Demand on autos is picking up in Egypt with Korean brands taking the lead and the Chinese moving to the front lines�ê�. �ê� Sherine Abdel-Razek looks at the changing features of the local passenger car market�ê� �ê� A striking fact that might surprise anyone suffering to drive through Cairo's clogged roads and streets is that the number of cars overall relative to the population�ê� �ê�--�ê� �ê�known as the car penetration rate�ê� �ê�--�ê� �ê�is amongst the lowest in the region�ê�. �ê�"For each 1,000�ê� �ê�Egyptians�ê�, �ê�there are only 30�ê� �ê�cars�ê�. �ê�This is compared to 89�ê� �ê�in Tunisia and 53�ê� �ê�in Morocco�ê�,�ê�"�ê� �ê�said Menatalla Sadek , director of corporate finance and investments at GB Auto�ê�,the distributor of Hyundai and Mazda brands in Egypt. The low ratio is not due to the aftermath of the 25�ê� �ê�January Revolution or the lack of security that followed it�ê�, �ê�stripping the market of 30�ê� �ê�per cent of its sales in 2011�ê�. �ê�Low demand on cars has been a feature of the local auto market for decades�ê�.�ê� Sadek recalls that in 2008�ê�, �ê�which witnessed an unprecedented revival in car sales�ê�, �ê�the year saw sales of 198,800�ê� �ê�units compared�ê� �ê�to 860,000�ê� �ê�in Turkey in the same year�ê�. �ê�"In a market of Egypt's size�ê�, �ê�passenger car sales should not be less than 400,000�ê� �ê�cars annually�ê�,�ê�"�ê� �ê�Sadek said�ê�.�ê� Demand started to pick up the last three months after taking a nose dive for almost a year and a half�ê�. �ê�According to Automotive Manufacturing Information Council's�ê� (�ê�AMIC�ê�) �ê�latest report�ê�, �ê�passenger car sales in August came at 17,458�ê� �ê�units�ê�, �ê�the highest monthly sales since July 2011�ê�. �ê�Moreover�ê�,�ê��ê� �ê�August sales were higher than monthly average of both 2011�ê� �ê�and 2012�ê� �ê�to date�ê�. �ê� "Vehicle sales are positively correlated with a country's wider macroeconomic stability�ê�. �ê�During the unrest in Egypt following the 25�ê� �ê�January Revolution�ê�, �ê�customers preferred to be cautious in the acquisition of new vehicles�ê�, �ê�considering them among the lowest priorities during uncertain times�ê�. �ê�However�ê�, �ê�we believe�ê� �ê�that the gradual improvement in the country's security and economic conditions in the current year will serve as a positive catalyst for the market�ê�,�ê�"�ê� �ê�said Ahmed Abdel-Ghani�ê�, �ê�an auto market analyst at a leading investment bank�ê�. �ê� The lack of security during the months following the revolution spurred an escalation of car theft to unprecedented levels�ê�, �ê�with�ê� �ê�some estimates putting the total stolen at over 500,000�ê�. �ê� As for gridlock�ê�, �ê�dealers have their own take�ê�. �ê�"Forget about the crowded streets�ê�. �ê�It is not because of a large number of vehicles�ê�; �ê�it is mainly because we don't replace old cars with new ones�ê�, �ê�a fact that results in a lot of traffic jams�ê�,�ê�"�ê� �ê�said GB Auto's Yehia�ê�. �ê� According to Sadek �ê�, �ê�the current low quality of public transportation services underlines the need for more passenger cars�ê�, �ê�especially for the youth often working and living in satellite cities on the fringes of the capital�ê�. �ê� Sales constraints are on both the supply and demand sides�ê�: �ê�the local assembling industry appears too small to achieve the economies of scale necessary to reduce costs�ê�, �ê�while imported vehicles face large import tariffs�ê�. �ê�On the demand side�ê�, �ê�there is also the�ê� �ê�low disposable income of most Egyptian families�ê�, �ê�limiting their ability to buy new cars�ê�. �ê� Car sales in Egypt are mainly composed of imported cars�ê� (�ê�known as�ê� �ê�"completely built units"�ê�, �ê�or CBUs�ê�). �ê�The problem with these cars is the very high tariffs imposed on them�ê�. �ê�"Tariffs on imported cars in Egypt are among the highest in the world�ê�,�ê�"�ê� �ê�said Abdel-Ghani�ê�.�ê� Despite the government's decision to lower tariffs in 2004�ê�, �ê�the tariffs range between 40�ê� �ê�per cent and 135�ê� �ê�per cent depending on the capacity of the car's engine and its origin�ê�.