The National Automotive Council, Nigeria
The National Automotive Council (NAC) was established in 1993 to implement Nigeria's Auto Policy with the core objectives of ensuring the growth and development of the sector. Now, 17 years on, the automotive industry of Nigeria has evolved drastically and holds tremendous potential in vehicle manufacturing, spare parts and components. This special report offers a comprehensive guide to the role, and vision of the NAC, plus the vast investment opportunities that this burgeoning industry offers.
THE NATIONAL AUTOMOTIVE COUNCIL, NIGERIA (NAC) Published by Henley Media Group Ltd in association with the Commonwealth Secretariat The National Automotive Council Establishment of the National Automotive Council Introduction The Automotive Industry constitutes a very potent force in the socio-economic development of a country. The vital contributions made by this industry led to the rapid transformation of the leading South East Asian economies (South East Asian Tigers) from primary under-developed economies to world rated industrial giants, in the second half of twentieth (20th) century. This is widely recognized and well documented. The industry had earlier made significant contributions to the industrial development of developed economies. In Nigeria the auto industry dates back to the early 1960s when private sector initiatives pioneered the establishment of auto assembly plants. The pioneering efforts included those of UAC, Leventis, SCOA, BEWAC and R.T. Briscoe. In the 1970s, the Federal Government became involved in the auto industry, with the establishment of two cars and four truck assembly plants. Government involvement was based on its desire to fast-track Nigeria's industrial development and to control the strategic sectors of the economy (the Federal Government has since made a reversal and privatized the assembly plants). The Nigerian automotive industry performed well, assembling vehicles with increasing local content until 1986, when its fortunes began to slide, a trend that has continued since. The auto industry has continued to be undermined by a number of inhibiting factors, which includes � lack of basic industrial infrastructure, high cost of industrial services, erratic supply and high cost of utilities, low tariffs on imported fully built units as well as inconsistency in government policy. 7. The National Automotive Policy The absence of a clear National policy for the sector was identified as the cause of its inability to adjust for survival in the face of changing economic environments. Given this consideration, the Government facilitated a stakeholder meeting through a Standing Technical Committee on National Automotive Industry (STC on NAI) in 1992, to 8. 9. 6. 3. 4. 5. 1. 2. Provision of automotive vehicles for urban and rural areas Accelerated technological development of the Nigerian economy Increased employment opportunities for Nigeria Conservation of scarce foreign exchange Establishment of an integrated automotive industry in Nigeria Standardisation and rationalization of the Nigerian automotive industry Increase private sector participation in the establishment of the auto industry Technology acquisition Creating conducive operational environment through the introduction of appropriate fiscal and monetary incentives produce a National Automotive Policy. The draft policy received Presidential approval and Transitional Council endorsement on the 30th of December 1992 and 10th of August 1993 respectively and the formal launch took place on the 23rd August 1993. The thrust of the National Automotive Policy is to ensure the survival, growth and development of the Nigerian automotive industry using local human and material resources. This is with a view to enhancing the industry's contribution to the national economy, especially in the areas of transportation of people and goods. The elements of this objective include: The National Automotive Council The National Automotive Council as a Parastatal of the Federal Ministry of Commerce and Industry was established by Act 84, 1993 to implement the National Automotive Policy. The functions of the Council include the following: (i) Regular study and review of the automotive parts/ components development industry in Nigeria; (ii) Developing a local content programme specifying which component parts are to be continuously deleted from the imported CKD's (iii) Recommending incentives for ensuring compliance with approved local content programmes (iv) Approve and recommend new models of vehicles envisaged for the Nigeria market to ensure model rationalization (v) Inspection and other quality assurance activities in factories, ports and roads in pursuance of other objectives specified above (vi) Regular evaluation of the pricing structure and quality of the products of the Assembly Plants to ensure international competitiveness (vii) Forecast the demand and supply patterns for various types of automotive vehicles produced in Nigeria and the basic raw materials (such as sheet metal alloy