18 August 2003
The Moroccan car industry is set for a shake up with the imminent privatisation of the government's remaining stake in SOMACA, the national car assembly enterprise, to Renault. Although the sale will raise a relatively modest amount, the investment will boost Morocco's Foreign Direct Investment (FDI) credibility. It will also bring some timely relief to SOMACA, which had previously been threatened by sluggish market conditions. It remains to be seen whether we are witnessing a new phase in Morocco's car industry.
On July 26 in Rabat, Luc-Alexandre Ménard, Senior Vice President of International Operations at Renault, signed a memorandum of understanding with Rachid Talbi El Alami, Minister of Industry, Trade and Communications, and Fathallah Oualalou, Minister of Finances and Privatisation. The memorandum foresees Renault acquiring the government's 38% stake in SOMACA: 26% by the end of September - after the visit to the country of Louis Schweitzer, president of Renault - with the remaining 12% to be taken up by the end of October 2005. The stake will be sold for EUR8.7m.
Besides the 38% currently held by the Moroccan government, FIAT and PSA both control 20% each, Renault Maroc 8%, and private investors the remaining 14%. After the privatisation, Renault and its subsidiary Renault Maroc will thus hold a 46% stake in SOMACA, and it remains to be seen whether Renault will attempt to acquire the further 5% necessary for majority control.
SOMACA has been producing within the schema of the voiture économique (budget car) programme since the mid-1990s. Focused on tackling ballooning imports of second hand cars, the project offered a cheap locally produced automobile, and it was FIAT that became the principal licenser, producing the FIAT Uno (and later the Palio), available on the market with a reduced VAT charge. In addition, SOMACA assembled small utility vehicles (mostly under license from French manufacturers - Renault Kangoo, Citroën Berlingo, Peugeot Partner), enjoying similar tax concessions.
With FIAT undergoing a major global restructuring, its production in Morocco has been under question, with its agreement to produce budget cars set to expire in December 2003. But this still leaves a two year gap - Renault intends to launch its own budget car at the end of 2005. FIAT intends to launch its new Palio model in March 2004, but to produce it in Morocco, it had hoped to extend its production agreement until 2008. But the simultaneous production of FIAT and Renault budget cars will likely prove difficult, at least for logistical and intellectual property reasons, even though SOMACA produces at a third of its capacity - 20 000 cars per year.
Meanwhile, Renault plans to invest a further EUR20m in SOMACA, doubling its current production with the launch of the new budget car. As part of these investments, it is currently looking into setting up a new factory, although it is unlikely to be as large as the one recently established in Russia (which produces 1500 cars per month).
Renault will be assembling the L90, a budget family limousine version of the Dacia W90 (the Romanian car producer, a long time associate of Renault, is now a part of Renault). Some local analysts view Renault's acquisition of SOMACA as an attempt to increase the new Dacia model's production scale, current production levels in Romania and Ukraine being too modest to acquire suitably quick returns. This notwithstanding, it looks likely to impact largely on Morocco's car industry.
The present voiture économique programme, which seeks to guarantee small budget cars at affordable prices, has done well in combating second hand car imports: in the mid-1990s and following an opening of the car market, these reached around 90 000 per year. As this constituted a threat to the local car industry, the government implemented stricter controls on these imports, including the imposition of high resale taxes.
This allowed the local car industry (and new imports) to recover, but the former has not seen as spectacular growth as had been hoped for. Sales began to slacken in 2000, and some point to sluggish local demand as the primary bottleneck facing SOMACA, as evidenced by its 20 000 (1 shift) production. So the potential for SOMACA to transform itself into a base for the assembly of Dacia cars for the regional market (and in particular, to fulfil the mantra of high value added exports) is being touted as the primary target.
The impact on auxiliary industries will also be important. Valeo has already announced its plans to reallocate production facilities from Spain to Morocco, and some attribute this decision to Renault's acquisition of SOMACA. Valeo will be joining a sector which is already expanding rapidly - Delphi, Yazaki, Lear and VW-Siemens to name a few, are all already installed in Morocco, with some providing car components to the local market, while others are destined entirely for export, in areas like the Tangiers Free Zone.
Two factors will need to be taken into account in future production. Firstly, the local market - there are currently around 1m vehicles in Morocco, a similar figure to that in Tunisia, but in a country with three times the population. Modest spending power, a limited consumer financing environment, and high fuel costs are restraints on more dynamic growth.
At the same time, the road infrastructure is unlikely to be able to sustain strong growth in car ownership. It is already strained by the annual influx of around 2.5m Moroccans living abroad, and large cities like Casablanca could face a 'Cairo scenario' if car ownership increases too quickly. The road infrastructure is being slowly improved, but much still needs to be done. A new motorway linking Rabat to Casablanca's Mohammed V airport and Settat (and bypassing Casablanca) was recently opened, but the extension of the motorway from Settat to Marrakesh remains unfinished. Links between major cities like Fes and Tangiers, or Agadir and Marrakesh, are single carriage 'national roads', which can become painfully slow in busy periods.
Structural bottlenecks in the national market leave Morocco's car industry with one major option - exports. The ability of Renault to convert SOMACA into a producer for the regional market will prove decisive in this respect. Renault's close commercial relationships with other North and West African economies should prove advantageous. The most promising scenario will see SOMACA producing cars for the European market. With Spain within spitting distance and industrial trade barriers disappearing, there is no reason why this cannot happen.
North African economies are generally wary of production competition from Eastern Europe, where wages are modest (even in comparison to North Africa) and the workforce highly skilled. Western European industrial production has generally relocated eastwards, so the SOMACA deal represents an important reaffirmation of Morocco's industrial competitiveness. The success of the deal will go some way to reinvigorating North Africa's position in the European industrial production cycle.
