TRALAC - Trade Law Centre

Nigeria: Developing local capacity for local automotive manufacture ?

Tuesday, 02 June 2009

Source: Business Day Nigeria

Other developing countries that have successfully grown their auto sector have shown that the key to developing the automotive sector is through a long-term investment in individuals and the higher education sector to ensure the development of local capacity in knowledge, skills, and resources for competing in the global market place. As part of the setting up of the first passenger vehicle manufacturing plants in Nigeria in 1975, the essential features of the technology agreement between the Federal Government and PAN/VWON were that:

PAN and VWON were “to assemble/manufacture” passenger cars using CKD components supplied by their parent companies but were “subject to progressive replacement with such parts, components, and elements made under licence in Nigeria or purchased from Nigerian suppliers.” PAN and VWON were to procure necessary equipment from their parent companies

In the first 3 years, the plants were to achieve 30 per cent local content by value of the CKD – 15 per cent through in-plant manufacture and 15 per cent through purchases from local manufacturers. The plants were to achieve 50 per cent local content after 5 years and 100 per cent after 13 years

The initial capacity of each plant was to be a minimum of 10 000 vehicles annually

Indigenous managerial and technical staff were to be recruited and trained locally in all essential activities such as “design and procurement of equipment, planning, installing and maintaining assembly machinery, tools, and jigs.”

A review of the actual implementation and operation of the agreement show that the most important single issue has been the inability of the plants, deliberate or otherwise, to achieve a level of local content anywhere near contractual provisions. Other issues for examination include: quality of products; management practices and labour relations; transfer of technology to local staff; production costs and product pricing; and channels of distribution of products. The question is, what lessons has been learnt by the Nigerian automotive sector after 30 years of operation of these plants?

The Federal Government policy on the privatization of the industrial sector is clearly stated in Section 5:13 of the Industrial Policy Document [The Industrial Policy of Nigeria: Targets, Policies, Incentives, Guidelines and Institutional Framework, Federal Ministry of Industry, Abuja, Nigeria, 1999], which says, “Government plans to divest its interests from all industrial concerns in which it has equity holdings. Already, virtually all cement plants in which Government had interest have been privatised under the first phase of the programme. In the second phase, Government interests in the pulp and paper, sugar, fertilizer, and automotive sub-sectors will be privatized”.

In launching the new policy, Kola Jamodu, the then Minister of Industry stated that “The Government of Nigeria is putting in place a system that will ensure, in the long-term, permanent resolution of the problems impeding industrial development. The Industrial Policy document has therefore addressed very concisely, critical issues of competitiveness, policy, finance, technology advancement, incentives to industries, research and development, among others”. As part of the Institutional Framework of the Nigerian Industrial Policy, the National Automotive Council (NAC) is charged with the execution of the Automotive Policy of Government and the evolution of local content programme for the auto industry in the county. It also administers incentives to qualified auto industries.

Other developing nations such as Malaysia, South Korea and now South Africa that has successfully developed their auto sector have shown the way forward, by demonstrating that one of the most potent means of achieving economic growth is through effective building of capability in research and development (R&D). They have all shown that the key to developing the automotive sector is through a long-term investment in individuals and the Higher Education (HE) sector to ensure the development of local capacity in knowledge, skills, and resources for competing in the global market place.

The development of a world-class HE sector and associated research institutions has a central role to play in the building up of the capabilities for R&D for building and sustaining the local automotive sector. There is ample evidence from the UK HE sector that the R&D generated by these institutions have contributed immensely to the building up and expansion of the knowledge and intellectual capital required by the automotive manufacturing sector.

The setting of the Knowledge Transfer Partnership (KTP) Scheme in the UK which brings together the HE and Industry, has been the vehicle for helping businesses to improve their competitiveness and productivity through the better use of knowledge, technology and skills that reside within the HE knowledge base. Perhaps a “KTP” type scheme could provide a vehicle for deploying the Federal Government’s Education Trust Fund (2% of Higher Education Tax on company profits used to provide R&D facilities: physical infrastructure, equipment and human capability development). This will ensure that the knowledge base currently “locked up” within the Nigerian HE sector is harnessed by the automotive sector.

Spare Parts Manufacture

Analysis of the over fifty automotive component manufacturers in Nigeria shows that there are huge potentials for automotive electronics components manufacture in Nigeria. Only 5 of these firms are currently engaged in the manufacture of electrical/electronic components – with the majority focusing on the provision of seats, wheel covers, brake pads/linings and other ancillary parts. According to a recent report, the NAC carried out some work on “The Nigeria low cost vehicle project”, in collaboration with UNIDO and the Centre for Automobile Design and Development (CADD). CADD is a partnership between ABU, PRODA, Addis Engineering, and KWARATECH, amongst others.

The NAC has other new initiatives which are relevant to building up the capacity to support R&D in automotive components manufacture. For example, they are collaborating with The Welding Institute (TWI) Cambridge, UK, to set up a world-class centre of excellence in material joining and allied technologies with a focus on automobile technologies. They are reported to have recently signed sign a technical agreement with the Automotive Association of India (ARAI) to act as a lead consultant for the establishment of an automotive Test Centre in Nigeria.