�ê� On the other hand�ê�, �ê�local car assembly is anything but developed�ê� �ê�--�ê� �ê�not only now but historically�ê�. �ê�The state-owned Al-Nasr Automotive Manufacturing Company�ê� (�ê�NASCO�ê�), �ê�was established in 1961�ê� �ê�to assemble vehicles according to an agreement with the Italian firm Fiat�ê�. �ê�NASCO�ê�, �ê�failed to achieve world competitiveness for several�ê� �ê�reasons�ê�, �ê�including limited local demand relative to the scale necessary for efficiency�ê�. �ê�However�ê�, �ê�NASCO monopolised the production of cars for nearly three decades�ê�. �ê� Only in the late 1980s did the government give a green light for foreign companies to establish assembly operations locally�ê�, �ê�enabling the development of a domestic automotive industry�ê�.�ê� Foreign companies were encouraged by the economic reforms introduced during the 1990s and many established joint ventures with Egyptian partners�ê�. �ê�Among the big names assembling some of their cars in Egypt are Mercedes�ê�, �ê�BMW�ê�, �ê�Nissan�ê�, �ê�Hyundai and Chevrolet�ê�.�ê� Nonetheless�ê�, �ê�domestic production is limited almost exclusively to the assembly of vehicles in joint ventures between Egyptian companies and international automotive companies�ê�. �ê� "The demand in the Egyptian market has never been large enough to justify investment in a wholly owned plant�ê�, �ê�especially that tariffs on car components imported by the assembly plants are very high and the cost is transferred to the consumer�ê�,�ê�"�ê� �ê�noted Abdel-Ghany�ê�.�ê� The Economist Intelligence Unit estimates that cars cost 20�ê� �ê�to 30�ê� �ê�per cent more to assemble in Egypt than in larger markets�ê�, �ê�a cost difference that is passed on to consumers in the form of higher prices�ê�.�ê� Another factor that limits the interest of international companies in expanding the local market is the low quality of feeding industries�ê�.�ê� Abdel-Ghani recalls that recently Volkswagen was considering building a plant to assemble its Jetta and Passat cars in Egypt�ê�, �ê�but the absence of quality control measures in feeding industries made it change its mind�ê�. �ê� Demand rose relatively quickly during the 1990s�ê�, �ê�but suffered in the early 2000s as economic growth slowed markedly with the depreciation of the Egyptian pound�ê�. �ê�This raised the local currency cost of imported complete vehicles and those locally assembled�ê�, �ê�since they consist largely of imported parts�ê�. �ê� The 2004�ê� �ê�decision to lower customs on imported cars and components pushed the market up�ê�, �ê�but then came the global financial crisis and in 2011�ê� �ê�the revolution�ê�. �ê� On the demand side�ê�, �ê�the absence of affordable car financing schemes limits buying�ê�. �ê�Tarek Mustafa�ê�, marketing Manager in EIT�ê�, �ê�the�ê� �ê�distributor of Kia cars in Egypt�ê�, �ê�points out that after Nazif's government decision to lower tariffs on cars in 2004�ê�, �ê�banks expanded car loan provisions�ê�.�ê� "We see a lot of promotional offers�ê�, �ê�for instance some car distributors resort to striking deals with banks according to which customers get certain advantages when buying the car on instalments�ê�, �ê�like lowering the downpayment or making the first year's payments interest free�ê�,�ê�"�ê� �ê�he explains�ê�.�ê� Also many car distributors�ê�, �ê�like Hyundai and Kia�ê�, �ê�set up car financing units to encourage demand�ê�. �ê�However�ê�, �ê�high down payments of�ê� �ê�at least 25�ê� �ê�per cent of the total car price�ê�, �ê�together with high interest rates�ê� (�ê�13�ê� �ê�per cent on average�ê�), �ê�make many hesitate before buying�ê�, �ê�Abdel-Ghani said�ê�. �ê� Affordability is the name of the game�ê�, �ê�and this is why sales in the 1.5-1.6�ê� �ê�litre category dominate 63�ê� �ê�per cent of total car sales�ê�, �ê�according to AMIC�ê�.�ê� "The price of the car is the main driver of demand in the local market�ê�; �ê�that is why the Korean brands are dominating sales�ê�,�ê�"�ê� �ê�said Mustafa�ê�. �ê� While the American company Chevrolet is leading the market in number of cars sold�ê�, �ê�this is to a great extent because of its sales of Lanos cars�ê�, �ê�produced in the plants of the South Korean company Daewoo that Chevrolet bought recently�ê�, �ê�explained Kia's Mustafa�ê�. �ê� Hyundai and Kia come in second and third positions�ê�. �ê�The three companies together dominate 60�ê� �ê�per cent of the market�ê�.�ê� Sales of South Korean cars increased by 23�ê� �ê�per cent in August this year compared to the same month of 2011�ê�.�ê�
