian automotive component companies were given their start in the industry through contracts with GM. Local content regulations and the subsequent establishment of several other vehicle assembly operations have played a key role in developing and sustaining a local components industry, as assemblers have been encouraged to use local sources of supply in order to fulfil the local content requirements necessary to take advantage of reductions in the duties on imported components. This has led to the development of a core group of local Egyptian component companies who supply the domestic assembly operations. The same companies often supply many in some cases all of the domestic assemblers, although variations in the supplier base do exist based on the vehicle type or brand being assembled. In addition to the companies supplying the local assembly operations, several Egyptian companies also specialise in products for the local and in some cases international aftermarket for vehicle parts. Estimates of the number of Egyptian component companies vary. The Egyptian Auto Feeders Association (EAFA) currently has around 70 members, who appear to be the major players in the industry. However, other (primary) sources estimate the number of Egyptian components companies to be anywhere between 100 and 300. Although the exact number is not certain, it is likely that these larger estimates would include numerous smaller companies supplying tools, simple parts (e.g. hoses or rods) and services to the industry. Based on our discussions with Egyptian automotive assemblers, it would appear that the core group of component companies that would qualify for analysis based on the scope of this project is well below 100 companies. The following is a listing of some of the major component companies in Egypt, along with the products they produce and examples of their customers. This is not intended to be an exhaustive list, but provides an illustration of some of the major types of components currently being assembled in Egypt. It is important to note that all of these companies are Egyptian owned and managed. There currently appears to be only one wholly owned automotive component foreign director investor in the Egypt. This is Leoni based in the Nasr City Free Zone, which produces wire harnesses exclusively for export and does not supply the Egyptian assembly industry.
Company Traxx Dr. Greiche Autocool Idaco Abou ElYazeed El-Teriak AKL Chloride Products Brake linings brake and pads. Glass Air conditioning and radiators Wire harnesses, instrument clusters, sun visors Mufflers and exhaust systems Cooling systems and radiators Lamps, wheel covers, mirrors, cooling fans Batteries Representative Customers in Egypt Aftermarket Egyptian assemblers and after sales market BMW, Citroen, Daewoo, Jeep Cherokee, Kia Pride, Mercedes, Opel, Peugeot, Suzuki GM, Hyundai, AAV, KIA, Ghabbour, Nasco, Lada GM, Egyptian Automotive, MCV, Nasco, KIA, Suzuki, Ghabbour, AAV Ghabbour, other local assemblers Egyptian assemblers and after sales market Nasco, domestic assemblers and aftermarket
Table 7:
Examples of Automotive Component Companies in Egypt
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3.3.6
Regulatory Background
Egypt governs the use of local content through the Presidential Decree No. 351 for year 1986 which is modified according to the superseding Decree No. 429 for the year 2000. The government employs this Decree to encourage the use of local materials and local components in the automotive industry and uses it as a base for granting investment incentives. This local content incentive advantage in the automotive industry is ruled by Article Six stipulated in the Presidential Decree No. 429 for the year 2000, which can be summarized as follows: A. If the assembled vehicles include no local content, then the completely knocked down (CKD) items are liable to 90% of the tariff applied to the completely build-up units (CBU). This implies that the reduction in tariff applied to CKD is only 10% of the tariff applied to the complete build-up units (CBU). B. If the proportion of local content ranges between 30% and 40% of the assembled vehicles, then the completely knocked down (CKD) items are entitled to a reduction ranging between 33% and 44% of the tariff applied to CBU. This tariff is computed based on a reduction of 110% of the proportion of local content used in cars assembly (for instance 110% X 30% = 33%). C. If the proportion of local content reaches 60% (which can be reduced to 40% by the virtue of a Ministerial Decree for passenger cars only), then assemblers are eligible to the different tariff rates applied to each individual item of the imported components. In this case the average tariff applied to CKD could range between 26% and 28%. In this case, the assemblers are also entitled to another alternative, which allows them to obtain a tariff reduction ranging between 69% and 46% of the tariff applied to CBU if the proportion of the local contents range between 60% and 40% respectively. This reduction represents 115% of the local content proportion ranging between 60% and 40% used in assembling cars for instance (115% X 60% = 69%) and (115% X 40% = 46%). In this case the tariff that would be applied to the CKD ranges between 31% and 54% respectively. The car assemblers are entitled to select one of these two alternatives. D. If the proportion of local content exceeds 60%, vehicle assemblers are entitled to a reduction of 120% representing at least 72% of the tariff applied to CBU. This tariff is computed based on a reduction of 120% of the proportion of local content used in cars assembly (for instance 120% X 60% = 72%). The maximum reduction entitled to car assemblers in this case is 90% of the tariff applied to CBU. The following table exhibits the proportion of the local contents and the related reduction in tariff: Percent of Local Content 30% to 40% Over 40% to 60% More than 60% Percent of Tariff Reduction 110% of the local content percent 115% of the local content percent 120% of the local content percent, with a maximum reduction of 90% of tariff applied to CBU
Source: The Presidential Decree No. 429 for the Year 2000 Article No. 6
Table 8:
Percent of Local Content and the related reduction in Tariff
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The proportion of local content is calculated based on the contribution of the line of assembly (labour force), paints and the components sourced from the domestic market in addition to the other imported components to produce the finished vehicles. The calculations of local content are determined by the General Organization for Industrialization (GOFI) according to a predetermined checklist and based on the terms and conditions related to the local content proportion stipulated in the manufacturing license of each car assembler. Other Regulations also include: Environmental consideration. Environmental issues are becoming increasingly important and it seems likely that the first area in which they will manifest themselves will be a gradual shift to diesel as emissions regulations for petrol engines become more stringent. Catalytic converters have become mandatory on all new vehicles in Egypt. Limited recycling facilities are available in Egypt but no formal recycling legislation is yet in place. Tariffs and taxes. A system of import tariffs is applied to new vehicles based on type of vehicle, engine size, application and whether locally assembled, and on components depending on category. The actual tariff and sales tax rates applied to various vehicles are shown later in this report in the analysis of the individual market segments.
3.3.7 3.3.7.1
International Trade Agreements The EU-Egypt Association Agreement
Under the provisions of the EU-Egypt Association Agreement, a bilateral free trade agreement on the basis of reciprocal tariff liberalization for industrial and agricultural products was established between Egypt and the European Union. The trade and trade-related provisions entered into force on January 1, 2004. The EU-Egypt Association Agreement is part of the EuroMediterranean Partnership (also called the Barcelona Process), which aims at creating peace, stability and development in a region that is of vital strategic importance for Europe. For industrial products, the dismantling of tariffs is based on a schedule of up to 10 years. After this period, any customs duties for European products will be abolished. The following schedules are based on the actual text of the EU-Egypt Association Agreement: The customs duties on raw materials and industrial equipment will be reduced by 25 % each year from January 1, 2004 to January 1, 2007. The customs duties on industrial supplies, semi-manufactured goods and construction materials will be reduced by 10 % in the first year and by 15 % each successive year from January 1, 2007 to January 1, 2013. The customs duties on clothes, electrical domestic appliances, cosmetics, furniture, and motor vehicles for the transport of goods will be reduced by 5 % in the first and second year and by 15 % each successive year from January 1, 2009 to January 1, 2016. The customs duties on motor vehicles designed for the transport of persons will be reduced by 10 % each year from January 1, 2010 to January 1, 2019.
As of January 1, 2004, customs duties and quantitative restrictions on Egyptian industrial products are completely dismantled.
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3.3.7.2
Regional Free Trade Agreements
Egypt has also concluded a number of other free trade agreements with countries in the Middle East and Africa. These are: The COMESA FTA (Common Market for Eastern & Southern Africa Free Trade Agreement). Egypt has been a member of COMESA since 1998, along with Angola, Burundi, Comoros, Congo, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritania, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. COMESA has been active as a free trade area with zero duties since October 2000, although not all countries have fully implemented the agreement. Egypt is a founding member of the Pan Arab Free Trade Area (PAFTA), which aims to eliminate customs duties between members through an annual 10% reduction starting in 1998. Other PAFTA members are Algeria, Bahrain, Comoros, Djibouti, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, United Arab Emirates and Yemen. Egypt has also concluded bilateral trade agreements with Lebanon, Syria, Morocco, Tunisia, Libya, Iraq and Jordan. However, vehicles are excluded from the list of Egyptian products that are exempt from tariffs under these agreements.
As a result of these trade agreements, Egypt has potential access to a number of international markets, both regionally and beyond creating the opportunity to supply increasing levels of parts, components, sub-assemblies and finished vehicles in the future, on an open competitive basis.
3.3.8
Policies
Two major policy reforms have recently affected the transport industry. The first was the decision to lift all restrictions on investment licensing for car production (1991) and the second was the complete liberalization of commercial imports of cars (December 1993) after a nine-year partial ban. The result has been the emergence of several international manufacturers in the car assembly industry, as well as a boost to the size and range of capacity for car components manufactured locally.
3.3.9
Investment Incentives
In order to encourage investment in Egypt, Investment Law 8 for the year 1997 provides certain incentives for foreign investors who carry out commercial activities in Egypt. These include tax holidays, reduced custom tariffs, guarantees against expropriation and sequestration, guarantees regarding foreign exchange and guarantees regarding repatriation of capital and profit. The following list summarises the main incentives incorporated in this Investment Law: Companies may not be confiscated nor nationalised. Companies and their assets cannot be sequestered, seized or expropriated by way of an administrative order. No administrative body can interfere in setting prices or profits margins.
36
Profits are exempted from corporate income taxes for five years, extended to 10.years for projects in new industrial zones and new urban communities, as well as projects financed by the Social Fund for Development. Projects located in remote areas (outside the old valley) enjoy 20 years tax exemption. Projects are subject to a flat rate of 5% customs tariffs on equipment and machinery imported for the project. Projects are allowed to repatriate their capital and profits. The majority of the board of directors may be non-Egyptians. Projects are exempted from certain labour requirements under the Egyptian Companies Law and the Labour Law. Foreign experts salaries are exempted from income tax if their stay in Egypt is for less than one year. Projects are exempted for 3 years from stamp duties and notarisation fees from the date of registration with the commercial register. Projects are exempted from all registration and notarisation charges levied on contracts.
The Peoples Assembly in June 2000 approved an amendment to Article 23 of the Investment law to provide full benefits to project expansions provided that new capital is injected and new assets are added to increase productive capacities.
3.4
Market Trends
In the following section, we examine trends in sales, production and exports over the last seven years, for each of the main segments of passenger cars, buses and commercial vehicles.
3.4.1
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 -
Vehicle Production Volume (1997-2003)
No
1997
1998
1999
2000 Ye ars
2001
2002
2003
Passe nger cars
Comme rcial Veh.
Buses / coache s
Production 1997 1998 1999 Passenger cars 31,142 39,135 45,416 Commercial Veh. 26,874 32,297 29,583 Buses / coaches 1,129 1,061 1,067 TOTAL 59,145 72,493 76,066 Growth Rate % 23% 5% Source: Egyptian Automobile Manufacturers Association (EAMA).
2000
39,616 17,966 2,181
2001
37,006 17,235 1,856
2002
27,422 14,699 3,052
2003
32,581 15,064 2,367
59,763 -21%
56,097 -6%
45,173 -19%
50,012 11%
Figure 3:
Actual Production by Product (1997-2003)
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Vehicles production volume fell from a peak of 76 thousand units in 1999 to 45 thousand units in 2002 recording a drop of 41%. This is primarily due to the declining demand resulting from the current recession. Production rose to 50 thousand units in 2003 to cater for an increase in demand for locally manufactured vehicles, which are still cheaper compared to imported vehicles due to the imposition of high import duties. The figures for production volume reveal that even when the industry reached a peak of 76 thousand units, the capacity utilization never exceeded 45%. This implies that Egypt has excess installed capacity of around 55% indicating that the market is currently too small to enable producers to achieve the economies of scale that could lead to reduced costs.
3.4.2
Vehicle Sales Volume (1997-2003)
Vehicles sales volume in total fell from 127 thousand units in 1998 to 67 thousand units in 2002 recording a decrease of 47% over the period (average annual decline of 12%). This drop in sales volume reflects the declining demand over the period. In 2003, sales volume slightly increased to reach 73 thousand units to satisfy demand as shown in the following table (which shows total sales including exports).
140,000 120,000 100,000 No 80,000 60,000 40,000 20,000 1997 1998 1999 2000 Years
Passenger cars
2001
2002
2003
Comme rcial Veh.
Buse s / coache s
Sales (CKD & CBU) Passenger cars Commercial Veh. Buses / coaches TOTAL Growth Rate %
1997
52,693 33,564 1,173
1998
82,213 43,666 1,047
1999
68,602 38,082 1,037
2000
64,567 20,562 2,443
2001
56,979 17,044 4,896
2002
46,525 14,587 5,580
2003
52,440 18,442 2,502
87,430
126,926 45%
107,721 -15%
87,572 -19%
78,919 -10%
66,692 -15%
73,384 10%
Figure 4:
Total Sales by Product (1997-2003)
3.4.3
Vehicle Export Volume (1997-2003)
Vehicles exports volume increased from 164 units in 1998 to approximately 2100 units in 2002. This substantial increase in exports in 2002 is primarily due to the sharp decline in the local
38
currency (Egyptian pounds), which increased the countrys international price competitiveness. In 2003, exports volume fell to around 1300 units primarily as a result of the significant reduction in commercial vehicle exports. Total vehicle exports amounted to 1,379 units in 2003. Exports were dominated by buses accounting for 63% of total exports followed by a non-recurring sale agreement for passenger cars to China accounting for 18%, whereas medium and heavy commercial vehicles accounted for 16% and the remaining 3% represented exports of light commercial vehicles. The major destinations were Gulf countries (73%), primarily Iraq 48%, Saudi Arabia 18%, Yemen 3%, Kuwait 3%, and Dubai 1%, in addition to other African countries accounting for 8%, 18% to China and the remaining 1% to other countries.
Export Destination Gulf Countries Iraq Saudi Arabia Yemen Kuwait Dubai Bahrain Qatar Total Gulf Countries African Countries Madagascar Algeria Rwanda Ethiopia Kenya Senegal Sudan Ghana Libya Total African Countries % Share of Total Exports 48% 18% 3% 3% 1% 0.1% 0.1% 73%
2% 2% 1% 1% 0.4% 0.4% 0.4% 0.1% 0.1% 8%
Other Countries China 18% Kazakhstan 0.3% Cuba 1% Total Other Countries 19% Source: Egyptian Automobile Manufacturers Association (EAMA).
Table 9:
Major Vehicle Export Destination Countries (1997-2003)
39
2,500 2,000 1,500 No 1,000 500 1997 1998 1999 2000 Years
Pass enger Cars Commercial Vehicles Buses / Coaches
2001
2002
2003
Exports Passenger Cars Commercial Vehicles Buses / Coaches TOTAL Growth Rate %
1997
92 121 1
1998
37 99 28
1999
7 130 34
2000
116 35
2001
40 293 410
2002
16 1,012 1,081
2003
250 189 826
214
164 -23%
171 4%
151 -12%
743 392%
2,109 184%
1,265 -40%
Figure 5:
Vehicle Export Volume (1997-2003)
3.5
Segment Analysis Passenger Cars
The main segments into which Egypts vehicle industry can be divided for purposes of this analysis are: Passenger Cars Light Commercial Vehicles (less than 3.5 tons) Medium and Heavy Commercial Vehicles (over 3.5 tons) Buses
This section will highlight passenger cars market dynamics, key players and their respective market shares, major characteristics, key market drivers and the surrounding environment.
3.5.1
Sector Characteristics
The passenger car sector in Egypt consists of 12 companies who assemble vehicles locally, with a nominal capacity of around 125 thousand units per year. However, at present, production is only around 33 thousand units, resulting in a rather low capacity utilization of around 26%. Around 90% of those cars assembled in Egypt (CKD) are units with engine capacity of 1300 CC and above, while 100% of imported units (CBU) have engine capacity of less than 1300 CC (due primarily to the higher import duties on larger capacity cars). The reported proportion of local content for those vehicles assembled locally ranges between 37% and 45% (Source: EAMA).
40
3.5.2
Market Dynamics
Assembly of CKD units dropped from 37 thousand units in 2001 to 27 thousand units in 2002 recording a decrease of around 27%, primarily due to the sharp devaluation of the Egyptian pound, which negatively impacted domestic purchasing power and resulted in declining demand. In spite of the reduction in domestically assembled cars, imports stood at the level of 20 thousand units, which accounts for 38% of the total market. These imported cars particularly serve the more affluent segments of society, where price elasticity is relatively low. These segments generally prefer to buy imported commodities, assuming that they will be of a higher quality.
40,000 30,000 20,000 10,000 2001

CKD
2002
CBU
2003
Exports
Figure 6:
Levels of Imports (CBU units), Local Assembly (CKD units) & Exports 20012003)
2001 3 7 .0 0 6 1 9 .9 7 3 40 2002 2 7 .4 2 2 1 9 .1 0 3 16 2003 3 2 .5 8 1 1 9 .8 5 9 250
CKD CBU E x p o rts
Table 10:
Levels of Imports (CBU units), Local Assembly (CKD units) & Exports (2001-2003)
Exports of passenger cars were minimal over the past three years. However, in 2003 there was a non-recurring agreement with China, whereby Egypt exported 250 passenger cars (Mercedes) to China.
3.5.3
Market Share by Brand
Passengers car sales are dominated by Daewoo with a market share of 33%, followed by the state owned company NASCO, which accounts for 19% of the market. General Motors ranks third with a market share of 14%. In the meantime, there are another six players with shares ranging between 4% and 6% as shown in the following figure.
41
CKD by Brand
CITROE N 0% FIAT 4% SUZUKI 1% PE UGOT JEE P 5% 6% VOLVO 5% OP EL 14%
DAE WOO 33% Tofas 19%
LADA 4% BMW KIA 0% 4% M ERCE DES 5%
Figure 7:
Share of Local Assembly of CKD units, by Brand
3.5.4
Major Drivers
Egypt is a price-oriented market; therefore, price is a crucial element in stimulating demand, while quality (in terms of safety factors) ranks second. However, the automotive industry in Egypt is constrained by the high cost of vehicles. According to the interviews conducted by KPMG, this is primarily due to the small size of the market, which prevents local assemblers from achieving the economies of scale necessary to reduce cost. These factors hinder the development of the passenger car market in Egypt. According to preliminary interviews with industry stakeholders, they reported that there are some tools that may stimulate demand, such as: The Central Bank of Egypt (CBE) should encourage banks to extend credit facilities to individuals for the purchase of passenger cars. Establish appropriate systems for car leasing. Ensure the availability of appropriate centers for after sale services. Ensure the availability of reasonably priced spare parts.
3.5.5
Surrounding Environment
Egypt lifted the ban on commercial imports of cars in 1993, but import tariffs have remained high to protect the local industry. The level of protection enjoyed by the car industry stems from the high level of tariffs on imported passenger cars. Duties range from 40% on cars with engine less than 1000cc (1 litre) to 135% on cars with engine of 1600 cc (1.6 litre) and above.
42
This compares to a range of 30% to 96% for imported components provided that the local manufacturers achieve a minimum degree of local content amounting to 45% for passenger cars, as shown in the following table. Achieving this local content allows the assemblers to receive duty reductions on the different tariff rates applied to each individual imported components (as opposed to the tariff rate that would have been applied to the CBU). In this case, the average tariff applied to CKD is reported to range between 26% and 28% as shown in the table below.
Engine capacit y CBU Cust om D ut ies % Less t han 1 0 0 0 cc From 1 0 0 0 cc t o less t han 1 3 0 0 cc From 1 3 0 0 cc t o less t han 1 6 0 0 cc From 1 6 0 0 cc t o less t han 2 0 0 0 cc M ore t han 2 0 0 0 cc 40 55 100 135 135 Sales Tax % 15 15 15 30 45 Tot al % 61 78 130 205 241 CKD Cust om D ut ies % 26 26 26 26 26 Sales Tax % 15 15 15 30 30 Tot al % 4 4 .9 4 4 .9 4 4 .9 64 64 D if f eren ce % 16 33 85 141 177
Source: Egyptian Automobile Manufacturers Association (EAMA)
Table 11:
Custom Duties and Sales Tax-Passenger Cars3
Based on the current level of protection, around 90% of passenger car manufacturers in Egypt (CKD) focus on assembling cars with engine capacities of 1300 cc (1.3 lt) and above, where the level of protection against imported cars is greatest.
3.6
Segment Analysis Buses
This section will focus on the market for buses, providing information on market dynamics, key players and their respective market shares, major characteristics of the industry, and the surrounding environment.
3.6.1
The bus sector in Egypt consists of 8 companies carrying out local assembly. These account for a nominal capacity of around 4 thousand units per year. Production was around 2.4 thousand units in 2003, resulting in a capacity utilization of around 62%. The level of local content for these buses is reportedly relatively high at around 70%.
3.6.2
Market Dynamics
The number of domestically assembled buses increased from 1,856 units in 2001 to 2,367 units in 2003 recording an increase of 28%. This is primarily due to the improvement in the caliber of
3
Please note that this report was written before the changes in customs rates effected in September 2004.
43
assembled units, in addition to achieving competitive prices as a result of increasing the proportion of local content to around 70%4. These two factors have stimulated demand for domestically assembled buses to substitute for imported units and have contributed to increased exports to other countries. On the other hand, imports of completely built up units fell from 3,040 units in 2001 to 135 units in 2003.
4.000 3.000 2.000 1.000 2001 CKD 2002 CBU Exports 2003
Figure 8:
Levels of Imports (CBU units) Local Assembly (CKD units) & Exports 20012003)
CKD CBU Exports
2001 1.856 3.040 410
2002 3.052 2.528 1.081
2003 2.367 135 874
Table 12:
Levels of Imports (CBU units), Local Assembly (CKD units & Exports (20012003
Exports were 410 units in 2001, and then grew significantly in 2002 to reach 874 units in 2003. The major destinations are in the Gulf area, which accounts for 90% of total bus exports, with the remainder going primarily to African countries. .
Source: Preliminary interviews with key bus manufacturers / assemblers
44
Export Destination Gulf Countries Iraq Saudi Arabia Yemen Kuwait Dubai Bahrain Qatar Total Gulf Countries African Countries Algeria Madagascar Rwanda Ethiopia Kenya Senegal Sudan Ghana Libya Total African Countries
% Share of Total Exports 51% 29% 5% 4% 1% 0.2% 0.1% 90%
3% 2% 1% 1% 1% 1% 1% 0.2% 0.2% 9%
Other Countries Cuba 1% Kazakhstan 0.5% Total Other Countries 1% Source: Egyptian Automobile Manufacturers Association (EAMA).
Table 13:
Export Volume by Destination county - Buses

Buses
Libya 2 Bus
Cuba 11 Bus
Algeria 25 Bus
Iraq 445 Bus
Kuw ait 37 Bus Bahrain 2 Bus
Kazakhstan 4 Bus
Qatar 1 midi Bus

Senegal 6 Bus
Ghana 2 Bus Dubai Saudi Arabia 11 Bus 1 midi Bus 251 Bus Yemen Ethiopia 40 Mini Bus 10 mini Bus
Sudan 6 Bus
Kenya 1 mini Bus 5 Bus
Madagascar 7 mini Bus 7 Micro Bus
Figure 9:
Exports of Egyptian Buses, 2003
45
3.6.3
Buses are dominated by two major players:, Manufacturing Commercial Vehicle (MCV) operating under license from Mercedes which has a 38% market share, and the state owned company IVECO/NASR with a 23% share. In the meantime, there are another three players with shares between 15% and 12% as shown in the following figure.
CKD by Brand
IVE O/NASR C 23% VOLVO 15%
M AN 12% M SUBISH IT I 12%
M R ED S EC E 38%
Figure 10:
Share of Local Assembly of CKD units, by Brand
3.6.4
Surrounding Environment - Buses
Buses are subject to a relatively low level of protection compared to passenger cars, with duties of 40%. Therefore, buses have been able to compete in a relatively more open market environment which has helped the manufacturers to take corrective actions in improving their products to be able to target export market and substitute for imports in the domestic market. The following table shows custom duties and sales tax applied to imported units (CBUs) and those applied to complete knocked down units (CKDs). CBU Custom Duties % 40% Sales Tax % 10% CKD Custom Duties % 4% -7%
Table 14:
Custom Duties and Sales Tax5
Please note that this report was written before the changes in customs rates effected in September 2004.
46
3.7
Segment Analysis Light Commercial Vehicles
This section will focus on the light commercial vehicles (LCV) segment, providing information on market dynamics, key players and their respective market shares and major characteristics.
3.7.1
The LCV sector in Egypt consists of 5 companies carrying out local assembly. These account for a nominal capacity of around 26 thousand units per year. Current production is around 11 thousand units, resulting in a capacity utilization of around 41%. The level of local content for these light commercial vehicles is reported to be high at around 70%.
3.7.2
Market Dynamics
Domestically manufactured light commercial vehicles dropped from 13,902 units in 2001 to 10,663 units in 2003 recording a decrease of 23%, primarily due to the prevailing recession which negatively impacted commercial activities and accordingly the demand for commercial vehicles. Nevertheless, imports of CBU LCVs grew significantly during the same period.
14.000 12.000 10.000 8.000 6.000 4.000 2.000 0 2001 CKD 2002 CBU Exports 2003
Figure 11:
2001 1 3 .9 0 2 0 11 2002 1 0 .5 9 0 631 50 2003 1 0 .6 6 3 2 .7 4 8 34
CKD CBU E x p o rts
Table 15:
Levels of Imports (CBU units), Assembly (CKD units) & Exports 2001-2003)
In the meantime, exports are minimal (34 units in 2003 accounting for 2.5% of total Egyptian vehicle exports). The two export markets in 2003 were Madagascar (19 units) and Rwanda (15 units).
47
3.7.3
The light commercial vehicle market is dominated by General Motors with a dominant share of 86%. In the meantime, there are another four players with shares ranging between 5% and 3% as shown in the following figure.
C KD by Brands
Ghabbour Group(Volvo,Tata) 3% JAC (Mitsu bish i) 0%
S UZUKI Egypt 5% NISS AN Egypt 3% Engine ering Co. 3%
GM 86%
Gh abbour Group(Volvo,Tata)
JAC (Mitsubishi)
GM
Engineering Co.
NIS SAN Egypt
SUZUKI Egypt
Figure 12:
Market Share by Brand Light Commercial Vehicles
3.8
Segment Analysis Medium & Heavy Commercial Vehicles
This section will focus on the medium and heavy vehicles industry dynamics, key players and their respective market share, major characteristics and surrounding environment.
3.8.1
The medium and heavy commercial vehicle sector in Egypt consists of 4 companies carrying out local assembly. These account for a nominal capacity of around 15 thousand units per year. Current production is around 4.4 thousand units, resulting in a relatively low capacity utilization of around 30%. The level of local content for these medium and heavy commercial vehicles is high at around 70%.
3.8.2
Market Dynamics
Domestically manufactured medium and heavy commercial vehicles increased from 3,333 units in 2001 to 4,401 units in 2003, an increase of 32%.
48
5.000 4.000 3.000 2.000 1.000 2001 2002 2003
CKD
CBU
Exports
Figure 13:
Levels of Imports (CBU units), Local Assembly (CKD units & Exports (20012003)
CKD CBU Exports
2001 3.333 609 282
2002 4.109 0 962
2003 4.401 630 221
Table 16:
Exports grew from 282 units in 2001 to 962 units in 2002, however, in 2003 exports fell dramatically to reach 221 units. This substantial drecrease is primarily due to the Iraq war, which negatively impacted Egyptian exports of medium and heavy commercial vehicles. Prior to the war, Iraq was the main customer for Egyptian exports of medium and heavy commercial vehicles with with a share of 99% (in 2003), with the remaining 1% going to Saudi Arabia.
3.8.3
The medium and heavy commercial vehicles market is dominated by General Motors (Chevrolet) with a share of 82%. In the meantime, there are another four players with shares ranging between 6% and 3% as shown in the following figure.
49
C K D b y B ra n d
MA N 5% MITS U B IS H I 6% IV EC O 3% M ER C E D ES 4%
C H EV R O L E T 8 2%
Figure 14:
3.8.4
CBU CKD Custom Duties % 8% -12% 10% Sales Tax %
Custom Duties % 40% Table 17:
Custom Duties and Sales Tax Medium & Heavy Commercial Vehicles6
3.9
Segment Analysis Components
This section will focus on the Egyptian component industry, although as mentioned above there is very limited statistical information available on this important part of the automotive industry.
3.9.1
The components industry consists primarily of Egyptian companies assembling for the domestic market. These are predominantly Tier 3 companies producing build to print products for the domestic assembly industry or products for the aftermarket. Some companies are assembling basic systems for the domestic vehicle industry (e.g. exhaust systems, cooling systems) and could be defined as Tier 2 suppliers in terms of the domestic industry structure. However, these companies are primarily assembling imported parts, and the level of value-added in Egypt consists mainly of the labour required to assemble the imported components according to the specifications of their customers. This is reflective of an overall reliance in the Egyptian components industry on imported parts and materials for locally assembled components. Although local content in the components industry is not formally measured as for vehicle assembly, this can be assumed to be quite low for most Egyptian components.
Please note that this part of the report was written before the changes in customs rates effected in September 2004.
50
3.9.2
Market Dynamics
According to one source identified by KPMG, Egypts components industry comprises around 300 companies with an employed investment of around US$ 1.5 billion7. According to information provided to KPMG by the Egyptian General Organization for Industrialization (GOFI), there are 324 companies classified as automotive components companies in Egypt, employing 46,491 persons. However, estimates of the number of component companies in Egypt vary significantly depending on the source. The vehicle assemblers interviewed by KPMG estimated that there were between 100 and 200 component companies in Egypt, while the Egyptian Auto Feeders Association (EAFA) was able to provide a list of only 67 known Egyptian component companies. Although the exact number does not seem to be known, it can be assumed that the larger estimates include many small companies providing spare parts or basic components to the automotive industry, and which therefore cannot be classified as true components companies for the purposes of this study. Based on the information available (i.e. actual names of companies), we will use an estimate of 80 to 100 component companies in Egypt. There is similar inconsistency in terms of the data available for local production and market size. According to the Economist Intelligence Unit, the Egyptian component industry manufactured goods worth US$455m in 2002. Demand for automotive components was estimated to be US$1.3bn in 2001, with Original Equipment Manufacturers (OEMs) accounting for 53.6% and the Aftermarket of Original Equipment accounting for the rest. However, an alternative source identified by KPMG provided the following indication of the industrys dimensions. 2002 Import market Local production Total market 196.537 65.512 262.049 2003 193.510 64.503 258.014 2004 209.362 69.787 279.136
Source: Automotive Feeder Industry in Egypt, International Business Strategies Report, June 2004
Table 18:
Egyptian Automotive Components Markets (in US$ millions)
The differences in the estimates of both market size and production between the two sources are dramatic and cannot be reconciled in the absence of reliable statistics from official sources in Egypt. For reasons of caution, KPMG will use an estimate of $100 million domestic component production for any calculations in this study that involve this figure. While the majority of component companies are dependent on the domestic market, some have succeeded in penetrating export markets. Exact figures on export activity, however, are difficult to obtain. The chart below shows exports of automotive components for Egypt based on official trade information from the WTO. However, upon discussion with the project steering committee, it was determined that these figures underestimate the level of Egyptian component exports. Although the exact number could not be determined, with input from the steering
7
Source: The Economist Intelligence Unit, Egypt Automotive Background, 2004
51
committee it could be estimated that Egyptian exports of automotive components are approximately $13 million, based on knowledge of the export activities of some of the major Egyptian component companies.
Egypt vehi e! t ! cl par s/accessor es! i expor s t
5. 000 4. 500 4. 000 3. 500 3. 000 $000 2. 500 2. 000 1. 500 1. 000 500 0 Expor s t 1998 2. 679 1999 4. 550 2000 2. 581 2001 4. 423 2002 1. 221
Source: World Trade Organisation, International Trade Statistics
Figure 15:
Egyptian Component Exports
3.9.3
Egyptian companies currently import many of the parts and materials needed to assemble components locally. They are therefore subject to the tariffs currently levied on imported components, which in turn affects the price they charge to Egyptian vehicle assemblers, and hence the price of domestically assembled vehicles.
3.10
Summary and Preliminary Findings
This report provides an overview of some of the major trends affecting the international automotive industry. Perhaps the most significant is the increased transfer of activity from OEMs to their Tier 1 suppliers, who are increasingly responsible for developing large parts of the vehicle. According to domestic and international perceptions cost reduction is still the key element to the OEMs and Tier 1 players as they seek to gain competitive advantage, and enhanced profitability, through lower cost of production. To seek further cost reductions, while retaining quality, Tier 2 and Tier 3 suppliers should seek to increase their production volume in order to realize economies of scale to meet growing global OEM requirements in terms of product quality, cost effectiveness, wide range of products, flexibility, capacity and supply chain management. Coupled with extreme price pressure, this results in a shift in responsibility to the supplier base, with implications for suppliers further down the chain. Another significant trend is the
52
increasing globalisation of the industry, in terms of both new locations for production as well as increased competition from components suppliers in countries such as China, India and others. The second half of the report has also provided an initial picture of the Egyptian automotive industry. This is intended as an overview of the industrys recent development and current state, and is not intended to represent a complete analysis of the sector based on which conclusions can be drawn and recommendations developed. However, given the information presented in this report, the following main observations can be made at this early stage of the project. The vehicle market is surprisingly small for a country of Egypts size, and has been declining for a number of economic reasons. Domestic assembly is protected by high tariffs, and is characterised by fragmentation and high volumes, especially in passenger cars. Vehicle exports are minimal, although the bus sector has been relatively successful in exporting to regional markets. Local content regulations represent a further barrier to market liberalization, but they have encouraged the development of a domestic components industry producing basic components for domestic assembly. Very little secondary information appears to be available on the components industry, which renders an analysis of this industry more difficult in the absence of reliable data.
These and other issues will be examined in more detail in Phases 1 and 2 of the project, through additional secondary research, interviews with companies in Egypt and overseas, as well as comparisons between Egypt and other relevant countries.
53
Phase 1 Vehicle Industry
January 2005 This report contains 45 pages
Industrial Modernisation Centre Egypt
Strategic Study to Upgrade Egypt's Auto Sector

Contents
List of tables and figures Definitions 1
1.1
2 1 3
3
Introduction
Overall objective of Phases 1
2
2.1 2.2 2.3
Characteristics of the Egyptian vehicle assembly industry

Passenger cars and light commercial vehicles segment Bus and coach segment Truck segment
4
4 23 30
3
3.1
Vehicle assembly industry summary

Attractiveness of industry segments to the Egyptian industry
35
35
4 5
Future vehicle industry scenario Appendix 2: Strategic map of the Egyptian automotive manufacturing industry
37
40

List of tables and figures
Tables Table 1: Total production and passenger car model numbers for selected European countries ................................................................................................................ 5 Table 2: Global passenger car and light commercial vehicle production volumes, 2003... 6 Table 3: Global passenger car and light commercial vehicle sales, 2003........................... 7 Table 4: Selected regional country passenger car sales ...................................................... 9 Table 5: Purchasing power parity for selected countries .................................................... 9 Table 6: Completed vehicle exports for selected countries (all vehicles) ......................... 12 Table 7: Egyptian passenger car and light commercial vehicle assemblers and numbers of models produced ................................................................................................. 13 Table 8: HPV and VPP comparison with selected European plants ................................. 15 Table 9: Import duty and sales tax levels on Egyptian vehicles (pre 5th September 2004)17 Table 10: Price comparison of selected Egyptian and non Egyptian components............ 19 Table 11: Total Foreign Direct Investment flows for selected countries .......................... 21 Table 12: Bus and coach production by country............................................................... 26 Table 13: Egypts bus exports by destination country ...................................................... 27 Table 14: Truck production by country ............................................................................ 33
Figures Figure 2: Vehicle tax regimes for selected countries.................................................... 11 Figure 4: Automotive industry strategic map.................................................................... 41
Case Studies Box 1: Volkswagen announces CKD production in Iran .................................................. 15 Box 2: Import versus assembly ......................................................................................... 16


Definitions
The following terms and definitions have been used in this report.
Motor vehicle
Any power-driven vehicle which is moved by its own means, having at least four wheels, with a maximum design speed exceeding 25 km/h. Motor vehicles with a MAM not exceeding 3,500kg having not more than 8 passenger seats. Motor vehicles with a MAM not exceeding 3,500kg used for transporting freight (rather than people). Trucks between 3,500kg and 7,500kg with a trailer up to 750kg. Motor vehicles over 7,500kg with a trailer up to 750kg. Motor vehicles with between 9 and 16 passenger Any bus with more than 16 passenger seats The part of the truck (the engine, cab and frame) excluding the trailer The frame on which the trailer of a truck is placed Maximum authorised mass. Original equipment manufacturer (vehicle assembler). Completely knock-down assembly. Note: OEMs use a variety of terms in between such as SKD, Semi knock-down. Completely built-up assembly. Major systems supplier (e.g. anti-lock/total brake systems and stop controls). Sub-assemblies and complex components supplier (e.g. brake sub-assemblies). Basic components supplier (e.g. tyres, batteries, brake pads).
Passenger car1 Light commercial vehicle Medium sized vehicles Large vehicles Minibuses Buses Tractor Unit
Fabricated body MAM OEM CKD CBU Tier 1 supplier Tier 2 supplier Tier 3 supplier
Source: European Commission Directive of Motor Vehicles 70/156/EEC and UK Driver Vehicle Licensing Authority

Tier 4 supplier FDI
Raw materials supplier (e.g. steel, linings, hydraulic fluids). Foreign direct investment.
Note: Tariff rates on automotive imports were changed unexpectedly after KPMG had completed most of its research for this project. While these tariff reductions are expected to be significant for various categories of vehicles, they do not alter the findings and analysis of this study and may even accelerate some of the processes described in this report.