and special steel) (viii) Regular review of the penalties to be imposed for non-compliance with the guidelines and programmes specified by it. Vision: To facilitate the production of components and vehicles of international standard at competitive prices by the Nigerian automotive industry. Mission: To ensure the survival, growth and integrated development of the Nigerian automotive industry using local human and material resources. Governing Board Committees The Governing Board of the Council has three standing Committees. They are: 1. Policy, Planning and Establishment Committee 2. Technical Committee 3. Finance and General Purpose Committee Structure of National Automotive Council The Secretariat of the Council is charged with the dayto- day administration of the council and is headed by the Director General. It is presently operating with three departments namely: Administration, Finance and Accounts; Policy and Planning and Industrial Infrastructure which are headed by Directors. Administration, Finance and Accounts The department is responsible for providing and managing the human resources, handling all matters relating to appointments, promotions, discipline, training, staff welfare. Other functions of the department include: management of funds; payment of staff salaries, allowances and other entitlements. Policy and Planning Department The department is responsible for planning, implementation and evaluation of the council's programmes; UNIDO matters, procurement operations, project monitoring, generates statistical data, conduct industrial and sectoral studies. Industrial Infrastructure Department The department is charged with the coordination and implementation of policies to promote the development of local components and parts, monitoring of the local content deletion programme of auto component, identification and classification of components and parts for standardization. Organisational Structure Automotive Council of the National Funding The Act establishing the council provided for the establishment of a fund which consists of a 2% levy on the cost, insurance and freight (CIF) value of all imported fully built units (FBU), auto components, spare parts, completely knocked down (CKD) and raw materials imported for the automotive sub-sector. The fund is meant purely for the administration of the council, staff training, direct intervention in the sector in form of soft loans and research. Collection of the levy started in November 1994 and was stopped in May 2007. Total amount in the fund on the 31st December, 2009 is in excess of N15 billion which is being managed by Bank of Industry (BOI) under the managed fund agreement whereby NAC continues to meet its budgetary requirement. The Council is made up of the Governing Board, its Committees and the Council Secretariat. Membership of the Governing Board is drawn from relevant agencies and comprises representatives of the following: i) Nigerian Automotive Manufacturers Association (NAMA) ii) Automobile Local Content Manufacturers Association of Nigeria (ALCMAN) iii) Standards Organisation of Nigeria (SON) iv) Raw Materials Research and Development Council (RMRDC) v) Manufacturers Association of Nigeria (MAN) vi) Nigerian Society of Engineers (NSE) vii) The Federal Ministry of Commerce and Industry. Programmes and Projects (i) NAC � Automotive Development Fund (NAC-ADF) A major factor that inhibited the development of the sub-sector was the absence of long-term funds at concessionary interest rates. NAC- ADF has substantially addressed this issue with the funding of 27 projects out of 70 applications received to date. Total disbursement as at 31st July, 2010 stood at N9.9 billion. (iii) Local Content Development Programme Automotive manufacturers produce about 30% of nearly 2,000 parts in a typical car, the rest they purchase from small and medium industries. This will result in huge employment opportunities and acquisition of technology. Local manufacturers have the capacity to meet the demand by both local and foreign assemblers. council: (i) Has commissioned the production of project profiles for some bicycle, motorcycle and vehicle parts (ii) Developed import deletion programmes for bicycles and motorcycles (iii) Is developing capacity for computer aided design (CAD), engineering (CAE) and manufacture (CAM) (iv) Is providing soft loans for the production of auto parts and components (v) Is providing research and development grant to develop auto parts and components. (iv) Establishment of an Automotive Test Centre NAC want to establish a test centre to achieve the following � Flickr/Ashley Palmero naira only) and Berekotry Industries Nigeria Ltd. project" Production of Auto Lubricating Grease of Various Grades from Petroleum Oils, Hexose Cassava and Saponification Materials" with N 4.00 million Accordingly the objectives: � � � � To ensure the safety and health of Nigerians To develop local automotive content To ensure the good operation and maintenance of Nigerian vehicles To obtain capability to conduct homologation