Ten questions for their feasibility . . .

The purpose of this article is to as objectively as possible raise the issue of the future profitability of the Automotive Industry in North Africa or Assembly Plants or put simply manufacturing of cars specifically in Algeria.
Because the international constraints are there and in the face of the global changes, the automotive sector is known for its restructuring, mergers and relocation of large groups, and for its high production capabilities. The global market for cars in perpetual mutation is nevertheless an oligopolistic market where a few companies control the international circuits.
It seems that some Algerian officials forget that globalization is here for good with political and economic implications. The press has recently echoed several Algerian operators desirous to embark into projects of cars manufacturing though with Original Equipment Manufacturers (OEM) from France, Italy, South Korea and Germany, etc. have open debates on the viability of such undertakings.
The question that arises, would be in the face of the global changes, about the break-even point of all these small car manufacturing projects, knowing that Algeria would be called to evolve within an open economy, though protectionism being sometimes necessary is only transitional?

According to the ‘Office National des Statistiques’ (ONS), the official agency of statistics, the automotive national park (NPA) totalled 5,683,156 vehicles by the end of 2015, up 4.75% year on year.  This increase of the NPA is due to an increase in registrations of new vehicles in 2015 compared to 2014 of more than 900,000 units, or 7.72%.

The number of operations of registration went from 1,397,554 operations in 2014 to 1,505,403 operations in 2015. According to the ONS, the number of registration of new cars fell from 301,722 units in 2014 to 257,589 in 2015, drop of 14.63% and that, unlike past years before the introduction of import licenses, almost all (91.3%) vehicles imported in 2015 were of the order of 282,119 units and registered their year of import.

Taking into account that the Algerian economy is based on the hydrocarbons revenues, the evolution of the price of oil basically determines the purchasing power of the Algerians and inflation would lead to its deterioration.

Several questions would need answers for any coherent economic policy and these are :

 

-First, what will happen with the inevitable exhaustion of oil in terms of economic profitability on the purchasing power of the Algerians? In this case of the real purchasing power of the middle classes, that will remain in terms of the possibility of purchasing power to buy a car?

 

-Secondly, due to the absence of industrial specialized units, and referring to the knowledge-based economy in order to promote integrated subcontracts, what will be the currency balance of these projected units? Especially that the majority of the inputs (costlier with the slippage of the Dinar) will almost all be imported before?

 

-Third, by international standards, the threshold of capacity at the global level are between 200,000 and 300,000 per year for individual cars, about 100,000 units per year for trucks / buses and scalable with the concentrations since 2009. Cost accountings are fixed costs to variable costs what is the break-even point for a competitive cost compared to international standards and the new mutations of this sector?   The hardware representing less than 20 to 30% of the total cost, whereas like a computer, the costs of software represent 70 to 80%; these mini projects will they ever be competitive in terms of cost/quality?

 

-Fourth, what is the situation of sub-contracting in Algeria in order to achieve an acceptable integration rate that can reduce costs? In making a comparison with neighbouring countries where the integration rate is higher as compared to Algeria, experts stressed during forum at El Mujahid this month that in Tunisia, the number of sub-contractors represent 20% of the industrial companies (1,000 sub-contractors among 5,000 industrial firms), while in Morocco, the rate is 28% (2,000 subcontractors out of 7,000 industrial companies). And that the industrial sector currently represents only 5% of GDP, while the needs of industrial equipment and other industrial components and spare parts are generally $25 billion. The number of sub-contractors in Algeria is generally around 900,000 companies, but 97% of these firms are SMEs, or even of all small enterprises (SEs) with less than 10 employees and about 9000, either 1% active for the industrial sector, the rest operating either in the commercial sector, distribution, services, building and infrastructure sectors.

 

-Fifth, in a coherent vision of the industrial policy taking into account the strong international competition and new technological change in this area, need not we select two or three Algerian constructors in a win/win partnership with foreign partners so as to start mastering the international circuits with precise specifications giving them tax and financial advantages in functions of their ability. So for an integration between 0 and 10% rate, the benefits must be limited to the maximum and before a certain threshold of production not exceeding 5000 units/year in order to avoid that during this period some operators might be tempted in a rentier logic, to arrive at more than 30.000/50.000 units per year without integration, increasing this way, the import components currency Bill.

 

-Sixth, related to the previous question, are we currently building a manufacturing factory of cars for a local market while the objective of the strategic management of any business is it not either regional and / or global in order to guarantee financial profitability in the face of international competition; this sector being internationalized with sub segments nesting at the global level?

How then will these micro-units often oriented to the domestic market, realize the rate of integration of 40 / 50% at the end of about five years, and risking to close by bankruptcy after having benefitted with all the benefits that are supported by Algerian Treasury subsidies where the importance of strict State regulations to avoid transfers of annuity in favour of a rentier minority?

 

-Seventh, an industrial policy without control of the solar is inevitably doomed to failure with a waste of financial resources. Also the automotive industry becoming capital based, with digital programming eliminating almost all intermediate jobs, what is the number of direct and indirect jobs that can be created, referring to the necessary qualification, taking into account new technologies applied to the automobile?

 

-Eighth, what will be the cost and strategy of distribution networks to adapt to these technological changes?

 

-Ninth, will these cars use petrol, diesel, LPG, hybrid or solar referring also to the policy of generalized fuels subcidies that distort the optimal allocation of resources?

 

-Tenth, how to approach the world market with the existing rule of 49 / 51% knowing that no reputed foreign firm would accept such a rigid constraint of this type. This rule not only carries the risk of all additional costs being born by Algeria, but could lead to further debts that might envenom tensions between 2017-2020?

 

In conclusion, I would not remind enough that the engine of any development process lies in research and development, that without the integration of the knowledge economy, economic policy or any project has no future in the 21st century. In the face of a turbulent and unstable world where technological innovations are constantly changing, Algeria should invest both in democratic institutions in segments where it can have comparative advantages, i.e.: agriculture, tourism, new technologies and in sub-segments of certain industrial sectors, taking into account the on-going deep technological changes and a major restructuring of this industry that is internationalized.