Last Word On Cars: My Selfish Reason For Disliking This ‘Policy’

I have been ‘harassed’ on a couple of occasions recently as to my opposition to this new auto ‘policy’. Naturally I’ve also been asked as to what my own is with Aganga, the ‘brains’ behind the new policy. So I will write about this one last time…

It is painfully clear that there is no intellectual framework whatsoever underpinning the current administration’s Transformation Agenda. It means different things in the hands of different ministers or governors. So Abba Moro, Internal Affairs Minister, can claim that his ministry’s decision to charge job applicants for the privilege of applying over the Internet is as much ‘in line with the transformation agenda’ as the Agriculture Minister’s various Value Chain programmes. The Transformation Agenda is thus like a very big tent where at any time one might find communists, libertarians, socialists and even socialites.

But nature’s abhorrence of a vacuum is well documented, so a loose ‘framework’ can now be observed when it comes to the Agenda. Once a sector has been earmarked for ‘transformation’, the first thing is for government officials, one after the other, to reel out frightening statistics showing the folly of what Nigerians have been doing. Once you hear ‘Nigerians spend billions of naira importing xxx every 2 hours’, you know that transformation is afoot. The next step will be to paint a picture of an alternate reality where if only Nigerians would stop importing said product, millions of dollars in foreign exchange would be saved and hundreds of thousands of jobs will be created. Who can quarrel with job creation? The final step will then be to either ban the product in question or introduce punitive tariffs on it to ‘discourage’ its importation and ‘encourage’ its local production. It’s all very simple and it doesn’t really matter whether or not it works – since something needs to be done, banning is something, and therefore it must be done.

But this simplicity in policy making has been taken a step too far by Olusegun Aganga, the Trade and Industry Minister, with his National Automotive Policy. All the boxes have been ticked – Nigerians spent N1.05 trillion importing cars in 2012. A total of 1.4 million jobs will be created under the policy in the short to medium term. Punitive tariffs of 70% – double the previous amount – have been introduced on fully built cars. Transformation is coming.

In the last few days, the government has sent out signals that it will soon review downwards the 110% tariff on imported rice it introduced at the beginning of the year. Other than acting as a stimulus to the economy of neighbouring Benin Republic and enriching border officials, the tariff on rice has been a woeful failure. The amount of rice imported into Benin Republic has gone up from 200,000 tonnes last year to 2 million tonnes since the Nigerian tariff came into effect, a ten-fold increase. No, the Beninois have not suddenly discovered a taste for parboiled rice. This is the consequence of rushing for the tariff and ban economic levers as the answers to everything. Even with the ban on fruit juice importation, you will be shocked at how much is being produced in Nigeria (less than 5% currently).

Where Is The Policy?

It gets worse. The minister has refused to make this policy public. He and his team are apparently still working on it, yet it has been backdated to October 3rd as its effective date. How did the Federal Executive Council and the Minister of Finance let this happen?

It’s perplexing to see people making claims that Nissan’s recent announcement that it was to set up a plant in Nigeria is a sign that the ‘policy’ is working. What policy? Perhaps if the Minister were to make this policy public, we might come to see whatever Nissan saw in it but note that no figures in terms of investment size were announced and the investment is ‘in expectation of final approval’ of the policy.

 From Whence Cometh The Jobs?

Where are these fantasy car-making jobs Aganga is claiming going to come from? The Mexican auto industry (manufacturing and spare parts) employs 579,000  producing just over 3 million cars annually. But that is not even the story – over 80% of the cars manufactured in Mexico are exported. Toyota’s plant in the country exports 99% of the cars manufactured there. Ford exports 96% of the cars it manufactures in Mexico. Honda is the company that sells the highest proportion of its production in the country, exporting only 60% of the cars it makes there. Unless you are a developed economy or perhaps China, the only way to sustain the level of jobs Aganga is dreaming of is to manufacture for export. Indeed, Nigeria currently imports around 100,000 new cars every year.