tests (ii) Specialised Auto Industry Research Fund The council supports R&D work aimed at advancing the frontiers of technological development in the sub-sector. A project, "The Developent of Production Tools for the Commercial Production of 3HP Petrol engine" submitted by Prof. A. O. A. Ibhadode, University of Benin, Benin City has been funded with N3,335,850.00 (three million, three hundred and thirty five thousand, eight hundred and fifty The feasibility study for the establishment of the test centre has been concluded, and preliminary activities for its establishment have started. (v) Capacity Building in the Repairs and Maintenance of Automobiles inNigeria The council in its efforts at capacity building in the repairs and maintenance of new generation vehicles has, in collaboration with other stakeholders carried out the following: (i) Developed a curriculum and training manual for teaching automotive mechatronics in the informal sector (ii) Acquired mechatronics diagnostic equipment and tools for training Nigerian auto technicians. (vi) Campaign for Patronage of Made in Nigeria Automotive Products The council has intensified the campaign for the patronage of local automotive products to shore up capacity utilization, local content development and employment generation. (vii) Industrial Environment Surveys and Sector Studies The council in its drive to attract Foreign Direct Investment (FDI) into the Nigerian auto industry concluded preliminary work towards undertaking a national survey of consumer preference profile for automobiles in Nigeria. This has remained an essential request by potential investors in the Nigerian automotive industry for years. (viii) National Automotive Data Base The council places premium on reliable and timely data to aid policy initiation, formulation, implementation and to assist prospective investors in their investment decisions. It has therefore developed an internet based platform to capture data from 18 data sources including that of all vehicles registered in Nigeria, automotive components manufacturers, assembly plants, car dealership etc... Conclusions With the anticipated conclusion of the merger of the National Automotive Council (NAC) and the Centre for Automotive Design and Development (CADD) plus the long term plan for the automotive industry in 2010, the Council will develop synergy to actualize the implementation of the National Automotive Policy. In addition, the establishment of the Automobile Test Centre will be pursued to enable complete testing of vehicle parts and promote the production of globally competitive automotive products to sustain domestic demand and take advantage of export opportunities. The Council will continue to pursue its programmes and projects with a view to realizing the potential gains of the automotive sector to the Nigerian economy. These include: Large scale employment generation Acquisition of technological know-how Effective utilization of local raw materials and resources Manufacturing Policy based Finance as a Strategic Option for funding the Nigerian Automotive Industry A Paper delivered by Luqman Mamudu, the Head of Department of Policy and Planning of the National Automative Council Abuja, Nigeria at the One Day Joint Automotive Forum by the House of Representative Committee on Industry and the National Council held in Abuja on Tuesday the 8th of December 2009. 1. Introduction This paper discusses the capability of an automotive industry to lead economic development and why and how some countries have by deliberate policy intervened in their financial markets to allocate funding for the sector to realise its full potentials. The background to the discussion is set by identifying the state of the Nigerian automotive industry and how funding has remained a critical challenge in meeting clearly defined objectives. The paper concludes by suggesting a structure for government intervention. developing countries such as Nigeria to grow. A close study of the development path of emerging economies such as of Malaysia, South Korea, Japan, China, India, Taiwan, Singapore clearly suggest that the automotive industry represent an opportunity for a developing country to quickly diversify into more sophisticated, technically demanding activities that support higher rates of economic growth. As argued by Dani Rodrick of Harvard University in his draft submission: Industrial Development - Stylised Facts and Policies . "One reason that latching on to more sophisticated manufactured products to promote growth is that such products have productivity frontiers that are further away and therefore present greater room for technological catchup. By starting to produce goods that countries much richer than them are currently producing, poor countries enlarge the scope of productivity improvements. Convergence in productivity levels with rich countries becomes an important force for economic growth" 1 2. The Automotive Industry as an Engine of Growth The automotive industry is widely recognised as an engine of growth and