Engine Idling: What We Know (Or Don’t Know) About The New Auto Policy

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer – Adam Smith, An Inquiry Into The Nature And Causes Of The Wealth Of Nations, 1776 (Book IV, Chapter 8, Paragraph 49)
I am not a fan of the Minister of Trade and Investment and whatever, Olusegun Aganga. In fact that is putting it mildly. I think it’s important to say this so you can stop reading now if you are looking for an ‘objective’ assessment of this new automotive policy.
I have previously written a short piece about the experience of South Korea and how difficult industrial learning can be when it comes to making cars.
But I now want to try to do a rolling piece – which will be periodically updated – on this policy based on the available facts. I still cannot lay my hands on the policy document itself and I know no one who has read it. It does seem like there is a deliberate effort in place to keep the policy document out of the public sphere. This is infuriating to no end but I will try to remain calm.
1. I saw this photo and it annoyed me so much. It goes against everything Adam Smith warned against in that quote above more than 200 years ago
A novice like me can recognise Cosmas Maduka of Coscharis and Ade Ojo of Elizade at first glance. The rest of them appear to be from Dana Group, CFAO, Toyota Nigeria, Mercedes-Benz and so on. In short, all the car importers were able to have a meeting with the minister to discuss this new policy because of course, their needs are the most important, far above that of any consumer.
This is all the more irritating because these guys are not the ones going to pay for this hare-brained policy (yes, I can call it hare-brained even without reading it). It is Nigerians who are going to pay all the costs associated with the experiment.
Here is what Aganga is quoted to have said after the meeting:
The meeting with major automobile importers in the country was very fruitful as it provided the opportunity to iron out lingering issues. It also afforded us the opportunity to understand what their concerns are. They have all endorsed the policy but what they are asking for is a level playing ground for every player in the auto sector and also to have more input in the implementation of the policy.“This is not a problem at all because the next step we usually take with all the policies that we have is to have an industry group to monitor and work with us in the implementation stage. So, we have set up a committee to work with us in the implementation of the policy
Not one word about consumers who are the ones going to buy the cars. After the meeting, Cosmas Maduka was quoted as saying the new policy ‘is one of the best things to happen to Nigeria’. How does he know this? We can of course take this to mean that he, a car dealer, is looking forward to making more profits on the back of this policy – in other words, the government has created a market for him that he didn’t otherwise have. Fair enough.
2. So what do we know about policy? Well, Ijeoma Nwogwugwu of ThisDay Newspapers seems to have read it, judging by her last backpage column. We know that the cut off date for the previous tariff regime was October 3rd, 2013. Previously, import duties on cars (fully built cars) ranged from 20 – 35% while duties on commercial vehicles were 10%. The new policy changes those duties to 70% for fully built cars and 30% on commercial vehicles. This is to ‘encourage’ local manufacture of these cars that we have been importing. Yep, it is that easy – doubling tariffs on cars will turn importers to manufacturers, kind of like turning water into wine.
How this is going to work is unclear, given that the costs will be paid by consumers. Will consumers protest and stop buying cars causing importers to start manufacturing locally? Will these locally manufactured or assembled cars be cheaper than the ones being imported? Why is the first thing about this policy an attack on consumers.
Ijeoma goes on:
A third and very crucial element of the policy is to guaranty consistency through legislation. Accordingly, the government is proposing that key aspects of this plan should be legislated to give comfort to investors that there will be no abrupt policy changes
Right. This part of the policy that is ‘very crucial’ has not even begun (emphasis mine). A car plant is not beans. It is incredibly expensive to set up and once it is done, the investor cant simply carry the plant if the government reneges on whatever agreements were given. The most important thing that will give investors the comfort to put their money in manufacturing capacity is still being ‘proposed’. But the hammer has been swift to come down on consumers. Who are these people?