Introduction
This report summarises the results of the vehicle part of Phases 1 and 2 of the IMCs Strategic Study to Upgrade the Egyptian Automotive Sector. It records and expands on the key points made in KPMGs presentation of preliminary results to the Steering Committee in Cairo on the 6th September 2004.
1.1
Overall objective of Phases 1

The overall objectives of Phase 1 are to characterise Egypts vehicle industry and to present scenarios for its future development. Both secondary and primary research, inside and out of Egypt, have been undertaken in the four segments that make up the overall vehicle industry in Egypt. They are passenger cars, light commercial vehicles (LCVs), buses and trucks. Each of these segments will be characterised in turn and conclusions drawn about each. The highest costs in the automotive industry are those associated with developing new models, especially with regard to meeting regulated crash standards. As platform engineering becomes more sophisticated, manufacturers have learned to stretch and alter the basic vehicle underpinnings. This allows the use of different engine sizes and layouts and even different passenger module sizes (two or four seats). With the number of independent manufacturers shrinking because of mergers and acquisitions, the significance of platform sharing intensifies. A successful platform strategy is a must in order to compete on a global scale. Platform sharing has allowed Renault and Nissan for example to share 10 platforms, whereas before these two organisations merged, Nissan had 25 of its own and Renault 8. GM has 5 unique global brands using the same new Epsilon architecture. Ford is in the midst of consolidating 32 platforms around its worldwide operations into 16. Renault's Modus, Peugeot's 107 and Lancia's Musa are the latest introductions in the European small-minivan segment currently dominated by the Opel/Vauxhall Meriva, Ford Fusion and Fiat Idea. Small minivans are one of Europe's fastest-growing segments. The Modus is built on the same platform as the Micra small car from Renault's Japanese partner Nissan. Passenger cars and light commercial vehicles are very similar segments (so much so that many researchers refer to these two collectively as light vehicles) in that these vehicle types are predominantly built from the same monocoque, often using the same production line facilities. GM produces its car derived LCVs on the same production lines as the equivalent cars. Thus the new GM plant in Poland produces Astra cars and LCVs together. The same happens with Corsa cars and LCVs. The passenger car and LCV segments also exhibit strong similarities in terms of the structure and participants in their supply chain, as well as the main market players internationally. For these reasons passenger cars and light commercial vehicles will be dealt with simultaneously in this report. By volume, buses and trucks constitute a very small percentage of the overall Egyptian (and world) market. Although these are important sectors in their own right, they do not offer the same level of opportunity in terms of potential FDI and employment generation as the passenger car/LCV sector. Therefore the majority of the analysis in this report will be aimed at passenger cars and LCVs.

Characteristics of the Egyptian vehicle assembly industry

The automotive industry is complex with many different segments, each with different characteristics and dynamics. There is also a great deal of interdependence between component manufacture and supply and vehicle manufacture and supply. As investment and supply decisions have been pushed down the supply chain, suppliers are taking more and more responsibility for vehicle assembly and hence are in more control of the costs of production than ever before. From a vehicle perspective, it is quite difficult to separate the individual segments as the boundaries between light vehicles e.g. passenger cars, light commercial vehicles, sport utility vehicles (SUVs), multi purpose vehicles (MPVs), pickups etc. continue to blur. Fundamentally however, the global automotive manufacturing industry is driven by volume and current levels of vehicle sales and forecast growth in Egypt are not sufficient for efficient assembly, from an international manufacturers perspective. This is a critical issue affecting the future of the Egyptian automotive industry and will be addressed in more detail in this report. The following are the major characteristics of the Egyptian vehicle assembly industry, based on KPMGs research for this project.
2.1
2.1.1
Passenger cars and light commercial vehicles segment

The Egyptian market is small and fragmented and exports are low
2.1.1.1 Production
The global industry has a perennial overcapacity problem estimated at between 20-25% that appears a long way from being solved. The industry has not yet got to grips with opening new capacity without rationalizing the existing excess. Despite this, manufacturers are still building more in Eastern Europe and China to be able to manufacture closer to major markets in Europe and Asia while taking advantage of lower costs of manufacture. Various commentators believe that manufacturers are looking to export their capacity problem. With countries such as South Africa, Romania and Central Europe promoting their exports, the global market is likely to reach saturation when China comes on line. With this in mind, finding reasonably sized markets is crucial for the survival of OEMs. In 2003, Egypt produced 50,000 total production units across all vehicles. This low volume level would not normally exist in a single market, without market protection such as tariffs. Vietnam for example, is a protected market and has low volume producers such as the Hyundai Vinamotor joint venture that starts production in 2006, ultimately aiming to produce 36,500 CKD units per annum2. Table 1 shows the number of models produced in selected countries compared to their total production units. Egypt produces many more passenger car models than the other countries compared to the overall production volume indicating that individual assembly plant volumes are very low and overall production widely dispersed and highly fragmented. The industry outside Egypt has consolidated to enable it to concentrate production volume and rationalise models in an attempt to produce at economically viable levels. Ford, for example has consolidated its Ford Transit
2
Saigon Times, 7th July, 2004

production into two factories, one in Southampton in the UK and the other in Izmet, Turkey in an attempt to gain sufficient economies of scale.
Country
Number of plants 2 1 10 7 1 1 6 16
2003 country production (000) 825 432 3,202 5,145 331 281 1,657 50
Number of passenger car models 3 8 20 13 4 2 14 37
Belgium Czech Republic France Germany Poland Turkey United Kingdom Egypt
Source: World Markets Data Centre, Automotive News Europe, EAMA Table 1: Total production and passenger car model numbers for selected European countries
There is a similar pattern for light commercial vehicle assembly with the 6 light commercial vehicle assemblers producing an average 1,777 units per plant in 2003. According to the Organisation of Automobile Manufacturers (OICA) there were just under 43 million passenger cars and nearly 15 million LCVs produced in the world in 2003 (Table 2),. Passenger car and LCV production in Egypt, at 47k units accounted for just 0.08% of global production and is therefore a tiny market by global standards. With global overcapacity running at around 25%, existing assembly plants around the world are capable of producing much more than they currently do, therefore finding market potential to generate production volume to put through the factory is key to all automakers.

Region Western Europe Eastern Europe North America Asia Central and South America Middle East incl. Turkey (of which 58k is Egypt) Africa TOTAL
Passenger cars production units3 (million) 2003 15.1 2.5 6.7 15.4 1.8 1.0 0.4 42.9
Light commercial production4 units (million) 2003 1.7 0.2 9.2 2.9 0.3 0.4 0.1 14.8
Table 2: Global passenger car and light commercial vehicle production volumes, 2003
2.1.1.2 Sales
According to statistics published by Automotive News Europe5 and the Economist Intelligence Unit (Table 3), there were over 40 million passenger cars and 14 million LCVs sold in the world in 2003. Globally, sales grew by a mere 2.2% over 2002, indicating again that markets are mature and the overcapacity problem may linger for sometime yet, especially if demand continues to dwindle.
3 4
Source: Automotive News Europe Data Center Source: Organisation of automobile manufacturers (OICA) 5 Original source of statistics is R.L. Polk Marketing Systems, and Automotive News Data Center

Region Western Europe Eastern Europe North America Asia Central and South America Middle East Africa TOTAL
Passenger car sales (million) 14.2
Light commercial registrations6 (million)
1.50 2.5 9.4 10.2 1.7 1.3 0.22 0.7 40.1 14 9.86* 1.94 0.53
Source: Automotive News Europe, EIU, Primedia Business Magazines.* USA estimate or 9m units (sales)
Table 3: Global passenger car and light commercial vehicle sales, 2003
Egypts sales figures are contained within Africas sales figures and are shown in detail in Figure 1 compared to a number of benchmark countries. These countries have been chosen because they exhibit similar characteristics to Egypt such as population size and Gross Domestic Product (GDP). They also represent suitable benchmarks in that they have been among the most successful developing countries in terms of establishing a viable automotive industry in recent years. In addition, Turkey, Iran and even South Africa are those countries that are currently vying for predominance in the Middle East and North Africa (MENA) regions vehicle industry. The benchmark countries therefore represent countries that are comparable to Egypt in terms of key characteristics, but also offer examples of successful development that could be relevant for Egypts own industry.
Figures for LCV registrations relate to identifiable data, including all major producing countries

Vehicle sales by country

700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Egypt South Africa Turkey Romania Iran Thailand 1999 2000 2001 2002 2003
Source: World Markets Research Centre and EAMA
Figure 1: Vehicle sales of selected countries Of the 73,384 vehicles sold in Egypt in 2003, 70,882 were passenger cars and LCVs, representing 0.1% of global sales. Over time, Egypts sales have been in decline due primarily to currency devaluation issues and poor economic conditions. By comparison, South Africa, Turkey and Iran all grew by over 20% from 2002 to 2003 which is the prime reason why manufacturers have located assembly plants in these countries. Egypt has an advantageous geographical location in that although it is part of the Arab world, it is in Africa and very close to the EU. As described in the Phase 0 report, Egypt also has free trade agreements with the EU as well as most African and Middle East countries (through the COMESA and PAFTA regional trade agreements). Therefore its regional market could be quite large. However, European demand has been relatively flat for a number of years and manufacture and export is fairly well established. A more realistic export regional market for Egypt would be Africa and the Middle East. Examining this regional market it is evident that it is very diverse and the spread of wealth heavily biased towards a relatively small number of countries such as the members of the Gulf Cooperative Council (GCC). Total vehicle sales in Africa and the Middle East were 2.67 million units in 2003, an increase of 5.5% and 14.5% year-on-year respectively. The increase in the Middle East is due almost exclusively to Turkey, Jordan and Iran who all had over 20% growth in sales, whilst many of the countries experienced negative growth during this period. Egypt is part of COMESA (Common Market for Eastern and Southern Africa) which comprises 21 member states, has a population of over 385 million and annual import bill of around US$32 billion7. It is also part of the Arab world comprising 22 countries, 6 of which are in the GCC. Table 4 highlights some of the differences in the countries in this regional market.
Source: www.comesa.int

Country Lebanon Syria Jordan Libya Iran Iraq Source: EIU
Passenger Car Sales 2003 13,366 (to Aug 2004) 13,000 10,027 20,000 (2002) 694,000 (light vehicles) unavailable
Population 4m 18m 5.5m 5.4m 65.5m 23.6m
Table 4: Selected regional country passenger car sales
Buying patterns are very diverse with countries such as Lebanon importing many used cars from mainland Europe and the USA. There is demand in the region; however, with perhaps the exception of Iran, Turkey and Jordan that are growing at double digit rates, demand is fragmented and does not manifest the level of consistent growth that would convince international automakers of its potential as a region for locating major production facilities. Economic conditions aside, there are a number of fundamental reasons why vehicle sales are low in Egypt despite the countrys large population. Firstly, the purchasing power of the Egyptian population is very low and so they are generally unlikely to be able to afford to buy vehicles. Table 5, shows Egypts Gross National Income (GNI)8 compared to selected other countries. Country GNI per person
South Africa 10,270 Thailand 7,450 Iran 7,190 Romania 7,140 Turkey 6,690 Egypt 3,940 USA 37,500 Source: World Bank World Development Indicators, 2003 Table 5: Purchasing power parity for selected countries
GNI expressed in purchasing power parity (PPP). A method of measuring the relative purchasing power of different countries currencies over the same types of goods and services.

It can be seen that Egypts purchasing power is approximately 40% less than that of Turkeys and over 60% less than that of South Africas, implying that for the majority of the Egyptian population, a purchase such as a vehicle, is prohibitively expensive. Elsewhere, low purchasing power has been overcome by formal or informal financial services. In Russia for example, villages will club together to buy a vehicle and allocate its usage base on how much individuals contributed9. Secondly, if the prices of vehicles across a number of countries are compared, (Error! Reference source not found.) then it can be seen that for a basic 1300 cc passenger car, Egypt is the third most expensive country and South Africa, that has the highest purchasing power, is the least expensive.
Egypt Item Low-priced car, 900-1299cc (low) Low-priced car, 900-1299cc (high) Compact car, 1300-1799cc (low) Compact car, 1300-1799cc (high) Family car, 1800-2499cc (low) Family car, 1800-2499cc (high) Deluxe car, 2500cc upwards (low) Deluxe car, 2500cc upwards (high) Yearly road tax or registration fee (low) Yearly road tax or registration fee (high) Cost of a tune-up but no major repairs (low) Cost of a tune-up but no major repairs (high) Annual premium for car insurance (low) Annual premium for car insurance (high) Regular unleaded petrol, 1 litre (av) Price (US$) 11,649 14,623 20,430 27,419 31,362 57,348 155,824 204,889 31.36 44.8 61.83 110 1,226 2,747 0.18 Romania Price (US$) 9,036 10,507 14,620 15,576 23,920 31,682 75,557 78,473 75.43 121 377 1,282 0.7 Turkey Price (US$) 13,633 16,318 18,779 20,232 21,616 31,176 104,604 148,137 125 188 188 251 1,232 2,046 1.18 South Africa Price (US$) 8,020 12,809 17,529 17,942 28,748 42,379 69,765 82,402 21.07 21.07 74.35 99.13 1,350 3,162 0.52 Iran Price (US$) 15,161 15,537 14,910 17,542 17,542 18,795 51,372 57,010 50.12 50.12 15.04 22.55 150 301 0.02
(Source: Egyptian Auto Manufacturers Association (EAMA))
Table 6: Passenger car prices and associated costs for selected countries, 2003
Therefore, not only do Egyptians not have the money to purchase a vehicle, but relative to other countries, the price of vehicles is high. This applies both to consumers purchasing passenger cars and businesses purchasing commercial vehicles.
2.1.1.3 Price
Three key elements drive the price of vehicles. i) base vehicle manufacturing cost, ii) applicable taxes and iii) manufacturer/retailer profit margin. Evidence from one assembler interviewed for this study indicates that the base cost of the vehicles they produce is around $1,000 more expensive in Egypt than the equivalent vehicle produced outside Egypt. According to the interviews, this is primarily because the assembler is importing parts that attract a high duty rate, and is procuring parts from within Egypt that are more expensive (excluding tariffs) than the equivalent components outside Egypt. The price of Egyptian made components is dealt with in more detail in section 2.1.4.
Source: KPMG Experience
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If taxes are examined in more detail (Figure 2), it can be seen that the taxation levels in Egypt are not higher than in countries with significant vehicle sales. Taxes increase dramatically for cars with larger engines but for cars less than 1600cc taxes are lower than all the benchmark countries. Although taxes contribute to the overall vehicle price (and hence removing them could stimulate vehicle sales), they do not appear to be the primary factor in explaining high car prices in Egypt.
80% 70% 60% 50% 40% 30% 20% 1 0% 0% 600 cc to M o re than 2000 300 cc to Fro m 1 Less than 1 000 Fro m 1 000 cc to Fro m 1 cc less than 1 600 less than 2000 cc less than 1 300 cc cc cc
Egypt CB U S. A frica CB U/ CKD
Egypt CKD Turkey VA T
Ro mania CB U/ CKD Turkey Special co nsumptio n tax
Source : KPM G
Figure 2: Vehicle tax regimes for selected countries
Basic profit margin data could not be gathered for this study as it is commercially sensitive and closely guarded by all assemblers for fear that competitors will be able to derive each others cost structures from the data and will be able to gain some sort of competitive advantage. By process of deduction, it can be assumed that assemblers in Egypt are making reasonable profit margins that are contributing to the base price of vehicles. This is reinforced by an economic argument that at such small production levels, assemblers must be making reasonable profit margins to remain in business, and as there are limited market forces to create competition, assemblers are able to maintain their profit margins.
2.1.1.4 Exports
According to the EAMA, in 2003, only 250 and 34 passenger cars and light commercial vehicles respectively were exported. This represents around 0.5% of all vehicles produced in Egypt.
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Vehicle exports Turkey Romania South A. Egypt 1999 85,816 59,583 2000 96,489 68,031 2001 198,233 3,830 108,293 743 2002 257,744 3,830 125,306 2,109 2003 347,119 3,830 1,379
Source: World Markets Research Centre, EAMA
Table 6: Completed vehicle exports for selected countries (all vehicles)
If bus and truck exports are taken into account, then exports, at 1,379 units rises to around 3% of total production and around 2% of total sales. Turkey and South Africa (SA) have developed considerable vehicle export programmes on the back of free trade agreements with the European Union in 2000. Specific tariff changes relating to the EU for these two countries are: Turkey: In 2000, the government reduced duties for some types of vehicles by 0.8%3.5%. The 1996 customs union with EU and EFTA had a significant impact on imports. Imports reached 54% of sales in first 10 months of 2000. SA: SA moved to dismantle high tariff barriers since 1994. Free trade agreement with the EU effective from 01/01/00. Import duties on SA cars imported into EU will be phased out over next 10 years.
Romania is tipped to become a major exporter of low cost cars as Renault have plans to produce 700,000 to 900,000 production units per annum with an objective of exporting 50% to the EU, even though Romania is currently not an EU member state.
2.1.2
There are a large number of companies assembling a wide variety of models

There are 12 passenger car assemblers located in Egypt, some of which produce light commercial vehicles, and 4 additional assemblers that produce solely light commercial vehicles. Passenger cars and light commercial vehicles collectively accounted for 47.6k production units in 200310. Appendix 1 details the vehicle assemblers interviewed for this study.
10
Source: Egyptian Automobile Manufacturers Association (EAMA)
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Assembler General Motors (includes Opel) Bavarian Auto Group (BMW) Daewoo Hyundai Motors Egypt Mercedes-Benz Peugeot Egypt S.A.E. Arab American Vehicles Suzuki Egypt S.A.E. LADA El Nasr Automotive Manufacturing Co. KIA Motors Egypt FIAT EAMCO Manufacturing Commercial Vehicles Ghabbour Group (includes Mitsubishi) Nissan Egypt TOTAL
Number of passenger car models produced 2 2 3 3 5 8 2 2 3 3 2 2 37
Number of light commercial vehicle models produced 3 2 1 1 2 1 10
(Source: Egyptian Auto Manufacturers Association (EAMA)) Table 7: Egyptian passenger car and light commercial vehicle assemblers and numbers of models produced (Source: Egyptian Auto Manufacturers Association (EAMA))
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Table 7 highlights the overcrowded assembler industry and the overwhelming number of models they produce11. Overall, at least 37 passenger car models and 10 light vehicle models are produced by 16 assemblers creating a high variety of parts and specifications for the assembler to manage. In manufacturing this is typically referred to as the volumevariety relationship where higher variety generally results in higher costs. The volumevariety trend for automotive manufacturing is for simplification and platform rationalisation, as discussed in the introduction.
2.1.3
Domestic passenger car and light commercial vehicle production is only viable because of import tariffs
Egyptian made passenger cars and LCVs are exclusively assembled in a CKD form, which lends itself to lower volume assembly because apart from assembling the kits, limited other parts procurement has to be undertaken. In reality, Egyptian assemblers have moved to a partial CKD assembly, where they import kits of parts, and also procure a range of parts, such as seats and wiring looms from the local market. Of the 12 passenger car assemblers, average factory production was 2,715 units in 2003. This level of production, in todays automotive environment, is insufficient to be able to generate the economies of scale needed to operate and compete effectively based on international industry standards. Recent figures published by the Economist12 suggest that real economies of scale are unlikely to be generated under 250,000 units per annum for full scale CBU production and this figure may be higher for facilities such as body-in-white13 plants, where investment levels are particularly high. Even new CKD plants, such as those recently announced by Volkswagen in Iran and Nissan in Egypt14, quote CKD assembly figures of between 20,000 and 30,000 units per plant, per annum A recent European productivity report15 details productivity statistics for 44 European car assembly plants. These plants manufacture vehicles in CBU form and the lowest production volume is 51,000 units per annum. The highest production volume is 494,000 units per annum. Two measures typically used to measure assembly plant productivity are man hours per vehicle (HPV) and vehicles per person (VPP). Table 8 shows the three best performers for VPP and the two worst performers for VPP from the European survey and compares them against data for an Egyptian plant, gathered during this study. Although these figures are not designed to be a direct comparison, it is useful to see the levels of productivity that can be achieved for volume manufacture. Note that the figures for the Egyptian industry are for individual plants, and may therefore not be representative of the entire Egyptian industry. At 25 VPP, this is just below the lowest volume producer in the productivity survey. However, the VW plant in Germany, which produces the VW Passat, has an uncharacteristically large workforce and productivity is hampered by labour restrictions and strong unions. Although comparing to high volume production, productivity measured in VPP is still exceptionally low. Tariff protection has
11
Table 1 includes CKD vehicles only. Model variants have not been included in these numbers. i.e. a BMW 318 and a 318i have been taken as 1 model. There are many more models present in the Egyptian car parc, however these are CBU, imported models. 12 The Economist, 6th September 2004, Special Automotive Survey. 13 Body-in-white is the area of vehicle manufacturing where the vehicle body panels are pressed and welded together to form the vehicle body. In its unpainted state, the body is referred to as body-in-white. Investment in tooling, jigs and fixtures tends to be very high in this area 14 Economist Middle East Business Briefing, July 2004 and press releases 15 European Automotive Productivity Index 2003, World Markets research Centre.
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allowed assemblers in Egypt to make money despite this level of productivity. Again, it is not possible to calculate the profit margins of Egyptian assemblers without access to confidential company information, nor is it feasible to estimate this cost by modelling the operations of a typical Egyptian assembler.
Hours per vehicle (HPV)16 18.94 17.99 19.40 45.97 60.11 55 Vehicles per person (VPP)17
Factory Nissan (UK) Best 3 Renault (Spain) Toyota (France) GM (Germany) Worst 2 VW (Germany) Egypt Egyptian Plant18
99 89 88 35 27 25
Source: European Automotive Productivity index, 2003, World Markets Research Centre
Table 8: HPV and VPP comparison with selected European plants Case Study German carmaker Volkswagen recently announced a deal with Kerman Automotive Industries Company (KAIC) for the assembly of the Gol 1.8 litre four-door model at a facility in a Special Economic Zone in Iran. Initially the cars will be built from completely knocked down kits (CKD) produced in Brazil, but Volkswagen says that if the market develops it will consider manufacturing some of the components locally. The agreement is for production of 20,000 cars per year. Iran is considered by many international car companies as one of the most promising international markets, with projected vehicle sales to exceed 1 million units. This demonstrates clearly the market seeking rationale behind automotive production decisions production will only be located in markets where significant vehicle sales and strong growth potential exist. Source: Various press articles, KPMG analysis Box 1: Volkswagen announces CKD production in Iran
HPV. HPV gives an indication of the relative rates of production in the form of hours spent on the manufacturer of each vehicle at plant level. The HPV calculation takes the total number of units produced in one year and divides it into the total plant working hours in that year. 17 VPP. By European standards, a VPP of over 80 is considered to be highly productive. VPP is calculated by dividing the total number of vehicles produced in one calendar year, by the workforce in those operations that are considered essential for building a car. They are, press shop, Body-in-white, paint shop, trim and final assembly and rectification. 18 Data for the Egyptian plant is for 1 plant only.
16
15

If a vehicle manufacturer decides that there is sufficient market potential to sell its vehicles it can enter the market in one of three ways. Firstly, it could have a local partner managing CKD operations, secondly, it could manufacture product outside of the country and ship it in and thirdly, they could set up a local, wholly-owned production facility. It is probable, everything else being equal, that the manufacturer will make a greater profit margin by shipping the vehicle into the market, in completed form, than by assembling it there, particularly if volumes are very low. However, because Egyptian tariffs are so high (Table 9), the only way manufacturers have been able to get into the Egyptian market is by using a local partner and partially manufacturing the vehicles in market. In this instance, profits will have to be split with the joint venture partner. Add this to the cost of knocking down vehicle kits and the OEM (outside Egypt) is probably making smaller margins this way than they would by shipping the finished vehicle from a plant outside the country. The incremental margins available in the tariff protected market give the opportunity for the OEM/CKD supplier and the local assembler each to have their acceptable margins, protected by the tariff but, because of the high price, on a restricted volume. Once tariffs are reduced, it becomes more profitable for the international OEM simply to ship the product from overseas rather than to share the margin with a local partner. At the same time, the lower tariff barriers will make it more attractive to local customers to seek an imported product, so reducing the demand for locally assembled product and providing a further incentive for the international OEM to supply the market though exports rather than assembly (and profit sharing) with a local partner. Therefore, in the absence of tariffs, manufacturers will be likely to ship finished cars in from abroad, because profit margins will be greater than under the current arrangement. The fact that low volume production at the levels currently seen in Egypt can only be observed in protected markets (e.g. Vietnam) is a clear indication that they are only sustainable due to tariffs, and represent a second-best option from the international manufacturers point of view. There is already 1 example of a successful importer in Egypt. Case study Toyota is an interesting exception in the Egyptian industry. Toyota is an importer and as far as can be ascertained, has no plans to manufacture in Egypt. Even with high tariff barriers, Toyota imports its entire product range from Japan. As a sales and marketing organisation, Toyota understands what it takes to price for advantage and has witnessed strong sales growth over the past 2 years or so. When import tariffs fall, Toyota will inevitably increase their sales volume as their prices will also fall. This model demonstrates that even when the product is manufactured in another location that offers low costs of production and economies of scale, it is still possible to achieve a strong market presence in a protected market such as Egypt without actually assembling there. Source: Interviews and research, KPMG Box 2: Import versus assembly
NOTE: Tariff rates on automotive imports were changed unexpectedly after KPMG had completed most of its research for this project. While these tariff reductions are expected
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to be significant for various categories of vehicles, they do not alter the findings and analysis of this study and may even accelerate some of the processes described in this report.
Engine capacity
Import duty CBU CKD 26 % 26 %
Sales tax CBU 15% 15% CKDCBU 15% 15%
Less than 1000 cc From 1000 cc to less than 1300 cc From 1300 cc to less than 1600 cc From 1600 cc to less than 2000 cc More than 2000 cc Source: KPMG
40 % 55 %
100 %
26 %
15%
15%
135 %
26 %
30%
30%
135 %
26 %
45%
30%
Table 9: Import duty and sales tax levels on Egyptian vehicles (pre 5th September 2004)
Interviews conducted by KPMG for this study with international car producers provide important insight into the calculations that determine under what conditions such companies decide whether to establish assembly in a specific country or market. One major company interviewed by KPMG stated that their basic premise for entering a market is that they will achieve a 10% to 15% market share of the overall domestic market. The same company also indicated that the minimum size assembly facility they would consider establishing would be for a capacity of around 30,000 to 35,000 units. In other words, for the company to achieve a market share of 15% while reaching a capacity of 30,000 units would require a total market size of at least 200,000 cars. For Egypt, this would represent an increase in market size of 300% based on a sales figure of around 50,000 cars in 2003. In the event that Egypt does reach a market size of 200,000, the number of assemblers that could be sustained (in the absence of tariffs) would depend on the level of import penetration. In Turkey, for example, imports grew rapidly following liberalisation and stabilized at around 50% in the years following the opening of the market. Assuming the same holds true for Egypt, domestic production of 100,000 cars (i.e. 50% of total sales) would therefore be able to sustain a maximum of three assemblers each producing at levels of approximately 30,000 units (minimum viable scale). These calculations are not unusual in the industry, and are reflected in the location decisions of other international producers. Some producers may enter smaller markets early if there are strong indications that the market will grow significantly or if there is significant regional potential for exports. However, even in these cases the decision is driven primarily by market size requirements that Egypt currently does not fulfil.
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2.1.4
Production costs are high despite very low labour costs
2.1.4.1 Local content rules contribute to high costs

Local content rules in Egypt are governed by Presidential Decree number 429, year 2000 (see the Phase 0 report for more detail on local content regulations). The local content ruling has been used as a means to vary the level of tariff on CKD assemblies, depending on the percentage of parts (by value) that are sourced from local suppliers. OEMs located outside of Egypt interviewed for this study highlighted that they purchase parts from around the world, wherever they are cheapest and the right quality level and delivery schedule can be guaranteed. Table 10 shows the difference in price to an Egyptian assembler of a range of components between those sourced from Egyptian suppliers and the equivalent components if they were sourced from suppliers outside of Egypt (including tariffs).
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Component Description
Prices of local content items locally purchased. (LE) 8,000 840 2,500 4,900 2,000 740 95 110 13,000 8,200 3,500 300 500 4,000 40,685
Prices of local content items imported from foreign suppliers. (LE) 6,190 620 2,300 3,650 1,300 700 75 90 10,000 6,200 3,100 230 450 3,900 32,615
Air conditioner Radiator Exhaust system Cable harness Glass Protective plate Brake cables Jack Seats Door panels Carpets Sun visors Battery Radio TOTAL EGP
Table 10: Price comparison of selected Egyptian and non Egyptian components19 On average the components made in Egypt are around 25% more expensive than their foreign equivalents. This was confirmed by other assemblers interviewed by KPMG in Egypt. Component suppliers have in the past benefited from the local content rules, which have in effect switched the balance of power away from the assembler, to the component manufacturer. Outside Egypt the balance of power is very firmly with the manufacturer, enabling him to ruthlessly drive down costs throughout the supply chain. It is common practice to ensure that suppliers sign up to year-on-year cost reductions, before they become a supplier to a particular manufacturer. This practice does not appear to be widespread in Egypt.
19
Source: Data in table was provided by an Egypt-based vehicle assembler on the condition of confidentiality
19

2.1.4.2 Labour costs

Although component and material costs are high, compared with those available on the global market, labour costs are exceptionally low.
2.5 2 1 .5 1 0.5 0 Egypt Turkey Ro mania China Thailand
1 999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Economist Intelligence Unit, 2004
Figure 3: Labour costs for selected countries Figure 3 compares Egypts labour costs (average hourly wage costs in US$) with countries that have recently been attracting major automotive production facilities and it can be seen that Egypt has a labour cost below all the comparator countries. Interviews conducted for this study confirmed that labour was very cheap to employ in Egypt. None of the Egyptian assemblers interviewed for this project reported any significant difficulties in recruiting sufficiently skilled employees for their assembly activities.
2.1.5
With some exceptions, foreign investment is low

Ownership structure of the passenger car and light commercial vehicle manufacturers in Egypt varies, but predominantly these organisations are joint partnership arrangements with mother companies outside Egypt and private investors in Egypt and the surrounding region. Nissan is the only assembly company that is predominantly owned by foreign investors (90%). Nissan Motor Egypt only bought out Nissan Egypt (NEG) toward the middle of 2004. This low level of foreign investment perhaps indicates that foreign companies are unwilling to invest significant amounts in Egypt because the market size is too small to justify owning production facilities. It also means that foreign companies can quickly withdraw their investments with limited costs, and do not yet perceive Egypt as a market where they would invest significant capital for a longer term presence.
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FDI inflows20 (US$m) Country Turkey South Africa Romania Egypt 1998 940 561 2,031 1,076 1999 783 1,502 1,041 1,065 2000 982 888 1,025 1,235 2001 3,266 6,789 1,157 510 2002 1,037 754 1,106 647
Source: World Investment Report (UNCTAD)
Table 11: Total Foreign Direct Investment flows for selected countries Table 13 shows total FDI flows (for all industries) into Egypt compared to selected countries. Although total FDI in Egypt is not much lower overall, all of these other countries have a number of large, wholly-foreign owned passenger car assembly facilities. This indicates that although Egypt has attracted FDI from other sectors, this has not been the case in the automotive industry. The fact that foreign investment is limited in the automotive sector also has implications regarding the amount of technology and know-how that international companies are willing to apply to developing the Egyptian industry. The experience of South Africa has shown that following market liberalisation and the introduction of export incentives, many international companies assumed ownership of their previous joint venture operations in the country, investing significant amounts of capital into new technology and upgrades. This resulted in a significant transformation of the industry, including the entry of international suppliers and an overall enhancement of standards. One negative side effect was that many local suppliers were displaced by foreign investors, although those South African suppliers that survived have been forced to enhance their competitiveness in order to retain the business of the international automotive producers.
2.1.6
Assembler quality levels appear competitive

Quality is a key issue for the automotive industry, particularly in the passenger car and light commercial vehicle segments as product differentiation can no longer be gained through quality differences. Quality is taken for granted and standards must be equally high for all companies. Globally, all suppliers to the big four manufacturers (Ford, General Motors, Daimler Chrysler and Volkswagen) have to meet recognised quality accreditation standards. The majority of supply to these organisations comes through Tier 1 suppliers who will be quality accredited to ISO 9001, QS 9000 and more recently TS 16949. These quality standards will be demanded and enforced by the assemblers. The interview programme for this project highlighted that the manufacturers facilities visited on the whole, for the volume they produce, are working to world class quality standards. GM for example, achieved a quality award for the best factory in the Group. Typically, the joint venture arrangement in Egypt has used the quality standards and arrangements of their mother companies to put robust quality procedures in place.
20
Note, these FDI inflows are totals for each country, and include automotive as well as FDI for other industry segments.
21

A significant number of manufacturing facilities were visited as part of this study and although world class quality standards were visible, there was an abundance of labour providing quality control at many stages of the production process. Even with Egypts low labour cost, this is still adding a large cost into the production process that would not be sustainable if global cost structures are to be achieved.
2.1.7
Summary
Based on this analysis, as tariffs on passenger cars and LCVs are lowered, a point will be reached where it is more profitable for OEMs to import than to assemble. All other things equal, many assembly operations in Egypt will cease and the market will be served primarily by imports. Key factors driving this scenario are The Egyptian market is small and highly fragmented by global standards and export potential is limited. Egypt is currently not an attractive market in terms of volume from an assembly perspective for international companies who are already faced with spare capacity in other countries that they need to export; The cost of the CKD unit is greater than the cost of the CBU assembled on a volume production line because of the double handling costs of the CKD components - pick, pack, ship, unpack, assemble - compared with simply 'assemble in a purpose built facility'. Given the small sales volumes they are likely to achieve, international companies can make more profits by simply exporting to Egypt rather than sharing profits with a domestic assembler. Low production volumes (i.e. lack of scale economies) will make it extremely difficult for local assembler operations to compete with volume-produced imports in a no-tariff environment. This problem will be exacerbated as the share of imports rises and local production volumes decline further. Most international OEMs have limited investments in Egypt and the costs of exiting are therefore low.
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2.2
2.2.1
Bus and coach segment

Overview of the Global Bus Industry
2.2.1.1 Origins
Worldwide, buses and coaches are the most prevalent and widely used means of public passenger transport. The vehicles used take a number of forms and are responsible for many types of journey for work, for leisure, for education and health but they are to be found in virtually every country, regardless of the level of provision of other forms of public and private transport. Buses represent a less expensive and more flexible solution to passenger travel than rail or air based modes, with much lower unit and infrastructure costs, although of course they are capacity constrained in relative terms. Buses and coaches were originally derived from trucks, with a high proportion of shared components in the early days, but this situation has changed progressively as vehicle engineering and characteristics have developed, also to meet emerging legislative requirements. The period of evolution has spanned the last 85 years or so, but it is important to recognise that in the developing countries21, truck derived vehicles remain standard; they are less expensive to source and road conditions require a higher degree of clearance between the road and the vehicle.
2.2.1.2 Vehicle specifications and development

Some key milestones in vehicle development have included: The introduction of production diesel engines, followed by horizontal engines, which were mounted under floor, thus increasing passenger capacity, and rear mounted vertical engines, which provide improved access for engineering purposes and limit the noise experienced by passengers; The move from manual towards pre-select and fully automatic gearboxes, which are more suited to the rigours of full time driving and provide a smoother ride for passengers; Safety features, such as strengthened body shells, ABS, speed limiters and retarders; Comfort features, initially air suspension, but later items such as air conditioning, which is particularly valuable in hot climates but more suited to coaches than buses because the doors are opened much less frequently given the nature of their use. Also the likes of toilets and refreshment facilities on coaches, which facilitate longer continuous operation without the need for so many stops; Features driven by environmental requirements, notably legislation which is progressively tightening permitted levels of emissions and engine noise in many countries; The drive towards accessibility in those countries where the roads are good, generally the same nations where car ownership and use has exploded, there has been
21
Reference is made to developing country where the road conditions are poor. Poor road conditions require more robust bus designs and hence a different specification than that needed for European roads for example.
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a strong trend towards low floor fully accessible buses as part of the move to attempt to arrest traffic congestion by making public transport more attractive. Low floor buses are also a response to the particular needs of the disabled and those who are less mobile, people who often do not have access to cars and are reliant on buses for mobility and equality of opportunity. This latter issue has also been the subject of legislative pressure in some countries; Designs and developments to permit increased capacity on busy urban corridors, including lengthened three axle vehicles, also articulated buses; Increasing sophistication of on-board equipment, sometimes to help passengers in their use of public transport visual indicators detailing service or stopping information, pre-recorded announcements, etc; also equipment to assist service management and control such as radios and location systems.
There are currently two fundamental types of vehicle design, that comprising a separate manufactured chassis and body, which will have been produced by two different manufacturers, and the integral vehicle which his made entirely by the same builder. Integrally built vehicles are common in certain European countries, North America and Japan; other countries, including Egypt, generally rely on vehicles where the chassis and bodywork have been separately constructed.
2.2.1.3 Vehicle types

Clearly there is a multitude of vehicle types, but principal categories include: Double deck buses generally used for intensive urban services requiring a high capacity, and traditionally popular in the United Kingdom and Ireland, Hong Kong and Singapore. The use of these vehicles is seeing something of a renaissance, with new buses now being introduced in some numbers in parts of North America; Single deck buses the standard worldwide product, taking many forms as indicated above, from the more simple robust truck derived vehicle where roads are poor, to the sophisticated low floor product of modern capital cities. A derivative is the articulated bus, with a concertina like section linking the front and rear sections and internal through access for passengers. These vehicles provide a high capacity (typically up to about 140 passengers); Minibuses the generic term for small passenger vehicles, typically with between 9 and 16 seats. These vehicles are prevalent in many countries, and in some nations they constitute the primary form of public passenger service provision, often on an ad-hoc or unlicensed basis. In countries with mature networks, they are often used as the means of accessing tightly developed urban areas where roads are narrow and corners tight, also for rural services where demand is limited; Coaches are used for a variety of kinds of work, including holiday and extended tours, excursions, scheduled long distance express services and private hires. Given the nature of the work, the vehicles are equipped to a higher standard of comfort than buses; some of the work on which they are employed is directly competing with rail and air services, but coach fares are generally a key attraction; School Buses in North America it is normal practice to use dedicated specially constructed vehicles for conveying students to and from school. These buses are
24

truck based, inexpensive and very robust in order to provide maximum protection for their occupants.
2.2.1.4 Global production and sales

Global bus and coach sales are estimated by trade associations to total a little over 200,000 units per annum, with Asia and Australasia accounting for about 40% of the total, around 80,000 units, North America some 30% or 60,000, Europe 25% or 50,000, South America about 25,000 and Africa and the Middle East under 5,000 in total. This implies that Egypt has a share of about 50% of the regional market for buses. It is difficult to account accurately for production or sales numbers because of uncertainty over the precise number of vehicles built and used in China, which is the largest market in the world, and continues to grow with the rapid expansion in that countrys economy. It is also wise to be cautious over production and sales numbers because of difficulties with definitions over smaller buses many small minibuses are van derived, and there is no consistency over how they are reported.
2.2.1.5 Key producers

The world bus manufacturing industry is dominated by Western European groups, which build locally for their home markets but have also established a global presence through exports, subsidiary businesses abroad and joint ventures or licensing arrangements. Daimler Chrysler is the largest worldwide bus and coach builder, with operations across all continents manufacturing plants are situated in four European countries, in Brazil (where production capacity amounts to some 30,000 bus chassis per year) and, through the Thomas Buses subsidiary, in the United States. Vehicles are also assembled in many other countries through joint ventures and licensing arrangements; the countries include China, Indonesia, Australia, Iran and South Africa. The other key European producers with wider interests include: Volvo - with chassis manufacturing facilities in Europe and Brazil, body plants in other countries, and joint ventures in North America and China; Scania - also with chassis manufacturing facilities in Europe and South America; Irisbus - part of Iveco, with the wholly owned Renault and Iveco bus building businesses, and majority shareholdings in Heuliez (France), Karosa (Czech Republic) and Ikarus (Hungary); MAN with factories and assembly facilities in Germany, Poland and Turkey.
There are a number of other smaller European manufacturers, several of which also have overseas interests; this all adds up to a situation where businesses which are either owned by the European builders or are in joint ventures with them, dominate production across Europe, in North and South America, and have increasing interests elsewhere.
2.2.1.6
Trends
It is undoubtedly the case that consolidation will continue, along the lines that have already been seen and are outlined above. This is likely to include increasing penetration
25

into the Chinese market on the part of the established Western manufacturers; possible further relationships with manufacturers in countries which have retained more of a free standing industry (India, Japan); more consolidation in North America; and further acquisitions of body building businesses by the large chassis manufacturers. With regard to vehicles themselves, there are likely to be further developments in the environmental and accessibility areas discussed above, again associated with further new legislation. Another area is alternative fuels pressure relating to emissions has directed more work and experimentation in the use of both Compressed Natural Gas and Liquefied Petroleum Gas, while Ethanol is used in some countries and there are experiments, including a current one in London, with Hydrogen Fuel Cells. Basic vehicle design will still be heavily influenced by road conditions in different countries, although it is likely that there will be more engineering solutions towards low floor access to vehicles even if the whole floor cannot be lowered. Work is also proceeding with the use of lighter weight materials to manufacture buses, which will be pertinent to fuel types and fuel consumption.
2.2.2
The Egyptian bus segment is fragmented

There are 4 companies producing buses in Egypt, including 1 state owned business and at least one company that is performing well and considers itself to be a regional player. Buses are produced in low volume, which means that there are limited economies of scale in bus manufacture. Collectively they account for around 4,000 units of capacity and produce around 2,400 units per annum22. The segment is dominated by two major players; Manufacturing Commercial Vehicles (MCV) operating under licence from Mercedes Benz and the state owned company EAMCO. These two companies have 38% and 23% market share respectively.
Country Turkey Egypt South Africa Romania23 Czech Republic Poland Source: OICA 2001 2,501 1,856 837 40 1,552 1,372 2002 2,684 3,052 1,219 13 1,812 1,588 2003 4,490 2,186 933 1 1,787 1,373
Table 12: Bus and coach production by country
22 23
Source: Interview programme and EAMA OICA estimate
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2.2.3
There is a high degree of local content manufacture

The bus segment differs from the passenger car and light commercial market segments because bus assembly requires much more manual input, and production runs are much shorter. Typical lifetime production units for a bus would be around 8,000 to 10,000 for a country like the United Kingdom. For a country like Egypt, where replacement cycles are longer, lifetime production units of 4,000 would not be uncommon. Short production runs and limited automation have therefore encouraged local bus manufacturers to manufacture many of the components they need themselves such as seats and stitching and turned parts, when they cant purchase them on the open market. This has resulted in local content of up to 75% for some bus manufacturers and has in effect, shielded them from high tariffs on imported components as they have no need to import parts and assemblies. Because most local buses are built on robust truck chassis, there is an opportunity to replace the bodywork before the natural life of the chassis has been exhausted, thus effectively extending the useful life of the vehicle.
2.2.4
Export activity is ongoing

According to the EAMA, 874 buses were exported in 2003 representing 36% of production. Export destination Gulf countries African countries Other countries Total Source: EAMA Percent 90% 9% 1% 100%
Table 13: Egypts bus exports by destination country
Table 13 illustrates that the major market for bus exports is represented by the Gulf States, where buses are important in transport terms because there is only a single rail link (in Saudi Arabia). The largest market for buses within the Gulf is Saudi Arabia, which has a developed urban and interurban service network, and also requires large numbers of buses to transport pilgrims. The largest single operator in the Kingdom, SAPTCO, has a fleet which is some 2,000 vehicles strong. It also operates international express services to neighbouring states. Among the other Gulf States, there are operators of full sized vehicles in Oman (ONTC), UAE, Bahrain and Kuwait; they provide links between states, organised local public transport networks and also carry large numbers of migrant workers. It is anticipated that demand for new vehicles will continue from these states.
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2.2.5
Movements in regional demand for buses

Within the Global Bus and Coach Report24 demand for buses and coaches was calculated on a North African, sub Saharan Africa and South African basis, although detailed production and sales numbers are not available for these regions. Table 12 highlights that most of the production figures decreased from 2002 to 2003 indicating a potential market contraction; however the production numbers are quite volatile probably because one-off contracts have a disproportionate effect.
2.2.5.1 Sub Saharan Africa

The market for buses in sub Saharan Africa is shrinking and the age of the current fleet is cause for concern. Whereas some years ago there were organised public transport networks in a number of countries and cities in this area, a chronic lack of investment together with uncontrolled competition from unlicensed minibuses have combined to cause most of these to fail. Public transport is as a result largely now run by small buses, and there are only a few cities where organised public transport continues to function. The number of coaches in use has therefore always been small, mainly confined to South Africa for tourist circulation.
2.2.5.2 South Africa

South African bus demand has been forecast to increase 3-fold from 1999 to 2005 to 1,400 units per annum. According to the National Association of Automobile Manufacturers of South Africa (NAAMSA) there were about 22,000 buses over 7.5 tonnes MAW in South Africa in 1999. After falling back in 1998, demand for buses and coaches in South Africa staged a recovery in 1999 with an estimated increase in sales of 14% to 480 units. Overall demand is expected to increase 3 fold to 1,400 units to 2005. There has been vigorous competition between taxis and buses for the market to transport workers. Bus drivers have been shot during the intense competition. The government has made plans to replace some of the very old buses employed on this type of work with safer modern vehicles25. A vote of confidence in the future of the South African market has been provided by the announcement by Volkswagen in September 2004 that it is to build a bus and truck assembly line near its existing car facility at Port Elizabeth during the second half of 2005.
2.2.5.3 North Africa

North Africa has a developed bus infrastructure which is characterised by a number of different manufacturers, predominantly importing chassis from Europe and assembling the bodies in market. Egypt, Morocco and Tunisia have substantial fleets of buses serving the tourist industry and there are regular and regulated bus services in most towns and cities across North Africa. The majority of chassis for larger buses and coaches are imported from Europe although Volvo and Daimler Chrysler have in the past also supplied from their factories in Brazil.
24 25
Source: Economist Intelligence Unit Source: KPMG experience
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2.2.6
Summary
The Bus industry is a viable industry in Egypt, particularly as fewer economies of scale can be generated with small production runs and Egypts labour rates are low enough to be able to capitalise on the highly labour intensive bus assembly process. Bus manufacturers differ from passenger car and LCV manufacturers in that they have been less dependent on tariff protection for their survival. Although these organisations use some of the same suppliers for their parts, they manufacture many of the parts they need themselves. This has had two benefits. Firstly they can control the cost and delivery and secondly, perhaps more importantly, they can control the quality. An interview with one particular company indicated that where they are unable to control the quality of the parts they receive so they manufacture them in-house. As with passenger cars and LCVs, further reductions in tariff levels, everything else being equal, will cause some of the bus manufacturers to become less competitive and potentially cease operating. A reduction in tariffs will also enable the more capable manufacturers to start to procure more parts from cheaper sources overseas rather than making the parts themselves, enabling them to reduce their costs of production and sell cheaper buses. As competition starts to be based on international market costs, those manufacturers who are not able reduce their costs in line with their competitors will lose market share and risk going out of business. Unless the Egyptian government decides to replace significant quantities of public transport fleets, it is unlikely that domestic demand alone will be sufficient to allow the industry to grow given the current number of assemblers. The export market is therefore important in maintaining the viability of this industry and is likely to provide continuing demand in the Gulf States and Africa. In much of the Arab world there is also limited rail infrastructure and buses are heavily relied on for mass transport. With a bus lifecycle of 10-12 years there could be demand for around 400-500 new buses per annum in these regions.
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2.3
2.3.1
Truck segment
The global truck industry
2.3.1.1 Characteristics of the global truck industry

The global truck industry, like the passenger car and LCV industry is plagued by global overcapacities, decreasing profits, fast changing market surroundings, and customer demands26. These factors have increased the pressure on truck manufacturers worldwide. The emergence of new technologies, the liberalization of truck retailing due to changes in government regulations (e.g. European Block Exemption) and the increasing number of new market entrants are widening the variety of distribution channels and further changing traditional truck retailing processes. Truck manufacturers are forced to rethink their current retailing strategy and to implement innovative marketing and retailing concepts in order to remain competitive in the future.
2.3.1.2 Consolidation and globalization mark the truck industry

Global truck manufacturers face pressures of globalization, cost-cutting, and excess capacity. This has already led to an increasing pace in industry consolidation with several large mergers and acquisitions having taken place only recently, such as Volvo & Renault V.I. or DaimlerChrysler and Western Star. Some industry senior executives feel that the need to achieve manufacturing economies of scale and pool research and development resources to cut costs will prompt further consolidation among truck producers over the next five years and there is a general view that production capacity will fall. Others take the view however that many of the advantages consolidation brings could also be achieved through strategic alliances. The key trigger for consolidation is seen as the ability of a bigger company to obtain better terms from parts suppliers and the need a volume manufacturer has to have a presence in all major global markets. The impact of competition is considered to have less relevance, but competition will be reduced as a consequence of consolidation.
2.3.2
Growth opportunities
Eastern Europe, China and the rest of Asia have the greatest global potential for truck sales growth during the coming five years as these markets witness rising demand. This is in marked contrast to demand in North and South America and Western Europe, which are likely to be far less buoyant and experience limited growth. However, much will depend on economic conditions, as truck sales are highly sensitive to economic swings and the general business cycle.
2.3.3
Global trends
Despite pressures to switch to environmentally friendly fuels such as compressed natural gas, the vast majority of the trucks sold between now and 2007 will still be diesels. There will be continued pressure to reduce diesel exhaust emissions, and in the short term, diesels may increasingly have to be fitted with particulate traps to meet ever-tougher air
26
The truck industry (from KPMG Truck Retailing in the New Millennium,2001)
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quality requirements. Truck makers will also have to introduce further noise reduction measures, and use more components that can be recycled. A growing use of electronics and the need for sophisticated diagnostic tools mean that more and more trucks will be serviced by dealers rather than by the operators themselves. Far more trucks are likely to be acquired on contract hire agreements between now and 2007. Manufacturers will get increasingly involved in putting together contract hire deals and providing haulers with fleet management data.
2.3.4
Mature markets within the global truck industry

Like the passenger car and LCV industry, the truck industry is also global and markets are mature. Therefore, issues of demand and profitability, at a global level, will affect regional and local markets as well, particularly as the industry continues to consolidate.
2.3.4.1 Heavy and light trucks gain in importance

The truck market can be divided into three product segments: light, medium, and heavy trucks. An ongoing trend towards heavy trucks at the expense of the medium truck segment can be identified when regarding sales forecasts up to 2005. This forecast is supported by expert interviews KPMG conducted in 2001 and by considering the further opening of the Western European Markets, the opening of the Central and Eastern European Markets, and the continuing deregulation of the road transport industry. These factors are likely to increase the demand for long-distance transport, thereby reducing replacement cycles through more intensive use.
2.3.4.2 Increasing power of customers leads to further reduced margins

The structure of the truck market is changing as customer markets change. A consolidation towards bigger fleets is marking the freight distribution industry. Fleet operators are using their market power to negotiate considerable discounts on large volume orders. Profit margins of new truck sales are therefore low with aftermarket services contributing an increasing portion to manufacturers and dealers earnings. Hence, manufacturers increasingly see themselves as broader-based mobility providers and try to take control of the distribution of value-added services by buying out thirdparty distributors.
2.3.5
Middle East and African markets
2.3.5.1 The Middle East

Markets in the Middle East are diverse and can be broadly grouped as follows The oil producers (Saudi Arabia, UAE, Kuwait, Qatar, arguably Bahrain, Oman), characterised by relatively sparse populations and therefore with only limited scope to develop manufacturing industries. There has however been significant capital investment in infrastructure and therefore there are good existing road
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networks. Rail networks are limited so there is often a demand for long road hauls. Countries with limited or no oil reserves which have developed to complement the oil producers by supplying labour, agricultural produce, manufactured goods and services, including Syria, Lebanon, Jordan, Yemen and Egypt. Supplying the oil producers has often involved long-distance road haulage. Wars have affected sea routes (e.g. closure of the Suez Canal from 1967 to 1975, risk of navigating the upper Gulf during the Iran-Iraq war) and this has also created a demand for long overland hauls. Iraq should be considered separately, due to its unique political situation. There is long term market potential for new trucks, due to its abundance of oil and sizeable population, however the current political uncertainty makes it an unlikely short term market prospect for supply of newly produced trucks.
Regulation has long permitted high gross weight vehicles on the roads and European and Japanese manufacturers are well established in the market. Exhaust emission issues are becoming a concern however (e.g. in Bahrain), but regulation is likely to follow leads set elsewhere. Small businesses are still common in the trucking industry, with family businesses often operating light or heavy trucks, whilst regulation is often an instrument of social policy, with haulage licences being distributed to provide jobs for local people. There are however, some state trucking enterprises, such as joint ventures between the Government of Jordan and the Governments of Iraq and Syria to haul international transit traffic from the port of Aqaba. There is the potential for expansion of the market for imports of used trucks from Europe, as the previously favoured export destination of Eastern Europe has seen significant decline in recent years, and there is a well established import trade of second hand vehicles to Lebanon, Jordan and the UAE, due to the availability of good used vehicles, especially from Germany and Japan, and in some regions import duties being higher on new vehicles than on used. Recent reports have indicated that the Middle East truck market is currently experiencing strong demand, as a result of reconstruction efforts in Iraq as well as increased oil revenues benefiting some of the regional economies. Mercedes Benz announced in September 2004 that it will sell 16,000 trucks to the Middle East in 2004, compared to 3,200 in the year 2000. However, all of these trucks are being produced in Germany and exported to the region.
2.3.5.2 North Africa

This may appear an attractive and viable market for Egypt, because economic prospects are less uncertain than those of sub-Saharan Africa, and also because Arabic is the common language. In addition, road networks are often reasonably good. Morocco, Algeria and Tunisia have local truck / bus assembly operations working with European producers (Berliet Maroc is part owned by Renault, STIA in Tunisia works
32

with several European producers). These industries have developed behind protectionist barriers, and their existence would be an obstacle to Egyptian exports.
2.3.5.3 Sub-Saharan Africa

The countries of sub-Saharan Africa are rarely seen as attractive markets, due to the history of poor economic performance and political uncertainty affecting some of the biggest markets such as Nigeria, Congo, Zimbabwe, Sudan and the Ivory Coast. However, higher oil prices have produced improved GDP growth for oil producing countries in recent years.
2.3.6
Truck production in selected countries

Country Turkey Egypt27 South Africa Romania Czech Republic Poland28 India29 China30 WORLD TOTAL Source: OICA 2001 9,683 3,333 12,321 333 2,719 2,232 90,400 800,000 2,026,231 2002 16,672 4,109 13,068 451 2,769 893 139,700 1,100,000 2,823,752 2003 25,835 5,011 15,863 237 2,327 905 209,100 1,200,000 3,103,573
Table 14: Truck production by country .
2.3.7
Emerging producers
Both India and China have the potential to become significant participants in the market place. The major international manufacturers are investing in China, which could become a major player in export markets in future and has recently begun to export commercial
27
Some of the bus producers produced the trucks in Egypt
28 29
OICA estimate India figures relate to the two major manufacturers and also include buses as figures are quoted together, due to buses being majority truck-derived 30 China figures are KPMG estimates based on CSFB China Auto Sector 2003 sales figures and limited current import and export activity
33

vehicles to the Middle East, as evidenced by shipments of small sized commercial vehicles to Syria, by Changan Automobile Group, in early 2004. In contrast, India is already a player in the Middle East and Africa, due to established trading relationships.
2.3.8
Major Indian producers

The two major Indian producers of trucks are Tata (160,000 trucks/buses produced in India 2003) and Ashok Leyland (49,000). Tata Motors was established in 1954 and benefited from a 15-year co-operation agreement with Daimler-Benz, which helped give early development of a reputation for quality. Tata now builds Cummins engines under licence and is at the small/medium end of the market, producing vehicles of up to 210bhp. In 2003 Tata acquired Daewoo commercial vehicles, which gives it access to technology for bigger vehicles (up to 450 hp). Currently it has assembly operations in Malaysia, Bangladesh, Kenya, and South Africa. Ashok Leyland is part of the Hinduja conglomerate. It has a deal with Hino on engine technology and a joint venture with Irizar of Spain on bus body manufacture. It supplies CKD vehicles to plants in Bangladesh and Sri Lanka and builds trucks of up to 25 tonnes MAM.
2.3.9
Summary
Overall, trucks are highly complex and sophisticated machines but as far as can be ascertained from KPMGs research, the Egyptian market is low technology (i.e. does not produce high technology tractor units31 or bodies such as fridge units), small in international terms and is primarily concerned with the manufacture of low MAM fabricated bodies. Because of the global consolidation issues mentioned earlier in this section, if Egypt produced tractor units which are highly technological and therefore high cost, then it would be likely that this industry would disappear and be consumed by the global operators in the absence of protection. As it is more likely that Egypt produces low technology fabricated bodies32, the industry may survive because Egypts low labour cost would allow it to remain competitive. However at a total export volume of 1,464 medium/heavy trucks33 for the last three years, further export markets would need to be found to maintain economies of scale, as competition increases. This will be difficult in a global industry that has spare capacity and is consolidating. Although, there appears to be market potential in the Middle East region, Egyptian producers will be competing against international truck companies selling to the region. Since these are often the same brands that are being assembled under license in Egypt for the domestic market, Egyptian assemblers may be precluded from exporting to countries served by the international OEMs. Egypts potential would therefore be contingent upon the agreements in place between the Egyptian assemblers and the international OEMs regarding the re-exports of Egyptian made trucks to other countries.
31 32
Tractor units are part of the trucks (the engine, cab and frame) excluding the trailer Fabricated bodies are the frames on which the trailers are placed 33 Source: EAMA
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Vehicle assembly industry summary

To understand the inter-relationship between the various vehicle segments and the effect that tariff reduction will have on these segments we have created a strategic map of the Egyptian vehicle industry. The map, shown in Appendix 2 shows each vehicle segment and how it is positioned with respect to the other vehicle segments. It should, however, be borne in mind that although not included within the scope of this study, the performance of Tier 4 basic industries such as the smelting of steel and the production of ingots for casting will effect the performance of the component manufacturing industry which may have a knock-on effect on the vehicle assembly industry, as they are critically dependent on the availability of good quality competitive raw materials. It is our understanding that the Tier 4 basic industries are being addressed in another study. The following summary is an explanation of the strategic map and position if of each of the segments.
3.1
Attractiveness of industry segments to the Egyptian industry

Egypts current capabilities in the passenger car segment are almost entirely within subsegment 4: Low volume CKD assembly, with the majority of parts shipped into Egypt, in kit form from an out of territory manufacturing location. This is an unattractive segment for Egypt in terms of sustainability because the industry outside Egypt does not assemble at these volumes. Therefore tariff reduction will cause many of these fragmented assemblers to cease operation. There is latent capability, and at least one announced plan (Nissan), to develop a presence in sub-segment 3: Medium volume assembly of all types of passenger cars and LCVs. Minimum economic volumes of around 20k to 30k units per annum would allow some direct import of parts and components in viable volumes alongside some lower volume / more complex parts in the form of kits. The research suggests that this is the minimum volume for any form of economic vehicle production. Medium volume assembly (CKD/partial CBU) of around 20k to 30k units per annum would be attractive to Egypt because it could create a degree of sustainability, especially if it involves increased FDI and the resulting upgrading of the industry. Egypt could potentially be competitive in this segment because it is already assembling (rather than manufacturing) cars, and supply chains do not have to be as well developed. Supply chains could therefore be focused on particular areas of supply, rather than extensive focusing on total vehicle parts supply. The critical and perhaps most difficult factor in achieving this is being able to raise production capacity to around 20k to 30k units per annum. One way of achieving this would be to rationalise and combine production of a number of different models, including cars and car derived LCVs, on a common platform base. As discussed in the introduction to this report, there is a continuing trend to rationalise parts and platforms, so-much-so that different vehicle types, such as passenger cars and LCVs are produced from the same monocoque. This rationalisation would allow the assembly facility to service two market segments from the same production line. Sub-segment 2: covers minimum volume manufacture of niche, or luxury vehicles at a minimum production scale of around 100k units p.a. This would be the minimum scale necessary for full scale manufacture (CBU) rather than assembly. This scale of manufacture would be a very attractive segment to Egypt because of the scale of
35

production creating reasonably high levels of employment and economic activity. However, it is very unlikely that Egypt could make the jump from sub-segment 4 to subsegment 2 (i.e. very low uneconomic volume assembly to full scale CBU assembly), without raising production levels, quality and skills by first operating at a higher volume CKD level (sub-segment 3) for an extended period. This level of production would also require a much larger level of local and regional market size. The majority of passenger cars produced in the world are produced in sub-segment 1: High volume manufacture of mid-range cars such as Ford Mondeo or Toyota Camry with lifetime production volumes of 500k to 600k units p.a. units fairly common. To operate in this segment, Egypt would need large scale production facilities that would be extremely attractive to the government because they could attract high levels of FDI and create high levels of employment. However, because companies are only likely to put assembly plants in large domestic markets, this is unlikely to happen in Egypt unless there is a huge increase in domestic demand. This is unlikely to happen in Egypt in the foreseeable future. Bus manufacture is attractive because the industry is already exporting and there appears to be residual demand for buses in the Africa and Middle East region. When tariffs are reduced, the bus industry will probably rationalise and become more focused through fewer producers as it takes advantage of cheaper global parts supply and reduces its operating costs. The truck sector is not particularly attractive as economic activity appears low and there is overcapacity in the global industry. A truck industry limited to low value fabrication of small trailer bodies is insignificant in the global industry. If truck assemblers are purchasing most of their materials in Egypt, then the likely result of tariff reduction will be for them to be able to purchase these materials more cheaply. They may be able to insource larger bodies for fabrication but these would need infrastructure to bring them into Egypt. However, the research indicates that the truck sector holds the least potential for developing Egypts automotive industry.
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Future vehicle industry scenario

Based on the preceding research and analysis of Egypts competitive positioning in the various vehicle segments a future scenario is presented. As tariffs are eliminated, many of the Egyptian based assembly operations close. A few OEMs assume ownership of their Egyptian operations and invest in modernisation and expansion. A small group of car assembly operations serve the domestic market with viable production volumes and capacity utilisation. The bus industry rationalises and increases its export capacity and capability, exporting a greater volume of units to Africa and the Middle East. The truck industry is maintained based on a specialisation in fabricating bodies for various uses. The position of Egypts car and LCV assembly segments compared to the global industry, suggests that when tariffs are eliminated, the industrys survival will be based on the whether the domestic market is large enough to encourage foreign owned manufacturers to set up CKD assembly (with a capacity of at least 30,000 units per annum). It is clear from the analysis that manufacturers will not be encouraged to come to Egypt if the domestic market cannot support a production volume, from a single plant, of much less than 30,000 units. Based on the interview programme for this projects, the size of market that would encourage a manufacturer to set up in Egypt is estimated to be around 200,000 units. The number of manufacturers that could be supported would depend on the level of import penetration. Growing the domestic market should therefore form the basis of the passenger car and LCV strategy. A possible way to achieve this would be to encourage the platform sharing of passenger car and LCV vehicle types. Low foreign direct investment in this sector indicates that international companies are not yet convinced of Egypts market potential as a basis for wholly-owned assembly. The bus industry by contrast, has been less dependent on tariff protection for its survival and any further reduction in tariffs should enable the more capable bus manufacturers to take advantage of cheaper global parts supply, thus competing on better terms both in Egypt and in their export markets in Africa and the Middle East. There is likely to be continued growth in the demand for buses in Africa and the Middle East, particularly as governments replace their ageing fleets and because in some countries, such as Saudi Arabia, rail infrastructure is low and buses are a very important mode of mass transport. The bus industry will become more focused as the number of producers rationalises and those producers left could reinforce their position by undertaking closer joint venture arrangements with foreign owned companies, rather than simply assembling under license. This would create valuable international relationships and reinforce Egypts position as a regional hub for bus manufacture. The government needs to help these producers export as much product as they are able with suitable export related policies. The truck industry in Egypt exhibits little evidence of advanced manufacturing capability or specialisation. Although there appears to be market potential in the Middle East region for truck manufacture, Egyptian producers will be competing against international truck companies selling to the region. Since these are often the same brands that are being assembled under license in Egypt for the domestic market, Egyptian assemblers may be precluded from exporting to countries served by the international OEMs. It is unlikely that Egypt could compete on these terms to further develop the industry and so truck manufacture is likely to remain limited to body fabrication that requires a high labour
37

content. Egypt can supply this at relatively low cost. It is unlikely that this will be fabrication of large containers or boxes and so the industry will be limited to the production of small fabricated boxes and trailers. The measures that could support the realisation of the scenarios outlined above are discussed in more detail in the report for the subsequent phase of this project.
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Appendix 1: Vehicle company interviews

Egypt based company interviews General Motors Daewoo
assembler
and
international
Manufacturing Commercial Vehicles (MCV) Mercedes-Benz, Egyptian-German Automotive Co. Toyota MISR Peugeot Egypt S.A.E. Suzuki Egypt S.A.E. Ghabbour Group El Nasr Automotive Manufacturing Co. (NASCO) Engineering Automotive Manufacturing Co. (EAMCO) Gorika Egypt Nissan
International company interviews VDO Siemens (Tier 1 supplier) Scania (trucks previously assembled in Egypt) Continental Teves (Tier 1 supplier - currently sourcing from Egypt) Delphi (Tier 1 supplier have plants in Tunisia and Morocco) Leoni (Tier 1 supplier operate a plant in Egypt) Volkswagen (announced decision to open assembly in Iran)
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Appendix 2: Strategic map of the Egyptian automotive manufacturing industry

The strategic map has been constructed on the following two axes:
5.1.1
Attractiveness
This decision axis measures how attractive the sector is to the Egyptian industry. This has been defined based on KPMGs findings and observations on the following dimensions: Good domestic growth potential compared to the other segments; Increased employment opportunities compared to the other segments. For example a full scale CBU factory producing in excess of 100k units per annum could generate between 2,000 and 4,000 employees (Toyota and GM have an number of factories in Europe that produce between 100k and 200k units per annum and each factory has a workforce around this size; Likely to encourage further FDI; Potential for increased value added; Increased export potential based on global and regional markets.
5.1.2
Position of the segment

This decision axis measures the position of Egypts current players in the sector compared to others in the region. This has been defined based on KPMGs findings and observations on the following dimensions Level of current activity in Egypt; Competitiveness of Egypts current players in the sector; Level of resources available in Egypt to support development and growth; Level of sustainability of the segment under a new tariff regime; Potential to reach international competitive standards within 10 years.
Considering these two criteria together we have determined the likely movement of each segment when tariffs are eliminated and importantly, where the industry should focus its efforts after tariff reduction.
40

Egypts position in the segment Low

Luxury car manufacture (sub seg 2)
M ed
High
M in volume CBU manufacture 100k units (sub seg 1)
High Attractiveness to Egyptian Government
M in volume CBU manufacture 100k units (Current)
3. Ultimately build on volume experience to manufacture full CBUs
B.
M ed volume CKD/ CBU assembly 20/ 30k units (sub seg 3)
1. Increase volume & move from CKD tow ards CBU to survive & grow
Buses
LCV
2. Combine Car and LCV volumes via common platforms
M ed
Impact of tariff reduction
Low volume CKD assembly (Sub seg 4)
Trucks
20,000 to 30,000 units pa
A. Low
Key to Strategic M ap Positions: Sustain / Leverage Develop / Improve Exit / Out Key to Vehicle Segments: Passenger cars LCVs Buses Trucks
Figure 4: Automotive industry strategic map
Global passenger car manufacturing has polarised over the last 10 years. Because of this polarisation, a number of manufacturing sub segments has developed within the overall passenger car manufacturing sector. We have considered these segments in our analysis to give a complete picture of vehicle assembly and manufacture.
5.1.2.1 Full manufacture and assembly of vehicles (CBUs):

Sub-segment 1: High volume manufacture of mid-range cars such as Ford Mondeo or Toyota Camry. Lifetime production volumes of 500k to 600k units p.a. units are not uncommon. Sub-segment 2: Lower volume manufacture of niche, or luxury vehicles at a minimum production scale of around 100k units p.a.
5.1.2.2 Partial manufacture and partial assembly of vehicles from kits (CKDs):
Sub-segment 3: Medium volume assembly of all types of passenger cars. Minimum economic volumes of around 20k to 30k units p.a. allow some direct import of parts and components in viable volumes alongside some lower volume / more complex parts in the form of kits. Sub-segment 4: Low volume CKD assembly, with majority of parts shipped into Egypt, in kit form from an out of territory manufacturing location.
41
Phase 2 Components Industry
January 2005 This document contains 45 pages
Industrial Modernisation Centre Egypt Strategic Study to Upgrade Egypt's Auto Sector Phase 2 Components Industry
Contents
Definitions 1 2
2.1 2.2 2.3 2.4 2.5 2.6 2.7
1 3 4
4 5 6 8 8 9 10
Introduction Current State of the Egyptian Automotive Components Industry

There is a significant lack of data on the industry. Egyptian automotive component companies are dependent on the local market. Company size and volumes reflect local market size. Egyptian component companies are located toward the low-end of the value chain Local value added is limited Standards among companies vary significantly. Foreign direct investment is virtually nonexistent
3
3.1 3.2
Likely Development of the Egyptian Automotive Components Industry

The future of the Egyptian components industry is closely tied to that of the domestic vehicle assembly industry. Current protection for Egyptian component companies will decline in effectiveness
12
12 12
4
4.1 4.2 4.3 4.4 4.5 4.6
International Industry Developments

Global automotive industry structure Global automotive components industry structure Automotive components global sourcing Automotive components industry FDI Aftermarket Industry Developments Other countries integration in the global automotive components industry
15
15 16 18 19 21 24
Implications and Opportunities for the Egyptian Automotive Components Industry
28 32
34
6 Summary and Next Steps Appendix 1 Analysis of Components with Potential for Egypt Appendix 2 Egyptian component company and international company interviews
41
Index of figures and tables

Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Supplier Positioning in the Value Chain Global Automotive Industry Structure Global Components Industry Structure Comparison of Locations for Automotive Component FDI Aftermarket Industry Distribution Structure Automotive Component and Exports, Selected Countries Number of Automotive Component Companies, Selected Countries Average Automotive Component Production per Company, Selected Countries Examples of Local Value Added by Egyptian Component Companies Number of Component Companies with International Quality Standards, Selected Countries Level of Foreign Direct Investment in Component Industry, Selected Countries Reduction in Value of Tariff Reduction Incentives as Tariffs Fall Top Aftermarket Suppliers in North America, Selected Product Categories Potential End-Markets for Egyptian Components Criteria used to Evaluate Potential Component Sectors 8 16 17 21 23 5 7 7 9 10 11 14 23 30 38
II
Definitions
The following terms and definitions have been used in this report. Motor vehicle Any power-driven vehicle which is moved by its own means, having at least four wheels, with a maximum design speed exceeding 25 km/h. Motor vehicles with a MAM not exceeding 3,500kg having not more than 8 passenger seats. Motor vehicles with a MAM not exceeding 3,500kg used for transporting freight (rather than people). Trucks between 3,500kg and 7,500kg with a trailer up to 750kg. Motor vehicles over 7,500kg with a trailer up to 750kg. Motor vehicles with between 9 and 16 passenger Any bus with more than 16 passenger seats The part of the truck (the engine, cab and frame) excluding the trailer The frame on which the trailer of a truck is placed Maximum authorised mass. Original equipment manufacturer (vehicle assembler). Completely knock-down assembly. Note: OEMs use a variety of terms in between such as SKD, Semi knock-down. Completely built-up assembly. Major systems supplier (e.g. anti-lock/total brake systems and stop controls). Sub-assemblies and complex components supplier (e.g. brake sub-assemblies). Basic components supplier (e.g. tyres, batteries, brake pads). Raw materials supplier (e.g. steel, linings, hydraulic fluids).
Passenger car1 Light commercial vehicle Medium sized vehicles Large vehicles Minibuses Buses Tractor Unit Fabricated body MAM OEM CKD CBU Tier 1 supplier Tier 2 supplier Tier 3 supplier Tier 4 supplier
Source: European Commission Directive of Motor Vehicles 70/156/EEC and UK Driver Vehicle Licensing Authority
Value added Value chain
The enhancement added to a product by a company before the product is offered to customers. A string of companies working together to satisfy market demands, usually consisting of one or a few primary product suppliers and many other suppliers that add on to the value that is ultimately presented to the buying public. A component that is produced according to the specifications of the customer (i.e. the producer has no input into the design of the component). Foreign direct investment.
Build to print
FDI
Introduction
This report summarizes the major findings of KPMGs analysis of the Egyptian automotive components industry. The report is structured as follows: Current State of the Egyptian Automotive Components Industry This section provides an analysis of the most significant characteristics of the industry today, based on KPMGs research findings. This is not intended to be an exhaustive analysis covering all facets of the components industry. Rather, it is intended to highlight those characteristics that are most relevant in terms of the Egyptian components industrys ability to survive and be integrated in the global automotive supply chain. Likely Development of the Egyptian Automotive Components Industry This section outlines potential scenarios for the industry based on the current situation and key factors that have an influence on the industrys future development. The report describes the likely development of the industry if it continues along its current trajectory, highlighting the issues that need to be addressed for a more favourable scenario to take place. International Industry Developments This section provides further detail on relevant international developments that were introduced in Phase 0 of the project. It describes those developments in the automotive components industry that represent potential opportunities for Egypt, and which should determine the direction of the industrys development. The section also provides case studies for a number of other countries that have managed in recent years to become successfully integrated in the international components industry, highlighting the main drivers and characteristics of this integration. Implications and Opportunities for Egypt This section provides further details on the potential development strategy for the Egyptian components industry, including a description of why the strategy is feasible based on industry developments, existing successes in Egypt as well as the experiences of other countries. Throughout the report, we have provided comparisons with other countries to illustrate key points and provide an analysis of the Egyptian industry in the context of international trends and the experiences of other countries. The countries used for comparison were chosen because their automotive components industry has experienced tremendous development during the past 10 years. In terms of specific examples used during the analysis, countries were selected based on their relevance for the specific issue being analyzed or discussed, as well as the availability of suitable data. It is important to note that each of these countries is unique, and that none of them provide a template or model for the development of Egypts industry. However, the experiences of these countries have useful implications for Egypts own efforts to develop its automotive components industry.
Current State of the Egyptian Automotive Components Industry
Perhaps more than any other industry, the automotive industry including the components sector is truly global in nature, and is characterized by countless international linkages between vehicle producers and the various tiers of suppliers that serve the industry. No country has been able to develop and sustain a purely domestic automotive industry, and those countries that have been most successful in developing this industry have accepted and acted upon the need to become integrated in the global supply chain. KPMG has therefore analyzed the components sector from the perspective of global industry developments and requirements, as we believe that a sustainable development strategy can only be based on Egypt becoming part of the global industry. In other words, the analysis focuses on those aspects of the industry that are most significant in terms of its ability to achieve this international integration. The following are the major characteristics of the Egyptian automotive components industry, based on KPMGs analysis.
2.1
There is a significant lack of data on the industry.
While this is not a characteristic of the industry itself, it does represent a significant obstacle to developing a detailed industry strategy. Although some information is provided through local bodies such as the Egyptian Auto Feeders Association (EAFA), this data is limited only to certain companies and is often inconsistent or superficial in terms of the type of information provided. Other data available from official sources (e.g. export data) appears to be inaccurate and does not reflect real industry conditions. KPMG used different means to collect the data required for the analysis within the scope of this project, including interviews and questionnaires with Egyptian suppliers, as well as detailed discussions with Egyptian vehicle assemblers regarding their supplier base. While the information we have obtained is sufficient for developing an overall strategy for the industry, we believe that a more detailed survey of individual companies is necessary for future initiatives. This survey would not serve solely for informational purposes, but would represent a valuable tool for attracting foreign investment, promoting exports and focusing initiatives designed to support the components industry. A number of other countries have developed detailed surveys of their automotive component industries. These are extremely useful tools for demonstrating the countrys expertise in this sector, and can be provided to potential customers for automotive exports (e.g. Tier 1 suppliers seeking to source components) as well as potential vehicle assemblers considering locations for new facilities (and therefore interested in the availability of local suppliers). To KPMGs knowledge, a detailed overview of this type does not currently exist in Egypt and should be compiled as soon as possible. As an example of best practice, the Polish Chamber of Automotive Industry (PIM) currently publishes a catalogue with data about 456 component manufacturers in the country. This is
available in four languages and contains information on each company, including descriptions of products, exports, employment, and quality standards. According to PIM: Our intent was to fill the information gap about Polish automotive producers due to the growing interest in Poland with regard to investments in the automotive industry stemming from stabile economic growth, good geographical location and competitive labour market. We wanted to and wish to present domestic automotive parts and components suppliers as far as possible and help in creating new production and trade contacts between domestic and foreign partners.
2.2
Egyptian automotive component companies are dependent on the local market.
All of the Egyptian automotive component companies interviewed by KPMG were almost entirely dependent on the domestic Egyptian market for sales. In most cases, 100% of company sales were to domestic Egyptian vehicle assemblers. In some cases, companies were also deriving revenue from sales to other Egyptian industries (for example white goods, furniture), although again this reflects a dependency on Egyptian customers. For most companies that are exporting, export sales account for a small share of overall revenues. The same holds true for companies that are selling to the aftermarket, although statistics showing component sales and exports by end-market (i.e. vehicle assemblers or aftermarket) are not available for Egypt. This dependency on the local market can be demonstrated using the data on local production and exports shown in the Phase 0 report. Based on an estimated level of domestic production of approximately $100 million and estimated exports of around $13 million, this implies that exports accounted for approximately 13% of total revenues for Egyptian automotive component suppliers. Note that this calculation uses the low end of the range of estimated components production in Egypt and that the share of exports may therefore be significantly overstated. This is compared to other countries in the following table.
Country
Total Component Total Component Production Exports Turkey 2002 $3.2 billion $1.9 billion Turkey 2003 $4.3 billion $2.4 billion India 2002/3 $5.4 billion $760 million India 2003/4 (est.) $6.7 billion $1 billion China 2001 $6.1 billion $1.6 billion China 2003 $8 billion $3.7 billion Thailand 2001 $5 billion $1.5 billion Egypt 2003 (est.) $100 million $13 million Source: Individual country automotive industry associations Table 1: Automotive Component and Exports, Selected Countries
Year
Exports as % of Total Production 60% 56% 14% 15% 26% 46% 30% 13%
Some of the other countries shown in the table, notably Turkey, are less dependent on their domestic markets for sales, and are therefore more integrated in the international automotive supply chain. Although the proportion of exports in Egypt may be similar to Indias, it is important to note that India has a large domestic vehicle assembly industry, which is able to absorb large volumes of domestic component production and allows domestic suppliers to achieve greater volumes. The table also shows very clearly how small the total volume of Egypts domestic components production is relative to the other countries chosen for comparison. Given the low ratio of exports to total production, the low level of domestic production is therefore primarily a function of the size of domestic demand for components (both from assemblers and the aftermarket). This dependency on the local market represents both a risk and a challenge for the Egyptian components industry. On the one hand, Egyptian component companies must achieve larger volumes to be able to reduce costs per unit and become more price competitive. However, they cannot rely exclusively on the domestic market to help them achieve these volumes. This means that Egyptian component companies must find other ways to achieve cost competitiveness, and grow volumes incrementally by securing sales overseas.
2.3
Company size and volumes reflect local market size.
The average output and production volumes of Egyptian companies are comparatively low relative to component companies in other markets. Again this is a function of the size of the domestic demand for Egyptian components, and the dependency of Egyptian component companies on the domestic market. While overall component production in Egypt is a tiny fraction of production in the countries shown in Table 2, the number of component companies in Egypt is not proportionally lower. For example, while Egypts component production is less than 2% of total component production in India, the number of component companies in Egypt (using a low estimate of 80 companies) is 20% of the number of companies in India. The table below shows the number of component companies in selected other countries.
India According to the Automotive Component Manufacturers Association of India (ACMA), there are 402 component suppliers in India. These are categorized based on turnover as follows: $1-5 million 237 companies; $5-50 Turkey The Turkish Association of Automotive Parts & Components Manufacturers (TAYSAD) estimates that there are 1000 component companies in Turkey. About 300 to 350 of these are estimated to directly supply the OEM industry and S. Africa South Africas Department of Trade and Industry (DTI) claims that there are approximately 270 first tier (i.e. selling directly to OEMs) suppliers and over 300 second and third tier suppliers operating in South Africa. Thailand The Thai Office of the Board of Investment estimates that there are 1,709 part suppliers operating in Thailand, as follows: 709 OEM part suppliers, including: - 386 automobile suppliers - 201 motorcycle suppliers Tunisia According to the Foreign Investment Promotion Agency of Tunisia, in 2002 Tunisia had an automotive component industry comprising 122 firms. Of these, 54 were export oriented and 33 were manufacturers of wire harnesses.
million 149 companies; $50-500 million 16 companies.
compete internationally, while the remainder are defined as small-scale companies producing for the replacement market.
- 122 suppliers for both automobiles and motorcycles 1,000 suppliers for supporting industry and raw materials (mould & die, heat treatment, forging, casting, painting, plastic, rubber etc.)
Table 2:
Number of Automotive Component Companies, Selected Countries
A rough measure of output per company can be obtained by dividing overall components output by the total number of component companies to show average production per company. Using an estimated production volume of Egyptian components of $100 million and a (low) estimate of 80 component companies, the average output for an Egyptian component company would be approximately $1,250,000. To put this in perspective, the same calculation for other countries yields the following results: Country Total Components Production $4.3 billion (2003) $6.7 billion (2003/4 est.) $16.8 billion (2001) $100 million (2003 est.) Number of Components Companies 1000 402 2724 80 (est.) Average Production per Company $4.3 million $16 million $6.2 million $1.2 million
Turkey India China Egypt Table 3:
Average Automotive Component Production per Company, Selected Countries
These are average figures, and it is important to note that each of the countries above has a number of very large suppliers that could significantly inflate the average. However, the figures do provide an indication of the relatively small size of Egyptian companies, on average, relative to their counterparts in other countries. As mentioned above, this is a disadvantage, as companies in foreign countries are able to produce at higher volumes, and therefore secure economies of scale and reduce average costs per unit. While there may be scope for consolidation in some areas of the Egyptian components industry (i.e. wherever there are multiple companies making the same product), this cannot be prescribed and will depend on individual company decisions. It is clear, however, that potential action steps resulting from this project should focus on the factors affecting the costs faced by component companies (e.g. inputs and raw materials, production processes) to attempt to compensate for the lack of production volumes and scale economies.
2.4
Egyptian component companies are located toward the low-end of the value chain
The majority of Egyptian companies are producing basic products, either built to print according to the specifications of their assembly customers or replacement parts for the aftermarket. The diagram below provides a simple classification of the automotive components value chain, based on value added including the level of design contributed by the supplier.
SUPPLIER POSITIONING IN THE VALUE CHAIN
Tier 1 Tier 1 Tier 2+ Tier 2+ Commodities Small Stamps Small Injected Parts Differentiated Commodities Rear View M irror Fuel Injector Steering Column Low Value Added Low Value Added Build to Print Build to Print M edium Value Added M edium Value Added Grey-Box Design Grey-Box Design Development Commodities Door Dashboard ABS High Value Added High Value Added Black-Box Design Black-Box Design
Source: Massachusetts Institute of Technology, Assessing globalisation and supply chain strategies of automotive material suppliers, 2001
Figure 1:
Supplier Positioning in the Value Chain
The majority of components produced in Egypt can currently be found in the commodities segment of the diagram. These include items such as glass, wire harnesses, basic brake parts, castings, and general body parts. It could be argued that a few Egyptian suppliers can be found further up the value chain toward the differentiated commodities segment. This would include companies assembling such items as exhaust systems, air conditioners or seats. However, it is important to note that these companies are simply assembling these items in Egypt using imported parts, and are not designing the products themselves. This low level of design and value added makes it more difficult to place these companies higher up the value chain. As will be discussed later in this report, the low level of R&D and design for commodity products implies that buying decisions in this market are primarily based on price, with a baseline of quality that must be met by all companies. Once again, this reinforces the need for Egyptian companies to become low cost suppliers to compete in the international market.
2.5
Local value added is limited
Many of the Egyptian component companies interviewed and visited by KPMG are dependent on imported components and materials for their products. Local value added is usually limited to labour processing and tooling. The following are a few examples of companies interviewed by KPMG. The company names have not been disclosed for reasons of confidentiality.
Company Brake Parts Exhaust Systems Wire Harnesses

Source: KPMG Interviews
% of Parts Imported 80% 100% 90%
Local Value Added Casting Wire forming, tube forming, welding Manual assembly and testing
Table 4:
Examples of Local Value Added by Egyptian Component Companies
This confirms the previous argument that Egyptian components can be found primarily in the commodities segment of the value chain. However, it is also demonstrates that Egyptian component companies have less options for affecting the price of their products or otherwise differentiating these through design enhancements. Egyptian component companies do not benefit from any cost advantages due to the availability of domestic components or raw materials (such as steel or plastics in some countries). In addition, they must also pay tariffs on the components they import, which represents a further burden on their ability to reduce prices. Based on KPMGs observations, low labour costs represent the greatest cost advantage for most Egyptian component companies, while some have managed to keep costs down by limiting their expenditure on machinery or even developing their own tools. However, this latter option is not available to all companies as many processes (e.g. plastics moulding) require very expensive tools that cannot easily be reproduced in-house.
2.6
Standards among companies vary significantly.
The component companies visited by KPMG in Egypt vary significantly in terms of standards and approach and can be divided into three broad categories: World Class Suppliers these are companies producing according to international standards and competing successfully in the international automotive components market. Based on our research, there are no more than 3 or possibly 4 companies in this category, either wholly-owned by or closely associated with major international producers. Domestic Leaders these are companies that have emerged as the leading Egyptian suppliers to the domestic assembly industry and aftermarket. Locally owned, many of these companies have acquired significant experience working with local assemblers on specialized components for Egyptian-made vehicles. Many of them hold international quality standards. While all of them are aware of the need to increase sales by penetrating international markets, not all of them are currently exporting. Local Suppliers these are suppliers that provide basic parts and materials to the domestic industry. They often supply other Egyptian industries and cannot be considered as pure automotive suppliers. They do not hold quality standards and are generally not pursuing growth through international sales. While this categorization is based on KPMGs observations and analysis, it is also possible to illustrate the differences based on the international quality standards held by Egyptian companies. Among the group of 50 component companies currently listed on EAFAs Internet site, 20 currently report holding internationally recognized quality standards, primarily ISO 9001, ISO 9002, QS 9000 and ISO 14001. This group of companies can be described as
belonging to the Domestic Leaders category of Egyptian components companies described above. The table below shows that, in absolute terms, the number of companies reporting quality standards in Egypt is far less than in the other countries used for comparison. In terms of the proportion of total component companies holding international quality standards, this ranges in Egypt from 25% to 10%, depending on the estimated total of Egyptian component companies used (from 80 to 200 companies). While this compares favourably to Thailand, it is still less than in Turkey and significantly less than the proportion in India and South Africa.
India 384 Companies with ISO 9000 Certification 223 Companies with QS-9000 Certification 83 Companies with TS 16949 63 Companies with ISO 14001 Certification 9 Companies with OHSAS 18001 5 Deming Prize winning companies 1 Japan Quality Medal winning company Turkey Approximately 30% of the supplier companies in Turkey have internationally accepted quality standards, primarily ISO 9001, ISO 9002, QS 9000 and ISO 14000. S. Africa Of the 217 companies listed as NAACAM members, 179 have quality standards. The most frequently held are TS 16949 (36% of companies), QS 9000 (32%), ISO 9002 (31%), VDA 6.1 (20%), ISO 9001 (20%), ISO 14001 (18%). Various other standards are also held. Thailand 178 companies have QS 9000 200 companies have ISO 9000 34 companies have ISO 14000
Table 5:
Number of Component Companies with International Quality Standards, Selected Countries
The table also show that many Indian and especially South African companies have already implemented ISO/TS 16949, which has become the standard in the global automotive industry (ISO/TS 16949 was developed with input from the four established automotive standards, QS9000, VDA6.1 in Germany, EAQF in France and AVSQ in Italy, with the aim of defining quality management system requirements that guarantee quality products to automotive customers worldwide). It is important for the efforts of Egyptian companies wishing to supply the original equipment market internationally to adopt this standard as soon as possible.
2.7
Foreign direct investment is virtually nonexistent
One of the most striking findings of the analysis is the extremely low level of foreign direct investment in Egypts automotive components industry. There is only one wholly owned foreign components company in Egypt, which produces entirely for export and does not serve the local market. This is Leoni Wiring Systems in the Nasr City Free Zone, which employs 1800 people in the production of wiring harnesses for sale to major international customers. To a lesser degree, Alexandria Automotive Castings could also be described as foreign investment. Although the company was established and largely funded by Egyptian investors, the
10
International Finance Corporation (IFC) also provided investment, while the main client (Continental Teves from Germany) contributed technical expertise as well as working capital. Besides these two companies, there do not appear to be any other instances of foreign direct investment in the Egyptian components sector. The difference to the countries shown in the table below is dramatic. While the other countries in the table have a large domestic vehicle assembly industry that serves to attract investment from international component companies, even a small country like Tunisia has managed to attract several FDI projects, primarily in the automotive electronics sector (wire harnesses).
India Japanese and British component manufacturers are operating JVs in India. American companies, which have or are planning to set up plants in India, include Delphi, Delco Electronics, Textron and Magna International of Canada. (Note: 100 per cent FDI in the automobile and component sectors was only permitted in 2002) Turkey Over 190 foreign capital partnerships and joint ventures between foreign and Turkish component manufacturers (2003). S. Africa 31.7% of companies are wholly owned subsidiaries of MNC auto component manufacturers. 26% are joint ventures between SA companies and MNC auto component manufacturers. 24.3% are SA companies with technology agreements with MNC auto component manufacturers. (Data for 2000) Thailand 287 majority foreign owned components producers in Thailand as well as 68 Thai majority owned joint ventures (2002). Tunisia At least 18 wholly or majority-owned foreign automotive component manufacturing plants (2003). Foreign investors include Autoliv Avo Industries, Bosh, Casco, Cavis DAV, Defontaine ERA-Electrotechnik Drxlmaier, HBS Technologie, KBE Electrotechnik, Lear Corporation, Leoni, MGI Coutier, NHK Springs, Pirelli, Record, Valo.
Sources: individual country economic development and investment promotion agencies Table 6: Level of Foreign Direct Investment in Component Industry, Selected Countries
The absence of foreign direct investment indicates the very low degree to which Egypts automotive industry is currently integrated internationally. Foreign investment is critical to Egypts potential for developing a strong automotive components industry, as the domestic companies alone are unlikely to serve as a base for sustaining the industry in a competitive environment. Increased component FDI will also enhance Egypts reputation as an automotive industry location, which will support efforts to attract further investment from both vehicle and component companies. It is worth noting that few of the international component companies interviewed by KPMG for this project were familiar with Egypts automotive industry, and that any measures to enhance awareness of Egypts industry should also help Egyptian companies in their efforts to sell their products overseas.
11
Likely Development of the Egyptian Automotive Components Industry
The previous section highlighted the major characteristics of the Egyptian automotive components industry from the perspective of its position and ability to compete in the global automotive industry. The characteristics described are those with the greatest implications for the industrys ability to compete with other countries, its potential for development, and indeed its ability to survive in the future. While there are other factors that may affect the day-to-day operations of individual Egyptian companies, these are related to the characteristics addressed above, and do not affect the fundamental structure and nature of the industry overall. These factors will be addressed later in the project in terms of measures that could be applied to enhance the competitiveness of Egyptian companies, within the framework of the overall development strategy presented in this report. The significance of the characteristics outlined above become clear in light of broader developments affecting the overall Egyptian automotive industry. These are developments that lie outside the analysis of the components industry, but that have a crucial impact on its future given its current characteristics as described above. The two main domestic developments affecting the industry are as follows:
3.1
The future of the Egyptian components industry is closely tied to that of the domestic vehicle assembly industry.
While this may seem apparent, it becomes even more evident given the strong dependency on the domestic market described above. As demonstrated by their high export rates, component companies in other countries have become integrated in the global automotive industry and are able to balance swings in the domestic market through international sales. The fate of Egypts component companies, however, is almost entirely in the hands of its domestic customers. This dependency is significant given the potential future of the domestic vehicle assembly industry as described in the Phase 1 report of this study. If, as is possible, domestic vehicle assembly declines as a result of reduced import protection, Egypts component industry will decline with it, and many component companies risk disappearing altogether. Although companies selling primarily to the aftermarket will be less affected, the implications for the remainder of Egypts component industry should be clear. The industry must reduce its dependency on the domestic market and become integrated internationally through increased exports and foreign direct investment.
3.2
Current protection for Egyptian component companies will decline in effectiveness
Egypts component companies are currently protected from international competition by two mechanisms: tariffs on imported components and local content regulations that encourage the use of Egyptian-made components. Both these mechanisms will begin to lose effectiveness as
12
Egypt lowers tariffs on imported components in accordance with the EU-Egypt Association Agreement. As imported components become cheaper with falling tariffs, the incentive for companies to use local components will also diminish. This incentive currently takes the form of duty reductions on imported components allowed to companies that achieve certain levels of local content (see the Phase 0 for a description of local content rules). As tariffs on imported components (including CKD kits) decline, a point will be reached where the reduction in tariffs granted to companies adhering to local content rules is no longer a benefit. The point in time when this situation occurs will vary for each company, depending on the exact price differential between Egyptian made components and their imported counterparts, as well as the overall value of domestically purchased components compared to imported components. This cannot be calculated accurately without access to the complete cost data of Egyptian vehicle assemblers. However, a simple example can be used for purposes of illustration. As described in the Phase 1 report, the average cost of Egyptian made components is approximately 20% higher on average than that of equivalent imported components. Assume that an Egyptian assembler is currently achieving 50% local content, and is therefore receiving a 58% reduction on tariffs on imported components (see table 7 below). At high tariff rates (e.g. 90), this represents a significant reduction in duties (e.g. 52%), and therefore a strong incentive to achieve a high local content. As tariffs on imported components begin to fall in line with the EU Agreement schedule, the value of this duty reduction begins to diminish. A point will be reached where the savings from the duty reduction on the imported components (achieved as a result of meeting 50% local content) is less than the extra cost of buying the more expensive Egyptian components. In other words, the cost of paying 20% more for Egyptian components is greater that the benefit of a lower duty on imports. For example, at a tariff rate of 30, the assembler may find it cheaper to pay the full tariff rather than spend more on Egyptian components in order to receive a tariff reduction of 17. All other things being equal, the assembler will no longer have an incentive to meet local content rules and will switch to importing cheaper foreign components. Again, the exact point in time when this situation occurs depends on the specific costs of all of the assemblers components (both domestic and imported), the actual level of local content, as well as the tariff rate levied on each imported component.
13
Full Tariff 100 90 80 70 60 50 40 30 20 10 Table 7:
Local Content Rate 60% 50% 40% Reduction of Tariff for Achieving Local Content 69% 58% 46% Reduced Tariff Rate on Imported Components 31 42 54 28 38 49 25 34 43 22 29 38 19 25 32 16 21 27 12 17 22 9 13 16 6 8 11 3 4 5
69 62 55 48 41 34 28 21 14 7
Full Tariff less Reduced Tariff (Benefit) 58 46 52 41 46 37 41 32 35 28 29 23 23 18 17 14 12 9 6 5
Reduction in Value of Tariff Reduction Incentives as Tariffs Fall
This simplified example shows that even before tariffs on imported components are completely eliminated, local content requirements will lose their effectiveness as a tool for encouraging assemblers to buy Egyptian-made components. In other words, Egyptian component companies will need to be prepared to compete with imported components in terms of price (as well as quality and service) and will no longer be shielded by local content rules. The role of local content regulations is crucial to assessing the future viability of the local components industry. All of the local vehicle assemblers interviewed by KPMG stated that they would buy less (and in some case none at all) local components in the absence of local content rules. In addition to higher prices, they also cited the additional effort required to work with local suppliers and get their parts approved by the international OEM. This additional burden is strongest for companies assembling passenger cars, although all Egyptian companies assembling under license must have certain local parts approved by the international licensor. The interviews clearly highlighted that local content rules have benefited local component companies in terms of providing incentives for assemblers to work with them. The reduced effectiveness of local content rules in future represents a significant threat to the Egyptian components industry. In summary, given the characteristics of the Egyptian automotive components industry and the major factors affecting it, the following are the implications for the industrys future development, assuming that its current structure remains unchanged. If domestic vehicle assembly declines, the components industry will decline as well. The components industry must become integrated internationally to reduce its dependency on domestic assembly. This integration can only be achieved by attracting foreign direct investment and increasing exports. While component companies supplying the aftermarket are not dependent on local vehicle assembly, they too can benefit from increased international sales.
14
Even if Egypt develops a viable and growing vehicle assembly industry, this does not represent a guarantee for the future of the components sector. Lower tariffs on components will diminish the effectiveness of local content rules, exposing Egyptian component companies to international competition. Egyptian component companies must be able to compete in terms of price and quality in order to retain the business of their domestic customers and increase their sales overseas. Again, this implies becoming integrated in the global automotive supply chain. Given this potential scenario, it is important to determine what opportunities exist for the Egyptian automotive components industry to become integrated internationally. The following section of the report examines international industry trends that may represent opportunities for Egypt, as well as the experiences of other countries that may be relevant to Egypts own efforts.
International Industry Developments
This section of the report examines relevant global industry developments as well as the experiences of other countries that have successfully become integrated in the global automotive supply chain. This information will be used to identify potential opportunities for the Egyptian automotive industry in the context of the international industry.
4.1
Global automotive industry structure
Figure 2 on the next page depicts the international automotive industry structure. While this structure is replicated to some degree in individual countries, the automotive industry is today truly a global industry. As described in the Phase 0 report, vehicle manufacturers (OEMs) have plants throughout the world, and each of these plants sources components globally from suppliers in different countries, who in turn buy from their own international suppliers. There are thousands of component types and companies around the world in this supply chain. The Egyptian automotive components industry is not currently integrated in this structure: as described earlier in this report, Egyptian components companies sell primarily to vehicle assemblers in Egypt. Figure 2 also shows that the aftermarket is a separate sector outside the main automotive industry structure. The aftermarket has its own highly specialized and complex distribution structure, which is very different for each part type as well as by country. The aftermarket will be therefore be addressed separately later in this report (although it could be the subject of a separate study outside the scope of this project).
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AUTOM OTIVE INDUSTRY STRUCTURE
M anufacturing services (Raw materials production services)
Tier 2/ 3 suppliers
Tier 1 suppliers
Car manufacturers (OEM s)
Franchise dealers
Independent dealers
Financial services End-consumer Aftermarket
Source:
KPM G analysis
Figure 2:
Global Automotive Industry Structure
4.2
Global automotive components industry structure
Similar to the overall automotive industry, the automotive components industry is also global in nature. The following diagram provides examples of major industry players in Tier 1 of the industry. The mega-suppliers or system-integrators (SIs) are the main suppliers to the OEMs, assembling major parts of the vehicle on behalf of their customers. As described in the Phase 0 report, these companies are assuming ever greater responsibility from their OEM customers, who are outsourcing large parts of the design and production of key vehicle parts (or systems). A recent study by the Fraunhofer Institute in Germany predicts that by 2015, automotive suppliers will be conducting about 80% of automotive R&D and production, compared with 63% today. Most of this work will be managed by the mega-suppliers who will take over the selection and management of Tier 1 and 2 suppliers from the OEMs. Although global in nature, these mega-suppliers are generally restricted in their location choices to those countries where their customers are located. Because of Just-in-Time production, they must be in close proximity to the major (i.e. large volume) assembly plants of the OEMs. The Tier 1 suppliers (represented by a selection of global and German companies in the diagram) are
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similarly limited in their location choices, and are compelled to locate close to their customers in order to maintain their business. There are some exceptions to these location restrictions, however, as the Tier 1 and mega-suppliers also produce some of their own components (i.e. they do not buy these from Tier 2 suppliers) and have a degree of flexibility in terms of where this production takes place (e.g. the Leoni plant in Egypt).
COM PONENTS INDUSTRY STRUCTURE
Tier 2-3
Components
Chassis Tier 1 Germany ThyssenKrupp

(complete chassis systems)
Systems Systems Behr

(air conditioning, engine cooling)
Electronics Electronics Hella

(lighting, electronics)
Interior Interior Siemens VDO

(interior & infotainment
ZFSachs
(transmisssion & chassis modules)
Beru (start & ignition

systems)
Kolbenschmidt Pierburg (air

supply, engine blocks)
Recaro
(seat systems)
Siemens VDO
(chassis & carbody)
Leoni
(w iring systems)
M ahle (filter & valve

train systems)
Tier 1 Global
Arvinmeritor
(suspension, shocks, w heels)
TRW (occupant safety systems) Arvinmeritor

(exhaust systems, brakes & ABS)
Valeo (electrical & electronical systems) Eaton (elec. control,

pow er distribution)
Lear (seating,
instrument panels)
Faurecia (seating,
interior)
Aisin Seiki
(transmission systems)
Johnson Controls
(interior systems)
M ega-suppliers/ SIs Delphi Bosch Denso Visteon M agna
OEM s
Source:
KPM G analysis
Figure 3:
Global Components Industry Structure
In general, the SIs and Tier 1s purchase components from a large number of Tier 2 and 3 suppliers around the world. Egypts current base of suppliers all fall within this category. The majority of products in Tier 2 and especially Tier 3 being commodities, there is relatively low value added and little differentiation between competitors. Manufacturers build to specifications and research and development is limited. Because of the extreme price pressure that is pushed down the supply chain from the OEMs, price has become the critical factor for the Tier 1s and SIs in making sourcing decisions. Quality and delivery (both volumes and times) are other critical factors, but these are taken for granted. In other words, there is a baseline level of quality
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required to even be considered as a supplier to the Tier 1s. Beyond this level of quality, price becomes the distinguishing factor that determines who the Tier 1 buys certain components from.
4.3
Automotive components global sourcing
The majority of the Tier 1 companies have initiated global sourcing programs, designed to identify low cost sources of components from suppliers around the world. These programs are open to all companies regardless of location, with a clearly defined selection and evaluation process to determine which companies are able to qualify as suppliers. The international Tier 1 companies interviewed by KPMG for this project all stated that they would buy from Egyptian suppliers provided these met their pre-defined supplier standards. These standards can be obtained directly from the Tier 1s, and in some cases application forms are even provided on the companys Internet site. Although the exact requirements differ for each company and type of component buying sourced, these generally focus on a number of key criteria. In all cases, the process for being assessed and accepted as a supplier is rigorous, with the burden falling largely on the company wishing to be considered as a supplier. Because of the high level of complexity and technological assessment required, it is not possible to provide a detailed analysis of whether Egyptian companies would qualify as suppliers to the international Tier 1s. This would require a separate and lengthy analysis of each company based on the requirements of the potential customer and the characteristics of the specific component being considered. For purposes of illustration, the Delphi Global Supplier Guidelines are available from the companys website, and describe in detail the various prerequisites and standards that a company must meet to become a Delphi supplier. The following quotes at the beginning of the guidelines clearly reflect the high standards expected of suppliers: Commitment to Excellence In direct support of Delphis commitment to excellence and desire to exceed our customers expectations, it is expected that our suppliers work toward exceeding the expectations and requirements of the Delphi Global Supplier Guidelines. Excellence means perfection in all that you do: Perfect planning, perfect execution, perfect communications, and perfect parts. This is demonstrated through consistent delivery of quality products to Delphi and our customers. Our suppliers are expected to have zero incidents and zero disruptions, provide products with zero defectives, and have flawless delivery performance and on time responsiveness to issues. Suppliers must have a philosophy of total quality commitment, with subsequent planning and actions, that drive for perfection. This commitment starts with top leadership and is driven through all levels and aspects of their operations. The guidelines also describe several categories according to which a potential supplier would be evaluated:
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Quality including quality system requirements, supply chain, production cycle, performance monitoring and several other factors. Pricing / Payment including pricing requirements, currency and payment terms. Production Control & Logistics including production processes, packaging, transportation and other requirements. Specification 10949001 requirements relating to recycling standards. Engineering including product expectations, data collaboration standards, equipment and tools specifications and other requirements. Change Approval requirements for communicating and requesting approval for any changes to design, component, packaging, component suppliers or facilities, Property Rights terms related to ownership of property rights. General Information several requirements including a 24-hour contact, English language standards, restrictions on holidays and plant down-time and others. Prototype Parts Provisions specifications for providing prototype components.
For each of these headings, there are detailed procedures and documentation requirements that a potential supplier must fulfil to even be considered as a Delphi supplier. The overall headings are similar across the industry, and the requirements of other international Tier 1 suppliers are no less stringent, reflecting the high standards required in the international automotive industry as well as the increasing pressure placed on suppliers by the OEMs (see Phase 0 report). The types of products that are sourced globally include many of the components in Tier 2 of the industry. These vary in terms of sophistication and the degree to which they can be shipped over large distances. The appendix to this report provides an indication of whether components currently made in Egypt are exportable based on the nature of the product (rather than an assessment of Egyptian components compared to those from other countries).
4.4
Automotive components industry FDI
The same automotive industry trends that are contributing to a growth in global sourcing are also responsible for an increase in foreign direct investment by automotive component suppliers. FDI in the automotive components industry can be broadly divided into two major categories: Market-Driven FDI especially the SIs and Tier 1 component companies have been forced to follow their OEM customers around the world and to establish new plants internationally. Whenever an OEM establishes a large plant in a new market, leading suppliers will be expected to follow or otherwise risk losing the OEMs business. This has been shown clearly over the last decade in countries such as Brazil or China, where most of the worlds OEMs have established major plants, leading to subsequent investments by most of their major suppliers. Increasingly, some of the larger Tier 2 companies are also following their customers overseas in an effort to capture or retain their business.
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Cost-Driven FDI in some cases, automotive component FDI has also been driven by cost considerations, with companies investing in countries that may not offer market potential but provide significant cost advantages (primarily in terms of labour costs). These FDI decisions centre around products that do not require immediate customer proximity, involve highly labour intensive production processes, and are not too sensitive to transportation costs. Examples include wire harness production, which has migrated to low cost countries (such as Tunisia or Romania) because of its highly labour intensive production process. In addition to the two categories described above, there are also cases where FDI is driven by other factors, such as the need to access specific raw materials, technology, know-how or skills. However, most FDI in the automotive components industry is driven by the need to access markets or reduce costs, or a combination of the two. Those countries that offer a combination of both market and cost advantages are attracting the highest level of FDI, as they enable companies to pursue both strategies outlined above. China is the leading example of such a location today. More vehicle plants are being built in China than anywhere in the world, which provides a massive potential market for international component companies establishing operations there. However, China also offers significant cost advantages, and many component companies are using their new plants in China as a low cost base from which to supply other international markets. The table below categorizes various countries based on their attractiveness for both marketdriven and cost-driven FDI. The countries in the top right quadrant are those where most automotive component FDI has occurred most recently. It is clear that Egypt does not offer the level of vehicle assembly operations to make it an attractive location from a market perspective, but that it does provide cost advantages relative to other countries.
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M AJOR AUTOM OTIVE COM PONENT FDI LOCATIONS