development because of its potential for forward and backward linkages. The automobile is recorded to be made up of about 10,000 parts and components obtained from companies in petrochemicals, metallurgy, electronics, textiles and so on. There is sufficient evidence to suggest that the sector led growth and development in the advanced nations of the world it represents an opportunity for less 1 National Automotive policy 3. The Nigerian Automotive Industry It was in recognition of the need to quickly diversify into the production of sophisticated and technically demanding activities for sustained growth that caused the federal government of Nigeria to invest heavily in the basic, intermediate and end-user industries in the 1970s and 1980s. 20 years later, however, the growth anticipated was not forthcoming because as argued by Engr. Otis Anyaeji, the pioneer Chairman of the Governing Council of National Automotive Council (NAC) in his submission to the National Assembly on occasion of a public hearing in 2007. "Towards the end of the 1980s, it became obvious that the ambitious public sector efforts in various industrial sectors were not making the desired development impact, one of the main reason for this situation was that within the industrial sector, the automotive industry in Nigeria was not fostered to assume the central place it ought to occupy by virtue of its unique potential for forward and backward linkages. It was then known that in both the developed and developing countries that had succeeded with their industrialisation programmes, the strategic importance of the automotive sector was such that the success of the overall industrialisation of each of those nations hinged critically on the development of their automotive industry. At about the same period, research had shown that the automotive industry had become characterised by globalisation in terms of trade, investment and corporate attitudes expressible by way of sets of standards" 3.1. The Structure of the Nigeria Automotive Industry The structure of the automotive industry is made up of assembly and component parts production. Components manufacturing is usually driven by the requirements of assembly plants. This means that with the tools of model rationalisation and standardisation, trade volume is provided for the component industry by the local assembly plant. Passenger car economics prescribes volume per year of 100,000 units for a profitable assembly plant in a developing economy as Nigeria. Incidentally, the two car assembly plants in Nigeria ( Peugeot Automobile Nigeria and Volkswagen Nigeria) have a combined capacity of about 100,000 which means that each on the average suffers an economic inefficiency rate of 50%. Components of car cost are: Body and Body parts: Engine transmission: Final Drive/Suspension/Steering/breaks: Others (paint rubber, trim, tyres, glass etc): Assembly: 25% 25% 15% 20% 15% Depending on models, it means that the impact of assembling operations can only represent 15% of total value added. In the case of PAN and VWON that already suffers economic inefficiency due to undersizing, only 7.5% can be achieved. This represents a strain on their economic viability. As said earlier, assembly plants provide trade volume for the components parts manufacturers through model rationalisation and standardisation but whereas the practise in the industry in most countries that have succeeded with automotive development is to have a few assemblers and large component manufacturers, the reverse is the case in Nigeria. Records held at the National Automotive Council (NAC) put the number of assemblers at 15 and component manufacturers at only 50. Please see table below: Structure/Characteristic of the Assembly/Component industries in select developing countries (1990s) No of Country Brazil S.Korea Mexico Taiwan Thailand Indonesia Assembly firms 5 6 5 10 8 12 No of components firms 550 1100 500 250/300 350 200 OEM/ RM split 50/50 80/20 40/60 50/50 40/60 ? Component annual 15 12 6 5 4 4 Export FBU 20% 25% 35% Less than 1% 7% 7% Export (Components) 15-20 of component turnover 10% of component turnover 20-25% of component turnover 20% of component turnover 5-10% of component turnover 5-10% of component turnover The table clearly shows the abnormality characteristic of the assembly/component industry in Nigeria. The trend usually is towards reduction in assembly and increase in components parts manufacturing through the instrumentality of model rationalisation and parts standardisation. In very early 1900, the United States had 2000 firms producing one or more vehicles but this reduced to 100 by 1920, then to 44 in 1929 and by 1976, the Motor Vehicles Manufacturers Association of America had only 11 members - the same trend of consolidation was noticed in Japan and Europe. The trend indicates an increase in efficiency and competitiveness of the industry. The attractiveness of this industry in terms of its potential for contribution to the GDP can be best illustrated by a comparison with its equivalent in terms