Crash course for the auto market – Features – Al-Ahram Weekly

 

Egypt’s auto sector continues to suffer from instability and unprecedented price hikes due to supply shortages caused by import complications and hardships experienced by importers because of shortages of the foreign currency they need for import documents such as letters of credit.

The spare parts sector that imports parts essential for repair and maintenance is also in trouble because spare parts are classified as imported goods and not as manufacturing materials that can be imported without advance letters of credit.

Importing spare parts requires foreign currency, which is in short supply. This has resulted in a serious scarcity of spare parts and driven prices through the roof.

Consumers have had to change their habits and consumption behaviour when buying or maintaining their cars for as long as possible as a result, discouraging them from upgrading their cars for the sake of the latest model.

They must also be mindful of how they use their cars to avoid the need for spare parts, maintenance, or repair and to keep costs down. The shortages have even impacted basic parts such as car batteries and tyres.

Many car-buyers have already postponed their decision to buy until further notice, not choosing to buy a new car unless absolutely necessary or trading in their current vehicle for a used car that is in better shape or a more recent model than their own.

Khaled Saad, secretary-general of the Association of Automobile Manufacturers and manager of Brilliance Bavarian, an importer, explained that “there is a serious supply shortage in the car market, and even increasing the limit for bank withdrawals and deposits has not helped to increase car sales.”

“This is because there is no product availability to begin with, which pushes prices much higher than the actual value of the products.”

Mohamed Ghoneim, deputy chairman of Great Automotive, agreed that the increases “in bank withdrawal and deposit limits have not impacted car sales because car-buyers rely on bank transfers to car dealers, not cash transactions, when buying a car.”

Shady Rayan, chair of Al-Masrya Auto, concurred that “raising the withdrawal limit to LE150,000 is a drop in the ocean compared to the current price madness when buying a new car.”

Saad said that the car market is currently frozen because car companies and dealerships cannot open letters of credit at the banks, resulting in empty car lots and prices driven so high that customers are staying away.

“Anyone who owns a car right now must hold on to it tightly because it is a treasure. They should not think of buying a new one unless it is absolutely necessary,” he said.

Rayan said that “now is a bad time to go car shopping due to skyrocketing import prices, including the high cost of transportation, shipping, and foreign exchange rates, all of which add to the price tag. Even if you own a car, it can be very expensive to use and maintain because of the price of petrol at the pump and the cost of repairs and spare parts.”

“The cost of spare parts has risen by 40 per cent, almost as much as the price of cars,” Ghoneim said. “The current condition of the auto market is more than just a crisis. It is also a transitional phase that impacts the purchasing patterns of consumers, marketing and sales strategies, and the cost and profit margins of agents and distributors.”

Car owners will likely keep their cars for longer than before and not upgrade to the next model or a bigger or more luxurious car on a whim,” he said. “Agents and importers are now importing fewer cars but selling them at astronomical prices. For example, an agent that used to import 10,000 cars will now import only 6,000 and put a much higher price tag on them to reach the same profit margin or more.”

Some car dealers have even cancelled contracts with accredited distributors because they cannot import enough cars to meet their needs or to keep most of the profit for themselves.

MARKET CHANGES

Ghoneim said that “the future of the spare parts trade is secure because it is profitable for car dealers, accredited auto service centres, and spare part importers.

“As consumers hold onto their cars for longer, they will need to keep up with maintenance, servicing, and buying spare parts. This will drive up profits and capital turnaround, which will somewhat compensate dealers for losses caused by the decline in car sales.”

Saad also believes that consumers must change their consumption habits and continue to use the same car for longer in order to drive down the demand for new cars until the market stabilises.

Rayan, however, disagreed. “Spare parts and maintenance will compensate car dealers and distributors for their losses on car sales. If there are fewer cars to sell, then there will be fewer to service, especially since customers only go to accredited dealers and service centres during the warranty period and then they take their business elsewhere.”

But “the current crisis will still negatively impact workers in the auto trade and industry,” Saad said.

“Already, several major car companies have closed down some of their branches and laid off employees because the owners can no longer cover costs. The situation will worsen the longer the auto sector is unstable, pushing out smaller dealerships and importers who do not have the economic power to sustain losses for long periods.

“Dealerships that have greater economic and financial clout will remain in the game for longer after compressing costs, but this will mean laying off a large number of employees, technicians, and workers.”

He added that “the car crisis will not be resolved except if one of two decisions is taken. Either the government should issue a directive to the banks to facilitate the process of issuing letters of credit and providing the foreign currency needed for car imports, or it should allow importing dealerships and agents to directly pay parent factories and companies.

“Alternatively, the state should focus on manufacturing cars and accessories locally. This would be the ideal solution to end the crisis.

“But in order to make Egypt into a manufacturing hub for cars, we have to first manufacture simple car parts such as batteries and tyres, and then move onto car bodies. Many people have expertise in this field in Egypt, and that way Egyptian companies would be generating foreign currency through exports rather than consuming it through imports.”

Saad added that “the focus on manufacturing electric cars locally is a key factor that could help to resolve the current auto crisis, because they are less costly to operate compared to cars that use petrol.

“The cost of operating an electric car is 60 per cent less than its petrol counterpart. Electric cars can travel for 350 km using one battery charge costing LE60, and they save on maintenance because they need fewer servicing sessions (every 100,000 km) than petrol cars.”

But in order to support and expand this industry in Egypt, there will have to be more charging stations on the roads. People will have to be educated about the advantages of electric cars, and they will have to understand that the whole world is heading in the direction of electric cars.

The government first took an interest in local car manufacturing when the auto sector crisis began, and the prime minister ordered the creation of an auto industry committee under his leadership to focus on supporting and facilitating the work of car manufacturers.

FUTURE PROSPECTS

For Ghoneim, “the crisis could improve in early 2023, with the best solution being to make Egypt into a car-manufacturing hub.”

 He said that developing policies and issuing new laws has taken too long and that even the government’s announced auto sector strategy has not yet seen the light. The business community was not doing enough to develop the auto industry, he said, and so far only two memorandums of understanding (MoUs) have been signed and nothing has happened since.

“In order to attract and encourage Egyptian and foreign investors to manufacture in Egypt, the government should take advantage of the current global crisis in the auto industry, as Morocco has done by providing financial, tax, and in-kind facilities and infrastructure projects for investors,” he said.

“Electric cars greatly reduce operating costs, which is what the consumer needs right now. While there are electric and hybrid cars on Egypt’s streets, they are few and far between and face many challenges that limit their popularity,” he added.

“First, a drop in global car manufacturing has also lowered the production of electric and hybrid cars. Second, there is the reluctance of major car dealerships to support the marketing and sale of this new technology. Most companies in this field are smaller importers and individual companies working on a small scale. If major agents and dealerships opened service and maintenance centres, provided spare parts, and fully supported electric cars, this would boost their popularity.”

For Rayan, “right now there are several speed bumps on the road to local car manufacturing due to lack of foreign currency and import difficulties, since manufacturing requires imported components and production supplies. Also, there are no incentives for investors or an attractive climate for investment.”

Electric cars have a long way to go before they become popular in Egypt because there is not enough infrastructure or trained technicians to maintain or repair this type of car. Since electric cars are not very popular, car dealerships are also not interested in importing or locally manufacturing them. A better alternative right now is a hybrid car fueled by both electricity and petrol, or by compressed natural gas (CNG) and petrol.

Omar Hisham, a university student, said he had decided to postpone buying a car because of the high prices and supply shortages. He said that the “price tags are infuriating for consumers, and increasing them further will inversely impact sales. Prices have gone up because some car dealers are price-gouging due to short supplies.”

Some auto companies have raised the prices of their products because of the climbing exchange rate of some foreign currencies. A car that once cost between LE200,000 and LE250,000 now has a price tag of LE500,000 and upwards, which means this category of cars, usually seen as economical, has jumped to the next level.

Economically priced cars are top sellers in Egypt and constitute 70 per cent of car sales.

Hisham said he had wanted to import a car from overseas, but his friends had advised him against it because this route was a “minefield of scams,” he added.

But according to Rayan, “there are simple steps for personal imports. The car is purchased and paid for at a dealership overseas, either directly or indirectly through a middleman or import company. The invoice for the car is then entered on the Advance Cargo Information (ACI) system, approval is obtained from the ministry of trade and industry, and the car is delivered and customs procedures completed by customs offices.”

However, “it is imperative to deal with trustworthy and reputable intermediaries, whether individuals or companies, because many customers have been scammed after paying the full price of the car to a middleman at the beginning of the process,” he said.

“Also, the Tax Authority pays close attention to companies that facilitate personal imports to prevent tax evasion.”

Saad, on the other hand, believes personal imports are too complicated because it is difficult to register on the ACI and foreign currency is hard to find to pay for a car.

Some companies import cars into Egypt through free zones. They are released in the names of individuals and then sold on the market. These are known as “grey imports” and are an attempt to circumvent the country’s economic policies, such as Directive 9 issued in February 2022 which requires importers and agents to open service centres for imported cars and maintain a reserve of spare parts that amounts to 15 per cent of the size of the cars.

The cars must also be equipped with a minimum of two airbags to meet safety specifications.

Personal imports are legally available to three categories of people at present. The first is people working overseas as long as the importer is the first owner of the car, and the car is registered in their name and documented at the Egyptian embassy in their country. The second category comprises foreign embassies and consulates in Egypt. The third includes special needs individuals who require certain specifications for their cars.

Ghoneim thinks that “personal imports are risky and unsuccessful in Egypt because no one is willing to risk their money and invest in a product that could expose them to financial losses, especially since car prices are also very high globally.”

He said that most car-buyers in Egypt want to see the car in front of them and inspect it before purchase, “which is why many potential buyers avoid personal imports.”

*A version of this article appears in print in the 15 September, 2022 edition of Al-Ahram Weekly.

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