High
USA Canada
Market Advantages
China Poland Slovakia Czech Rep. Hungary Mexico Turkey Brazil South Africa Spain Russia Portugal Thailand Romania India Ukraine Morocco Tunisia Egypt
Low Low
Cost Advantages
Comparison of Locations for Automotive Component FDI
High
Figure 4:
It is important to note that the factors influencing the location decisions of automotive component companies vary according to the drivers behind the investment decision. In the case of market-driven FDI, the initial location decision is often made indirectly by the automotive OEM. Once the OEM has determined where to locate a new vehicle assembly facility, component suppliers selected or wishing to supply that facility will need to base their own plant close enough to meet the OEMs delivery requirements. The suppliers location decision will therefore be focused on individual regions or sites within acceptable proximity to the OEMs plant. For cost-driven FDI decisions, the location decision will be based on a combination of cost and other factors, including labour availability and skills, infrastructure, taxation, the political and economic environment as well as government incentives and support. Although cost will be the driving factor, the components company will seek a location that provides a supportive operating environment and allows products to be exported effectively to customers or its own operations overseas. As described in the Phase 1 report, Egypt does not compare unfavourably to other locations based on these factors.
4.5
Aftermarket Industry Developments
Although it forms part of the automotive industry, the aftermarket represent a separate sector with its own supply chain and structure. This study focuses on the overall automotive industry,
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and a detailed assessment of the aftermarket sector would represent a separate industry study. Nevertheless, the international aftermarket may represent potential opportunities for Egyptian companies, and the major trends in this sector are therefore outlined below. The distribution of parts in the aftermarket is very complex and the distribution structure and dynamics of the sector are different for each type of part as well as each country. The current distribution structure in each country is a result of a natural development of the distribution market as opposed to the introduction of efficient global supply chain systems as in the original equipment market. Whereas in the original equipment sector the number of distribution channels is largely limited to the vehicle manufacturers or other component suppliers, in the replacement sector there are a very wide variety of distribution outlets. The dynamics of this distribution structure, and the importance and relationships among the various participants is changing rapidly, although these changes differ from country to country. The distribution of parts is also changing through efforts to introduce electronic business-to-business platforms to streamline and automate the supply chain. The diagram below provides an overall depiction of the aftermarket supply chain, which clearly illustrates its complexity and difference to the original equipment market. As shown in the diagram, aftermarket parts can take various channels to reach the final consumer (i.e. the motorist). In addition to the various retail channels where the motorist is able to purchase aftermarket parts (e.g. garages, specialised shops) this also includes a number of different intermediaries between the producer of the aftermarket part and the retail outlets. The implications for a producer of aftermarket parts are that it is important to understand the supply chain for the individual part, and that there may be multiple potential customers for that part.
P a rts M a n u fa c tu re r/ R e p re s e n ta tive s
M a n u fa c tu re r
W h o le s a le D is trib u to rs
V e h ic le M a n u fa c tu re rs A /M O p s
W h o le s a le T ie r 1
W h o le s a le rs
M a in D e a le rs
W h o le s a le T ie r 2
New D is trib u tio n
In d e p e n d e n t G a ra g e s
B o d ys h o p s
A g e n ts / S a te llite s
R e ta il
M o to ris ts
M o to ris ts
Source: Datamonitor
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Figure 5:
Aftermarket Industry Distribution Structure
In general, aftermarket parts can be divided into three categories: Replacement parts that are unlikely to require replacement except in the case of damage to the vehicle caused by an accident (e.g. side mirrors, bumpers). Demand for such parts is likely to remain relatively stable. Distress purchase parts, which must replaced because of natural wear and tear, as they are essential to operation of the vehicle (e.g. exhausts, brake parts). The market volume of these parts is expected to fall as their life expectancy increases due to improvements in research and development. Parts whose replacement is not critical to the functioning of the vehicle (e.g. shock absorbers). The main factor affecting the size of the market is the ability to convince consumers to incur expenses to replace these parts.
The manufacturers of aftermarket products are often the same companies that produce components for the OEM market. A listing of the top automotive suppliers reveals many of the same names as in the OEM industry, as well as some companies that specialize in aftermarket parts. It is important to note that the large automotive component suppliers have specialized aftermarket divisions, with their own procurement departments and processes. Potential Egyptian exporters must therefore be aware that the same company (e.g. Delphi) will have separate buyers for aftermarket or original equipment parts, each requiring a separate approach. The following are examples of some of the top producers and suppliers for selected aftermarket product categories (in the North American market). Air Conditioning Delphi Corp. Jordan (Alma Aftermarket Inc.) Standard Motor Products (Four Seasons) TransPro, Inc. (Ready-Aire) Visteon Corp. Exhausts ArvinMeritor, Inc. Bosal USA Brake Parts Akebono Corp. Dana Corp. (Raybestos) Federal-Mogul (Wagner) Honeywell International (Bendix) Universal Automotive Industries Filters ArvinMeritor, Inc. (Purolator) Champion Laboratories (United Components Grp) Clarcor, Inc. (Baldwin/Hastings) Dana Corp. (WIX)
Goerlichs Inc.
Tenneco Automotive
Honeywell International (FRAM)
Source: Automotive Aftermarket Suppliers Association
Table 8:
Top Aftermarket Suppliers in North America, Selected Product Categories
There are several market research reports on the aftermarket industry, providing analyses and forecasts for different countries and products. One recent report by the Freedonia group predicts that global demand for automotive aftermarket products is projected to increase five percent per
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year through 2007 to $144 billion. This growth projection is based on a steady increase in the global motor vehicle parc, continued maintenance and repair of older vehicles (especially in the developing regions of the world) and greater use of higher value automotive electronics. Gains are expected to be fastest in the developing regions of the world, which generally have a higher proportion of older vehicles and a more rapidly expanding light vehicle (i.e. cars and LCVs) parc compared to the more mature markets of North America, Western Europe and Japan. The strongest gains are forecast for the Asia/Pacific region, especially China and India, where rising incomes will promote a rapid increase in vehicle purchases and usage. The above information is not intended as a detailed analysis of the aftermarket industry. However, it demonstrates that this is a growing market that represents an potential alternative opportunity to the OEM market for Egyptian component companies.
4.6
Other countries integration in the global automotive components industry
The developments described above have enabled a number of countries around the world to successfully become integrated in the global supply chain for automotive components. The following is a description of key developments in some of these countries. Romania Romania has been a beneficiary of the tremendous success of the automotive industry in other central and eastern European countries, especially Poland, Hungary and the Czech Republic. In the early to mid-1990s, European vehicle makers and their suppliers invested significantly in these countries to take advantage of low labour costs, strong market potential and their proximity to the European Union. These investments were largely successful, but labour costs in these countries rose quickly as their economies became more integrated with those of the European Union (leading to their accession to the EU in 2004). Rather than close down their significant installed capacity in these countries, OEMs and component companies chose instead to restructure their operations there to focus on more technology intensive, higher value operations (e.g. production of engines and even R&D) and to look further east for new low-cost locations. Romania has been the location of choice for many of these investments, and has attracted a host of automotive component FDI over the past few years. Both Renault and Daewoo have manufacturing plants in Romania, and the Renault plant has attracted a number of companies to a new supplier park near its plant in Pitesi (Valeo, Faurecia, Automotive Chassis International, Piroux, IRI, MCI Ingenerie and others). However, Romania is also host to several cost driven FDI projects, including investments by Germanys Continental (3 plants), Autoliv (who have just announced a second Romanian plant for seat belts) and DaimlerChrysler who announced plans to invest in a factory manufacturing gearboxes for Mercedes cars, creating over 300 jobs. Several small and medium sized German and Austrian suppliers have also relocated manufacturing operations to Romania for cost reasons. Besides low labour costs, other advantages in Romania include a tradition of engineering industry, a strong steel sector, proximity to other European countries, and the potential for joining the European Union in the next wave of new entrants in 2007. The countrys most significant
24
disadvantage is in the area of labour relations, and in addition to onerous and bureaucratic labour regulations the country also has active unions that have recently organized strikes at several foreign owned plants. China China has attracted more automotive industry investment than any other country in recent years. Automotive production grew from representing 2.8% of global production in 1996 to 4.1% in 2001. The country ranked the 7th largest market for vehicle sales globally in 2001, and is expected to be the 3rd largest by 2010. Almost all OEMs have established significant operations in China and their suppliers have followed, with most of the major Tier 1 suppliers operating multiple plants with the dual objective of selling to the domestic market and exporting products globally. Bosch, Delphi, Denso, Visteon, Continental, Lear, TRW and Dana all have multiple plants in China. A large number of other foreign players have entered the market through both wholly owned entities and joint ventures. The Chinese government has also been actively involved in shaping the components industry. Reforms introduced in 1997 with the aim of reducing inefficiencies in the auto sector (through the closure and bankruptcy of loss-making firms and the merger of loss-making firms with profit-making firms) reduced the number of domestic component companies by around 56 percent from 5,241 in 1997 to 2,321 in 1998. This improved the competitiveness of local firms in terms of volumes and financial stability. The governments auto industry policy also calls for exports to account for more than 40 percent of Chinas total component parts sales by 2010, although that goal already seems to have been achieved. The majority of the components market is for initial production, accounting for 85 percent of total production in 2001, with the remainder made up by the aftermarket for components. Both markets are expected to continue to grow steadily, although the greatest growth is expected to occur in exports, which have grown by over 250% since 1995. China has become a major global component production base, largely as a result of the unique combination of its major domestic market and very low costs. However, various international automotive executives operating in China have stated publicly that the domestic Chinese components industry suffers from a lack of domestic raw materials, high transportation costs and outdated manufacturing techniques. As with other Chinese industries, these deficiencies are often compensated for by an abundance of low-cost labour as well as high volumes resulting from the large domestic market. South Africa The South African automotive industry has changed dramatically since the introduction of the Motor Industry Development Programme (MIDP) in 1995. The MIDP represents a phased liberalization of the South African automotive market, reducing tariffs, removing local content regulations and providing export incentives in the form of duty credits on imported components (granted in return for exports). The overall effect of the MIDP on the industry has been positive, and South Africa has become integrated in the global automotive industry as a base for vehicle and component production. However, the program has also placed huge competitive pressures on the domestic South African automotive components industry. The OEMs are no longer forced to purchase from local component manufacturers and can use their duty credits to bring in their foreign sourced
25
components duty-free. To some degree, the automotive components industry is operating in a completely open economy with no trade barriers to protect local firms. Another form of pressure on the local components industry has been the fact that all of the OEMs in South Africa are now either fully or partly owned by foreign parent companies (whereas they were previously South African owned operating under licensing agreements). In addition to high standards, these OEMs also have established international supplier bases that they can buy from rather than source components domestically from South African suppliers. These changes have had a significant impact on the South African components industry. FDI has entered the country through both acquisitions and greenfield investments, and the majority of components in South Africa is now being supplied by foreign investors. The main reason for this shift is that as the OEMs have become integrated into their parent companys global operations they have developed a preference for purchasing components from international component companies located in South Africa rather than domestic suppliers. Domestic South African suppliers have responded by increasing their quality standards (which explains the high ratio of internationally certified companies shown earlier in this report) and their efforts to export. Component exports have grown dramatically by 520% between 1996 and 2003, but the bulk of export expansion has been by foreign owned firms with links to vehicle manufacturers rather than by domestic components suppliers. It is also interesting to note that exports are dominated by two products: catalytic converters, which accounted for 38% of all exports in 2003 (down from 48% in 2001) and stitched leather components (mostly seat parts and covers), which accounted for 14% of all exports in 2003. These two component groups illustrate the way in which South Africas component industry has become integrated in the global automotive supply chain. Catalytic converters were hardly used in South Africa before recent years, yet the country supplies almost 12% of the world market for this product. The production of catalytic converters is capital intensive, and does not obviously lend itself to a country whose major advantages include low labour costs. However, South Africa is rich in natural resources, including the platinum needed for the production of catalytic converters. Only limited segments of the total production process were initially carried out in South Africa. Initial investment involved the establishment of plants for coating (Engelhard and Johnson Matthey) and canning (Arvin, Bosal, Magneti Marelli and Tenneco) of the imported ceramic substrate. This was followed by backward integration into the ceramic substrate with the two world leaders, Corning and NGK Insulators, establishing plants in South Africa. There has been investment in ancillary industries such as flex connections, matt manufacture and manifold, exhaust system and silencer assemblies. Catalytic converters are now exported primarily to Europe, with the majority going to Germany (30%), France (20%) and Spain (10%). In the case of automotive leather, this involves a labour intensive production process that reflects the advantages of locating production for such items in a low-cost country such as South Africa. Again, however, South Africa had the advantage of extensive natural resources for leather and the country now supplies most of BMWs requirements for leather seat covers (75% of exports are to Germany). South Africa also exports a range of other components (tyres, wheel parts and engine parts are major categories). However, the examples of catalytic converters and leather parts show clearly how the country was integrated in the global supply chain as a result of market liberalization, a
26
large domestic market, export oriented FDI as well as domestic advantages in terms of raw materials and labour costs. Turkey Turkeys automotive components industry has its roots in the countrys efforts to produce a national car in the 1960s. While initially heavily protected and dependent on the domestic market, Turkeys component industry developed quickly following the opening of the market to foreign competition in 1995. The establishment of major vehicle production facilities attracted significant FDI from international component companies, primarily in the form of joint ventures as well as some greenfield investment. In addition to European companies, Japanese and Korean companies were also attracted to Turkey by its low-cost labour and access to the EU market through the countrys customs union with the EU. At the same time, Turkish companies also enhanced their efforts to become more competitive, as evidenced by the number of companies achieving international quality certification. It is interesting to note that local content in OEM vehicles produced in Turkey has fallen from 49% in 1997 to 22% in 2002. According to a report by the Turkish Ministry of Trade, this is due to the costs and effort involved for vehicle producers in working with local suppliers on design and having their products approved for use in OEM vehicles, especially where these are intended for export to international markets. As happened in South Africa, the newly established OEMs preferred to use their established international suppliers for their new plants in Turkey, rather than the existing Turkish supply base. This development is also reflected in the relatively high level of component imports into Turkey, which account for approximately 50% of local component sales. Turkish component companies have responded by turning to export markets, which also helps them to balance the dramatic swings in the domestic market (for example, vehicle sales fell by 70% between 2000 and 2001). Exports of Turkish automotive components have increased significantly, from $915 million in 1997 to an estimated $2.7 billion in 2004. Approximately 70% of exports are to the European Union. The largest share of exports are parts and accessories for tractor and special purpose vehicles, engine parts (Ford has an engine plant in Turkey), tyres and iron or steel semi-finished products. It is worth noting that Turkey is one of the worlds top 20 steel producers. Finally, Turkey also has a large number of component companies supplying the aftermarket and approximately 25% of domestic production is for the aftermarket. Although data on Turkeys aftermarket exports is not available, Turkish companies are aggressively seeking new export opportunities, and are targeting the middle east market as an area for growth. A clear example of this was the large number of Turkish companies exhibiting at the Automech Akhbar el Yom tradeshow in Cairo in June 2004, where there were more companies from Turkey than any other single country, including Egypt. India India has benefited significantly from the increase in automotive component global sourcing, and automotive component exports have doubled in only two years, reaching $1 billion in 2003. The share of exports to OEMs versus the aftermarket has also grown from 20% in 1997 to 40% in 2002, reflecting the growing interest in India from international OEMs and Tier 1s, as well as the
27
increasing sophistication of Indian components companies. Production of Indian components in 2003 was primarily concentrated in engine parts (23%), drive transmission and steering parts (16%), suspension and braking parts (12%) and electrical parts (8%). Exports to major markets were divided evenly, with North America, Europe and Asia each accounting for 28% of total component exports. The Indian automotive industry has traditionally been heavily protected, but the countrys large market size led to the development of a domestic vehicle assembly and components industry. Because of significant competition among Indian suppliers, many of these were compelled to developed strong design capabilities to improve the quality of their products. In addition to acquiring international quality certification, Indian companies have also adopted modern production processes and best practices, including Six Sigma, TQM and lean production systems, as well as integrating design and production software into their operations. As a result of these improvements, India has recently captured the attention of most of the worlds OEMs and Tier 1 suppliers, many of whom have established sourcing offices in the country. Ford, for example, has established an India Sourcing Programme under which it aims to buy $120-160 million worth of components from Indian manufacturers over the next two years, and is currently sourcing plastic parts, automotive clocks, alloy wheels as well as alternators and starters. DaimlerChrysler is currently sourcing over 70 million from India, and other companies have been sending delegations to India to visit with Indian suppliers and secure supply agreements.
Implications and Opportunities for the Egyptian Automotive Components Industry
The case studies in the previous section illustrate how different countries have benefited from developments in the automotive industry to become integrated in its global supply chain. Although each of these countries is unique, their experiences can provide lessons for the development of Egypts own components industry. First of all, it is clear that Egypt does not have the large domestic or even regional vehicle market that contributed to the growth of the components industry in all of these countries. Egypts vehicle market has always been small, and the potential that it will not grow significantly (or even decline) is a key factor influencing the development of the domestic components industry. The market is not large enough to attract the market-seeking type of FDI that has occurred in China or South Africa, among others. The Egyptian market is also not large or competitive enough to generate the increases in volume and quality that have enabled component companies in Turkey and India to become competitive internationally and grow through exports. As long as Egypts component companies continue to focus on the domestic assembly market (under the protection of local content regulations), they will remain constrained in size and will not face the pressure to adapt to international standards and market conditions.
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On the positive side, the developments and case studies above also reflect opportunities for Egypts automotive component industries. As shown by the case of Romania, there will continue to be opportunities for attracting cost-driven automotive component FDI, especially as costs in the current low cost locations of Eastern Europe and Turkey continue to rise. Both Tunisia and Morocco have managed to attract several of these types of projects, and based on KPMGs analysis, Egypts poor performance in this respect is due primarily to a lack of focused investment attraction and promotion efforts, rather than any locational disadvantages relative to these other countries. The experiences of India and other countries also show clearly that automotive OEMs and Tier 1 suppliers are increasing the amount of components they source globally, and are willing to purchase products from companies regardless of where they are based, provided they meet their requirements in terms of price, quality and other specifications. Finally, the international market for automotive aftermarket components also continues to grow, and represents opportunities for Egyptian component companies to achieve growth through international sales. These opportunities also represent the main elements of the proposed development strategy for Egypt. The two elements of this strategy, along with an initial overview of potential actions that need to be taken, are as follows: Promote Exports of Egyptian Component Companies to both the Original Equipment and Aftermarket As described in this report, increased global sourcing by vehicle OEMs and Tier 1 suppliers, as well as the growth of the aftermarket, represent international market potential for Egyptian component exports. With respect to the Original Equipment market, there is nothing that would exclude Egyptian companies from being considered for the global sourcing programs of international buyers. The growth in component exports from other countries demonstrates quite clearly that these opportunities exist. Based on KPMGs interviews and site visits with Egyptian components companies, there are significant differences in terms of the readiness of these companies to meet the extremely rigorous standards of international buyers. It is not possible to provide a detailed assessment of this readiness and to identify gaps that need to be filled, as this would require an in-depth analysis of each individual company and component, covering a range of issues from product quality, pricing and production processes, which is outside the scope of this industry study. Nevertheless, a number of industry-wide measures, relating to issues such as access to buyers or product certification, have been identified and will be addressed in the subsequent phase of the project (development of action plan). The aftermarket also represents an interesting opportunity for Egyptian companies. While still high, quality requirements are not as rigorous as those for components supplied to the original equipment market. The aftermarket could represent a potential initial route for Egyptian companies that are not yet exporting to pursue new growth opportunities and gain experience in international markets. However, not all products are suitable for aftermarket sales. The following table lists the product categories used in the EAMAs classification of Egyptian component companies, indicating which markets their products could be sold to. It is important to note that the potential universe of potential Egyptian exporters appears to be very small, at around 30 to 40 companies based on the information provided by the EAMA.
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Product Integral Air Conditioners Aluminium Profiles Batteries Brake Drums, Brake Disks and Hubs Brake Shoes Cables and Wires Coil Spring Disk Wheels Exhausts Filters Glass Lamps and Bulbs
Original Aftermarket Comments Equipment Integral air conditioners are custom to vehicle.
More aftermarket potential than OE More aftermarket potential than OE
Already being exported from Egypt for aftermarket.
Hoses and Pipes Pistons, Cylinder Pins and Piston Rings Propeller Shafts Rubber Parts Car Seats and Lining Shock Absorbers Suspension Wheel Covers, Mirrors and Plastic Parts Wiring Harnesses Instrument Clusters Key: indicates potential;
Mufflers already being exported from Egypt for aftermarket Strong demand for fuel filters growing market. Aftermarket mainly for repairs specialized suppliers Good aftermarket potential. Some countries like France legally require spare bulbs in the car. Would need to ship high volume. Slow moving aftermarket parts. Replaced infrequently. Engine supply chains well developed. Need to produce at very low cost to supply Tier 1.
Aftermarket potential for elasticated seat covers, not seats. Still limited aftermarket potential although this part becoming more frequently replaced. Wheel covers are fast moving aftermarket part. When people buy second hand car they often buy new wheel trims. Leoni already exporting from Egypt to multiple customers worldwide. Potentially high value OEM part. Clusters becoming more sophisticated. indicates limited or no potential
Table 9:
Potential End-Markets for Egyptian Components
As described earlier in the report and shown in the table above, the components currently made in Egypt are predominantly in the commodities category of the automotive components value
30
chain. Egypt is not currently making highly complex components (e.g. electronics systems) that can be differentiated on the basis of their design or other technological product specifications. Because of the low level of R&D involved in the production of commodity components, as well as the large number of companies manufacturing them around the world, the key competitive factor to achieve export sales is price. A given level of quality is taken for granted before a company will even be considered as a potential supplier, and other factors such as the ability to satisfy delivery and volume specifications are also required. However, once these requirements have been met, buying decisions will be made on the basis of price. This holds true for both the original equipment and the aftermarket, and perhaps even more for the aftermarket as this is ultimately a highly price sensitive retail industry. The implication for Egypts component companies is that regardless of whether they wish to sell to OE or aftermarket clients, they must be able to compete internationally on the basis of price. This presupposes that they have met the quality, delivery and other requirements that enable them to be considered as a supplier. Attract Cost-Driven FDI While the majority of FDI in the automotive components industry will continue to go to countries that offer both cost advantages and market potential (e.g. China), there is potential to attract FDI projects that are primarily cost driven. FDI projects in countries such as Romania or Tunisia demonstrate that this is feasible, and there are no apparent disadvantages in Egypt relative to these countries. On the contrary, since labour costs are generally the main cost factor in the location decision, Egypt offers significant advantages relative to other countries such as Turkey or Romania. Based on discussions with companies operating in Egypt as well as Turkey or Romania, there appear to be no major disadvantages that would preclude increased automotive component FDI in Egypt. The Leoni plant in Nasr City provides a clear example of the advantages that Egypt offers as a location for this type of FDI. Established as a pilot facility in 1997, Leonis operations in Egypt have grown consistently and the company has expanded on several occasions, adding a second plant in the Nasr City Free Zone, which was again expanded by 4000m2 in June 2004. Employment during this period has grown from 14 employees to 1800, and is forecast to increase to 2200 by 2007. In terms of quality, Leonis Egypt plant was designated Plant of the Year of all Leoni plants worldwide in 2004, ahead of similar plants in Tunisia, Romania, Portugal, South Africa and several other countries around the world. Leoni Egypt was also designated supplier of the year 2003 by Denso, a major Japanese Tier 1 supplier. This success story is a shining example of Egypts potential as a location for automotive component FDI, and should be used a testimonial in any efforts to attract further FDI to Egypt. Although greenfield projects offer the greatest potential attraction in terms of capital investment and employment generation, they are not the only mode of FDI that could be attracted to Egypt. As the case of Alexandria Automotive Castings demonstrates, collaborations between international and Egyptian suppliers also represent an attractive option. In this case, the international company provided know-how and expertise to develop a captive Egyptian supplier. Since the financing for this project was primarily from Egyptian sources, this case could be defined as a hybrid between global sourcing and direct investment, which demonstrates that pure exports or FDI are not the only alternatives for Egypt. Joint ventures were also the most
31
prevalent mode of foreign investment in countries such as Turkey, China or India, where foreign capital partnerships were the precursor to full-fledged FDI by international component companies. Building on the efforts of Egypts General Authority for Investment (GAFI) to promote Egypt as a location for foreign direct investment, a targeted investment attraction is required to identify and attract potential automotive component investments. The first phase of such an effort would involve a clear definition of the sectors that could benefit from a presence in Egypt. Although this would involve a highly in-depth analysis of individual segments within the automotive components industry, KPMG has already conducted an initial analysis of sectors that could feasibly be attracted to Egypt. KPMG evaluated 50 types of components along a range of criteria to determine their potential for Egypt. The methodology and results of this analysis are described in Appendix 1 of this report. Implementing a targeted investment attraction strategy will also require the development of clear and powerful value propositions for each of the target sectors, as well as each individual company identified as a potential investor. Again, this will require in-depth research to tailor Egypts advantages to the specific needs of individual sectors and companies. The elements of such a targeted investment attraction strategy will be described in more detail in the subsequent phase of the project (development of action plan).
Summary and Next Steps
This report has outlined the major characteristics of the Egyptian automotive industry, as well as the developments that represent the greatest threats and opportunities with respect to its integration in the global automotive supply chain. In summary, the results of the analysis and the major elements of the potential development strategy for this industry are as follows: Egyptian components companies are currently too dependent on the domestic market. This is constraining their ability to expand and develop and also represents a threat to their survival as the Egyptian automotive industry is opened to international competition. The growth in global sourcing and aftermarket sales creates export opportunities for Egyptian companies. Since the types of components currently produced in Egypt can be defined as commodities, export success will depend primarily on being able to compete internationally in terms of price. A number of factors including low volumes, lowdomestic value added and the cost of importing raw materials and components are negatively impacting the cost structure of Egyptian component companies. These factors must be addressed, and Egyptian companies must be also able to fulfil the basic requirements of potential international customers as a prerequisite to exporting. Automotive component foreign direct investment in Egypt is minimal, even when compared to countries without a major automotive industry such as Tunisia or Morocco. There are no fundamental disadvantages to preclude increased FDI in Egypt, and the existing investment demonstrates clearly the advantages that Egypt offers. A targeted foreign direct investment attraction strategy is required to identify, approach and attract FDI from carefully selected automotive component sectors and companies.
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The next phase of the project (development of actions plan) will focus on specific measures or initiatives required to help achieve the elements of the development strategy outlined above. Based on our existing research they are likely to include: Measures to increase the level of necessary information available about the industry. Opportunities for reducing the costs, and hence increasing the price competitiveness, of Egyptian companies. Measures to enhance the productivity and efficiency of Egyptian companies. Initiatives to assist Egyptian companies to become aware of and approach potential export opportunities. Approaches for identifying and attracting automotive component FDI.
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Appendix 1 Analysis of Components with Potential for Egypt

As part of the research for this project, KPMG conducted an analysis of more than 50 component types to determine those with the greatest potential for Egypt. Components were assessed based on their potential for being assembled in Egypt either by domestic companies or foreign direct investors given Egypts current capabilities as well as the requirements of the international automotive industry. This assessment is based on various dimensions of the components itself, as described in more detail below. The analysis therefore provides an initial indication of which components would lend themselves to exporting from an Egyptian base. It follows, that these would be the same component sectors with potential for attracting FDI from international automotive component companies seeking lower cost production bases to supply international markets. Approach KPMG first developed a list of over 50 typical automotive component sectors relevant to all vehicle assembly customers (passenger car, LCV, truck and bus), divided into three categories: Commodity manufacturing segments basic components with low value-added and global competition based primarily on price. Regional manufacturing segments components that are generally supplied on a regional basis to different vehicle plants within the region. Customer-specific manufacturing segments more complex systems that are often designed and produced specifically for an individual customer (company, plant or model). Each of these component sectors was evaluated on a wide range of criteria, which we developed to help identify those sectors with the greatest potential for Egyptian industry and which could be of interest to major vehicle manufacturers and Tier 1 customers regionally and in Europe. A full list of these criteria, and all the alternative assessments for each is included in the following pages of this section. Once these criteria were assessed for each product sector, we then applied KPMGs experience and judgment to select those sectors with the greatest interest and potential to Egypt. These basis for this selection is shown below and on the following pages. The expression Egyptian company is used to refer both to Egyptian components assemblers as well as international companies that could be producing components from an Egyptian base. Criteria for Selecting Component Sectors 1 Nature of competition that Egyptian manufacturers have to face in international markets. This refers to the level and structure of the competition that Egyptian component companies would face in the global market, and hence the barriers to entry that Egyptian companies would face in terms of scale, existing relationships and other factors. Generally, the larger and more fragmented the number of competitors in the global market, the lower the entry barriers for Egyptian companies.
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Geographic trend for vehicle manufacturers sourcing policies. This describes the sourcing policies of major OEM customers, in terms of the geographic proximity, costs and other requirements for their suppliers. Those components that are sourced primarily on the basis of cost, and where geographic proximity does not play a key role in sourcing policies, are considered to have greater potential for Egyptian component companies or for attracting FDI. Competition trend in the nature of supplier competition. This is based on the geographic level of competition among suppliers of a particular component. Is the market global, regional, national or even local? Greater opportunities for Egyptian companies are likely to exist in sectors where competition among suppliers is global. Sensitivity to labour cost. Since labour cost is one of Egypts major advantages, sectors with a high manual labour content are considered to represent greater potential. Sensitivity to transport cost. International OEM customers in other countries and regions are more likely to buy Egyptian components that are relatively small and of higher weight, and therefore less sensitive to transportation costs. Labour skill requirement. Sectors with a medium to low skill requirements are likely to have greater potential in Egypt than sectors requiring highly complex and specialised skills. Tooling support requirement. Given the large investments necessary in specialized tools and equipment, and the high volumes necessary to justify those equipments, it is more likely that the Egyptian components industry will be based on sectors with a relatively low tooling support requirement. It is also more probable that foreign investors would place labour-intensive operations in Egypt, rather than capital intensive activities with a high tooling requirement. Product complexity. This refers to the level of complexity (and quantity) of parts or processes used in the end product or sub-assembly. While low product complexity provides a more accessible entry point for Egyptian suppliers to start to supply customers, ultimately it is also the potential to move to more complex parts, once credibility and reputation has been established. Value-Added. Again, although a relatively low-value added part offers a greater and more accessible opportunity for Egyptian suppliers to enter the supply chain with less intense competition from more sophisticated, design and development driven companies sectors were also assessed based on the potential to graduate from low to medium to higher value-added, once the basic manufacturing capabilities have been proven, and capabilities can be developed in higher value assembly, design and development.
10 Aftermarket The relative importance of the aftermarket, compared to the original equipment markets, was also assessed both from a domestic, regional and European market perspective as this
35
provides an additional and parallel opportunity for Egypt to enter the market (which often has lower barriers to entry than the OE market), and build market share. 11 Current Egyptian Presence The last selection factor used was to make sure that the capability to manufacture and potentially assemble the product was already present in Egypt to a minimum extent. This is essential in providing the initial credibility on which to build and develop a more substantial, export oriented capability and, to a lesser degree, for attracting FDI. For each of the criteria described above, a scale was developed to assess the suitability of each component for Egypt. The factors used to measure this scale for each criterion are as follows:
Criteria Alternatives In-House Description Significant proportion of production still retained by the vehicle manufacturers often not outsourced due to issues of critical safety, quality, delivery issues or due to proprietary design considerations. Few, large multi-national suppliers dominate the supply of these components, often due to high economies of scale, high R&D investment requirements, etc. Greater number of large & medium sized multinational suppliers, still requires some scale to compete. Many small medium and large suppliers compete for business lower barriers to entry than any of the above. Critical to the design and performance of the vehicle, so supply is retained close to vehicle design (& assembly) most often in same country Relatively high volume, critical parts and assemblies shipped directly onto the production line requires very tight control of the supply chain and often final sub-assembly very close to vehicle manufacturers own vehicle assembly plant. Sourcing fulfilled on a regional basis i.e. within up to 1,000 miles of the vehicle assembly plant dependant on combination of best quality, cost, delivery criteria, etc. Sourcing based primarily on lowest cost where length of supply chain can be extended even further afield if necessary e.g. to China, India,
Nature of Competition (that Egyptian OE manufacturers have to face in international markets)
Oligopolistic
Global Fragmented
Fragmented
Core
JIT (Just In Time)
Geographic Trend (for Vehicle manufacturers sourcing policies)
Regional
Low Cost
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Global
Competition Trend (Trend in nature of supplier competition)
Regional
Local
Increasing competitive intensity from new suppliers from around the world, able to competitively supply & actively target most attractive global markets. E.g. includes Japanese, Korean, Chinese, Indian suppliers etc, targeting supply to European auto assembly. Often previously local or national supply (e.g. UK, Spanish, Eastern European suppliers), broadening out their customer base to supply regional vehicle assemblers across a region (e.g. EU/ Europe). Local supply base still important to retain close links with vehicle assemblers for design, JIT, and other considerations. Significant manual labour content in the manufacturing / sub-assembly of these parts. Moderate manual labour content in the manufacturing / sub-assembly of these parts. More automated manufacturing / assembly processes reducing the overall impact of labour costs. High volume, low weight, relatively low value parts and components, resulting in transport costs making up a significant proportion of the parts total costs. Moderate size, value parts that can be shipped but tend to be uneconomic over longer distances. Relatively small, higher weight, higher cost / valued added components, that can be packed efficiently for low transportation cost per part. Complex manufacturing or assembly requiring specialist skills and highly qualified workforce. Some specialist skills required. Simple manufacture or assembly, requiring few specialist skills. Complex, expensive, specialist tooling often includes highly automated manufacturing and assembly requiring specially trained specialist support. Moderately capital intensive, somewhat specialised tooling, with moderate support requirements Simple, standardised tooling requiring relatively simple non specialist support available locally.
High Medium Sensitivity to Labour Cost Low
High
Sensitivity to Transport Cost
Medium Low
High Labour Skill Requirement Medium Low
High
Tooling Support Requirement
Medium
Low
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High
Medium Product Complexity Low
Sub-assembly with relatively high parts count, and design complexity, requiring some specialised assembly processes. Some moderately complex parts or processes, but capable of manufacture and assembly by most competent, qualified suppliers. Standardised type of product / sub-assembly, with relatively low parts count and simple assembly process High relative sales price compared to parts and material costs. Parts or sub-assemblies requiring significant, skilled, design, development and assembly resource which can be recouped in price charged to the customer. Most often includes larger sub-assemblies, rather than stand-alone parts Some moderate skills input by the supplier above simple manufacturing tasks Build-to-print standardised parts, with no real design or development input from the supplier. Significant level of aftermarket demand. Moderate aftermarket demand in parallel to OE sales. Primarily and original equipment market.
High
Value-Added Medium Low
Aftermarket (relative importance of aftermarket to OE sales)
High Medium Low
Table 10: Results
Criteria used to Evaluate Potential Component Sectors
The following tables show the results of KPMGs analysis, with an assessment of each criterion for every component. Components that are suitable for Egypt are marked with the symbol ( ), whereas those that do not currently represent potential are marked with ( ).
Nature of (OE) Geographic Competition trend Sensitivity Sensitivity Labour skill Tooling to labour to cost transport cost requirement support requirement Product Value AM earnings potential
competition trend
complexity added
Commodity manufacturing
Air conditioning condenser Air conditioning compressor Oligopolistic Core Global Low Low High High High High Low Oligopolistic Low cost Regional High Medium Low Low Low Low Low
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Hvac Fuel pump (Diesel injection pump)
Oligopolistic Core Oligopolistic Core?
Global Regional
High Low
High Low (Low)
Medium Medium (High)
Medium Medium
High High
High
Low
Medium High
Wiper motor Oligopolistic Regional Blower motor Ignition coil Oligopolistic Low cost Springs Tie rods Starter Knuckles Brake discs Fragmented Regional Fragmented Low cost Oligopolistic Low cost Fragmented Low cost Fragmented Low cost Oligopolistic Low cost
Global Global Regional Local Regional Global Regional Local Local Regional Local Regional Regional Global Global Local Global Regional
Medium Medium High High Medium High High High High High High High High Low Low High High Medium Medium High High High High High
Low Medium Low Medium Low Low Low Low Low Low Low Low Low Low Low Low Low High High High Medium Medium Medium Medium
Medium Medium Low Medium Low Medium Low Low Low Low Low Low Low Medium Medium Low Low High High Medium Low Medium Low Medium
Medium Medium Low Low Low Medium Low Low Low Medium Medium Low Low Medium Medium Low Low Medium High Medium Low Low Low Medium
High High Medium Low Low Low Low Low Low Low Low Low Low Low Medium Low Low High High High Low Low Low High
High
Low
Medium Low Low Low Low High Low High
Medium High Low Low Low Medium High High
Brake drums Fragmented Low cost Half shaft Link shaft Oil pump Fragmented Low cost Fragmented Low cost Fragmented Low cost
Medium Medium Low Low Low Low Low Low Low High High High Low Low Low High Low Medium High Low Low Low Low Low Medium Low Low Low High Medium
Water pump Fragmented Low cost Fuel rail Throttle body Washer bottle Radio Differential Global fragmented In-house Core Low cost Fragmented Low cost Oligopolistic Core Oligopolistic Core
Steering gear Oligopolistic Core/regional Global Steering column Condensor Inter-cooler Radiator Air brakes Oligopolistic Low cost Oligopolistic Low cost Oligopolistic Regional Oligopolistic Core Regional Regional Regional Global Oligopolistic Core/regional Regional
Regional manufacturing
Switches, connectors Wiring harnesses Instrument Oligopolistic Low cost Global Low Low Low Low High Low Low Oligopolistic Low cost Global Low Low Low Low Medium Low Low Oligopolistic Low cost Regional High Low Low Low Medium Low Low
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cluster Air induction Oligopolistic Low cost system Transmission In house case Rear axle In house Core Core Core Global Global Global Medium High Medium High High High Medium High High Medium Medium Low Low Medium Low Medium Low Low High Low High Low Low High Low High Low Low Low Low High Core Regional High High Medium Low High Low Low Regional Medium Low Low Medium Low Medium, Low
Transfer case In house Power take off Lighting In house
Oligopolistic Low cost
Global/Regional High High
Interior trim Oligopolistic Regional/JIT Global assembly Interior trim Oligopolistic Regional/low Regional - plastic parts cost
Medium, Low
High
Low
Low
Low
Low
Medium, Low
Interior trim Oligopolistic Regional/low Regional - plastic parts Air conditioning hose HVAC assembly Fuel tank IP skin IP console Door assembly Door trim metal parts Door trim plastic parts Oligopolistic Regional/low Regional cost Oligopolistic Regional/low Regional cost Oligopolistic Regional Oligopolistic Regional Oligopolistic Regional Oligopolistic JIT Regional Global Global Global Oligopolistic Regional Global ? cost Low cost Regional
High
Low
Low
Low
Low
Medium, Low
Low
Low
Low
Low
Low
Medium, Low
High High High High High High High
High High High High High Low Low
Low Medium Medium Medium Low Low Low
Low Medium Medium Medium Low Low Low
Low Medium Low Low Low Low Low
High High
Low Low
Medium, Low Medium, Low Medium, Low Medium, Low Medium, Low
Customer specific manufacturing

Cooling module assembly IFES Oligopolistic JIT Global High High High High Low Low Low Low High High High High Low Low Oligopolistic JIT Regional/Global High High Low Low High High Low
Fully built IP Oligopolistic JIT/In house Global assembly
Table 11:
Results of Component Type Assessment
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Appendix 2 Egyptian component company and international company interviews