of oil revenue. During this period captured by the table, Nigeria was producing just slightly over one million barrels per day as a mono export economy. It was in realisation of the tremendous wealth creating capacity of the automotive industry that the Federal Government resolved to develop the industry and position it for self sustained growth. Equivalent of selected Country's Automotive Industry Turn Over in Terms of Crude Oil (1990S) Oil Prices was $`10 per Barrel.. Annual turnover (components) US$b 12 6 15 5 4 4 Equivalent in Crude Oil (Million Barrels) 1200 600 1500 500 400 400 Equivalent in Crude Oil. Million barrels per Day >3 > 1.5 >4 1.4 >1 >1 External sales of FBUs (US$b) 5.0 2.0 0.2 Country South Korea Mexico Brazil Taiwan Thailand Indonesia 3.2 The National Automotive Policy By 1990, the Automotive industry had virtually collapsed in terms of capacity utilisation and the void left in the market was quickly filled by massive import of pre-owned FBUs. The few component manufacturers that had set up operations to supply the APs closed as existing capacity levels of surviving APs could no longer sustain meaningful level of production. The reason for this are many and debatable but as analysed in paragraph 3.1 above, the economically inefficient structure of the industry and the absence of a specific national automotive industry policy made it vulnerable to economic shocks that occasioned the structural adjustment program adopted by the government of the day. In order to reverse the trend, government in 1993, launched a national automotive policy which had as its main thrust "the survival, growth and development of the national automotive industry using local human and material resources`' It set a target date of 2017 for a component parts deletion program that will guarantee 100% components parts incorporation and made provision for the creation of the National Automotive Council (NAC) as an institutional framework for implementation. For effective policy administration it drew membership from practitioners so that the process of policy intervention will be guided by the outcome of continuous interaction between the private sector and government. Essentially, the Council was to evolve a local content program and recommend incentive measures to ensure compliance with implementation schedules. 3.3 Funding Requirement for the Nigerian Automotive Industry At the time of policy launch in 1993, it was estimated that about $18 billion will be needed to revitalise the industry with the aim of realising 100% local content development by the year 2017. This figure is derived from a simple estimation based on stages of automotive production characteristic sourced from IFC data; If as earlier highlighted in paragraph 3, Mexico, Brazil, Argentina and South Korea have between 500 to 1100 component manufacturers while Nigeria has 50 and a combined assembly capacity of about 100,000 per annum, it means that for a meaningful level of investment, Nigeria will need to invest as follows: Assembly Major components Moderate processed part/ System Rough processed Parts/Systems Stages Investment (million US$) 400-500 400-500 50-200 Scale (Thousand Units) 100-200 500 500-1000 20-100 200-100 Source: IFC Data Stages Major components Processed Parts/systems Rough processed Parts/system Total Least investment levels (Million US$) 400 50 20 Scale (Units) 500,000 500,000 200,000 No of Firms 20 100 280 Total investment (Billion US$) 8.0 5.0 5.6 18.6 The present assembly plants fall short of prescribed economic levels of installed capacities. Recall that the optimum capacity for an assembly plant is 100,000. Yet PAN and VWON has installed capacities of 63,000 and 45,000 respectively. If the estimated cost of a 100,000 units car Plant is $400,000, then both plants will require about $250m to scale up. ANAMCCO, Steyr, NTM and Leyland will need US$600m to scale up while other small scale assemblers like Burem, GM, FMI, SCOA and Leventis will need support of about US$150m to upgrade facilities. This brings the total investment requirement to US$20 billion but this was to be spread over a period of 24 years ending in 2017. The assembly plants will require $1 billion frontend investment while the component sector will require injection of a third of $18.4 billion in the first 6 yrs another third in the second 6 yrs and the rest in the last 12 yrs. expected that industry funding will be attracted from local private sector, foreign direct investment, government, bilateral, and multilateral agencies. However, in order to fund the administration of the National Automotive Council and to undertake extensive research to support industry, the act establishing it made provision for a levy of 2% on CIF value of all automotive import into Nigeria. As said earlier in this paper, NAC was put in place as a technical body capable of initiating, recommending and supervising policies and programs for locally manufactured vehicles and components. Other statutory source of funding include: f f Such sums as may be provided to it by