The question that is now begging to be answered is – what exactly does the minister want to achieve with this policy?

  1. Does he want to create jobs?
  2. Does he want a made in Nigeria car?

The policy answers to those questions are different and the only one that can be usefully answered with high import tariffs is 3. i.e. do we want a Made in Nigeria car? The Koreans did this quite smartly. Given that they needed to break into foreign markets with their cars (of questionable quality at the time), their only option was to compete on price initially by selling their cars abroad at a loss. To compensate for this, the government then protected the local market and making Koreans pay double the price at home. But the Korean carmakers were only given this protection if they met export targets.

This is very different from the Mexican strategy (mentioned earlier). The Mexicans wanted jobs and not necessarily a Made in Mexico car. Ergo, they simply needed to pitch incentives (cheap and highly skilled labour) to established carmakers to come and set up in Mexico. There is no need for high import tariffs given that it’s not Mexicans who will be buying the cars. So while Mexico answered question 1, South Korea answered question 2 (and 1). By end of 2014, it is expected that BMW, Toyota, Mercedes Benz, Nissan, Honda, Mazda and Volkswagen would have started work on new plants totaling $8bn in value ($6bn has already been announced this year).

What about Thailand which is a (quiet) car making hub in Asia? Here’s The Economist:

In 2012 production reached 2.45m vehicles of which 1m were exported. This made Thailand the 7th largest car exporter globally.

The rise of Thailand’s car industry is no accident. After Asia’s financial crisis in 1997 the country did away with much regulation in the sector; unlike in India or Malaysia, foreign firms do not need to enter joint ventures with local partners. Thailand’s Board of Investment offered generous incentives to produce eco-friendly cars. The government cut the corporate tax rate from 30% to 20%, below that of Indonesia, Malaysia and even Vietnam.

On top of all that came investment incentives after the floods and a first-time car-buyer scheme, which gave a further boost to domestic demand. In 2012 Thailand again became the biggest car market in South-East Asia with 1.44m vehicles, after having lost the pole position to Indonesia the previous year.

Simply slapping tariffs on imports and then expecting magic to happen is the lazy man’s approach to policy making. If we want to create jobs, then there is no need to punish Nigerians with tariffs. To create anywhere near the amount of jobs to make a difference, we have to manufacture/assemble for exports. If we want a Made In Nigeria car, then surely tariffs will come last not first.

Where Are The Incentives?

In 2012, the UK government gave Nissan almost £10m towards the £125m cost of expanding its factory in Sunderland; the state of Kentucky in the USA this year offered Toyota $147m in tax incentives to expand its car plant there to create just 570 jobs.

Interestingly, Aganga claims that the South African former Industry minister worked as a consultant to Nigeria when the ‘policy’ was being drafted. Stallion Motors also made it known that all the auto dealers went on a ‘retreat’ to South Africa with Aganga to discuss the policy before it was made public. Keeping that in mind, read this article from South Africa’s Mail & Guardian and ponder this question – have the South Africans sabotaged Aganga’s ‘policy’ with dodgy advice? While we are slapping tariffs of 70% on cars, the South Africans have theirs frozen at 25% until 2020. Perhaps the argument will be that we are at different stages of the production cycle but it will be interesting to watch if this our ‘policy’ ends up as a gift to the South Africans.

Other countries are thinking the same thing. Unless you are China or a developed country, you cant assume your local market will be big enough to sustain car production. Here’s Indonesia:

Indonesia is hoping to follow in the footsteps of Thailand, which has used favorable government policy and infrastructure to attract investment and become one of the world’s biggest sources for vehicles, especially pickup trucks.

“We want to multiply our auto-manufacturing production to become an export hub for at least some of the signature models,” says Indonesian Trade Minister Gita Wirjawan. “We definitely can catch up [with Thailand], particularly with tax facilitation and supportive regulations we already, and will, have in hand.”