Egypt based company interviews Autocool Mak Brake Lining/Traxx FAIK Industrial Co Mobica Abou El Yazeed Group Texmar Development Projects Leoni Egypt Idaco
International company interviews VDO Siemens (Tier 1 supplier) Scania (trucks previously assembled in Egypt) Continental Teves (Tier 1 supplier - currently sourcing from Egypt) Delphi (Tier 1 supplier have plants in Tunisia and Morocco) Leoni UK (Tier 1 supplier operate a plant in Egypt) Volkswagen (announced decision to open assembly in Iran)
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Phase 3 - Development Strategy and Action Plan
January 2005 This document contains 54 pages
Industrial Modernisation Centre Strategic Study to Upgrade Egypts Auto Sector Development Strategy and Action Plan
Table of Contents
1
1.1 1.2 1.3 1.4
Introduction
How does this report fit into the overall scope of the project? What are the objectives of this report? How is the report structured and what information does it provide? What are the key assumptions underlying the report?
7
7 8 9 10
2
2.1 2.2 2.3 2.3.1 2.3.2 2.4
Objective 1: Attracting Foreign Direct Investment

Strategic Issues Development Strategy Prerequisites The domestic vehicle market must grow to persuade international OEMs to invest and expand in Egypt Key companies must be encouraged to invest in Egypt Other Requirements
13
13 14 15 15 19 21
3
3.1 3.2 3.3 3.3.1 3.3.2 3.3.3 3.4
Objective 2: Increasing Exports

Strategic Issues Development Strategy Prerequisites Exports from Egypt must be encouraged and facilitated Egyptian products must be price competitive Egyptian companies must have access to international buyers Other Requirements
24
24 24 25 25 29 30 32
4
4.1 4.2 4.3 4.3.1 4.3.2 4.4
Objective 3: Modernise Egyptian Industry

Strategic Issues Development Strategy Prerequisites Egyptian companies must gain internationally recognised quality standards Egyptian companies should be using leading international production processes Other Requirements
34
34 34 36 36 38 39
5 6 7 8
Impacts Action Plan Timing Beyond 2010
42 43 48 51
Next Steps
53
Table of Figures
FIGURE 1: DEVELOPMENT STRATEGY AND ACTION PLAN ............................................................... 12 FIGURE 2: ACTION STEPS - KEY AREAS OF IMPACT .............................................................................. 42 FIGURE 3: ACTION PLA N - KEY IMPLEMENTATION ISSUES............................................................... 47 FIGURE 4: FACTORS AFFECTING TIMING OF ACTION STEP IMPLEMENTATION ...................... 50
Table of Examples
EXAMPLE 1: TAX INCENTIVES FOR PICK-UP TRUCKS IN THAILAND AND POPULAR CARS IN BRAZIL. ....................................................................................................................................................... 16 EXAMPLE 2: CONSUMER FINANCING IN INDIA ....................................................................................... 18 EXAMPLE 3: EMERGING AUTOMOTIVE FINANCING MARKET IN RUSSIA................................... 18 EXAMPLE 4: ABU DHABIS EFFORTS TO ATTRACT AUTOMOTIVE FDI......................................... 20 EXAMPLE 5: EXPEDITED CUSTOMS CLEARANCE IN INDONESIA AND THE PHILI PPINES.... 22 EXAMPLE 6: EXPORT INCENTIVES IN SOUTH AFRICAS MOTOR VEHICLE DEVELOPMENT PROGRAMME ................................................................................................................................................. 27 EXAMPLE 7: EXPORT INCENTIVES IN THE PHILIPPINES ...................................................................... 28 EXAMPLE 8: ASIA PACIFIC ECONOMIC COOPERATION (APEC) AUTOMOTIVE DIALOGUE. 29 EXAMPLE 9: COUNTRY PROMOTION AT THE EQUIP-AUTO TRADE SHOW ............................. 33 EXAMPLE 10: THAILAND'S VENTURE CAPITAL FUND FOR THE AUTOMOTIVE INDUSTRY 39 EXAMPLE 11: A DEDICATED AUTOMOTIVE TECHNOLOGY CENTRE IN SOUTH AFRICA ..... 40 EXAMPLE 12: A SINGLE AUTOMOTIVE INDUSTRY ASSOCIATION IN GERMANY .................... 41
Summary
The Egyptian automotive industry is at a crossroads. Significant achievements have been made since the Government of Egypt began liberalizing the industry approximately 20 years ago. Numerous foreign companies have entered the Egyptian market, many of them assembling vehicles locally with Egyptian partners in order to avoid the high tariffs that are imposed on imported vehicles. This has helped create a domestic vehicle assembly sector, employing thousands of Egyptian who have gained valuable automotive industry skills. Several Egyptian automotive suppliers have also been established, providing parts and components to the Egyptian assembly and replacement markets. The Egyptian bus industry has also grown, producing a variety of models for both the local and regional markets. Although small by international standards, the Egyptian automotive industry has built important elements of a foundation for future development. This nascent industry is now confronted with serious challenges. The same policies that helped create, nurture and protect it are destined to be dismantled as Egypt becomes more integrated into the world economy. The Euro-Mediterranean free trade agreement with the European Union commits Egypt to eliminating all tariffs on imported vehicles by 2019. When this happens, it is likely that many foreign companies will find it more profitable to export cars to Egypt than to assemble small volumes locally as they are doing now. Egypts accession to the World Trade Organisation also restricts the governments ability to protect or favour certain industries, calling into question the local content requirements that have helped to create and sustain domestic component suppliers. In its current state, the Egyptian automotive industry appears too fragile to withstand these cha llenges. Few of the foreign vehicle makers have significant sunk costs in their local operations, mainly because the Egyptian market has never been large enough to justify investment in a wholly owned plant. Barriers to exit are low and assembly operations will be closed down as soon as they no longer represent the most profitable way of selling vehicles in Egypt. If this happens, Egyptian component companies will suffer tremendously, as most of them are entirely dependent on the local market for their sales. Without their big local customers, the majority of Egypts suppliers would simply disappear. Another vulnerability for Egypt is the near absence of direct investment from foreign automotive component producers. A solid base of foreign owned component plants would provide a valuable link to the global automotive industry, and would be less vulnerable to the challenges facing the rest of the sector in Egypt. The risks outlined above all relate to a common weakness: the Egyptian automotive industry is not sufficiently integrated in the global automotive supply chain through exports and foreign direct investment. The isolation of Egypts automotive industry, while contributing to its early growth, now represents the single greatest risk to its survival as current protective mechanisms disappear. Despite these risks, there are also opportunities that may allow the Egyptian automotive industry to master the transition to full liberalisation. The Middle East and North Africa (MENA) region has always been an attractive market for international vehicle makers. However, it remains a fragmented market that is approached on a country by country basis. In other regions of the world, integrated vehicle markets have developed within the free trade areas of the European Union, NAFTA, Mercosur and ASEAN. In each of these areas, a few countries have emerged
as the hubs for assembling and supplying specific types of vehicles for the regional market. This has not happened in the MENA region, and there is potential for Egypt to assume that role and to become a regional centre for the production of certain vehicles. For Egypts bus makers, steady demand for buses in the MENA region could provide attractive export opportunities. Another opportunity for Egypt is the growth of global sourcing, as automotive companies and other buyers have intensified their efforts to search around the world for the lowest cost suppliers of various components. Egypts component companies could benefit from this, provided that they are able to provide quality products at globally competitive prices. Cost pressures are also driving many international component companies to move labour intensive production processes to low cost countries, and Egypt could benefit by positioning itself as a location for this type of investment. For each of the opportunities outlined above there is a corresponding threat. A number of countries, notably Turkey, Iran and South Africa are positioning themselves as the MENA regions vehicle assembly hubs. Many others, including Tunisia, Morocco and Abu Dhabi, are also vying for automotive investment, especially in the components sector. Other countries in the region have bus makers that represent domestic competitors to Egyptian exports. In the global components market, Egyptian companies are competing with numerous efficient, low-cost suppliers from countries like India, Turkey and China. Competition in the global automotive industry is intense, and many other countries are seeking to exploit the very same opportunities that represent the best chances for Egypt. In order to survive the exposure to full competition, Egypts automotive industry must swiftly address the most pressing issues facing it today. Failure to do so will prevent the industry from taking advantage of the opportunities described above, and from weathering the challenges that confront it. It is no exaggeration to say that Egypts industry is at a crossroads between survival and failure. Any strategy for Egypts automotive industry should therefore not be focused on lofty goals or long term aspirations, but on the practical and immediate necessities of survival. The immediate goal for the industry is to reach a sustainable position. While it is still being shielded from full competition, the industry must be strengthened sufficiently to enable it to compete without protection. This means focusing on the issues that have the greatest impact on the industrys ability to compete, and not dwelling on other factors that, while important, have less of an influence on the industrys continued existence. The automotive industry is highly complex, and it is possible to get distracted by topics that are not fundamental to its overall performance. According to the schedule of the EU-Egypt Association Agreement, the tariff reductions affecting the automobile industry will take effect between now and 2019, when tariffs on all automotive products, including all vehicles and components, should have been removed. By 2010, the components and truck sectors will have started feeling the effects of reduced protection and tariffs on cars and buses will start to be reduced. By that time, Egypts industry should be prepared to face the open market. The development strategy for Egypts automotive industry is therefore to reach a sustainable position by 2010.
The elements of this strategy, and the vision for Egypts automotive industry, can be summarised as follows:
n
n n
Egypt must develop a viable vehicle assembly sector, producing for both the local and regional markets. This will require international automotive companies to select Egypt as their regional base for assembling specific vehicles and models. These companies must be convinced that it is worthwhile to really make a commitment to Egypt, and to incur the necessary investments for establishing wholly owned plants that are integrated in their global production networks. Egyptian component companies must free themselves from their dependency on the local market, including both assemblers and aftermarket. The most promising companies must move beyond their domestic status to become independent, modern and internationally active suppliers. To do so, they must be in a position to compete with suppliers around the world on the basis of quality, price and reliability. Egyptian bus companies must build upon their current skills to become more efficient and cost competitive, making Egypt a leading country in the region for bus production. Egypt must attract a diversified base of automotive component foreign direct investment on the basis of low labour costs and other advantages. These companies will bring skills and technology, further strengthening the Egyptian automotive industry and increasing its integration with the global automotive industry. They will also contribute to Egypts exports and its reputation as an automotive location.
Achieving the elements of this strategy will not be easy. It will require commitment and a concerted effort from all stakeholders in the industry. Collaboration is crucial to achieving the strategys objectives. Various parts of the industry must understand that they share the same interests and that focusing only on the benefits of their individual sector will damage the ability of the entire industry to survive. The situation faced by Egypt is by no means unique. Other countries around the world have faced similar challenges and many have responded successfully. South Africa, Turkey, Brazil Thailand, Romania and Australia are just some examples of countries that have managed the transition from protection to liberalization, and whose industries have become integrated in the global industry through trade and investment. While no other country can provide a perfect blueprint for Egypt, each of them offers practical lessons that can be applied to Egypts own efforts. By 2010, Egypt should have implemented the actions and changes necessary to achieve the goal of a sustainable industry that is able to compete without the benefit of protection. The dismantling of tariffs will undoubtedly still cause pain to some sectors, but the overall survival of the industry should not be at risk. Achieving this goal will provide a solid basis upon which to build further, by specialising and enhancing technology, increasing capacity and moving to the next level of development. This report focuses on the key issues affecting the competitiveness of Egypts automotive sector and the prerequisites for developing a sustainable industry by 2010. It outlines the actions that are necessary to meet these prerequisites and shows how other countries have overcome similar challenges. The time for action in Egypt is now, and strong leadership is required to ensure a sustainable future for Egypts automotive industry.
1
1.1
Introduction
How does this report fit into the overall scope of the project?
This report outlines the potential development scenario for the Egyptian automotive industry, and describes individual actions that should be taken for this to be achieved. The contents of this report are based on the extensive analysis conducted by KPMG in the preceding phases of this project. The findings of this analysis were provided to the IMC in three previous reports: Phase 0:Global Automotive & Egyptian Industry Review At the outset of the project, KPMG conducted an assessment of significant developments in the global automotive industry that are shaping the way the industry operates, both for vehicle producers and assemblers as well as the component companies that supply them. An understanding of these global dynamics is essential for any efforts to enhance Egypts competitiveness within the international industry. KPMGs report for Phase 0 also provides an initial overview of the Egyptian automotive industry, inclu ding vehicle assembly and components. The report covers such aspects as the structure of the industry, its size, participants, output, international trade and other basic parameters. Phase 1:Vehicle Industry The Phase 1 report provides an analysis of Egypts vehicle industry, including passenger cars, light commercial vehicles, buses and trucks. The analysis is based on KPMGs significant research, both inside and outside of Egypt, and highlights the major characteristics of the industry with respect to its international position and potential for achieving long term competitiveness. The report presents scenarios for the industrys future deve lopment given its characteristics and international industry developments. Phase 2: Components Industry The Phase 2 report summarizes the major findings of KPMGs analysis of the Egyptian automotive components industry. As in Phase 1, the report highlights the findings that are most relevant in terms of the Egyptian components industrys ability to survive and be integrated in the global automotive supply chain. The report also presents opportunities for Egypt, and outlines a potential development strategy for the Egyptian components industry, including a description of why the strategy is feasible based on industry developments, existing successes in Egypt as well as the experiences of other countries. In terms of the project scope, KPMG completed the following tasks in Phases 0, 1 and 2:
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Assessed the structure and performance of the Egyptian automotive industry relative to international industry trends and requirements. Identified the major issues affecting the Egyptian automotive industrys competitiveness and ability to survive, both in terms of its own characteristics and relative to international industry dynamics.
Described what is likely to happen to the Egyptian industry given these issues, in the absence of any further actions or intervention. Formulated scenarios for the development of the Egyptian automotive industry and its individual sectors. Provided the key elements of development strategies for both the vehicles and components sectors.
This current report builds upon these previous tasks to describe the actions that must be taken to increase the potential for the Egyptian automotive industry to become competitive and survive in the long term.
1.2
What are the objectives of this report?

The previous reports showed that the Egyptian automotive industry faces significant challenges and threats based on the combination of its own characteristics and international deve lopments. However, the reports also illustrated that opportunities for the Egyptian industry exist and that there is potential for positive development. This report describes the specific prerequisites that must be fulfilled and actions that should be taken for Egypts industry to take advantage of existing opportunities and fulfil its development potential. As stated in the IMCs original brief for this study, the overall objectives of the project are to reach a development strategy and action plan on how to upgrade the industry to face its future challenges, increase exports and attract foreign direct investment. The development strategies and actions in this report are viewed from the perspective of the projects ultimate objectives and outcomes, which are defined as follows:
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Attract foreign direct investment (FDI) from both vehicle assembly original equipment manufacturers (OEMs) as well as automotive component companies. Generate increased exports of both vehicles and automotive components from Egypt. Modernise und upgrade the industry, in terms of technology, structure, processes and other key factors that will contribute to enhancing its international competitiveness.
This report draws on the analysis of the various sectors of the Egyptian automotive industry in previous phases to determine what actions are necessary to achieve these three objectives. In other words, while the previous phases of the project addressed the question what issues are affecting Egypts ability to upgrade its industry, generate exports and attract FDI?, this report seeks to answer the question what needs to be done to address and overcome the issues that are affecting Egypts ability to meet these objectives.
1.3
How is the report structured and what information does it provide?

The report is structured to reflect the three overall objectives of the project as stated above, rather than being organised along the lines of industry segments. Thus the report considers what can be done to meet each of these overall objectives in both the vehicle and component industries, rather than looking at each segment individually. The reports structure can be illustrated using the example of one of the three objectives attracting increased automotive FDI. The report starts by examining which factors play the greatest role in determining Egypts ability to attract more FDI. These are key strategic issues identified during the analysis conducted in Phases 1 and 2, and the relevant findings from the previous reports are combined and provided in summary form. The report then goes on to outline the industrys potential development scenario in terms of FDI attraction. This includes both a negative scenario reflecting current characteristics and challenges, as well as a positive scenario that is considered to be both desirable and attainable given the analysis. Achieving this desirable scenario is part of the overall development strategy for the industry. Next, the report addresses prerequisites that must be met if Egypt is to achieve the development strategy for attracting more FDI. These prerequisites are seen as critical to the success of the development strategy. If they are not met then the development strategy is unlikely to be achieved (i.e. Egypt is unlikely to attract more FDI). Individual action steps are then suggested for meeting the prerequisites. These are specific activities or efforts that that will contribute to meeting the prerequisites. The action steps related to achieving the prerequisites should be seen as priorities in terms of timing and effort. Finally, the report outlines other requirements and action steps . These are other important requirements that could be fulfilled to support achievement of the development strategies. Using FDI as the example, these are other steps or actions that could make Egypt more attractive as a location for automotive FDI. Depending on the resources available, these other requirements and related action steps could be addressed in parallel or subsequent to the prerequisites. However, addressing these requirements will not be of much benefit if the key prerequisites have not been met. The same structure is used for each of the three overall project objectives (increase FDI, i n crease exports, modernise Egyptian industry). The benefit of this approach is that it focuses directly on achieving the projects key objectives. The report also takes into consideration the various sectors of the automotive industry but does not look at them in isolation. This reflects the fact that the different sectors of the industry are interdependent and that the same overall goals apply to all of them. Achieving the goals in one sector such as passenger cars, will positively influence the chances of achieving them in all the others. This interdependency is also true of the projects overall obje ctives. Thus, attracting more FDI should also lead to increased exports while contributing to the modernisation of Egypts automotive industry. Similarly, efforts to upgrade the industry domestically will improve the export
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potential of Egyptian products while making Egypt more attractive as a location for FDI. Again, it is helpful to view the objectives and associated prerequisites and action steps as mutually reinforcing, rather than as isolated efforts targeting individual aspects of the Egyptian automotive industry. It is also important to emphasise that this report is focused on the key issues affecting the competitiveness of Egypts automotive industry in terms of the projects three overall obje ctives. The associated action steps are those that are seen as most critical to overcoming these issues and achieving the project objectives. The report does not provide recommendations regarding each and every factor that could be influencing the performance of the various segments of the Egyptian automotive industry, but concentrates on those issues with the greatest impact on the industrys future competitiveness. Finally, it is also important to understand the level of detail provided by the report. Although the report addresses questions related to the implementation of these actions steps such as stakeholders, timing and other practical issues it does not provide an exhaustive implementation plan for each action step. A precise set of instructions for each action step would be outside the scope of this project, and each of the action steps will need to be taken further and broken down into detailed workplans by the relevant stakeholders.
1.4
What are the key assumptions underlying the report?

The strategies and actions presented in this report and indeed the entire approach for this project are based on a number of key assumptions regarding the automotive industry and the efforts necessary to achieve the project objectives. These assumptions are as follows:
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Level of Support. We have assumed that the automotive industry plays an important role in Egypts industrial policy and that there is a commitment at all levels to support and enhance this industry. We have therefore not evaluated the level of government support or other political issues related to the industry. We have also not conducted an assessment of the industrys economic impact or an analysis of the costs and benefits of supporting the automotive industry relative to other industries. While these issues may be interesting, they are clearly outside the scope of this project. Industry Level Approach. The automotive industry is highly integrated, both in terms of its individual sectors as well as the level of integration across international borders. This is reflected in our approach to the study, which focuses mainly on the competitiveness of the overall industry rather than looking at its individual parts in isolation. While it is important to understand how those individual parts operate and interact, the strategies and action steps presented in this report take a broader industry view. The report does not provide highly specific initiatives, which might be of benefit to only a handful of companies in individual segments of the industry. Such a narrow level of focus would not be addressing the broader issues affecting the overall competitiveness and indeed survival of the Egyptian automotive industry. In fact, such narrow initiatives may prove to be futile unless the broader industry issues are addressed and resolved first. This is first and foremost an industry study designed to determine develop strategies for the industry overall.
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Market Driven. The automotive industry is dominated by private companies, with only a few remnants of nationalised production remaining around the world. Competition in the industry is intense, and the decisions of companies are driven by the need to cut costs and increase sales. This profit motive underlies all decisions by automotive companies, and a clear understanding of how these companies act in their efforts to maximise profits is critical to achieving the goals of this study. This is reflected in our research for this project, which focused heavily on personal interviews with both Egyptian and international automotive companies. In other words, our findings and conclusions are based on the real actions and decision making behaviour of the companies that make up the industry. Role of Government. The number of countries pursuing interventionist industrial policies has decreased significantly over the past decade or two. With respect to the automotive industry, it has been largely those countries that have liberalised their economies and reduced the level of government intervention that have been most successful. We believe the role of government is critical to ensuring the necessary environment in which companies and industries can thrive. Governments can also play a key role in providing tools for stimulating specific activities, or in directing public sector resources towards certain areas of the economy. However, our assumption for this project is that the role of the government does not extend to micro management of individual sectors or companies. The contents of this report reflect our view that as long as the necessary supporting framework has been put into place, market forces will determine which companies thrive and which ones do not. Experience of Other Countries. The experience of other countries can provide useful le ssons for Egypts own efforts to enhance the automotive industry. Throughout the project and all through this report, we have provided examples from other countries to show how the automotive industry in these countries has developed and to illustrate how important issues have been addressed. While such a review of best practices can be useful, we do not believe this extends to a detailed quantitative benchmarking of specific industry characteristics. No two countries are identical, and a static comparison of industry features risks overlooking dynamic issues that are far more important to the industrys performance. Also, this type of benchmarking does not reflect the realities of corporate decision making, where countries are compared according to the specific market and cost characteristics relevant to a company and its products. For these reasons, comparisons with other countries have only been used where they are useful to achieving the projects objectives, in terms of supporting the analysis, testing hypotheses, or formulating develo pment strategies and action steps.
The following sections of the report describe the major issues, strategies and actions related to achieving the overall objectives of this project.
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Egyptian automotive industry reaches a sustainable position by 2010 Objectives Increase FDI
Most vehicle assembly in Egypt is in the form of joint ventures - not true FDI. Foreign OEMs assemble in Egypt mainly to bypass high tariffs on imported vehicles. Biggest barrier to greater investment is limited market size and perceived lack of market potential. FDI in the components industry is minimal. Egypt is not perceived as a potential location for component FDI. Existing investors demonstrate strong potential for attracting further component FDI to Egypt.
Increase Exports
Exports of Egyptian made vehicles are very low. Export potential is essential to generate large enough volumes to justify car & light vehicle investment by OEMs. Regional exports of buses have grown in recent years and appear to have potential. Exports of trucks have fallen dramatically Exports of components are very low. A few Egyptian component companies are exporting successfully, demonstrating potential. International competition for components currently made in Egypt is based mainly on price.
Modernise Egyptian Industry

Low labour cost is a significant competitive advantage that could be maximised with improvements in efficiency and technology. Current standards among Egyptian companies vary significantly. Some companies are attaining world class standards. Companies with the best standards are those with the greatest links to foreign parents, partners or customers. Domestic component suppliers and bus companies would benefit most from technological assistance and support. There is strong interest among Egyptian companies for receiving such assistance. A large number of Egyptian automotive companies achieve international accreditation. Increased FDI leads to improvements in technology and standards. Egyptian component companies and bus makers receive technical assistance. Greater collaboration among Egyptian companies and other industry players.
Strategic Issues
(relevant characteristics of the Egyptian industry)
Development Scenario
(desirable scenario for the industry s development)
Reduced number of vehicle assemblers and market growth enables viable production volumes and capacity utilisation. Some OEMs establish and invest in modernising and expanding Egyptian assembly operations. Increased component FDI in selected target sectors.
OEMs export more vehicles to the Gulf, Middle East and COMESA countries. Egyptian component companies reduce dependency on the domestic market and increase exports. More foreign-owned component plants in Egypt supplying customers worldwide.
Prerequisites and Action Steps

(key requirements that must be met to achieve the development strategy)
1 The domestic vehicle market must grow to persuade OEMs to invest and expand. - Provide tax incentives to stimulate domestic vehicle demand - Facilitate access to vehicle financing 2 Key companies must be encouraged to invest in Egypt. - Approach major automakers regarding assembly operations in Egypt - Implement a targeted investment attraction programme for automotive component FDI
1 Exports must be encouraged and facilitated. - Provide export incentives for vehicle exports - Make regional markets more accessible and remove barriers to exporting 2 Egyptian products must be price competitive. - Reduce the price paid by Egyptian companies on imported parts and materials 3 Egyptian companies must have access to international buyers - Identify key buyers internationally for the types of products made in Egypt - Assist Egyptian companies to meet international procurement requirements 4 Egypts automotive industry must become known internationally. - Arrange joint presence of Egyptian suppliers at major industry trade shows - Promote the Egyptian industry through key industry publications and events - Produce a directory of Egyptian component companies that can be distributed internationally to potential buyers (and foreign investors)
1 Egyptian companies must gain internationally recognised quality standards. - Provide support in receiving international certification - Egypt becomes signatory to Geneva agreement on automotive standards 2 Egyptian companies should be using leading international production processes. - Train labour force & management in quality and production techniques - Provide financial support for capital investment and modernisation
Other Requirements and Action Steps

(other issues that should be addressed to support the development strategy)
3 Egypt must offer a world-class environment for FDI. Review and enhance key factors: - Customs procedures - Incentives - Security risks - Company registration - Local content rules
3 There should be increased cooperation among all industry players to raise overall industry standards. - Establish a focused automotive industry technology centre - Create a professional trade association for the entire industry
Figure 1: Development Strategy and Action Plan
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2
2.1
Objective 1: Attracting Foreign Direct Investment

Strategic Issues
Based on KPMGs analysis for Phases 0, 1 and 2, the following are the main issues related to Egypts ability to attract automotive foreign direct investment (FDI). These issues are addressed in more detail in the reports for the preceding phases of the project.
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Most of the vehicle assembly currently taking place in Egypt consists of joint ventures or licensing agreements between foreign OEMs and Egyptian or other investors. The foreign companies hold a minority stake and their activities in Egypt cannot be defined as actual FDI as they do no not own their Egyptian operations. The only exception is Nissan, which bought a majority stake of its Egyptian operation and has announced plans to invest signif icantly in upgrading it. While some of the other foreign companies that are active in Egyptian vehicle assembly, including cars, buses and trucks, have also invested in Egyptian operations to some degree, they all hold minority stakes in these ventures. This distinction is important, since real foreign direct investment in terms of actually establishing and investing in a wholly or majority owned assembly facility implies much greater commitment to and confidence in a country, as well as integration with the parent companys international operations. This type of FDI is the exception in Egypt today. The foreign companies that are currently assembling vehicles in Egypt are doing this pr imarily to circumvent high tariffs. Most of them can currently sell more vehicles in Egypt by using a local partner to assemble knocked-down kits than by exporting built-up vehicles to Egypt from other countries. However, as tariffs continue to fall through the efforts of the government or in line with Egypts free trade agreements, it is probable that most foreign assemblers will pull out of their Egyptian partnerships. A point will be reached where it is more profitable for them to ship built-up vehicles to Egypt than to share profits with a local partner. The biggest barrier to greater investment by automakers is the small size of the Egyptian vehicles market and perceived lack of market potential. Despite Egypts large population, it has an extremely underdeveloped vehicle market. International vehicle producers will not invest significantly in countries unless they believe them to represent significant market opportunities or potential. The country currently perceived to have the most promising market in the Middle East is Iran, where car sales are soon anticipated to exceed 1 million units per year. Several OEMs have invested in Iranian assembly plants, despite the significant bureaucratic burdens and political risks associated with such investments. This is a reflection of the countrys large and growing vehicle market. Egypts vehicle market, by contrast, has been declining, and is not perceived as having much potential for growth in the short to medium term. FDI in the Egyptian automotive components industry is minimal, with only one foreign owned production plant. This is extremely low compared to the large amounts of investment that several low-cost countries around the world have attracted in recent years. It is also low compared to regional competitors such as Tunisia or Morocco, who have both managed to attract a la rger number of foreign automotive component companies than Egypt, based largely on their cost advantages.
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Despite Egypts poor performance in attracting automotive component FDI, there do not appear to be any significant barriers to attracting more FDI to Egypt compared to some other countries that have been more successful. Indeed, the examples of existing automotive FDI in Egypt clearly show the potential for foreign automotive companies to be successful in Egypt. The research for this project has shown that Egypt is simply not perceived internationally as a potential location for automotive component FDI. Other countries have been more effective at promoting themselves to foreign investors and convincing them to invest.
2.2
Development Strategy
Given the current situation and the issues outlined above, there are both challenges and opportunities for Egypt to attract more automotive FDI. On the negative side, there is the risk that FDI will not increase from its current low le vels. With regards to vehicle assembly, the Egyptian market may remain too small to convince foreign companies that there is any advantage to establishing their own assembly facilities in Egypt. Indeed, as tariffs continue to fall in line with free trade agreements, many foreign companies are likely to pull out of their relationships with Egyptian partners and serve the Egyptian market by exporting from other countries. FDI in vehicle assembly operations in the region will continue to go to those countries with the largest domestic markets like Iran and Turkey. The same risk applies to automotive components, and unless significant efforts are made to position Egypt as a location for investment, FDI will continue to go to those countries that are more proactive and effective at identifying and attracting foreign investors. The previous reports in this project have shown that there are also opportunities for attracting more FDI to Egypt. As the Egyptian vehicle market becomes more liberalized, the number of companies assembling low volumes in Egypt to circumvent tariffs will decline. The market will become less crowded compared to the current situation where a large number of companies are all assembling at very low volumes. This could create opportunities for a small number of companies to invest in Egyptian assembly operations in an effort to dominate the local market for certain types of vehicles. The potential for this to happen would be significantly enhanced if Egypts vehicle market were to grow and demonstrate signs of sustained expansion. Under this positive scenario, a reduced number of domestic assembly facilities, coupled with a larger overall market, could induce a few OEMs to assume ownership of their Egyptian operations and invest in modernisation and expansion. This small group of assembly operations would serve the domestic market with viable volumes and capacity utilisation. An added attraction for these companies would be the potential for using Egypt as a hub for regional vehicle assembly and exports (this scenario is explored in more detail in the next section of the report). At the same time, a concerted and focused effort to attract automotive component FDI could successfully position Egypt as low-cost production location for components, resulting in i n creased investment of this type.
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Summarizing the main elements of this positive scenario provides the development strategy for achieving the goal of attracting more automotive FDI to Egypt.
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Encourage a small number of international vehicle producers to invest in Egypt Position Egypt as a location for low-cost component production
2.3
Prerequisites
There are two key prerequisites that must be met for this development strategy to be achieved.
2.3.1
The domestic vehicle market must grow to persuade international OEMs to invest and expand in Egypt
This prerequisite is essential for all sectors of the vehicle industry. For passenger cars, our research has shown that a market size of at least 200,000 units would be necessary to convince OEMs that establishing assembly operations in the absence of tariff barriers could be profitable. This is more than double the current market size. A market of this size would allow 2 to 3 assemblers to produce at volumes of at least 30,000 units, with the rest of the market served by imports. Volumes of this size would be more feasible if assemblers were to combine multiple vehicle models on a single platform, as well as if they could complement domestic sales through exports. For the other segments of the vehicle industry, including trucks and buses, increases in market size are also necessary to convince foreign OEMs that a direct i vestment in Egypt n could be profitable. There are several reasons why vehicle sales in Egypt have been stagnant and even declining in recent years. These include the economic situation, the depreciation of the Egyptian currency, low disposable incomes, and the relatively high price of some vehicles in Egypt compared to other countries. The concentration of Egypts population in Cairo and the result ing congestion also restricts the market for passenger cars and other types of vehicles. Clearly, an improvement in economic conditions and an increase in individual and bus iness consumption would stimulate vehicle sales. The governments efforts to develop regions outside Cairo and enhance the countrys infrastructure could also lead to an increase in vehicle demand. In addition, the progressive liberalisation of the Egyptian vehicle market could also have a positive effect. As tariffs fall and vehic le imports become more affordable, vehicle sales are stimulated. The price of domestically assembled vehicles must then also fall in order to remain competitive with imports, further increasing the overall demand for vehicles. The experience of several other countries that have gone through this process (Australia, South Africa, Turkey, Thailand) demonstrates the pos itive effects that a reduction in import tariffs and other forms of market distortions can have on the automotive market. Egypt appears to have taken the first step in this direction with the reduction in tariffs that was introduced in late 2004. The factors above would influence vehicle sales indirectly through changes in the overall economic or trade situation. However, there are also direct measures or action steps that can be taken to stimulate the vehicle market and meet this important prerequisite.
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Provide tax incentives to stimulate demand for specific vehicles

Fiscal policy is widely used by governments around the world to influence demand for certain types of vehicles. Governments provide tax incentives for consumers to switch to or favour certain types of vehicles that are considered more beneficial (for example, more environmentally friendly) than others. In some cases, these measures are targeted at the corporate sector in an effort to increase sales of certain vehicle types (for example company cars). In other cases, governments try to directly stimulate the purchases of specific types of vehicles by individual consumers. Brazil and Thailand are examples of countries where tax incentives have been successful at boosting consumer demand for certain vehicles (see Example 1). The government of Egypt could provide targeted tax incentives to stimulate demand for certain types of vehicles within Egypt. This could be done by reducing or eliminating the sales tax on selected vehicle types. The types of vehicles selected to receive incentives would need to be carefully selected in accordance with the governments policies on transportation, urban pla nning, regional development and the environment. The decision on which types of vehicles to promote would also need to take into consideration the requirements and usage patterns of Egyptian consumers (individuals and businesses) in o rder to be most effective at stimulating demand. Along with ongoing tariff reductions, targeted tax incentives could provide a short term method for reducing the price of specific types of vehicles to Egyptian consumers. If these measures are effective at increasing sales, this would help meet the prerequisite of increasing market size to attract investment. Companies producing the types of vehicles that are receiving the favourable tax treatment would be natural candidates for establishing assembly operations in Egypt to supply the increased demand. Example 1: Tax incentives for pick-up trucks in Thailand and popular cars in Brazil. Thailand is the second-largest producer of pick-up trucks (after the USA) in the world. Toyota, Isuzu, Mitsubishi, Nissan, Mazda and Ford have all selected Thailand as a major production base for pick-up models. This development is partly the result of an industrial policy that pr omoted sales of pick-up trucks in Thailand. The Thai government lowered the excise tax on pick-ups to as low as 3 % compared to 50 % for ordinary passenger cars. This favourable tax regime boosted pick-up truck sales in Thailand and turned the country into an attractive base for the production of this niche vehicle model. Growing local sales allowed many companies to realize economies of scale and to begin exporting. At the beginning of the 1990s, the Brazilian government promoted so-called popular cars with engines up to 1000 cc by significantly reducing excise taxes on these cars. Subsequently, the market share of this vehicle category rose from 4.3 % in 1990 to 64.1 % in 1997, fuelling a huge increase of FDI in car-assembly operations.
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Facilitate access to vehicle financing

In any part of the world, a vehicle is an expensive purchase that is rarely paid for one hundred percent in cash. Both individuals and corporations tend to buy vehicles in instalments, either by obtaining loans or through other models such as leasing. The low purchasing power of average Egyptians, the current economic situation, and the relatively high price of vehicles in Egypt all combine to make the purchase of a vehicle even more prohibitive for Egyptian consumers and businesses. This situation could be improved by providing greater access to vehicle financing. Vehicle financing is in its early stages in Egypt, and mostly still takes the form of personal loans provided by banks that can be used by consumers to purchase a car. However, interest rates on these loans are high and the eligibility criteria disqualify many people from obtaining credit. Beyond bank loans, there does not appear to be an established market for vehicle financing that would provide an alternative for individuals or businesses wishing to purchase a new vehicle. There has been an increase in vehicle financing services in the MENA region in recent years, especially in some of the Gulf states. Together with the significant growth of Islamic banking, this has led to the development of new Shariah compliant products for vehicle financing, which are being rolled out and marketed across the region by major banks such as Standard Chartered and HSBC. The government of Egypt should support and stimulate efforts by private sector institutions to establish these products in the Egyptian market. The public sector banks could also play a role in providing greater access to vehicle financing to consumers and businesses at more favourable conditions. Access to financing could help satisfy some of the pent up demand for vehicles in Egypt, thus helping to increase market size to the levels necessary for attracting foreign direct investment from vehicle assemblers. It is important to note that such financing must be focused on the purchase of new vehicles (not used) in order to have the desired effect of increasing market size. Also, the development of vehicle finance could have further positive economic effects by encouraging the development of secondary financial services such as credit checking and credit rating agencies.
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Example 2: Consumer financing in India Because of their low incomes, the vast majority of the Indian population cannot afford to buy a car. When Maruti and its partner Suzuki introduced a low cost, fuel-efficient Maruti passenger car for the Indian market they also developed a special finance concept to help stimulate sales. Maruti formed a consortium including the financial institutions Citicorp Maruti, Maruti Countrywide, HDFC Bank, Standard Chartered, ABN AMRO, Kotak Mahindra and Sunduram Finance to design an attractive and reliable financing concept. This concept makes it easy for consumers to obtain financing, combining widespread availability, a simple application process, low interest rates, no processing fees and long repayment periods. Maruti has also teamed up with the national State Bank of India and several public sector banks in individual Indian states to make its finance package available to customers even in the more remote parts of the country. Today Maruti has a 50% share of the passenger car market in India, thanks in part to its ability to make car ownership a reality for many individuals who would otherwise never have been able to afford their own car.
Example 3: Emerging automotive financing market in Russia Russia is another example of a country where the emergence of finance concepts for purchasing new cars significantly increased car sales. The Government of Russia requested the assistance of the International Finance Corporation (IFC, a member of the World Bank Group) in developing the financial leasing industry in Russia. In 1997 the IFC Leasing Development Group Russia was founded to assist the Russian Government in improving the legislative and economic environment for leasing by analyzing existing conditions for leasing development in Russia, recommending changes to the legislative environment, conducting an extensive national training program on leasing for government officials, leasing companies, entrepreneurs and business support agencies, developing and disseminating information on leasing to increase awareness of leasing as a financial tool, providing oneon-one consultations to leasing companies and enterprises using leasing and identifying investment opportunities in the leasing sector for the private sector. Car sales financed by loans in Russia have grown from almost zero in 2000 to $400 million in 2003 and are expected to reach $1.4 billion by 2007. The number of banks operating in the car loan market doubled in 2003. Interest rates are declining and terms of repayment have been eased. While in 2002, only 10 percent of cars in big Russian cities were sold through a loan agreement, in 2003 this share grew to 25-30 percent. However, in smaller cities and villages, 95 percent of vehicles are still paid for in cash. Experts believe that once loan programs are expanded to the regions the share of loan sales may reach 40 percent in 2004. Overall car sales in Russia grew from 1.2 million units in 1998 to an estimated 1.6 million units in 2004, with the increase partly due to the development of consumer financing schemes.
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2.3.2
Key companies must be encouraged to invest in Egypt