The Moroccan car industry is set for a shake up with the imminent privatisation of the government's remaining stake in SOMACA, the national car assembly enterprise, to Renault. Although the sale will raise a relatively modest amount, the investment will boost Morocco's Foreign Direct Investment (FDI) credibility. It will also bring some timely relief to SOMACA, which had previously been threatened by sluggish market conditions. It remains to be seen whether we are witnessing a new phase in Morocco's car industry.
On July 26 in Rabat, Luc-Alexandre Ménard, Senior Vice President of International Operations at Renault, signed a memorandum of understanding with Rachid Talbi El Alami, Minister of Industry, Trade and Communications, and Fathallah Oualalou, Minister of Finances and Privatisation. The memorandum foresees Renault acquiring the government's 38% stake in SOMACA: 26% by the end of September - after the visit to the country of Louis Schweitzer, president of Renault - with the remaining 12% to be taken up by the end of October 2005. The stake will be sold for EUR8.7m.
Besides the 38% currently held by the Moroccan government, FIAT and PSA both control 20% each, Renault Maroc 8%, and private investors the remaining 14%. After the privatisation, Renault and its subsidiary Renault Maroc will thus hold a 46% stake in SOMACA, and it remains to be seen whether Renault will attempt to acquire the further 5% necessary for majority control.
SOMACA has been producing within the schema of the voiture économique (budget car) programme since the mid-1990s. Focused on tackling ballooning imports of second hand cars, the project offered a cheap locally produced automobile, and it was FIAT that became the principal licenser, producing the FIAT Uno (and later the Palio), available on the market with a reduced VAT charge. In addition, SOMACA assembled small utility vehicles (mostly under license from French manufacturers - Renault Kangoo, Citroën Berlingo, Peugeot Partner), enjoying similar tax concessions.
With FIAT undergoing a major global restructuring, its production in Morocco has been under question, with its agreement to produce budget cars set to expire in December 2003. But this still leaves a two year gap - Renault intends to launch its own budget car at the end of 2005. FIAT intends to launch its new Palio model in March 2004, but to produce it in Morocco, it had hoped to extend its production agreement until 2008. But the simultaneous production of FIAT and Renault budget cars will likely prove difficult, at least for logistical and intellectual property reasons, even though SOMACA produces at a third of its capacity - 20 000 cars per year.
Meanwhile, Renault plans to invest a further EUR20m in SOMACA, doubling its current production with the launch of the new budget car. As part of these investments, it is currently looking into setting up a new factory, although it is unlikely to be as large as the one recently established in Russia (which produces 1500 cars per month).
Renault will be assembling the L90, a budget family limousine version of the Dacia W90 (the Romanian car producer, a long time associate of Renault, is now a part of Renault). Some local analysts view Renault's acquisition of SOMACA as an attempt to increase the new Dacia model's production scale, current production levels in Romania and Ukraine being too modest to acquire suitably quick returns. This notwithstanding, it looks likely to impact largely on Morocco's car industry.
The present voiture économique programme, which seeks to guarantee small budget cars at affordable prices, has done well in combating second hand car imports: in the mid-1990s and following an opening of the car market, these reached around 90 000 per year. As this constituted a threat to the local car industry, the government implemented stricter controls on these imports, including the imposition of high resale taxes.
This allowed the local car industry (and new imports) to recover, but the former has not seen as spectacular growth as had been hoped for. Sales began to slacken in 2000, and some point to sluggish local demand as the primary bottleneck facing SOMACA, as evidenced by its 20 000 (1 shift) production. So the potential for SOMACA to transform itself into a base for the assembly of Dacia cars for the regional market (and in particular, to fulfil the mantra of high value added exports) is being touted as the primary target.
The impact on auxiliary industries will also be important. Valeo has already announced its plans to reallocate production facilities from Spain to Morocco, and some attribute this decision to Renault's acquisition of SOMACA. Valeo will be joining a sector which is already expanding rapidly - Delphi, Yazaki, Lear and VW-Siemens to name a few, are all already installed in Morocco, with some providing car components to the local market, while others are destined entirely for export, in areas like the Tangiers Free Zone.
Two factors will need to be taken into account in future production. Firstly, the local market - there are currently around 1m vehicles in Morocco, a similar figure to that in Tunisia, but in a country with three times the population. Modest spending power, a limited consumer financing environment, and high fuel costs are restraints on more dynamic growth.
At the same time, the road infrastructure is unlikely to be able to sustain strong growth in car ownership. It is already strained by the annual influx of around 2.5m Moroccans living abroad, and large cities like Casablanca could face a 'Cairo scenario' if car ownership increases too quickly. The road infrastructure is being slowly improved, but much still needs to be done. A new motorway linking Rabat to Casablanca's Mohammed V airport and Settat (and bypassing Casablanca) was recently opened, but the extension of the motorway from Settat to Marrakesh remains unfinished. Links between major cities like Fes and Tangiers, or Agadir and Marrakesh, are single carriage 'national roads', which can become painfully slow in busy periods.
Structural bottlenecks in the national market leave Morocco's car industry with one major option - exports. The ability of Renault to convert SOMACA into a producer for the regional market will prove decisive in this respect. Renault's close commercial relationships with other North and West African economies should prove advantageous. The most promising scenario will see SOMACA producing cars for the European market. With Spain within spitting distance and industrial trade barriers disappearing, there is no reason why this cannot happen.
North African economies are generally wary of production competition from Eastern Europe, where wages are modest (even in comparison to North Africa) and the workforce highly skilled. Western European industrial production has generally relocated eastwards, so the SOMACA deal represents an important reaffirmation of Morocco's industrial competitiveness. The success of the deal will go some way to reinvigorating North Africa's position in the European industrial production cycle.
© Oxford Business Group 2003