No Hiace With No Finance

How is it that over 1 million new cars were sold in the Indonesian market in 2012, ten times the amount sold in Nigeria? The short answer is that 70% of the cars purchased in Indonesia are done with bank finance. This is a crucial reason why Nigerians buy only 100,000 new cars annually but buy 400,000 second hand cars. To reverse that ratio, finance has to be made more readily available. Indonesian law requires buyers to only put down 30% of the car’s cost (it used to be as low as 10% but the govt increased it to ‘cool’ down the market) to purchase a new car – 25% for motorcycles). Even if you block imports, the only way to boost local demand for the new cars you dream of manufacturing is to ensure finance is widely available. There is afterall a reason why Mercedes Benz has a banking licence across the European Economic Area, which allows it to provide finance to its customers. You can visit BMW Bank’s website here if you understand German.

The earlier post on Thailand talked about a ‘first time car-buyer scheme’. Although the scheme back-fired with a lot of defaults, the Thai govt spent $2.5bn on the scheme to revive car making in the country after the floods in 2011. This is important to note because I am not aware of the Nigerian government committing a single dollar to boosting local demand for cars. If car making is so important to the government, why don’t they back it up with cash?

Or here’s an idea – why not grant established car dealers like Stallion and Elizade licenses that allow them to offer consumer credit or finance? The government can then underwrite this in some way to boost local demand. It’s of course a tricky exercise because cars are not really assets but a government that is motivated by the bigger picture will see this as a price worth paying.

We already have some useful demand – we can safely say that 99% of people who buy second hand cars in Nigeria do so for cost reasons and not because they are collecting vintage cars. In other words, those 400,000 second hand cars sold annually can easily be turned into new cars with decent finance available. Who doesnt want to drive a car with less potential for headache? And if my friends are anything to go by, this trend is already taking hold. If Nigerians start buying 500,000 new cars a year with accessible finance, then car makers will take notice and initiate conversations with the government on setting up in the country.

Here’s a report from last year on Indonesia:

The world’s top car makers are in the middle of an expansion spree in Indonesia, battling for a piece of the world’s next auto hub.

Toyota Motor Corp. tm +0.94% and other Japanese auto makers have dominated the Indonesian market for decades. But General Motors Co. GM +2.76% , Ford Motor Co. F -0.24% , Tata Motors Ltd. ttm +1.77% and others are trying to wedge their way in. They have plans for new plants, new models or new dealerships, aimed at reaching the emerging middle class in Indonesia.

Toyota on Wednesday said it would invest $200 million in Indonesia beyond expansion plans announced last year. Bloomberg News

Toyota on Wednesday said it would invest an additional $200 million beyond expansion plans announced last year, lifting its Indonesia capacity to 230,000 vehicles annually by 2014. That would more than double today’s output.

With overall Indonesian auto sales expected at nearly one million vehicles next year, the country is becoming one of the world’s largest car markets. More important, its low auto-ownership rate means Indonesia—the world’s fourth most-populous nation, behind China, India and the U.S.—could be one of the world’s last great growth markets.

Damaging The ‘Brand’

Why do I feel so strongly about Aganga and even used strident language when talking about him? I have personal and selfish reasons for doing so. I work in financial services in London and I have been privileged to have learnt some very valuable lessons in my short career so far – among which is the respect for contracts underpinned by the rule of law stretching all the way back to the beheading of Charles I (one day I will write about this)…and most importantly why you shouldn’t sign anything until all the fine points are sorted.

I have also met and worked with some of the sharpest Nigerians I have ever met here. Today you might find exceptionally good Nigerians, average Nigerians and not so great Nigerians working out here i.e. the distribution of Nigerians in the City is as normal as anyone else. This makes me think about the first set of Nigerians who must have broken into the city. They must have really applied themselves so exceptionally to the point where it is no longer a requirement for Nigerians to be twice as good as everyone else just to get a job. This applies to many other areas of life – Jackie Robinson was so incredibly talented as the first black player in Major League Baseball in 1947 that today black players don’t have to prove themselves as much as he had to do back then.