In addition to efforts aimed at stimulating market size, Egypt should also seek to directly encourage international companies to invest. Although most large companies routinely monitor regions around the world for market opportunities and developments affecting their bus iness, it is impossible for companies to be equally aware of conditions in all countries. In addition, decision makers often have preconceptions about individual countries that may be inaccurate or out of date. Very often, a single investment decision by one well-known company can draw the attention of other companies in the industry and encourage them to also invest in a specific location. Many of the worlds most successful countries in terms of attracting FDI are those that have been most proactive and assertive in terms of seeking out, approaching and promoting themselves to companies around the world. Without the attraction of a large and growing market, Egypt cannot afford to adopt a passive approach. Egypt needs to directly approach both vehicle OEMs and component companies to promote its advantages as a location for automotive FDI and to position itself for future investments. The two actions steps necessary to achieve this prerequisite are as follows.
Approach major automakers regarding assembly operations in Egypt

One of Egypts key advantages is that many international vehicle producers are already active in the country through their partnerships with Egyptian firms. This means that they are already familiar with Egypt and some of the advantages it offers. More importantly, it means that direct contacts to decision makers at key foreign companies already exist. These existing contacts should provide a starting point for a concerted effort to contact vehicle assemblers around the world to discuss possible FDI in Egypt. This should involve a focused and comprehensive effort to identify and establish contact with all of the worlds vehicle OEMs, including those from countries such as China, India or Russia. Given the significant consolidation that has taken place in the industry over the past few years, the number of companies that would need to be contacted is manageable. Within larger companies, this may require multiple contacts to individual divisions responsible for passenger cars, trucks or other vehicle types. The appropriate initial contact at most companies would be the person responsible for sales, marketing and/or strategy for the Middle East and North Africa (MENA) region. For those companies already active in Egypt through partnerships, the appropriate contacts should be easy to identify. The objective of these contacts should be to discuss the companys plans for the MENA region and their perception of Egypt in particular. Although most companies may not currently have plans to establish assembly operations in the region, it is important to position Egypt as a location for future projects. Renault for example has announced its decision to invest Euro 300 million in Iran to produce its low cost Logan model. Iran was clearly chosen as a location for this project because of its large domestic market. However, Renault is also planning to produce the Logan in other countries around the world including Morocco, which does not have a large domestic market. It is important for Egypt to establish relationships with decision makers at key OEMs like Renault to position Egypt as a location for future projects of this type.
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It is also important for Egypt to be responsive to the needs of potential foreign investors and to seek ways to encourage their investment. This involves meeting with them to discuss their requirements, and developing a tailored response to their needs. This is especially true since Egypt does not have the advantage of a large market such as Iran, where companies are willing to put up with significant burdens and risks simply to be present in the market. Example 4: Abu Dhabis Efforts to Attract Automotive FDI Abu Dhabi provides an example of a location that is currently trying to attract automotive FDI without the advantage of a large domestic market. The emirate is hungry for investment to help diversify its economic base, and has targeted the automotive industry as one of its priority industries. Abu Dhabi has launched a focused investment attraction program, and is systematically contacting OEMs and suppliers to convince them to invest. The first success came in the second half of 2004, when Volkswagen announced it would establish a facility for assembling trucks. VW is also considering moving the production of certain types of components that require aluminium, rubber and polymer parts. Although VW has a business relationship with Mubadala Development Company (the government financed investment company in Abu Dhabi), this is not the only reason why VW chose to invest in Abu Dhabi. The emirate also offers low electricity and aluminium prices, efficient customs processing, fully prepared land and industrial facilities, minimal bureaucratic burdens and other attributes that would be attractive to a potential foreign investor. Abu Dhabi has also hired specialised professionals to contact and promote the location directly to potential investors overseas.
Implement a targeted investment attraction programme for automotive component FDI

There should also be a similar effort to attract investment from automotive component companies. However, since there are thousands of component companies around the world, such an effort would require a more targeted approach than for vehicle assemblers, focused on specific sectors and companies with the greatest potential. KPMGs report for Phase 2 of this project provided an initial list of automotive component sectors that could represent potential for Egypt. This can serve as a starting point from which to select a number of sectors with which to commence a targeted investment attraction programme. Such a programme should begin by analysing the target sectors in more detail to identify their major requirements and match with Egypts advantages. A tailored value proposition should be developed for each sector, highlighting Egypts specific benefits. This value proposition should consist of more than the general benefits that Egypt offers to potential foreign investors, and should specifically address the requirements of the individual component sector. As a next step, individual companies within each sector should be identified based upon a predefined profile. Specific criteria (for example size or geographic location) should be used to restrict the number of companies to a manageable size. Each company should be researched in more detail to identify critical information, such as performance, decision making structure, in-
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ternational activities and recent developments that indicate potential for investment in the Middle East and Egypt specifically. Next, each company must be contacted directly to initiate a discussion with the appropriate decision maker and present the specific advantages that Egypt can provide that company. Since many companies will not have immediate investment plans, it is critical to initiate a thorough and consistent follow-up process to ensure that contacts with each company are maintained and tracked on an ongoing basis. A targeted investment attraction programme of this type is a time consuming process that requires significant commitment, discipline and dedicated resources. There is intense competition for FDI among locations around the world today, and the automotive industry is an especially sought after and contested sector. An increasing number of countries, regions and cities are employing proactive investment attraction methods of this type, in an effort to reach potential investors and differentiate themselves from other locations. If Egypt wishes to successfully compete for automotive component FDI, it must adopt similar methods to identify and pursue opportunities before its competitors. This is especially important since Egypt is not perceived as an obvious location for automotive component investment.
2.4
Other Requirements
In addition to the prerequisites described above, there are other issues that should be addressed to support the objective of attracting more automotive industry FDI. These rela te to the infrastructure for attracting and retaining FDI, and are based on the various factors that a foreign company will consider when evaluating potential locations for a new investment. Put simply, the requirement is as follows.
Egypt must offer a world-class environment for attracting and retaining foreign direct investment.
As mentioned in the introduction to this report, automotive companies are profit-seeking. As such, they will only invest in a new market if there is a viable commercial reason for doing so (either increased sales or reduced costs, or both). If this reason does not exist, the company is unlikely to invest in that market, even if it offers a highly advanced infrastructure for investors. Once the decision has been made to enter a new region or country for commercial reasons, the company will review a series of other factors related to the operating environment in that country. The most important of these factors are: Costs is the cost environment competitive? Infrastructure what is the quality of utilities, sites, and transportation? Suppliers are raw materials and components available locally or can they be freely imported? Incentives what types of financial and other support will the government provide? Labour is there a pool of sufficiently skilled employees? Regulatory how easy is it to establish and operate a business? Supply Chain can goods be brought in and out efficiently and quickly? Risk what is the level of political, economic, security and other risk? Based on KPMGs research, Egypt rates quite favourably for some of these factors. For example, all of the Egyptian-based assembly operations interviewed by KPMG agreed that the country offers a large pool of well educated employees. Egypt also has a favourable cost base, and labour costs are lower on average than in other leading destinations for automotive FDI such as
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China or Romania. There also appears to be a good supply of industrial land, as well as reliable and affordable utilities. Finally, Egypts government is supportive to foreign investors and provides incentives in the form of long-term tax holidays. These are all positive characteristics that could enhance Egypts efforts to attract FDI. However, KPMGs research also identified potential disadvantages that could impact the environment for foreign investors.
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Customs procedures many of the companies interviewed by KPMG referred to lengthy and bureaucratic customs procedures at Egyptian ports. This is absolutely unacceptable in the global automotive industry where just-in-time delivery is the norm and delays can lead to huge penalties, cancelled contracts and large losses for the affected companies. This is a critical factor that could impact the decision of vehicle companies to use Egypt for anything other than a base for domestic assembly. It could also be a serious obstacle to attracting automotive component FDI, as these companies would be supplying plants around the world and would therefore be dependent on fast and reliable customs processing. Example 5 below provides examples of how some other countries have addressed this issue.
Example 5: Expedited customs clearance in Indonesia and the Philippines Indonesia and the Philippines introduced the expedited clearance programs Gold Card (Indonesia) and Super Green Lane (Philippines) to facilitate and speed-up customs clearance for importers. The Philippine Bureau of Customs (BOC) processes entries through its Automated Customs Operating System (ACOS) and classifies shipments as low-risk (Green Lane), moderate-risk (Yellow Lane) and highrisk (Red Lane). According to the classification there are divergent requirements on documentation and physical inspection. The Super Green Lane is a facility for low-risk importers with a good reputation. Importers can apply for an accreditation for the Super Green Lane. For example the major automakers are acknowledged as stable, reliable and trustworthy customs partners and in so far quite safe candidates for the priority lane. Combined with modern information technology the custom clearance time for low-risk companies can be reduced from several days to about two hours.
Suppliers and raw materials the presence of or access to key sources of components and raw materials is another key factor in the automotive industry. While some companies require highly specific localised inputs, most of them can source these freely in the international market. Although Egypt has a base of domestic component companies and lower-tier suppliers, the government imposes local content requirements that provide an additional burden to domestic assemblers. Duties on imported parts and inputs also increase the cost of components and raw materials that cannot be sourced domestically. Such constraints on the ability of companies to freely obtain the inputs they need represent serious obstacles in an industry that is increasingly characterised by global sourcing and highly integrated international supply chains. Incentives although the Egyptian government has implemented incentives legislation and provides generous tax holidays to foreign investors, this may be less support than some vehicle producers are accustomed to from other locations around the world. The competition for FDI around the world has become so intense that in addition to tax incentives, many locations are offering a range of other financial and non-financial benefits. These include
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cash grants, free land or buildings, assistance with recruiting and training employees, expedited permitting, investment in infrastructure and even assistance with securing specific sources of raw material. These incentives are often promoted to potential investors, who value the transparency of knowing what support could be available to them in addition to statutory tax exemptions.
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Security risks most international surveys do not rank Egypt as a particularly insecure or unstable country based on actual events. However, many of the international companies interviewed by KPMG did perceive Egypt to represent a high level of risk. This is partic ularly the case for medium sized automotive component companies who are more risk adverse and less experienced internationally. The existence of these preconceptions should be taken into consideration in any efforts to attract component company FDI. Bureaucratic procedures some of the companies interviewed by KPMG stated that certain administrative requirements in Egypt, notably the company registration and permitting process, were very time consuming and excessively bureaucratic. A supportive and efficient registration and permitting process is an integral part of an environment that is conducive to FDI, and many countries around the world have streamlined the bureaucratic procedures that foreign investors have to go through.
The potential disadvantages discussed above were highlighted in the course of KPMGs discussions with companies within and outside of Egypt. This means that they could influence future investment decisions by these and other companies in Egypt. Each of these factors should be reviewed to determine whether improvements can be made that would enhance the environment for FDI. Improvements in these areas will also benefit domestic companies. It is important to emphasise the distinction between these factors and the prerequisites described earlier. The prerequisites are fundamental conditions that must be achieved for Egypt to attract more FDI. To some degree, companies are willing to tolerate less than optimal investment conditions provided important prerequisites have been met. This explains why countries with huge markets such as China or Iran are successfully attracting automotive FDI despite the fact that the investment environment in these countries is less than optimal. Countries with smaller automotive markets, such as South Africa or Romania, must work harder to attract and maintain FDI. However, these countries still provide large enough markets to be attractive for automotive companies and their suppliers. For Egypt, this means that the prerequisites of increasing market size and directly encouraging investment must be achieved first. Revie wing and enhancing the other key factors outlined here will serve to further enhance Egypts potential. However, addressing these factors alone will not enable Egypt to meet the goal of attracting more FDI.
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3
3.1
Objective 2: Increasing Exports

Strategic Issues
Based on KPMGs analysis for Phases 0, 1 and 2, the following are the main issues related to Egypts ability to generate increased automotive exports. These issues are addressed in more detail in the reports for the preceding phases of the project.
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Exports of Egyptian made vehicles are low and sporadic . There are no consistent exports and Egypt does not represent a significant export base for any vehicle type. Although exports of all vehicle types are low, there are differences among the export performance of various sectors. Exports of passenger cars and other light vehicles are almost nonexistent. Exports of buses to other countries in the region have grown in recent years and appear to have potential for development. Exports of trucks have fallen dramatically as a result of the war in Iraq but could have medium term potential. The previous section of this report explained how critical market size is for attracting automotive FDI. Given the small size of the domestic Egyptian market, export potential would be essential for international vehicle companies to generate large enough volumes to justify investment into Egyptian plants. Many of countries around the world that have attracted significant vehicle FDI are used by OEMs as platforms for regional exports (e.g. Thailand, Brazil, Slovakia). It is rare for a vehicle plant to be producing only for one country and exports provide a way to increase production volumes and balance capacity utilisation. Exports of automotive components from Egypt are also very low, both in absolute terms and relative to total output when compared to export ratios in other countries. However, a few Egyptian component companies are exporting successfully, and their achievements demonstrate the potential for increasing Egyptian component exports. Egypt's current base of component companies lies in the "commodity" segment of the industry. Within this segment, competition is highly fragmented and international, and sales are primarily based on price. While a given level of quality is required and taken for granted, orders are generally secured based on the most competitive price along with favourable delivery terms. The trend toward global sourcing of such components represents an opportunity for Egyptian companies to secure international sales. Since Egypt is not host to major vehicle assembly operations, any automotive component FDI attracted to Egypt is likely to be producing primarily for international markets. Increased automotive component FDI will therefore have a significant impact on Egypts exports.
3.2
Given the current situation and the issues outlined above, there are both challenges and opportunities for Egypts ability to increase automotive exports. Challenges include the current dependency of Egyptian component companies on the domestic market. Even some of the companies that are already exporting still generate most of their sales from Egyptian-based assemblers and are therefore vulnerable to any downturn in this sector. Under a negative scenario where Egyptian assembly suffers as a result of reduced protection and inability to attract assembly FDI, Egyptian component companies would be at great risk. Exporting is therefore not only desirable for Egyptian component companies, but essential for their
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survival. The experience of Egypts current exporters shows that there are opportunities to compete internationally based on price by taking advantage of Egypts very low cost base. With regards to vehicle exports, Egypts access to regional markets through its geographic position and membership in several free trade agreements (COMESA, PAFTA) represents an opportunity. The MENA region is considered to be an attractive market by most vehicle makers, but it is still being approached as a series of national markets. The region is not being treated as an integrated vehicle market such as the major free trade areas in other parts of the world (EU, NAFTA, ASEAN and MERCOSUR). This suggests that there may be barriers to regional exports that are preventing the development of a true regional market. It also means that no single country has yet emerged as the dominant base for regional vehicle production. Turkey, Iran and South Africa have all moved closer toward claiming this role. Many of the new assembly operations being established in Iran plan to be exporting some of their production and Iran is positioning itself as the key r egional manufacturer for passenger cars in the Middle East. While most of Turkeys vehicle exports are destined for the EU, the recent downturn in the countrys vehic le market means that Turkey based producers have started looking for new export destinations in the Middle East, including Egypt. In Egypt, Nissan has officially announced that it will use Egypt as a base for regional exports. This shows that there is potential to position Egypt as a hub for regional vehicle exports, although there are serious challenges and this opportunity cannot be taken for granted. Given these opportunities and challenges, the key elements of the development strategy for achieving the objective of increasing Egyptian automotive industry exports are as follows.
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Encourage vehicle assemblers to use Egypt as a base for exporting to the MENA region Reduce the dependency of Egyptian automotive component companies on the domestic market Increase exports by attracting export-oriented foreign owned component plants to Egypt
3.3
Prerequisites
There are three key prerequisites that must be met for the development strategy to be achieved.
3.3.1
Exports from Egypt must be encouraged and facilitated

Achieving this prerequisite is closely tied to the goal of attracting vehicle assembly FDI to Egypt. As described earlier, a key prerequisite for attracting FDI is that the domestic vehicle market in Egypt must grow. In addition, international OEMs are more lkely to establish i wholly-owned assembly operations in Egypt if there is potential to use the country as a regional production base. The additional sales from exports will allow them to assemble at greater volumes, thus reducing costs per unit through economies of scale. The additional export sales also provide a way to balance swings in the domestic market. Nissan is the only major international vehicle company that has official plans to use Egypt as a regional assembly hub, with the companys CEO Carlos Ghosn stating publicly that Nissan intends to invest $100 million in Egypt by 2010 to turn the country into its base for the Middle
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East and North Africa. Otherwise, the vehicles assembled in Egypt are intended primarily for the domestic market, although there are some exports of buses and trucks. It is clear that further public support is required to increase the level of vehicle exports. Automotive components exports could also be stimulated by official support. The following actions steps could contribute to encouraging further automotive exports.
Provide export incentives for vehicle exports.

A number of governments around the world provide export incentives to companies in specific sectors, often in agriculture or other important industries. Export incentives can take various forms, including cash subsidies, price guarantees or credits against taxes or duties. Although export subsidies are prohibited and gradually being phased out under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement), some lower-income countries i n cluding Egypt have been exempted from the prohibition of export subsidies while their per capita GNPs remain below US$ 1,000. In the automotive industry, there are a few examples of countries that have successfully used these tools to encourage export oriented i vestment. The most notable of these is probably n South Africa, where the Motor Industry Development Programme (MIDP) has played a great role in stimulating the countrys automotive industry (see Example 6 below). Other countries such as the Philippines (see Example 7) and Australia have also provided export incentives to the automotive industry. In order to offset the effect of its small domestic market, the Egyptian government should consider introducing incentives to encourage vehicle exports by Egyptian based assemblers. Similar incentives could be provided to Egyptian-based automotive component companies. In addition to promoting exports by existing companies, these incentives could help to attract automotive industry FDI. It is clear that promoting exports has been a priority of the Egyptian government for some time, and a number of policies and laws have already been introduced to encourage exports. These include the Export Promotion Law, the creation of Free Zones for export oriented activities, as well as the duty drawback system which in effect represents a form of export incentive. However, automotive industry exports have not grown since these measures have been introduced. If this in dustry is to truly become a major source of export earnings for Egypt, then any incentives provided should be compelling and beneficial enough to both attract export-oriented FDI and encourage domestic companies to export more. Direct export subsidies are unlikely to be a viable option given their cost to the government. However, both tax and duty exemptions can represent attractive benefits to companies. For foreign investors already exempt from taxes, reductions in duty such as in South Africa would be the more attractive option. As tariffs on automotive products in Egypt will be reduced in accordance with the EU-Mediterranean Agreement, there is a limited window of time during which duty reductions can be applied as an effective incentive. The availability and benefits of any new export incentives introduced for the automotive industry should be clearly explained and promoted to companies both inside and outside of Egypt. Other key success factors for any type of export incentives are administrative transparency,
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minimal bureaucratic procedures and requirements, and the ability for companies to obtain their benefits reliably and without unnecessary delay. Example 6: Export Incentives in South Africas Motor Vehicle Development Programme South Africas Motor Industry Development Programme (MIDP) is generally credited with the recent success of the countrys automotive industry and is frequently cited as an example of effective trade and industrial policy. Introduced in 1995, the MIDP contained several measures to progressively liberalise the South African automotive market, including tariff reductions and the removal of local content regulations. A major component of the MIDP has been the provision of export incentives (the import-export complementation scheme) whereby import duty on components and vehicles may be offset by import rebate credit certificates granted in return for exporting vehicles and components. In simple terms, for each dollar exported a company can import one dollars worth of product duty free. Largely as a result of these incentives, several foreign OEMs have invested heavily in South African assembly operations and are using the country as a base for both local and export oriented vehicle production. The duty credits allow the OEMs to import components at free market prices, while taking advantage of the other benefits that South Africa provides as a location for automotive production (including low costs and a large domestic market). The incentive to export means that South African assembly operations have been able to achieve high volumes by focusing on the production of selected models for larger foreign markets, thus reducing per unit costs and making it more economic to raise localisation of components. At the same time, the duty credits allow assemblers to import other models for the local market on a duty free basis. Both FDI and vehicle exports have increased dramatically since the MIDP was implemented. The component industry has benefited from a larger domestic customer base as well as also being able to take advantage of the export incentives.
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Example 7: Export Incentives in the Philippines In 2003, the Government of the Philippines initiated an Export Incentive Program. The program provides local assemblers an export credit of US$ 400 per car for exporting a minimum of 10,000 completely built-up (CBU) cars per year. The companies can use this credit to reduce their tariff rates for importing CBUs from 5 per cent to 1 per cent for ASEAN (Association of Southeast Asian Nations) sources and from 30 per cent to 10 per cent for non-ASEAN sources. The exporting companies can continue to enjoy the tariff reduction until the overall credit earned by exporting CBUs is exhausted. The preferential tariffs cannot be enjoyed if the imported car models are also being assembled locally. The Export Incentive Program along with the Motor Vehicle Development Program, was implemented by the Philippine Board of Investments (BOI) to make the Philippines more attractive as a regional production base. The program was cited as a major factor behind Fords decision to make the Philippines a regional export hub for its ASEAN operations. The additional volume from exports was critical for boosting the production of Ford in the Philippines to optimum capacity.
Make foreign markets more accessible and remove barriers to exporting

A number of Egyptian and foreign companies interviewed for this project stated that barriers to trade within the MENA region still exist. Despite the regional free trade agreements that have been concluded, it appears that there are still obstacles in practice to the free movement of products between countries, such as the discriminatory treatment of products based on their country of origin. In addition, many of the bilateral free trade agreements that Egypt has concluded with countries in the region (Lebanon, Syria, Morocco, Tunisia, Libya, Iraq, Jordan) have clauses that exclude vehicles from the list of Egyptian products that are exempt from tariffs under these agreements. Such barriers to trade would need to be addressed as part of any concerted effort to support exports of Egyptian made vehicles and automotive parts. This would involve a detailed official investigation of trade practices in the region to identify specific barriers to trade that are constraining Egyptian automotive exports to specific countries. In addition to bila teral negotiations with those countries, the Egyptian government could also make use of WTO mechanisms to resolve issues and remove obstacles that are seriously affecting the ability of Egyptian companies to export. Example 8 below illustrates how countries in another region are addressing the issue of automotive free trade without having to resort to WTO arbitration.
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Example 8: Asia Pacific Economic Cooperation (APEC) Automotive Dialogue The Asia -Pacific Economic Cooperation (APEC) was established in 1989 to reflect the growing economic, political, and trade relationships between the Asia -Pacific economies. The APEC Automotive Dialogue was formed in 1997 to accelerate the overall APEC objective of free and open trade and investment in the region by 2010 for developed countries and 2020 for developing countries. The Automotive Dialogue has taken a cooperative approach to combining industry and government officials together as part of the Dialogue. Together, the region's industry and government leaders identify the problems and issues, discuss the potential for seeking mutual benefit in resolving the problems, and seek consensus as a group to move the process forward. Steering committees and working groups meet regularly to address issues such as non-tariff barriers, technical standards and other issues affecting automotive industry performance and trade in the region. The Automotive Dialogue provides recommendations for action to APEC leaders and ministers on trade liberalization, trade facilitation measures, and economic and technical cooperation programs related to the regions automotive industry. Twelve of the twenty-one APEC countries actively participate in the Auto Dialogue, including the major APEC automaking nations (USA, Japan, Korea, Canada, and Australia).
3.3.2
Egyptian products must be price competitive

A further prerequisite for increasing Egyptian automotive industry exports is that the products made in Egypt must be able to compete internationally on the basis of price. This applies both to vehicles and to components. A number of factors can influence the price of Egyptian products, including operating costs (e.g. labour, electricity), taxes, production volumes as well as the price of raw materials and parts. Egypt provides relatively low operating costs and taxes (especially for foreign investors), which represents a competitive advantage in terms of production costs. Production volumes of both vehicle assemblers and component companies are very low because they are based on domestic market size. Obviously, increased exports could raise volumes and help lower costs, but raising exports cannot be both the end and the means. Another major influence on product prices is the cost of materials and supplies, which the research for this project identified as being relatively high in Egypt. In order to improve the price competitiveness of Egyptian products, action should therefore be taken to reduce the costs of materials and parts.
Reduce the price paid by Egyptian companies on imported parts and materials
Vehicle assemblers and component companies in Egypt interviewed for this project stated that the high cost of imported parts and materials was a major factor influencing the price of their products. In the case of assemblers, the majority of parts is imported although a specific percentage of components is sourced domestically (partly to comply with local content regulations). However, many Egyptian component companies import most of their parts and Egyptian made automotive components generally have a very low level of local content. At some of the
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Egyptian component companies interviewed for this project, the level of local value added consisted almost entirely of labour processing, with very few domestically made parts actually being integrated in the finished product. The cost of imported parts therefore plays a significant role in influencing the price of Egyptian automotive products. The tariffs imposed on all automotive components entering Egypt are a major factor contributing to their costs. A direct way of reducing the costs to Egyptian automotive companies would be to reduce or eliminate the tariffs on specific materials or parts that are currently being sourced from overseas. While this may conflict with some of the importsubstitution policies that are currently in place, it will provide relief to those Egyptian companies trying to sell their products internationally. This type of support appears to be particularly critical for Egyptian component producers, who are highly dependent on imported parts and are competing in very price sensitive international markets, often against low cost producers from China and other Asian countries.
3.3.3
Egyptian companies must have access to international buyers

A third prerequisite relates to securing access to potential international buyers of Egyptian products. This is primarily an issue for Egyptian component companies, many of whom revealed during interviews that they faced difficulties identifying and approaching potential international customers. There is intense competition in the global automotive component market, and the procurement departments of major potential buyers (OEMs, Tier 1 suppliers, aftermarket wholesalers) are inundated with offers from potential suppliers. On the other hand, they are under pressure to reduce costs, and are interested in finding new sources of parts from around the world. The growth of global sourcing has allowed many suppliers from countries such as India or China to become successful exporters, and also represents an opportunit y for Egyptian suppliers. The international procurement managers interviewed by KPMG stated that they would be glad to consider serious proposals from qualified suppliers in Egypt, but that they had never been contacted by Egyptian companies. At the same time, it is clear that a number of Egyptian component companies are eager to export but require assistance to identify and pursue international opportunities. The following actions could be taken to assist these companies.
Identify key buyers internationally for the types or products made in Egypt
Most of the successful automotive component exporters interviewed by KPMG in Egypt received their first export opportunity through a direct introduction to an overseas buyer. In some cases, the introduction was made by an overseas partner working with the Egyptian company on technical collaboration. Two of the exporters interviewed were introduced to international customers as part of a programme conducted by the Private Sector Development Project (a previo us programme in Egypt subsequently rolled into the Industrial Modernisation Project). As in most industries, it is clear that direct access to a potential buyer represents the best opportunity for securing a sale. The first step for securing such access is to identify the potential customers. This would entail a detailed survey to identify potential international buyers for the major types of components being produced in Egypt. This should include both OEM and aftermarket buyers where relevant,
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and would need to provide the name and contact information of the specific individual responsible for receiving and evaluating offers for certain types of products. Although published directories of buyers can be purchased, a more customized list may be better suited to the needs of Egypts potential exporters. Such a list could be distributed directly to individual Egyptian companies who would then attempt to contact potential buyers on their own. Alternatively, the companies could be assisted in their effort to contact potential buyers, for example by engaging a specialist resource to establish the first contact and pre-qualify potential opportunities. The level of support provided will obviously be a function of amount of resources available to finance such an activity. This actions described above involve a proactive approach to business development. Some companies adopt a passive approach such as posting their profile on an internet site and waiting for customers to contact them. Experience has shown that in practice a proactive approach, although more challenging and time consuming, is more effective than a passive one.
Assist Egyptian companies to meet international procurement requirements

As described in the report for Phase 2 of this project, international automotive companies employ rigorous procedures for evaluating and selecting potential suppliers. These are designed to ensure that only the most qualified suppliers are awarded contracts and they act as a form of prequalification to screen out unsuitable or unprepared companies. The procurement requirements represent a formidable hurdle for aspiring exporters and they can act as a deterrent that discourages some companies from trying to export at all. Once a components company has successfully achieved the first step of identifying and establishing contact with a potential i ternational buyer, that company must then be in a position to n fulfil the requirements necessary to secure the sale. These can be divided broadly into three categories). First of all, the companys products must obviously have the necessary quality at the right price. Secondly, the company must also be able to satisfy the standards and related documentation procedures required by the potential buyer. Thirdly, if a sale is likely, the company must also be familiar with the logistics of exporting, including letters of credit, shipping bills and other important issues. The first category depends entirely on the companys own products and pricing structure, and will determine whether the company will even be considered as a potential supplier. International trade related know-how (the third category) is similar across all industries and can be acquired through a variety of courses and materials. However, the actual elements of the automotive in dustry procurement process itself are highly specialized and may represent a significant stumbling block. This includes fulfilling numerous and complex documentation requirements related to product quality, processes, materials, equipment, pricing, delivery schedules, company information and other factors. This process is extremely onerous and it is here that Egyptian component companies may benefit from assistance. Awareness of what international buyers expect and how they evaluate potential suppliers can help Egyptian companies assess the degree to which they are ready to pursue export opportunities and what gaps may still exist. This should allow them to better prepare themselves and to increase the chances of securing an international sale. Egyptian automotive suppliers that are interested in exporting should be provided access to resources or training that helps them to understand and fulfil stringent international automotive procurement requirements. This could be
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done by hir ing a specialised industry advisor or by leveraging the knowledge of Egyptian component companies that are already exporting and are willing to share their knowledge.
3.4
Other Requirements
In addition to the prerequisites described above, there are other factors that could contribute to achieving the objective of increasing Egyptian automotive industry exports. These involve creating a greater awareness internationally of Egypts automotive industry and its various sectors. Although many OEMs are already active in Egypt, there does not seem to be much international knowledge about the countrys automotive industry, especially among component companies. During our research for this project, we spoke with companies that were completely unaware that an automotive industry even existed in Egypt. Many countries around the world are actively promoting their automotive industries. In addition to countries such as Germany or Japan, which are known for their established automotive industries and companies, this also includes relative newcomers such as the Czech Republic, South Africa, Turkey, India, Thailand and even Tunisia. These countries are widely perceived around the world to have successfully developing automotive industries. Although this is partly a reflection of actual conditions, it is also the result of intensive promotional activities. These promotional efforts often involve politicians, investment attraction agencies, company executives and other industry representatives and spokespeople. In addition to promoting the countrys products, they serve to highlight its benefits as a location for automotive FDI, while creating an overall positive association and recognition of that countrys automotive industry. Given the significant competition faced internationally and regionally, measures should be taken Egypt to promote Egypts automotive industry. In other words:
Egypts automotive industry must become known internationally

Steps that can be taken to achieve this include: Arrange joint presence of Egyptian suppliers at major industry trade shows under a common banner. A number of Egyptian component companies have already jointly visited major trade shows in Europe. However, there has not been a concerted effort to jointly position these companies as exhibitors at important industry trade shows. This would be an important step towards promoting not just the individual companies, but also the Egyptian automotive component sector as well as the automotive industry overall. Although the Egyptian Auto Feeders Association (EAFA) has organised joint attendance at trade shows in the past, the frequency and visibility of these efforts needs to be increased to truly affect international awareness of Egypts automotive industry.
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Example 9: Country Promotion at the Equip-Auto Trade Show
Equip Auto is a biennial international trade show help in Paris, France that covers all automotive related industries, from design and production to after-sales. At the 2003 event, automotive industry associations from the Czech Republic (AIA CR), France (CNPA and FEDA), Slovakia (AIA SL), Spain (SERNAUTO), Taiwan (THTW) and Turkey (TAYSAD) were present to promote their national automotive supplier industry und inform about national activities and events in this sector. In addition, governmental departments and not-for-profit institutions of commerce or export promotion from Argentina (EXPORT/AR), the Czech Republic (Ministry of Industry and Trade), India (Trade Development & Merchandising Department), Italy (Lombardy Foreign Trade Centre), Japan (Okayama Industrial Promotion Foundation), Mexico (Regional Governments of Aquascalientes, San Luis Potosi, Guanajuato, Tamaulipas), Slovenia (Chambers of Commerce and Industry), Thailand (Department of Export Promotion), Tunisia (CEPEX) and Turkey (ULUDAG Exporter Unions) represented their country, region or national industry, either to promote exports or position themselves as locations for automotive FDI.
Promote the Egyptian industry through key industry publications and events. Efforts should also be taken to promote the Egyptian industry at conferences and other events, as well as in key industry publications. Speaking arrangements could be made for executives from Egyptian automotive companies (particularly existing foreign investors) to represent the industry at international events. Editorial contributions and advertisements could also be placed in industry publications to increase awareness of Egypts automotive industry. Produce a directory of Egyptian component companies that can be distributed internationally to potential buyers (and foreign investors). Egypt requires a detailed, comprehensive and representative directory of component companies and other suppliers to the automotive industry that is updated on an annual basis. This would be a useful tool for increasing international knowledge of the Egyptian industry and its companies. Again, it is important to note that while these factors could enhance efforts to increase Egyptian automotive exports, they are unlikely to have the required effect unless the prerequisites d escribed earlier are achieved first.
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4
4.1
Objective 3: Modernise Egyptian Industry

Strategic Issues
Based on KPMGs analysis for Phases 0, 1 and 2, the following are the main issues related to Egypts ability to upgrade and modernise its domestic automotive industry These issues are addressed in more detail in the reports for the preceding phases of the project.
n
Egypt has significantly low labour costs, even when compared to other countries that have recently been developing successful automotive industries. These low costs represent a significant competitive advantage. However, the benefits of low costs are being partly outweighed by issues related to efficiency and technology. If these issues are overcome, the combination of low costs and greater efficiency could greatly enhance the competitiveness of the Egyptian automotive sector (both vehicles and components). Local content regulations have contributed to the development of a base of Egyptian automotive component companies. However, a number of factors limit the types of components that will be localized as a result of this policy and the impact it will have on local technology levels. In order to satisfy local content requirements, the first assembly operations in Egypt that were established in the 1980s developed a base of local suppliers for specific (usually basic) components. The vehicle assembly operations that have been established since then have all tended to use the same component companies, and there have consequently been few new entrants to the Egyptian components industry. The assemblers usually assist the local supplier to meet the minimum requirements necessary for supplying a specific component, but do not provide technical assistance beyond that point. This means that many suppliers generate all of their sales from domestic assemblers, but also do not have the necessary standards for selling to other customers in international markets, further increasing their dependency on the domestic market. Current standards among Egyptian companies vary significantly. S ome companies have world class standards and employ the latest technology and production techniques. The companies with the highest standards are those with the greatest links to foreign parents, partners or customers, in both the assembly and component sectors. The companies that would benefit most from assistance in this area are the true domestic companies, including the Egyptian component companies as well as vehicle companies with a high degree of local content and domestic value added in their products (primarily bus assemblers). Based on the interviews conducted for this project, there is strong interest among Egyptian companies in these sectors for receiving technological assistance and support.
4.2
Given the issues outlined above, there are both challenges and opportunities related to Egypts ability to modernise its domestic automotive industry. The greatest need for modernisation is in the components sector, where many companies are not working according to internationally recognised standards. Improvements in the components sector could also generate the greatest benefits, helping to make Egyptian component companies
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more competitive internationally, and freeing them from their dependency on the domestic market. In the vehicle assembly industry, the level of technology and standards is determined largely by the foreign partner involved in the venture. Some companies primarily those with a larger financial interest in their Egyptian venture have invested significantly to introduce modern equipment and techniques and to train their local workforce. Others companies have not been as proactive, providing only the basic level of know-how and technology necessary to assemble cars from kits at an acceptable standard. In the latter cases, it seems evident that assembly is only taking place as the best option for selling cars in a protected market. Volumes are low and there is no commercial incentive for either the Egyptian or foreign partner to invest significantly in raising standards. In the assembly industry, it appears that standards will continue to be a function of FDI. The greater the level of foreign ownership in Egyptian plants, the higher the commercial incentive for the international OEMs to invest in the equipment and processes necessary to make their plant more efficient. As described earlier in the report, market size is the major prerequisite for attracting more assembly FDI to Egypt. The market will dictate the degree to which investment in modernisation takes place, and there is little scope for intervention or support to upgrade the Egyptian assembly industry. The exception is the domestic bus industry, where a number of Egyptian companies have succeeded in producing almost entirely domestic products in terms of the level of local content and even design. While some parts (e.g. engines or chassis) continue to be i ported, this is m normal in the global automotive industry where the concept of a national vehicle is largely a thing of the past. Although license agreements with foreign bus manufacturers exist, the level of support they provide is generally restricted to assembly of specific models and does not extend to the Egyptian partners overall operations. It appears that the Egyptian bus industry could benefit from assistance to optimise processes and raise technology standards, which could help to reduce costs and make Egyptian bus exports more competitive in regional export markets. Another factor that emerged from the research for this project was the relative lack of cooperation among companies in the Egyptian automotive industry. Such cooperation, for example through joint efforts to resolve technical issues or develop common supply sources, is usual in other countries, and could greatly benefit Egyptian companies in their effort to become more competitive. The examples of cooperation that were observed were primarily initiated by foreign companies in Egypt, further highlighting the potential benefits of attracting more FDI. Given these opportunities and challenges, the key elements of the development strategy for achieving the objective of modernising the Egyptian automotive industry are as follows.
n n n
Provide technical assistance to Egyptian component companies and bus makers. Increase technology standards through attracting more FDI Promote greater collaboration among Egyptian companies
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4.3
Prerequisites
There are two key prerequisites that must be met for the development strategy to be achieved.
4.3.1
Egyptian companies must gain internationally recognised quality standards

Virtually every product in the automotive industry must conform to strict rules regarding quality, safety, environmental impact and other product characteristics. Although different countries apply their own standards, the global nature of the automotive industry means that certain standards have become universally recognised. Adherence to these standards, along with the necessary certification to demonstrate it, is a prerequisite for producers to sell their vehicles as well as for suppliers wishing to sell components to the producers. For Egyptian companies wishing to export to major international markets, reaching the necessary quality standards and obtaining such certification are absolute prerequisites. The following two actions can be taken to help meet this prerequisite.
Provide support to Egyptian component companies in receiving international certification

Original equipment manufacturers in the automotive industry demand several quality assessments and registrations from their suppliers. The ISO/TS 16949 (year 2002) is the most recent specification of quality system requirements for suppliers within the automotive industry sector. The ISO/TS 16949:2002 fuses the European variants of ISO 9001 - VDA 6.1 (German), AVQS (Italian), EAQF (French) and the QS-9000 (US) into one international standard. The deadline for supplier registration set by Daimler Chrysler was July 2004, General Motors and Fords deadline is December 2006. The release of the ISO/TS 16949:2002 was agreed by the International Automotive Task Forces (IATF) members DaimlerChrysler, General Motors, Ford, Fiat, Peugeot, Citroen, Renault, BMW and Volkswagen. ISO/TS 16949 is, among others, explicitly applicable to assemblers of production parts or materials and to vehicle assembly plants. The certification scheme is managed by the International Automotive Oversight Bureau (IAOB). In general, the new standard is less restrictive, provides more ground for a company-specific design of the quality system and opens supplies to European, Asian and American companies with one registration (compared to different required registrations before). Nevertheless some OEMs continue to demand additional company-specific conditions. The IMC has already launched a new training course in November 2004 to help local component companies to qualify for the ISO/TS 16949 quality certificate. The course aims to reduce producers' costs for training, technical support and quality standardization, with the IMC covering 85 percent of costs. Obtaining ISO/TS 16949 certification is crucial for all suppliers trying to sell their products internationally, and the IMCs new course should be quickly rolled out to as many Egyptian automotive suppliers as possible.
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Egypt becomes a signatory to the 1958 Geneva Agreement on Automotive Standards

For a manufacturer to be able to sell a vehicle in Europe, most vehicles require a European whole vehicle type approval certificate. As a large majority of the components are manufactured or assembled by suppliers, it is often necessary for these components also to be separately approved. European certific ation already combines many country-specific regulations of different European nations, but regulations and certifications for Asian, African or American countries still differ. The differences between the standards of various countries constitute trade barriers, largely due to the cost of redesigning vehicles and parts to meet the differing standards and of demonstrating compliance with these standards. Also, design changes brought on by differences between regulations can lead to expensive changes to production tooling. For automotive suppliers it is easier to reach economies of scale when they can deliver the same parts to different export markets without such adjustments. Furthermore, having one certification that is valid in many countries around the world makes the certification procedures less time consuming and speeds up delivery to market. This is the rationale behind the UN Economic Commission for Europe (UN/ECE) Agreement concerning the Adoption of Uniform Technical Prescriptions for Wheeled Vehicles, Equipment and Parts. Concluded in Geneva in 1958, the Agreement was designed primarily to enhance technical uniformity for motor vehicles, equipment and parts between European countries. By 1995, the UN/ECE Working Party 29 (WP.29) had become the global forum for the international harmonisation of vehicle technical standards and the agreement was amended in 1995 to encourage participation by non-European countries. About 45 countries, including many smaller as well as non-European countries such as South Africa, Australia, Japan, Turkey, Romania, Estonia and Cyprus have joined the agreement so far. Currently the agreement contains 120 regulations dealing with safety, emissions, energy and anti-theft devices for wheeled vehicles, equipment and parts (covering motor vehicles and trailers). The regulations address issues such as test methods by which performance requirements are demonstrated, conditions for granting type approval, and the reciprocal recognition of the regulations. Application of the regulations by members of the agreement provides a mechanism for harmonisation of the regulations of the parties as well as for the mutual recognition of approvals issued under the regulations. The Geneva Agreement is the only widely accepted forum for the development of internationally harmonised vehicle regulations. Egypts membership in the agreement would make it easier for Egyptian suppliers and vehicle makers to have their products recognised in Europe and other key international markets. National institutions in Egypt would not need to spend resources to develop unique Egyptian automotive standards when an international standard already exists that satisfies the same requirements regarding safety or other factors. Participation would also provide Egypt access to the international regulation development process, including the opportunity to introduce proposals for new regulations or amendments to existing ones. It is important to note that it is possible for countries to access the agreement without being bound by any of its regulations. Parties can declare that they do not consider themselves bound by certain regulations and apply new regulations step by step. This means that if Egypt were to join, it could select which standards to adopt and could do so at its own pace. Apart from
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minimising the administrative resources required, this would also allow Egypt to select and become party only to those regulations that would have the most favourable impact on Egyptian automotive companies.
4.3.2
Egyptian companies should be using leading international production processes

Only some of the Egyptian companies visited for this project were using state of the art equipment and production processes and as mentioned above, these were mainly those companies with the closest links to international firms. Many of the companies visited are clearly not applying modern production processes, and are working with outdated equipment and machines. Raising the standards of these companies will assist them to become more efficient and hence cost competitive. Equally important for component companies, the processes and equipment used are carefully evaluated by potential buyers and are often important factors in determining whether contracts can be secured. The following action steps should assist Egyptian companies to apply leading international processes.
Train labour force and management in quality and production techniques

In general, automotive suppliers wishing to supply the international OEM market are expected to implement Total Quality Management (TQM) systems, get ready for IT-based supply chain management procedures, improve their process management, enforce individual training on project management, ensure a reliable risk management and implement a continuous improvement process. Increasingly, suppliers also have to meet environmental management system requirements. Implementing these systems and processes requires substantial investments, not least of which is the training required for existing management and employees to understand and implement the new procedures. General TQM courses are available in Egypt through a number of channels, and are also part of EAFAs official services to its members. However, the more specialised automotive related courses may need to be provided by dedicated service providers from other countries. Egyptian companies should be provided assistance in organising and attending such training, perhaps through a similar model as is currently being used by the IMC for ISO/TS 16949 training.
Provide financial support for capital investment and modernisation

Many Egyptian companies are using outdated equipment, which they are maintaining in working order though their own ingenuity and resourcefulness. For these companies, the high cost makes it prohibitive to invest in new equipment or tools. In addition to the large investment required, the volumes produced by most Egyptian companies (both vehicles and components) are too low to enable a reasonable amortisation of new equipment. The use of information technology in production and other processes is not widespread, especially among the domestic component companies. As mentioned above, this lack of new equipment represents a barrier to becoming more competitive internationally.
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The IMC is currently working on a range of initiatives to assist Egyptian SMEs to acquire funds through credit. This is especially important in the automotive industry, where equipment costs are generally very high. It is important to note that automotive companies in other countries receive a range of tailored financial support from governments, often including direct grants and subsidies. Any programs developed to provide financial assistance to companies in Egypt should therefore be readily accessible and provide reasonable terms and conditions, in order to encourage companies to take advantage of them. Example 10 below illustrates an automotive financing concept recently introduced in Thailand. Example 10: Thailand's Venture Capital Fund for the Automotive Industry
Founded in 2003, the Thai Automotive VCF Co., Ltd. is the first of its kind in Thailand for the automotive industry. The Fund has a paid-up capital of 260 million baht (about 7 million U S$) and will invest in Small and Medium Enterprises (SMEs) in Thailands automotive industry. The Fund has been set up with the main aim of assisting these SMEs to become successful ventures, not to exercise control of the invested companies. The application procedure is relatively straight forward, and the fund is administered by an investment committee than includes the former executive vice president of Toyota in Thailand. The Fund will also provide support to investees, including advice on business pla ns, assistance in match-making with potential clients and/or strategic partners, and consultation on management and technology matters.
4.4
Other Requirements
In addition to the prerequisites described above, there are other factors that could contribute to achieving the objective of modernising the Egyptian automotive industry. These are primarily aimed at increasing the level of cooperation among Egyptian companies, who are all ultimately working toward the shared objective of strengthening the industry and its international competitiveness. Although there are examples of joint initiatives, different segments of the industry appear in some instances to be working at cross-purposes, especially with regards to their attitudes towards specific policies affecting the industry. KPMG encountered few instances of technical cooperation among companies, either among suppliers or between assemblers and suppliers, beyond what is necessary to provide a certain product. The following initiatives could serve to address these issues. Exceptions can be found primarily in the bus industry, where there are examples of longer term relationships and cooperation between Egyptian assemblers and some of their local suppliers.
Establish a focused automotive industry technology centre.

Many Egyptian companies face similar issues regarding access to raw materials and parts, technical specifications, testing or process i provements. The industry currently lacks a formal m venue where companies can work together on shared technology issues. Such a venue could also include members of government and academic technology institutions from relevant disciplines (for example engineering, materials sciences). Such a centre would not only strengthen
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cooperation among companies and help resolve shared issues, but could also generate a level of innovation that currently appears to be lacking in the Egyptian automotive industry. Example 11: A Dedicated Automotive Technology Centre in South Africa
The South African Automotive Industry Development Centre (AIDC) is a government-funded service company that serves the South African automotive industry, government departments and government agencies on a national basis to carry out strategic initiatives related to strengthening the automotive industry. AIDC was established in 2000 as a joint venture between the Gauteng Provincial Government's Blue IQ Initiative and the Council for Scientific and Industrial Research (CSIR). The objective is to bring automotive research programs of South African universities, governmental research initiatives, automotive companies (OEMs) and automotive suppliers together to jointly enhance the South African automotive industrys global competitiveness. AIDC's mandate is to promote production and process engineering, logistics services and design, engineering and testing services and to support human resource development, small and medium enterprise (SME) development and supplier development. Examples of projects launched by AIDC are: n The Motor Industry Supply Chain Competitive Improvement Programme (MISCCIP) is an initiative for an IT-based connection of eight Original Equipment Manufacturers and 400 supplier sites. The objectives are productivity gains through better co-ordination of orders, management of lead times and overall transparency through all tiers of the supply chain. n The development of an Automotive Supplier Park (ASP) in Rosslyn to concentrate automotive component manufacturers, suppliers and service providers in one location adjacent to assembly plants in order to save costs and exploit synergies in logistics and processes in the automotive manufacturing chain. Nine supplier companies have moved to the ASP and the AIDC moved its offices to the ASP in May 2004. n The Automotive Component Manufacturing and Tooling Incubator (ACMTI) is a collaboration of AIDC with the Tshwane University of Technology and several industry partners to develop state-of the art capabilities in laser ablation equipment, reverse engineering expertise, contact and non-contact scanning expertise and high-end CAD modelling.
Create a professional trade association for the entire industry.

Egyptian automotive companies are currently represented by two separate industry associations, the Egyptian Automobile Manufacturing Association (EAMA) for assemblers and the Egyptian Auto Feeders Association (EAFA) for components companies. While both associations play a leading role in representing the requirements of their members, there is currently no single entity to represent the interests of the entire industry. It would be very progressive for Egypt to develop a single industry association along the lines of the German example below. At the very least, a new association jointly funded by assemblers and suppliers could be formed to represent the entire industry, with the two existing associations continuing to exercise their current roles.
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Example 12: A Single Automotive Industry Association in Germany
While many countries have dual automotive associations such as in Egypt, automotive companies in Germany realised very early that they share common goals as an industry and created a single industry association, the German Association of the Automotive Industry (VDA). The VDA consists partly of automobile manufacturers and their development partners, the suppliers, and partly of the manufacturers of trailers, body superstructures and containers. As the VDA says in its own materials The fact that automobile manufacturers and suppliers are members of a joint association is by no means common at the international level: in many other countries, the different companies belong to separate associations. The advantages of the German model are there for all to see: the partners sit in the same working groups and working parties. The results are direct discussion and rapid decision-making.
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Impacts
As mentioned earlier, the individual objectives and actions steps are mutually reinforcing and will generate the greatest impact if implemented as a part of an integrated effort. However, each action step is designed to address a specific area. Figure 3 below indicates the major areas of impact of each of the action steps, in terms of both the objectives as well as the sectors of the automotive industry that they are designed to address.
Objective Upgrade Exports Cars / LCVs Sector Components Trucks Buses
Prerequisite Action Step Action Step Prerequisite Action Step Action Step Prerequisite Action Step Action Step Prerequisite Action Step Prerequisite Action Step Action Step Prerequisite Action Step Action Step Prerequisite Action Step Action Step
The domestic vehicle market must grow to persuade international OEMs to invest and expand in Egypt Provide tax incentives to stimulate demand for specific vehicles Facilitate access to vehicle financing Key companies must be encouraged to invest in Egypt Approach major automakers regarding assembly operations in Egypt Implement a targeted investment attraction programme for automotive component FDI Exports from Egypt must be encouraged and facilitated Provide export incentives for vehicle exports Make foreign markets more accessible and remove barriers to exporting Egyptian products must be price competitive Reduce the price paid by Egyptian companies on imported parts and materials Egyptian companies must have access to international buyers Identify key buyers internationally for the types of products made in Egypt Assist Egyptian companies to meet international procurement requirements Egyptian companies must gain internationally recognised quality standards Provide support to Egyptian component companies in receiving international certification Egypt becomes a signatory to the 1958 Geneva Agreement on Automotive Standards Egyptian companies should be using leading international production processes Train labour force and management in quality and production techniques Provide financial support for capital investment and modernisation
FDI
Figure 2: Action steps - key areas of impact
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Action Plan
The following chart provides further information on the action steps associated with each of the prerequisites, including: Objectives the goals of each action step. Lead stakeholders in Egypt that could potentially take the lead in implementing each action step. Costs major cost elements associated with implementation. Metrics potential measures for assessing the progress and effectiveness of each action. Key Success Factors critical issues that will affect successful implementation. Next steps immediate tasks necessary to move forward (additional information about the sequence of the action steps is provided in Section 6). Each of the action steps requires a detailed implementation plan that should be developed by the group or stakeholder taking the lead. In addition to a detailed breakdown of individual tasks and associated timing, it is important that the implementation plan clearly determines accountability for achieving milestones and results.
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Objectives Prerequisite The domestic vehicle market must grow to persuade international OEMs to invest and expand in Egypt Make vehicles more affordable to both consumers and businesses. Stimulate consumption and increase market size. Government - to determine match with existing policies and implement tax incentives. Specialist advisor - to study purchasing patterns and select appropriate vehicles to benefit from tax incentives. State and/or private banks to distribute financing through their branch network. Vehicle producers - to develop financing for certain models. Cost to government of foregone tax revenue from lower tax rate. This could be offset by the increased tax revenue from greater vehicle sales. Increase in number of vehicles sold after tax cut. Change in market share of those vehicles whose sales are being stimulated. Price reductions must be significant enough to stim ulate consumption. Vehicles promoted must match with consumer needs and other government policies (e.g. transportation planning, environment). Financing concepts must be widely available (i.e. not just to affluent consumers in big cities), easy to understand and apply for, unbureaucratic and financially attractive. Financing must be for new (not used) vehicles. Study to determine which types of vehicles should be stimulated and likely market and fiscal impact. Lead Costs Metrics Key Success Factors Next Steps
Provide tax incentiv es to Action Step stimulate demand for specific vehicles
Action Step
Facilitate access to vehicle financing
Enable more consumers and businesses to purchase vehicles. Stimulate consumption and increase market size.
Cost of developing and rolling out the financing concept. This should be offset by income generate from increased vehicle sales and loans.
Increase in number of vehicles acquired through new financing mechanisms. Increase in car ownership.
Working group to determine whether the initiative should be moved forward by the private sector (vehicle companies and private banks) or public sector (state banks).
Prerequisite
Key companies must be encouraged to invest in Egypt Government - GAFI to establish contacts. High level officials to meet with executives. Existing vehicle assemblers in Egypt to provide contacts. Personnel time to develop a Number of companies concontact list and approach key tacted and met with. companies. Increased FDI in Egypt. Travel to visit with key decision makers around the world. The right decision makers for FDI decisions must be identified and approached with an attractive proposition to position Egypt as a location for their future investments. Establish list of all relevant vehicle producers and exist ing or previous contacts with these companies.
Engage in dialogue with companies already in Egypt to understand their requireApproach major aut omakers ments and investment plans. Action Step regarding assembly operations Establish/build relationships in Egypt with companies not in Egypt and attract vehicle assembly FDI. Direct contact with carefully selected individual compaImplement a targeted investnies to attract FDI to Egypt. Action Step ment attraction programme for automotive component FDI
Government - GAFI to drive initiative. Specialised consultant to identify and contact relevant companies.
Research costs. Consulting fees. Eventually foreign travel to meet with potential investors.
Number of companies contacted. Number of meetings held. Number of companies visiting Egypt. Number of FDI projects.
Selecting sectors and compa- Select priority sectors for nies with the greatest poten- targeting initiative. tial for FDI and match with Egypt's strengths. Contacting companies with a tailored message. Consistent follow-up.
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Objectives Prerequisite Exports from Egypt must be encouraged and facilitated Make Egypt more attractive Government - to formulate as a base for regional vehi- and implement the most cle production. effective incentives package. Compensate for limited domestic market. Stimulate vehicle exports Attract export oriented vehicle assembly FDI. Cost to government of foregone tax or duty revenue (depending on type of incentive provided). This sh ould be offset by greater FDI and earnings from exports. Increased vehicle exports following introduction of incentives. Increased FDI in assembly operations. Incentives should be substantial enough to make Egypt attractive as an export base. Transparent eligibility requirements and application procedure. Minimal bureaucratic requirements. Benefits available to companies without delay. Increased automotive indus- High level government try exports to specific coun- support to resolve trade tries. issues and push for real free trade within the context of existing regional free trade agreements. Working group to determine what type of incentives would induce greater exports (this should involve representatives of foreign owned vehicle assemblers). Lead Costs Metrics Key Success Factors Next Steps
Action Step
Provide export incentives for vehicle exports
Action Step
Identify and overcome barriers to Egyptian automoMake foreign markets more tive exports in the region. accessible and remove barriers Stimulate exports. to exporting Egyptian products must be price compet itive Reduce costs for Egyptian assemblers and component companies. Make Egyptian products more price compet itive.
EAMA and EAFA - to identify key issues. Government - to take the lead in reducing barriers.
Depends on barriers identified and efforts made to resolve them.
Survey of Egyptian automotive companies to identify and document specific cases of barriers to trade encountered.
Prerequisite
Action Step
Reduce the price paid by Egyptian companies on imported parts and materials
Government - to implement a tariff reduction for selected imported parts and materials used in the automotive industry. EAMA and EAFA - to recommend items to benefit from tariff reduction.
Cost to government of foregone tariff revenue. Could be offset by increased exports.
Reduced cost of specific imported parts and materials. Corresponding cost reduction for Egyptian-made products.
Materials and parts must be carefully selected to provide the greatest benefit to the industry. Cost reduction should be passed on to customers in the form of lower prices.
Compile list of key automotive inputs that must be imported (are not produced in Egypt) and contribute most to costs.
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Objectives Prerequisite Egyptian companies must have access to international buyers Provide component companies with direct access to potential buyers. Increase Egyptian exports. EAFA/IMC/Specialised consultant - to identify potential international buyers. Cost of conducting market research. Consulting fees. Database of potential buyers. Number of contacts established. Increased exports generated from new customers. Identifying the actual decision makers within buying/procurement organisations. Understanding buyers needs and ensuring match with Egyptian product. First contact must be professional and credible. Companies should be prepared for their contacts with potential buyers. Companies must be motivated to export and not be overwhelmed or discouraged by the complexity of the process. Compile database of potential clients (companies) around the world before identifying actual contacts (decision makers). Lead Costs Metrics Key Success Factors Next Steps
Action Step
Identify key buyers internationally for the types or products made in Egypt
Action Step
Assist Egyptian companies to meet international procurement requirements
Prepare component companies to complete and satisfy the procurement process. Enable companies to identify areas of improvement to increase export potential.
EAFA/IMC/Specialised consultant - to introduce companies to the procurement process and guide them through it.
Consulting fees for providing specialised assistance to companies.
Number of companies securing first export contracts.
Select group of promising Egyptian component companies with whom to work on a "pilot project".
Prerequisite
Egyptian companies must gain internationally recognised quality standards Provide support to Egyptian component companies in receiving international certification Increase the number of companies obtaining ISO/TS 16949 and other important certifications. Increase overall standard and export potential of Egyptian companies. Facilitate recogn ition of Egyptian products in key international market s. Facilitate exports of components and vehicles. Harmonise Egyptian standards with those in other countries. EAFA - to identify interCosts to IMC of providing ested companies and protraining. mote the need for certification. IMC - to roll out and finance training courses. Government - to take lead in all steps necessary to join the agreement. Automotive industry specialists - to assist government with industry-specific technical issues. Costs to government are variable and depend on the number of regulations that Egypt will become party to and apply. Ongoing costs of maintaining government working groups and participating in meetings. Number of companies obtaining certificat ion. Percentage of suppliers with active international certification. Companies must understand that this is an absolute prerequisite to exporting. Certification must be renewed regularly in accordance with customer deadlines. Number of regulations Commitment by Egyptian adopted by Egypt. government to actually Increased exports of Egy p- adopt the regulations and tian products covered by the norms that will facilitate regulations to other sign aexports by Egyptian compatory countries. nies. Focus on the regulations that will most benefit Egy ptian companies. Detailed survey by EAFA to assess current level of cert ification in Egypt and selection of companies to receive training.
Action Step
Action Step
Egypt becomes a signatory to the 1958 Geneva Agreement on Automotive Standards
Joint working group of government and industry representatives to assess implications of joining.
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Objectives Prerequisite Egyptian companies should be using leading international production processes Promote the implementation of modern automotive industry production and management systems. Increase the efficiency and reduce costs of Egyptian automotive companies.
Lead
Costs
Metrics
Key Success Factors
Next Steps
Action Step
Train labour force and management in quality and production techniques
Action Step
Provide financial support for capital investment and modernisation
Number of companies completing training. Number of companies implementing new processes (e.g. TQM). Cost reductions and other improvements reported by participating companies. Enable Egyptian companies The IMC's financial compo- Costs of developing and Amount of capital proto invest in modernisation of nent - to review financing promoting new programs. vided/taken-up under each processes, plants and concepts relevant to the All programs should be self- program. equipment. automotive industry. funding (e.g. loans) or even Return on investment. profit oriented (e.g. venture capital).
EAFA - to identify interCosts to IMC of providing ested companies and protraining. mote the need for training. IMC - to roll out and finance training courses using specialised industry consultants.
Commitment by companies to improvement and learning. Tracking of company results after training is completed to make sure results are captured and maintained.
Survey companies to identify priority needs and identify suitable training programs.
Funding must be readily Select individual companies available to those companies with whom to work on pilot that meet eligibility refinancing programs. quirements. Industry expert to review potential projects on an individual basis.
Figure 3: Action plan - key implementation issues
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Timing
The trade and trade-related provisions of the EU-Egypt Assoc iation Agreement entered into force on January 1, 2004. According to the schedule, the customs duties on automotive components will be reduced progressively between January 1, 2007 and January 1, 2013. This means that automotive component companies will be increasingly exposed to foreign competition very soon. As explained in the report for Phase 2 of this project, it also implies that local content requirements will start to lose effectiveness at some stage during this 6-year period. The automotive components sector will therefore be the first part of the automotive industry to be affected by changes in tariff regulations. The customs duties on trucks will be scaled down during the period from January 1, 2009 to January 1, 2016, while those on passenger cars and buses will be reduced by 10 % each year from January 1, 2010 to January 1, 2019. Given these schedules, and assuming that the government of Egypt does not implement additional tariff reductions before then, it appears that the domestic vehicle industry will continue to enjoy its current level of protection for at least four or five more years. At that point, the industry must be prepared for the effect of open markets and progressively less expensive imported vehicles. These critical milestones point to a number factors regarding the timing of any efforts to sustain the Egyptian automotive industry:
n n
The threat of reduced protection is more imminent for the components sector than for vehicle assembly. The round of tariff reductions that took place in 2004 means that the next round of tariff reductions will have a greater impact on vehicle assemblers (since tariffs have already been lowered). By 2010 all sectors of the Egyptian automotive industry will be subject to some degree of reduced import protection.
Given these factors, it appears that 2010 is a natural target date for achieving the development strategys overall objective of reaching a sustainable position that allows the industry to survive and compete without protection. By 2010, the prerequisites described in this report therefore need to have been fulfilled to the degree necessary for Egypt to meet its immediate objective. This implies that the individual action steps must be implemented as soon as possible in order to have the necessary impact between now and 2010. To achieve this, the actions steps should be implemented simultaneously as part of a concerted and integrated effort. It is clear that there are differences among the action steps that will affect the duration and timing of their implementation. These are:
n n n n
Whether the action steps require changes to government policies and the passing of new le gislation or modifications to existing laws. The number of stakeholders actively required to be involved in the implementation. The extent of additional planning and investigation necessary before implementation can commence. The anticipated level of resources required for implementation.
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The table on the next page provides an assessment of each of the actions steps on the basis of these factors and provides an estimated ranking of the potential speed of implementation from 1 (fastest) to 4 (slowest). Based on the table, it appears that some of the direct efforts to assist Egypts domestic component companies could be completed most quickly. These also have the greatest level of urgency given the scheduled timing of tariff reductions described above. This is followed by efforts to proactively establish contact with foreign companies to attract foreign direct investment. These efforts would also have immediately measurable effects in terms of actual investment projects that they are able to generate. As can be expected, action steps involving changes in policy or coordination among numerous stakeholders are more complex and would take longer to implement. However, these efforts are equally essential to achieving the success of the overall strategy and should not be omitted or overlooked. As mentioned before, the various action steps are mutually reinforcing and should be seen as part of integrated effort to be implemented simultaneously between now and 2010.
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New or revised policies or laws Prerequisite Action Step Action Step Prerequisite Action Step Action Step Prerequisite Action Step Action Step Prerequisite Action Step Prerequisite Action Step Action Step Prerequisite Action Step Action Step Prerequisite Action Step Action Step The domestic vehicle market must grow to persuade international OEMs to invest and expand in Egypt Provide tax incentives to stimulate demand for specific vehicles Facilitate access to vehicle financing Key companies must be encouraged to invest in Egypt Approach major automakers regarding assembly operations in Egypt Implement a targeted investment attraction programme for automotive component FDI Exports from Egypt must be encouraged and facilitated Provide export incentives for vehicle exports Make foreign markets more accessible and remove barriers to exporting Egyptian products must be price competitive Reduce the price paid by Egyptian companies on imported parts and materials Egyptian companies must have access to international buyers Identify key buyers internationally for the types or products made in Egypt Assist Egyptian companies to meet international procurement requirements Egyptian companies must gain internationally recognised quality standards Provide support to Egyptian component companies in receiving international certification Egypt becomes a signatory to the 1958 Geneva Agreement on Automotive Standards Egyptian companies should be using leading international production processes Train labour force and management in quality and production techniques Provide financial support for capital investment and modernisation No No No Yes No No Yes Yes Possible No No Yes No
Number of stakeholders
Additional planning and analysis
Level of resources
Potential Speed
Medium Medium
High Medium
Medium High
3 3
Low Low
Low Medium
Low Medium
1 2
Medium High
Medium High
Medium High
3 4
Medium
Medium
Low
Low Low
Medium Low
Low Medium
1 1
Low High
Low High
Medium Medium
1 4
Low Medium
Low Medium
Medium High
1 3
Figure 4: Factors affecting timing of action step implementation
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Beyond 2010
As described above, the immediate goal of the strategy outlined in this report is for the Egyptian automotive industry to reach a sustainable position by 2010. Assuming this goal will be achieved, it will be useful for efforts to implement the strategy to consider what the future of the industry could be beyond 2010. Clearly, the specific characteristics of the industrys future development will depend to a large degree on the events and actions over the next five years. However, a number of general characteristics can be highlighted based on experiences in other countries.
n
Import penetration as tariffs on vehicles are reduced, it is likely that Egypt will experience a significant increase in the sale of imported vehicles relative to domestically assembled ones. This is what occurred in other countries that reduced tariffs on imported vehicles, including Turkey and South Africa. Although this has a negative impact on domestic assembly, the overall effect on the automotive industry can be positive to the degree that sales are stimulated and overall market size grows. In addition, the lower price of imports will force domestic assemblers to also reduce their prices, and will drive those companies that are unable to do so out of the market, leaving only the most efficient producers to operate locally. Based on data for other countries, it is possible that beyond 2010 the ratio of imported to domestically assembled vehicles in Egypt could stabilize at around 50:50, compared to a rate of import penetration of approximately 35% in 2003. Specialisation and scale if Egypt is able to seize the opportunity of becoming a regional hub for the assembly of specific vehicle types as well as exports of components, this will lead to specialisation in the production of certain vehicles and components (e.g. pick up trucks in Thailand, wire-harnesses in Tunisia). As Egypt becomes integrated within the global automotive industry, it will need to develop specialisations within the global industry division of labour. This implies that for the Egyptian industry to reach a sustainable pos ition beyond 2010, it can no longer be assembling all types of vehicles as at present or attempting to achieve self-sufficiency in component production. Instead, the industry will be characterised by a focus on specific vehicle and component types, which is essential for achieving the production volumes and economies of scale necessary to compete internatio nally. It is important to realise that decisions taken in this regard now (e.g. providing tax incentives to stimulate sales of certain vehicle types) will provide the basis for long-term structural changes that will have significant repercussions beyond 2010. Design and development along with specialisation and increased scale, there is potential for increased capabilities in the design and development of specific vehicles and components. As Egypt develops competencies in the production of certain products, this will lead to increased capabilities in the design and development of these products. Beyond 2010, Egypt would therefore no longer be simply assembling vehicle kits or basic components exclusively based on the specifications of individual customers, but could be contributing to the design of certain products that are being used in vehicles regionally or even worldwide. Decisions made today regarding standards, training, investment and other aspects of the automotive industry will have an impact on the Egyptian industrys ability future design and development capabilities.
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Foreign competition the strategy presented in this report is based to a large degree on international vehicle producers investing in Egypt to establish regional production hubs. In addition to the effects of specialisation, scale and design capabilities described above, realising this strategy will also have a significant impact on Egypts domestic supplier base. Other countries that have successfully attracted vehicle production FDI have experienced a crowding out of domestic suppliers as the growing scale of the foreign vehicle makers production begins to attract that companys international suppliers with whom long standing relationships exist. Egyptian suppliers should therefore be aware that in the long term, increased vehicle assembly in Egypt does not necessarily imply increased business for them, and that, paradoxically, a significant increase in domestic vehicle production could result in losing sales to larger and more established foreign suppliers. In terms of looking beyond 2010, this means that domestic Egyptian suppliers must do more than simply ensure their own survival, but should also begin positioning themselves as suppliers of choice for international vehicle makers in a liberalised market.
It is important that any efforts to implement the automotive industry development strategy take these potential long-term developments into consideration. Actions taken to secure the industrys survival by 2010 could have implications for the industrys development beyond that date. In practical terms, this means that any measures taken as part of the strategy implementation should also be assessed from the perspective of their potential longer term impact. Although it is too early to predict the precise shape of the Egyptian automotive industry beyond 2010, this should become cle arer as the strategy is implemented during the next five years. As this happens, the strategy can be fine-tuned and revised as necessary in light of longer term objectives beyond the immediate goal of survival.
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Next Steps
This report has focused on the critical issues affecting the future of the Egyptian automotive industry. A number of prerequisites must be met for Egypts automotive industry to reach a sustainable position by 2010. The report has also described the various action steps that could be taken to meet the prerequisites, and has provided an indication of key implementation issues and timing. It is important that a single entity assumes the lead in driving forward the development strategy and ensuring that the individual actions are imple mented quickly and effectively. This entity would also be responsible for tracking progress and measuring the impact of each of the actions in terms of achieving their stated goals. Unless such a single entity is appointed, there is a risk that the various elements of the development strategy will be addressed in a fragmented and uncoordinated manner, rather than through an integrated approach focused on achieving the overall strategy. It is important for such an entity to have the appropriate authority and access to resources to move the strategy forward. At the same time, it requires the necessary industry knowledge to address specialised and technical automotive industry issues. At present, no such entity appears to exist in Egypt. The creation of a leading organisation has been critical to the ability of other countries to i m plement and achieve automotive industry development strategies. Thailand created the Thailand Automotive Institute in 1998 for the specific purpose of formulating suitable policies, and taking a coordinating role in facilitating the country's continuous automotive industrial development, including implementation of the Master Plan for Thai Automotive Industry. In South Africa, the Motor Industry Task Group (a forum representing industry, trade unions and government) was created to develop and implement the successful Motor Industry Development Programme. Egypt requires a similar entity to spearhead implementation of the automotive industry strategy and coordinate the activities of the relevant stakeholders. Such an entity requires the necessary authority to affect policies as well as the resources necessary to operate effectively on a fulltime basis. It should therefore include members of government with the appropriate decision making powers as well as private sector representatives who will jointly guide its activities. The entity should have its own employees working full time to move the strategy forward within the necessary timeframe. The entity should also be accountable for the successful implementation of the strategy in the necessary timeframe. The creation of such an entity should be the immediate next step before any other actions are taken.
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Automotive Sector Development Strategy

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Automotive Sector Development Strategy

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Strategic Study to Upgrade Egypt's Automotive Sector

Executive Summary & Overview

Strategic Study to Upgrade Egypts Automotive Sector

Strategic Study to Upgrade Egypts Automotive Sector

Executive Summary of the Study (with focus on the future strategy)

Strategic Study to Upgrade Egypts Automotive Sector

Strategic Study to Upgrade Egypts Automotive Sector

Strategic Study to Upgrade Egypts Automotive Sector

Contents of Reports Phase 0 Global Review

Phase 3 Development Strategy and Action Plan

Strategic Study to Upgrade Egypts Automotive Sector

Strategic Study to Upgrade Egypt's Automotive Sector

Phase 0 - Global Automotive & Egyptian Industry Review

January 2005 This report contains 59 pages

Introduction and Objectives Part A: Global Automotive Industry Review

Part B: Egyptian Automotive Sector

Index of figures and tables

Table 16: Table 17: Table 18:

Introduction and Objectives

Part A: Global Automotive Industry Review

Drivers for Change

global automotive industry.

I egr ed! r nt at t anspor t N ew ! ays! ! or ng w ofw ki Rest i i on! r ct on! uses

Five Forces Model of the Developing Global Automotive Industry

Buyers and Customers

Dynamics of Key Regional Markets

Refocusing Global Challenges

Global Supply Industry

V al chai posi i ue! n! t on V ehi e! cl assem bl ! er ( EM ) O Ti ! suppler er 1! i

Ti ! suppler er 3! i Ti ! suppler er4! i

Value-chain structure of the global automotive industry

Vehicle Assemblers / OEMs

Tier Two Players

Development Opportunities Tier 2 players

Some Example Countries Exporting Components

Source: UN World Trade Statistics, 2002

$46, 345, 000

$21, 060, 000

$18, 198, 000

$40, 586, 000

$628, 763, 008

$22, 754, 000

$140, 822, 000

$51, 887, 000 $37, 521, 000

Spai n $41, 890, 000

$166, 972, 000

W or d! 394, l $1, 440, 960

U nied! ngdom t Ki Aust i ra Ot s her Tot al

Source: UN World Trade Statistics, 2002

$138, 431, 008

na $12, 629, 000 Chi

$6, 957, 000

$6, 057, 000

$9, 536, 000

$6, 939, 000

Russi Feder i an! at on

$72, 246, 000

$8, 283, 000

$43, 549, 000

$32, 679, 000

$49, 523, 000

$27, 803, 000

$13, 228, 000