Daily traffic jams, ‘go-slows’ in local parlance, here in Nigeria’s commercial capital(Lagos) are testament to the country’s love affair with the automobile. The market for cars – new and used – in Africa’s most populous country is estimated to be worth more than $6 billion according to government figures. Nigeria is estimated to import more than half a million cars every year, with nine-tenths of those vehicles second-hand imports. The large-scale import of tokunbo, second-hand vehicles of occasionally uncertain provenance, regularly stokes controversy in local media over quality and traffic safety concerns but is largely reflective of the willingness and ability to pay for cars in a lower-middle-income economy.
Over the last few years the government of Goodluck Jonathan increasingly set its sights on building up a domestic capacity to assemble, and ultimately manufacture, cars. The focus is partly driven by concerns over the impact of car imports on foreign exchange reserves but also by a desire to diversify and industrialize the economy, which relied heavily on oil revenues for the last three decades. Nigeria didn’t always import its cars. Several international car manufacturers had partnerships with government and local factories in the 1970s with an annual output of about 108,000 cars. Nigeria’s nascent car industry subsequently withered away due to high production costs, limited innovation and a rise in imports as trade policies were liberalized and smuggling increased.
As part of its industrialization policy, the government announced the National Automotive Industry Development Plan (NAIDP) in October 2013, introducing tariffs on imports as a key instrument to make domestic production more competitive. The ultimate aim of the policy is to create 70,000 skilled and semi-skilled jobs and create the conditions for Nigeria to eventually enter into car manufacturing. The planned tariffs will entail a significant increase in duties and levies on fully built vehicles, from 22% to 70% for passenger cars and 10% to 35% for commercial vehicles. To boost local assembly, there is no levy on importing materials and parts for full assembly in-country and discounted levies of 5%-10% for partially assembled vehicles. Tariffs are only one part of the equation, as many used cars are smuggled to Nigeria from neighboring countries. The government has stated that it will reduce smuggling through better controls on vehicles, car dealers and ports.
Nigeria has a history of announcing grand policies with little implementation, but in this instance, the tariff announcements have boosted international interest in establishing local assembly lines, with several major manufacturers already moving in. Not everyone is pleased with this policy however. Nigerian car importers constitute an influential lobby and the push for more in-country manufacturing has come up against vested interests. There are also concerns that local capacity to build cars – constrained by poor infrastructure – is inadequate to meet demand and that this is pushing up prices significantly and creating yet more incentives for tokunbo smuggling.
Faced with public resistance and local capacity constraints, the implementation of the tariffs hike has been delayed on several occasions. A 35% duty on fully assembled vehicles came into effect in July 2014 and the additional 35% levy was only implemented on new vehicles in late 2014. In February 2015, government announced that the full 70% tariff on tokunbo cars would be implemented in late June. The official reason was that domestic assembly couldn’t keep up, but the delay suggests wariness of introducing an unpopular tariff just before a closely fought presidential election.
The results of that election cast additional uncertainty on the viability of Nigeria’s automotive industry. President Jonathan lost his March reelection bid to opposition challenger Muhammadu Buhari, and the tariff regime is now at the mercy of the incoming Buhari administration, which takes office in late May. Buhari’s All Progressive Congress (APC) has indicated that its shares the former government’s industrial objectives, but it does not have a particularly clear policy platform. Moreover, Vice-president-elect Yemi Osinbajo publicly questioned the wisdom of the current policy in February. Although Osinbajo said that the APC will “encourage local production of cars” he also added that “we will reduce the high tariffs that Nigerians are paying to import vehicles.” In the short term at least, international car manufacturers with expansion plans into Nigeria will face uncertainty over tariffs – and potentially the commercial viability of some local ventures.
There are other potential pitfalls as well. Investors in the automotive industry in Nigeria will need to navigate a highly complex business environment, selecting the right local partners and interfacing with government agencies that have a reputation for difficulty and corruption. Making the wrong commercial or operational decision has the potential to lead to substantial damage to the investor’s reputation or balance sheet. Moreover, infrastructure is uneven –for instance the power supply is far from a given – and the security environment for expatriates and local employees is at times challenging. Nonetheless, the prospective rewards in entering are also great with a potential new-car market of 1 million. It is this factor that will continue to attract international entrants to Nigeria over the next year. .
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