Aganga has not enhanced the reputation of Nigerians who work out here since he went into government. In fact, knowing Nigerians, there will soon be a heavy reputational discount on anyone going into government from Goldman Sachs or London’s financial services for that matter – when the policy fails as it’s bound to, they will say ‘it was that man that came from London/Goldman Sachs that did it’. There is nothing special about his approach to policy making at all. You don’t need to hire someone from abroad to introduce tariffs on imports – it has been the ideology du jour in Nigeria since the 1970s. The bill for government’s policy failures is always handed to Nigerians. I cannot see any useful improvement in business registrations in Nigeria since he became Minister – our rankings in the Doing Business Report have worsened under him.

To the extent that you can call London’s Financial Services a ‘brand’, Aganga has been the worst possible Ambassador anyone could have asked for. He’s bad for business. You get?Today it’s cars but tomorrow it could be anything. This gra gra policy making style that seeks to announce results before the game is even played is not new. And to see someone who ought to know much better being at the forefront of that in this government….really saddens me.

But I’m done with this matter. No more blog posts on cars. I promise

FF

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12 thoughts on “Last Word On Cars: My Selfish Reason For Disliking This ‘Policy’

  1. FF, so your anger is that Aganga represents the “London Financial Services” and should be smarter? Sorry.
    Banks actually finance tokunboh purchases but tenor is shorter- max 3 years.
    This government loves hoarding information – it is sickening.
    I think We just want the Euphoria of assembly plants- whether the plants would create 1 million jobs is another matter.
    After that, maybe some form of technology transfer.
    And I agree with you, Govt needs to think deeper. Increasing tariff should not be the only way to encourage local production- it is a lazy way.
    With this post, we can finally say you are off Aganga’s case.

  2. @Doubleeph, you have once again provided facts, figures and an in depth analysis of the new [Aganga] Nigeria Auto Policy.

    It pains me greatly that nobody in Government today has made a move to critical look at the issues you have raised or addressed the many questions you have asked.

    You have done you bit very well.
    Thank you.

  3. I heard an interesting convo/interview with the CG of Customs on Sat. I was shocked to hear his clear disappointment with the new ‘order’ for the Customs to collect 70% revenues. Selient points I got; the NCS is not exactly positioned (both purposely and by lack of capacity) to checkmate smuggling, which he also acknowledged anticipated blowout; He also declared that PAN is the most positioned manufacturer for any govt and public patronage, but its has been serially imposed with several hinderous charges over the last two years. At the end of the interview (which was in Hausa), he said something like “we will implement it waiting any FURTHER CHANGES”.
    Oh, so this isn’t final, yes? It tells you a lot about this government!
    As always, Feyi, interesting read…
    Regards…

  4. There is an obvious dearth of purpose sincerity in governance back home and it reeks through many of the whimsical initiatives we see on display every time. One can understand the 18th century thought-lines prevalent in the old order but when a Goldman Sachs Director in hedge funds is handed the reins of Industry, Trade and Investment in a country like ours… One couldn’t have been asking for too much when you expect reasoned policies. Adapting global best practices albeit the limitless resources at the beck of these guys is now akin to getting a better alternative to google…

    Whence comest succour ?

  5. As usual reading your posts leave a sour taste in the mouth…… The quality of clueless and unintelligent people in govt places scares one. It appears that we may have passed the Rubicon.

  6. Well written article. Feels good to know that there are strong facts to back up my opposition to this policy, I have been arguing along this same lines since the policy was announced. Its the typical theory I was thought in Econs class in secondary school, stop importation to encourage local production, its a no brainer + the policy fails to address the disparity between tokunboh and new cars. It clearly shows their stupidity. Thank you for covering all the bases. But don’t let this be the last rejoiner should you get new facts, please share,

  7. Pingback: The Ultimate Guide To Crafting Nigeria’s Best Policy Decisions | Naijanomics

  8. Pingback: The Ultimate Guide To Crafting Nigeria’s Best Policies | NAIJANOMICS

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