While no official statement has yet been released, media reports have quoted anonymous sources as saying that the European Union has agreed to postpone the annual reduction in import tariffs on European cars for 2014 at the request of the Egyptian government. A source at the Egyptian Customs Authority told Al-Ahram Weekly that the authority had received related instructions from the Ministry of Foreign Trade. According to the Egyptian-EU Association Agreement, tariffs should be slashed annually by 10 per cent starting in 2010 until all European car imports are tariff free by 2019. The tariff reduction was not introduced last year either because of Egypt's balance of payments constraints. The Association Agreement gives each of the two parties the right to postpone the application for a year, said Youssef Tawfik, an automotive sector analyst at Pharos Brokerage. Tawfik expected that the scheduled 10 per cent cut would be executed in the coming five years, as per the agreement. Passenger cars coming from the EU with cylinder capacities of 1600 cc are subject to tariffs of 28 per cent, unlike 40 per cent for cars of the same motor capacity from the rest of the world with the exception of Turkey. The recent move will not affect the demand for cars in Egypt, according to Tarek Mustafa, head of marketing at EIT, sole agent for the South Korean company KIA in Egypt. “Even with the tariff differential, most European cars are still more expensive than competing cars in the market,” he said. Korean cars, mainly Hyundai, have been taking the market lead in Egypt with a share of 24 per cent followed by Chevrolet, Toyota and KIA. The Egyptian market has been seeing subdued sales since June. According to the Automotive Marketing Information Council, the main data collector for the local market, the demand for passenger cars in November 2013 came in at 12 per cent less than in the previous year with 11,621 cars being sold during the month. “This has been the trend in the second half of the year due to the political unrest that Egypt has been seeing. The decline in sale figures has been mainly due to car dealers importing fewer cars for fear that the unrest could tighten demand for cars,” Mustafa said. Another factor that has decreased demand is the increase in car prices due to the increases in the value of the dollar. However, according to Mustafa the effect of this has been to shift demand to lower-end categories. The market has not yet felt the effect of the 12 per cent already deducted from the tariffs on European cars, he said, as the devaluation of the pound since 2011 has eaten into the gains. The pound has lost more than 15 per cent of its value since January 2011 to reach LE6.91 against the dollar in this week's official transactions. “The high tariffs on cars and lower per capita income have tightened the potentials of the car market in Egypt with annual sales never exceeding the 200,000 units mark per year,” noted a report on the sector co-prepared by Tawfik. Most sales have been concentrated in the 1600 cc and lower capacity engines category, as these are subject to only a 40 per cent tariff rate in addition to a sales tax of 10 per cent. According to a WTO agreement, tariffs applied on cars with engine capacity of 1600 cc are 40 per cent. However, cars originating from the EU and Turkey are subject to preferential rates of 28 per cent as per the EU and Turkey Association Free Trade Agreements. According to both, tariffs on cars will fall to zero by 2019 and 2020, respectively. But the fact that European cars will enjoy a significant back-loaded tariff cut over the upcoming five years will likely present a threat to the overall market and to the market leader Hyundai. Japanese cars have become more affordable as the exchange rate between the Egyptian pound and Japanese yen has not deteriorated as the pound has against the dollar. Some companies have been producing cars targeting the Egyptian market in Europe-based plants to benefit from the lower tariffs on cars of European or Turkish origin. “This is why we are seeing more Corollas in the streets now, as they are assembled in Turkey and thus enjoy preferential tariffs,” Tawfik said. The Pharos researcher expected Hyundai either to follow suit by establishing an export hub in a European country or Turkey or to establish a semi-manufacturing facility in Egypt to maintain its market share. Another scenario is that the government could slash import tariffs on all cars and instead raise the sales tax to minimise the effect on revenues. The “industry is already lobbying to ensure equal treatment for European cars,” as Pharos put it. Another out of the box move was revealed by Raouf Ghabbour, chairman of Ghabbour Auto, who was quoted recently in the daily Al-Mal as saying that his company was negotiating with several European and US companies to establish a new joint venture to sell second hand cars. GB Auto plans to launch the new project using its own resources if talks with these companies fail, Ghabbour said, adding that the project would be launched during the first quarter of 2014 when LE80 million would be injected as an initial investment.