The usual fantasy figures have been rolled out to justify the policy – 700,000 direct jobs to be created in the short to medium term and a further 210,000 indirect jobs in companies supplying the car makers with a further 490,000 jobs to be created in companies supplying raw materials to the carmakers. It is unclear how many cars are expected to be manufactured to generate this level of employment but we know that we currently import 100,000 new cars annually (400,000 second-hand ones).
Mexico, by virtue of being neighbours with the USA and a highly skilled labour force, produced 3 million vehicles in 2012:
It’s worth pointing out that Chrysler has been making cars in Mexico since at least 1959.
The Brookings Institution recently crunched the numbers for car manufacturing employment in North America as part of an automotive policy recommendation to revive carmaking in the state of Tennessee [If you want to see what a serious automotive policy looks like, since ours remains hidden, you can download it here). I have pulled out the numbers to create a serious looking chart:
If you steal it without credit, you will turn to camphor
You can see how fantastic Aganga’s numbers look compared to Mexico’s 579,000 jobs (which haven’t much changed in 13 years). You’d think we would have moved past this nonsense of throwing around figures without any backing, but the practice is still alive and well. And we have not even spoken of automation in the car industry. While not comparing Nigeria to the UK, it is worth noting that the Nissan plant in Sunderland, the largest in the country, operates 24 hours producing 500,000 cars per annum and employing a grand total of 6,500 people. It is not just expensive labour that makes automation attractive, it is that robots don’t go on strike and hardly make mistakes. This is critical in an industry where the difference between profits and losses might just be the recall of one model.
3. The other thing we know about this policy can be gleaned from the current fight going on between Stallion Motors on one hand and all the other car importers on the other hand. As usual, the devil is in the detail but we can summarise the following:
  • It would appear that Aganga made the car importers aware of the date the new policy would kick in. It also appears they had all been in discussion for a while designing the best way to shaft consumers. The implication of this advance notice is that it presented the car importers with a mouth-watering arbitrage opportunity – import cars at 35% duty and sell them to unwitting buyers at 70% duty. No brainer.
  • The policy was announced on October 2nd and was to take effect from October 3rd. So any letters of credit opened after the 3rd would attract the new 70% and 30% rates. Any letter of credit opened before October 3rd would thus be subject to the old duty until February 28, 2014. In other words, from March 2014, the gap will be closed and all cars will attract the new rates irrespective of when the LCs were opened
  • Now, the car importing cabal, Auto Manufacturers Representative Group in Nigeria (AMRGN) are claiming that the policy announcement caught them by surprise i.e. they had no way of benefiting from it. This is a good thing as it means we have a level playing field. But…
  • AMRGN are claiming that Stallion Motors must have known about the policy announcement in advance because, allegedly, it ‘rushed’ to its (five) banks to open LCs to the tune of $382m. In fact, AMRGN claims it did this ‘rushing’ on the 2nd of October as the FEC was meeting in Abuja, after which the policy was announced.
  • Normally, according to those in the industry, Stallion Motors opens LCs for around $100m in any given year. So $382m, if true, is definitely unusual and bears all the hallmarks of activity based on inside information.
  • The Vaswanis, who are behind Stallion Motors, are of course no saints and they have plenty of form in this area. Indeed, the battle between Elizade’s Chief Ade Ojo and the Vaswanis is almost as old as democracy in Nigeria. The Vaswanis have also been deported twice from Nigeria in the last decade or so.
  • The Vaswanis, by their own account, claim that they (car importers) ALL knew about the new policy coming into effect and were thus ‘free’ to take advantage of the arbitrage opportunities. The implication of this is that the Vaswanis are claiming the other guys weren’t able to raise LCs while it did and such they are #bitter not better. It does seem that Stallion Motors, by virtue of being part of Stallion Group, have the largest balance sheet of all the importers. So when it comes to raising LCs, it would have been easier for them to do compared to the other guys.
  • AMRGN are now claiming that the government will be cheated out of N134bn of revenue as a result of Stallion Motors move as cars that should have attracted 70% duty will only attract 35% etc. This is probably an exaggeration given that the new duty will kick in in 3 months time anyway regardless of when the LCs were raised. It is very doubtful that Stallion can shift 3 years worth of cars in 3 months at significantly higher prices. But there can be no doubt that Stallion will make a very tidy profit on this.

What can we make of all of this? For one thing, leaking such sensitive information to one person is a very serious offence and crime against the Nigerian people. But then, Stallion are claiming everyone knew about it and were ‘free’ to take advantage of it. Who is being taken advantage of here? It is again the Nigerian people. The tariffs will be paid by ordinary Nigerians who buy cars. So what kind of government makes suya of its citizens just so some importers can make a fast buck? Either way, it is a tragedy.

Going by quotes attributed to Aganga, who is a tool of business interests anyway, I am inclined to believe the Vaswanis version of events, that perhaps they all knew of the policy in advance:

The new policy is an adaptation of the South African Automotive Policy. Since South Africa started manufacturing cars, the industry today contributes 7 per cent to the country’s GDP, it accounts for 12 per cent of exports, and is the second largest employer of labour there.

Also, Chief Ade Ojo was one of the first persons who approached me to adopt the South African model. It was for this reason I studied what my counterpart in South Africa had done to the extent that their minister became our consultant.

As a result, when the policy was eventually approved on October 2, Chief Ojo was in my office on October 4 to intimate me of the plans he has with Toyota to set up an assembly plant.
This is what I expect the policy will do: encourage investment and catapult us to industrialisation, not accusation being hurled by importers who want the status quo to remain.

They are clearly all in it together.

But it is in the interest of consumers for them to fight each other in this way, regardless of whatever the truth may be. This is the only hope for the consumer because the more they are able to ‘cabalize’ (word hereby invented), the greater our doom.

4. A couple of years ago I met Professor Pat Utomi and our discussion shifted to his time at Volkswagen Nigeria. He said that when he saw the direction policy was heading under SAP in the Babangida days, he recommended that Volkswagen Nigeria be converted to making rubber for cars. According to him, Nigeria has/had the highest grade of rubber in the world and he had spoken to the German manufacturers to source all the door and windscreen rubbers from the plant if the plans went ahead.

This is where the infamous quote credited to him that cars should not be manufactured in Nigeria came from. In any event, the backlash to his suggestion was sufficiently great that the plan was dead on arrival. Of course, his fears proved correct – car manufacturing died in the country and we had no rubber making to at least cushion the effects.

Today Nigeria does not even manufacture car paint not to talk of any other components. And these things have only gotten more complex with time. We used to manufacture tyres in the country, not anymore. (Innoson was supposed to start manufacturing tyres in Enugu last year but I am not sure this has happened).

What has happened here is that the government has decided on an expensive policy and has decided that Nigerians are the ones going to pay for it. I don’t know why it cannot put its money where its mouth is and back such a policy with cash if it’s so important and will do all the wonderful things its threatening to achieve.

Anyway, this is what I know of this policy for now. I will update the post below if any new information is made public. Or, horror of horrors, if we actually get to see the policy document.

FF

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9 thoughts on “Engine Idling: What We Know (Or Don’t Know) About The New Auto Policy

  1. Appointing Aganga was a huge mistake dude is punching way above his weight. The truth is Titles in Investment Banking mean nothing really, if the title doesn’t come with a big Paycheck, a supervisory role on an executive board or supervising more than 5 people. There are many Directors in investment banks that are sole directors with no associated staff/ staff to manage or supervise, these people usually earn less than many people think that is less than a sum total Basic+ Bonus of circa £90k per annum. I believe Aganga was a titled Director without any staff he was simply a prime brokerage director / accountant (not to deride). How he got that initial Job was a result of serious washing afterall the manager at a Chevron filling station and an Oil Field Engineer both work at Chevron in Oil & Gas. The wonder is how he’s manged to keep the job for so long given all this including the fact he doesn’t represent any state in the Fed Republic. ……He must be a very willing puppet / muppet looks the part too

  2. God bless you bro.. this is a well researched and well written piece. Even before reading your piece I am convinced that the basis of international trade has been and will always be ” comparative and even competitive advantage”….Nigeria has neither in the manufacturing of cars and this policy is just a bad idea period! I hoe it is reversed shortly….what worries me is how such a policy that has such a huge negative implication for the Nigerian consumers across the board cleared the president desk………..this i repeat is a bad idea! Thanks for the piece …

  3. But wait o, how do you implement such high duties on imported vehicles without giving consumers an alternative of loally manufactured ones?
    And given this Nigerian precedence of placing the producers’ interest above that of consumers, how can we be sure that the quality of locally manufactured vehicles will be high and maintained in the long run? (picture driving a Nigerian made car and having various parts fall off…). Considering the fact that Nigeria was once a dumping ground for the low quality Korean cars a while back…this scares me.
    If Nigerian consumers were already being exploited before the implementation of this policy, I seriously doubt that these locally manufactured vehicles would be even cheaper.
    Did Aganga surround himself with right-thinking people when this was being conceived? I have a feeling that there was no study or thorough research given to the formulation of this policy.
    (and i was just planning to buy a new car next year o 😦 )

    Thanks for the write-up!

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