government of the federation for running the affairs of the council; Contribution from organised private sector; 3.5. Funding of the Nigeria Automotive Industry 3.4 Sources of Finance for the Nigerian Automotive Industry Government provided the major investment fund for the first six automobile plants in Nigeria but with the dwindling fortune of the automobile industry by 1993 when the national automotive policy was launched, government Overall information on funding allocated by the Nigerian Financial market to the automotive industry is not available but given the N60b or US$400m plus applications received by NAC for funding under its NAC-Automotive Development fund, and the observed reluctance of the market to lend to the real sector, the industry's access to funding is constrained. The total size of NAC fund which was accumulated from the 2% levy in 14 years but scrapped by act of government in 2007, is just barely N15 billion or US$100m. This is definitely inadequate considering the level of funding required to establish a truly integrated automotive industry estimated to require about US$20 in 24 years. If Nigeria must meet its target of becoming one of the 20 most industrialised countries in the world by the year 2020, it must urgently seek alternative source of funding for this industry on whose part it must tread. At this point it is perhaps necessary to take a cursory look at how other nations of the world have engaged this challenge. of Japanese parts was 60% more than the international average and the law sought to cut this to 12% by 1960 while simultaneously bringing the quality to international standard. In 5 years the value of production increased from �8.5 billion to �175.8 billion. By the end of the 1965 financial year prices had reduced 29.4% lower than those of 1960. In monetary terms the value of production quadrupled from �206.9 billion in FY 1961 to �833 billion in FY 1968 with a stable currency. Between 1961 to 1963 for instance, the JDB and SBFC jointly provided 50% of their financing for specified equipment used by the auto parts industry. The cost of loans was severally reversed during the period such that by 1965 interest rate were 7.5% for an average loan period of 5-6 yrs as directed by the Ministry of Finance. 4.2. South Korea South Korea on account of its small domestic market adopted an export oriented strategy within an industrial and macroeconomic policy framework. Policy oriented loans therefore comprised about half of credit extended by the domestic financial market. The manufacturing sector, especially automotive, received 46% of total bank loans. Unlike in japan were credit policies depended on fiscal funds, the South Koreans depended heavily on central bank credit and deposit mobilised by DMBs. By controlling financing the South Korean government was effectively a risk partner with industrialists and motivated their risk venture and entrepreneurship. In the same token they induced the industrialists to take the longer term business perspective. The risk partnership arising from the South Korean government's implicit co-insurance scheme with banks and industry enabled Korea to establish large internationally competitive industrial firms within a short period of time. 4. Strategies Adopted by some Countries to Develop Their Automotive Industries Most students of development economics agree that some form of government intervention in the financial market is necessary to allocate resources in the form of loans, guarantees or interest rates subsidies to sectors that they may consider winners and which the market will not ordinarily attend to because of factors bordering on risk return trade-off. There are however those who would prefer that credit decisions are best left to properly functioning markets but evidence from developing economies that have attained admirable heights following policy based financing intervention abound. 4.1 Japan Post world war Japan established a policy based finance system by which funds were channelled to the private sector through Fiscal Investment and Loan Programme (FILP) and the Japanese Industrial Bank. FILP account was established in tandem with overall general account whereby funding is allocated to meet national policy objective. By 1963. FILP was approximately 8% of GNP and 50% of general account. Between 1945 and 1960 Japan rationalised its industry and strengthened the capital accumulation necessary for rationalisation through Enterprise Rationalisation Promotion Law (ERPL)-1952. A specific policy for fostering an infant automotive industry was equally put in place. In 1956 there was still an imbalance between vehicle assembly plants and components parts manufacture, therefore it passed the law on Machine Industry Promotion law (MIPL). The law specified automotive parts as designated machinery and gave the Automotive Parts Sub- Committee the powers to select the most important and essential parts to be targeted. The law was aimed at lower costs and improving quality by modernising plant and equipment. The price 