Egypt: Reducing automobile tariffs

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CAIRO: The Egypt automotive industry has staged a comeback in the first months of 2010, following disappointing sales figures in 2009. This strong performance appears to dispel the worry that Egypt s reduction of tariffs in line with free trade agreements could push out local manufacturers.

In March, GB Auto, Egypt s largest automobile assembler with a 30 percent market share, posted a net income of LE 89.9 million for fourth-quarter 2009, a more than six-fold annual increase from LE 12.1 million. GB Auto s CEO, Raouf Ghabbour, told international press that his company s recovery began in third-quarter 2009.

On the back of these strong results, the company announced it would soon begin producing buses and trailers for the Middle East and Africa. We will start exporting from the second quarter of this year, Ghabbour said. Most neighboring countries lack developed auto industries, and Egypt has the competitive advantage over European and Asian manufacturers in its low-cost production and proximity. Iraq is already receiving GB Auto vehicles as of February, and the company has said it expects to send 36,000 units this year.

The Automotive Marketing Information Council reported in March that Egypt s January 2010 automobile sales were up 63 percent year-on-year, from 10,765 to 17,551 units. The growth was led by passenger car sales, which were up 96.4 percent from 7,105 to 13,951 units.

The spike in car sales can be attributed to rising consumer confidence as the global economic crisis appears to be in remission, and World Trade Organization (WTO) agreements coming to play in 2010 are expected to generate further growth.

A signatory to the WTO s General Agreement on Tariffs and Trade (GATT), Egypt began phasing out tariffs in 2004, which generated a huge boost in auto sales. The aim is to eliminate them by 2019, and a new Egypt-EU trade agreement has gone into effect this year, targeting the reduction of tariffs on European imports.

Cars imported to Egypt from Europe will see a 10 percent decrease from the current Customs rate starting in 2010, Ali Tawfik, the chairman of the Egyptian Auto Feeders Association, told local press in August 2009.

Khaled Youssef, the head of the automotive division at Egyptian International Motors, told OBG, The major shift in market shares will not begin to happen until 2011-12, as the tariff reduction increases each year. Similar trade agreements with South Korea and Japan, which make up the bulk Egyptian auto imports, are also expected.

While the GATT will help Egypt to become better integrated into the global economy, it also means local manufacturers must bring the Egyptian auto industry up to international standards fast, or risk extinction. The reduction in customs tariffs on car imports will exert considerable pressure on local manufacturers, as the tariffs were the sole reason why establishment in the Egyptian market was seen as an attractive Endeavour by foreign assemblers, said Youssef.

The Agadir Agreement between Egypt, Morocco, Tunisia and Jordan has also relaxed trade barriers. Coming into force in 2007, the pact was designed to create a regional free trade area. However, according to local press, the deal has not resulted in much lower prices for cars in Egypt because few cars qualify as imports as they are partially assembled in Egypt.

For example, Renault cars, some of the most popular on the Egyptian market, are imported from Morocco but do not qualify for a tariff reduction despite having 40 percent Moroccan inputs.

The market will change as more vehicles are imported tariff-free into Egypt, but local manufacturers are in a strong position. Egypt is one of the fastest-growing markets in Africa: in January 2010, Business Monitor International estimated that retail sales will increase from ?56.5 billion in 2009 to ?104.8 billion in 2014, due mostly to population growth, which is projected to grow from 78 million to 84 million in the same period.

With car demand on a steep ascent, there is room for both domestic auto manufacturing and imports in the medium term. -This article was first published by Oxford Business Group on April 16, 2010.

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