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Automakers await market developments

March 2009
The automotive industry is one of the most important and critical sectors of the Egyptian economy. Since the global economic downturn began, the industry has experienced a drastic recession worldwide, with many prominent car manufacturers forced to implement layoffs, close factories and reduce prices.

The Egyptian market, however, continues to brace itself against an ominous tide of speculation, as the well-being of the industry remains bogged in uncertainty. Countless rumors have circulated about the Egyptian car market, chief among them the suggestion that the reductions in prices globally will have a direct impact on local car prices. Menatallah Sadek, consumer goods analyst at regional investment bank Beltone Financial, predicts that Egypt's automotive market will slow down in the coming months.

"The global financial crisis [suggests] that car prices might come down with the lower global car demand. Potential clients will postpone their buying decisions until they have further clarity," says Sadek.

Despite crippled consumer confidence levels and amplified financial insecurity, Sadek believes that the impact on automotive sales will be indirect. She adds that the inflation rate is expected to come down sharply by mid-2009, but that it remains high enough to affect consumers' appetite to spend. Meanwhile, consumer financing as a means to promote car sales has stagnated.

Following global examples of government intervention in various sectors, the Egyptian government has devised comparable solutions and safeguards for the local automotive industry. On January 8, Minister of Trade and Industry Rachid Mohamed Rachid unveiled new incentives for the industry as part of the government's fiscal stimulus package. These incentives include reducing fees on car exports by 2 percent; exempting car manufacturers from paying taxes on equipment and capital goods, and customs on imported components; and eliminating the 2- to 5-percent customs duties for certain capital goods.

Rachid also stressed that the government is looking into reducing or canceling sales taxes on cars altogether, and has no intention of reducing duties on imported cars in the foreseeable future - a measure to support the local industry and help maintain its competitiveness.

According to the Automotive Marketing Information Council (AMIC), the local automotive market experienced a 25-percent increase in sales in 2008 compared to its recorded sales in 2007. A total number of 230,000 vehicles were sold during 2008, a drastic increase from the 183,000 sold the year before. The total number of passenger cars sold in 2008 reached 175,000, a 22-percent increase from 2007. The number of locally produced passenger cars sold reached 66,000 during 2008, an increase from the 56,000 sold during 2007. Sales of imported passenger cars reached 109,000 during 2008, also an increase from the 88,000 sold during 2007.

However, Ibrahim Saad, owner of First Car, a major distributor in the Egyptian car market, claims that "there was an increase in the local production of cars during 2008 until the month of October. A downfall hit starting from October due to the international financial crisis and its effects on Egyptians. They became convinced that they should postpone any buying decisions... they became cautious due to rumors about future reductions in price."

Further recommendations presented to the Ministry of Trade & Industry by industry experts include reducing customs on raw materials used in automobile production, shifting the implementation of the sales tax to when vehicles are sold instead of when they are released from the factory, limiting the importation of competing brands, and increasing Egypt's international commercial and trading ties. The role of local banks in redressing the recession affecting the automotive market has taken center stage recently, as pressure on them mounts to increase their volume of investments in the market and reduce their interest rates on car loans.

Despite Al Ahly Bank allotting LE 5 billion towards car loans for the expressed purpose of reviving the market, and Egypt's central bank reducing interest rates, local banks - most notably Barclays Bank Egypt , Credit Agricole Egypt and Citibank , NA Egypt, traditionally recognized as providing the most attractive car loan packages locally - have yet to reduce their interest rates on car loans pending further study of market activity. Instead, these banks have increased the number of requirements for car loans, and, in some instances, have even increased their minimum income requirements.

"Seventy percent of car sales in the market are backed up by consumers taking bank car loans," says Effat Abdel Aaty, owner of Hafei Lobo, one of the leading Chinese car agencies in Egypt. "Both local and international banks have an important role to play to balance out the negative effects of the financial crisis," he asserts. He also notes that car prices remain at the mercy of fluctuations in currency exchange rates, since most imported cars are bought by agencies and distributors with foreign currency, as are many raw materials used in local automotive production.

Many industry experts believe that the burden now falls on local agents and distributors to devise strategies to increase consumer demand through promotions and innovative marketing strategies.

Internationally, many automotive manufacturers have introduced special promotions, with some reducing their prices so drastically that their brands now lie in different price categories altogether.

According to Khaled El Ghamry, Al Ahram Cars' advertorial manager, the amount of local advertising space sold to car companies in the period from May 2008 to February 2009 is down by 10 to 15 percent compared to the same period the previous year. "One can observe empty billboards all over Cairo and the number of television commercials is much less. Most car companies have turned to online advertising as a cheap and effective way to promote their cars," he says.

Industry experts agree that adaptation in marketing strategies will be a decisive factor in determining who will weather the storm.

"We are taking more control over our advertising budget and ensuring that it is going to the right place at the right time," says Tarek Moustafa, marketing manager of KIA in Egypt, a company that has not resorted to price reductions or layoffs. "Our marketing and advertising plans are very flexible, to cope with any drastic changes in the market, and this is what [keeps] us a step ahead for any problems that we may come to face."

Specialized cars shows, such as the annual Automach and Formula Al Ahram, invigorated the market when little else did. Both events showcase a variety of vehicles, from small to luxurious. According to El Ghamry, who also co-manages Formula Al Ahram, this year's event, held between January 21 and 26, was beneficial for both participating car companies and attendees.

"More people visited the car show this year than any other Formula Al Ahram] in the past six years. They came to verify the rumors about the reduction in prices of cars, and to get an idea about the different promotional offers from the car companies," said El Ghamry. "However, due to the fact that most advertising budgets were cut down this year, some companies were hesitant or did not participate in the show."

Despite the prevailing skepticism, both Mercedes and Volkswagen reported actual sales during the car show according to El Ghamry an unfamiliar and unprecedented trend.

Sadek also sees light at the end of the tunnel for the local market, citing Egypt's population growth as one of the reasons why demand for cars will not diminish severely. "Passenger cars are considered necessity items for those who can afford them because of the lack of alternative transportation means in Egypt," says Sadek, "It is one of the great assets of the Egyptian car market."

With additional reporting by Sherine Bekir and Waleed Marzouk

By Mohamed Soliman

© Business Monthly 2009