5. Recommended Policy Based Finance Structure for the Nigeria Automotive Industry Given the success story of countries that have developed through the varying mix of policy based financing, it is recommended that government reinforces its commitment to this development strategy. I say reinforce because the development history of Nigeria is replete with several attempts to adopt this policy as evidenced in the establishment of institutions such as NIDB, NBCI, NERFUND, NAC-ADF and some government guarantee schemes etc. The reason why they have not led to the expected outcome are extensive and debatable but be assured that most have been considered in making the following recommendation: 5.1. NAC-Automative Development Fund The estimated amount required to fund a truly integrated automotive industry in the next 24 years is $20 billion or N3 thrillion but only N750 billion may be required as seed money for the first six years. NACFUND with Bank of Industry can be expanded by this amount with specific instruction to finance the automotive industry at a Federal Ministry of Finance determined interest rate. The fund will empower local entrepreneurs to meet counterpart funding requirement in forming alliances with foreign component manufacturers already active in the global automotive parts supply chain. Proceeds from this fund may eventually be paid back to the fedration account as the industry matures and goes public. Although the market may not consider non financial goals or social costs in allocating resources, the following factors prevents it from operating properly and they should be addressed: a) b) c) d) e) f) Difficult legal and judicial environment; Incomplete regulatory environment; Lack of information as there are no credible credit bureaus; Lack of professionalism in financial institutions especially the dearth of experienced risk analysts; Inconsistent government policies; Unstable currencies 6: References: 5.2. Automotive Industry Credit Guarantee Scheme Policy based credit provided from funds generated by Central Bank's skilful use of her discount rate, and funds generated from external borrowing can be used to guarantee loans directed to the industry as may be advised by specific development program drawn up by government. 5.3. The Nigerian Financial Market The Nigerian financial markets still remain a very significant stakeholder in the allocation of scarce resources to the real sector including the automotive industry and it should be encouraged to do so. 2) 3) NAC Decree No 94 of 1993. The NAC levy as a critical component of the policy based finance system for the development of Nigeria Automotive Industry by Engr. Otis Anyaeji,2007; 4) 5) `Financial intermediation and policy based lending' `Structural transformation and patterns of by Antonio Vives and Kim Staking, Washington, DC 1997; comparative advantage in product space', Hausman, Ricardo and Bailey Klinger. Mimeo, Harvard University Press, 2006. Aminu Jalal Director-General National Automotive Council Investment Opportunities Within Nigeria's Automotive Industry The estimated annual demand for motorcycles and bicycles Introduction The automotive industry in Nigeria has tremendous opportunities in the manufacture of vehicles, spare parts and components. This paper looks at the auto industry in Nigeria, the potential areas of investment, the incentives available to investors in the sub-sector and the raw materials and manpower situation. is one million units of each. The country has the capacity to produce these, but locally produced units average only 20 percent in the motorcycle industry and 40 percent in the bicycle industry. The Nigerian Government aims to encourage the increased local content in motorcycles to 50 percent and in bicycles to 100 percent by the end of 2011. This requires new investment to produce the needed components and spare parts. The Automotive Industry in Nigeria The automotive industry in Nigeria is over three decades old and has the capacity to produce 108,000 cars as well as 56,000 commercial vehicles, 6,000 tractors, 1.2 million motorcycles and a million bicycles annually. There are over 50 auto-component manufacturers, some of which are original equipment manufacturers, with others supplying the after-sales market. Capacity utilisation in the subsector, which was 90 percent in 1981, currently stands at only at ten percent in automotive assembly and 40 percent in components manufacture. Investment opportunities in the manufacture of vehicles The high demand for used vehicles translates into a need for new investment in the manufacture of low cost vehicles. A low cost utility vehicle would service the needs of the majority of Nigerians who live in the rural areas. There are facilities already in the country for the assembly of cars and light commercial vehicles. Most of these facilities are currently under utilized and could be used by potential entrepreneurs. There are also well established component suppliers who will supply many of the auto components required. Motor Vehicles The vehicle demand in Nigeria is about 75,000 for new and 100,000 for used vehicles. Over five million vehicles are registered in the country, the majority of which are preowned and would therefore require frequent maintenance. This translates to a heavy demand for spares and components. Other West African countries also provide a ready market, which is already exploited by some Nigerian component manufacturers. Motorcycles and Bicycles Investment opportunities in the manufacture of auto components and spares The automotive parts industry consists of many manufacturing and sub-assembly plants that are fed by heavy engineering industries. These include casting, forging, presswork, plastic moulding, heat treatment, surface treatment and machining. Considering that about 70 percent of over five million vehicles plying our roads were bought as used vehicles, there is a vast scope for the manufacture of servicing and replacement parts. Other Investment Opportunities Demand and Supply of Vehicle and Spares areas that need investment are in the establishment of industries for making automotive components, like press shops, forge shops and precision machine shops. Raw Materials The average vehicle has up to 2,000 parts made from steel, cast iron, alloy steel, copper, tin aluminium, wood, glass leather and plastics. The Aladja Steel Company produces steel billets, rods and angles. The Ajaokuta Steel Company, when completed, would produce steel sheets, pig iron and alloy steel. The Eleme Petrochemical Complex produces polypropylene, polyethylene, ethylene and propylene. The Aluminium Smelter Company produces aluminium ingots. Though some raw materials would still need to be imported, the low labour costs in the country enable even factories with 100 percent of imported raw materials to be economically viable. Investment Incentives In addition to the general incentives available to investors, there are others that are specific for the automotive industry: 1. Import duty for `Complete Knock Down' vehicle assembly is 5 percent, while that for fully built units is 20 percent 2. The Nigerian Government has mandated all its ministries, agencies and parastatals to patronise the products of local automotive assembly plants 3. The National Automotive Council has established an Auto Development Fund to provide soft loans for industries that will produce auto parts 4. The automotive industry has the status of a `pioneer industry', which grants a five year tax holiday anywhere in the country and seven year tax holiday in any economically disadvantaged local government area 5. Up to 120 percent of expenses on Research and Development is tax deductible. For `R&D' on local raw materials, 140 percent is allowed 6. Industrial establishments that have in-plant training facilities enjoy a two percent tax concession for a period of 5 years 7. 8. 20 percent of investment in infrastructure (such as roads, water and electricity) is tax deductible Industries in economically disadvantaged areas would enjoy an additional 5 percent capital depreciation allowance, over and above the initial allowance 9. Industries with high labour to capital ratios are entitled to the following concessions: Those employing 1,000 people or more will enjoy a 15 percent tax concession, those employing 200 or more will have a 7 percent tax concession and those employing 100 persons or more have a 6 percent tax concession 10. Engineering industries with high `local value added' will enjoy a 10 percent tax concession for 10 years 11. Expenses incurred on expansion, modernisation and/ or diversification will attract allowances 12. Engineering industries using up to 60 percent local raw materials in their manufacturing process would attract a 20 percent tax credit for five years 13. The Federal Government has recently established a bank for the industry in order to provide long-term loans to industrial projects Manpower There are many technical schools, polytechnics and universities in Nigeria that produce craftsmen, technicians, technologists and engineers of the highest calibre. The various motor assembly plants, foundries, steel plants and existing auto parts manufacturers have, over the years, trained many Nigerian in various aspects of engineering, design, manufacture and management. Conclusion The Nigerian automotive industry offers significant investment opportunities in the manufacture of vehicles, motorcycles and bicycles, their components and spares. This is particularly true where the federal Government needs to ensure that more components are produced locally. Nigeria also has the vast potential to become the leading vehicle manufacturing centre for the Economic Community of West African States (ECOWAS). For further information contact: The Director-General National Automotive Council 23, Parakou Crescent Off Aminu Kano Crescent, Wuse II P.M.B 320, Garki, Abuja. Tel: +234 (0) 707 220 6911-3 E-mail: firstname.lastname@example.org email@example.com firstname.lastname@example.org www.nac.gov.ng CREDITS Editor Sylvia Powell for Henley Media Group Ltd.