With respect to automotive electronics components, when established the new Centre of Excellence will also need to link up with the Component Technical Committee of the Automotive Electronics Council which is the standardization body for establishing standards for reliable, high quality automotive electronic components. Components meeting these specifications are suitable for use in the harsh automotive environment without additional component-level qualification testing.

With the support of the NAC local automotive component manufacturers can in the very near future, explore opportunities for exporting overseas – especially, taking up export opportunities such as that offered by the US African Growth & Opportunity Act (AGOA), primarily aimed at opening up the American market to the African Continent.

Used auto-parts

Although trading in used parts in Nigeria dates back to the early 80s, in the last ten years, it has become a full-fledged multi-million dollar business involving a large number of small and large enterprises spread all over the country. From an estimated market size of $40-50 million in 1998, the industry has grown ten times over to $400 million in 2004. There are prospects that this market size will exceed the billion-dollar mark in the next 10 years.

The Ladipo market is the major center for used auto parts trade in Lagos and supplies the rest parts of the country. The market is known for being the largest spare parts destination south of the Sahara. In fact, it is the biggest in terms of size and available varieties of car accessories in the whole of Nigeria. It is often said that whatever one cannot find in Ladipo is not yet in the country. The growing activity in the used parts trade has led to the emergence of a highly competitive environment, which almost poses serious threats to new auto parts manufacturing.

Secondly, there is growing concern on the increase in automotive accidents on Nigerian roads which are often linked to the poor quality/reliability of imported used parts. According to a recent media report, the Corps Marshal and Chief Executive officer of the Federal Road Safety Commission (FRSC), Osita Chidoka, disclosed that some 434 lives were lost and 1,123 people sustained various degrees of injuries in road accidents recorded in Lagos State, between January and June 2007.

Analysts believe that there are some links between the rather high rates of fatal accidents and the increase in the use of imported used automotive components. There is a need for some studies to firmly establish if the use of imported used automotive parts is in any way responsible for the death toll in our roads.

Components Reliability

Today, electronic systems and controls account for around 20 per cent of the value of the average light vehicle. However, while 90 per cent of the innovations in today’s vehicles are based on developments in electronics, according to Siemens VDO, and they account for about 70 per cent of the quality problems, according to Daimler Chrysler. Automotive recalls are common.

Every month automakers announce recalls to replace products or parts that fail. These include such things as fuel lines that rupture, components that melt due to proximity to a hot manifold, or electronic failures that may cause the vehicle to stop dead in traffic for no apparent reason. Reliability problems become field failures that can erode credibility and ultimately result in a loss of reputation.

It is estimated that the £40 billion automotive sector has product recalls costing over £500 million due to electronic failures – and high profile cases have had significant impact on brands. As one example of many, a major automotive manufacturer had to recall 55,000 vehicles due to short circuits within ABS units in 2002 alone. Just recently, Jaguar had to recall some 68,000 vehicles in North America, Europe and Japan due to an electronic system failure that could inadvertently select the reverse gear if the controller detected a major loss of transmission – oil pressure.

In another example, it was reported that Toyota voluntarily recalled about 7500 Prius Hybrid vehicles. They recalled slightly more than half of the Prius built in the last 2 years. The problem is associated with the gas – electric engine Electronic Controller module which sometimes causes the car to stall or shut down.

In terms of the potential costs for recall, failures lead to costs that extend the time-to-profit for a product, as failures can irrecoverably stain the reputation of a company. Financial losses can be in the form of loss of market share due to damaged consumer confidence, increase in insurance rates, costs to replace parts, claims for damages resulting from personal injury and maintenance of service infrastructure to service failures.

A history of reputation and poor reliability can also prevent potential future customers from buying a product, even if the causes of past failures have been corrected. As the industry continues to implement new lead free materials and processes, manufacturers know that for them to remain competitive, they do not only need to know how things work, but they also need to know how things fail and how to minimise failure.

The result is that 30 to 40 per cent of North America’s $10-billion annual automotive warranty costs are attributed directly to software and electronics. Analysts predict that this problem will grow proportionately as the percentage of in-vehicle electrical and electronics content grows from a current 25 to 40 per cent by 2010.

To this point, electronics have been used in spot locations in vehicles for such things as fuel injection, antilock brakes and electronic clocks. But now there is a shift to applications including transmission controls and drive-by-wire and future developments such as crash avoidance systems will heighten the level of complexity. What are the implications for the Nigerian Automotive sector? What about the training and retraining of engineers, technologists and technicians?

A low cost utility vehicle would serve the needs of the vast majority of Nigerians who live in the rural areas. There is already in the country, facilities for the assembly of cars and light commercial vehicles. Most of these facilities are currently not utilised or utilised sparingly and could be used by potential entrepreneurs. There are also well established component suppliers who will supply some of the auto components required.

In terms of the efforts to develop a sustainable car manufacturing capacity in Nigeria, it is very important to make the distinction between the establishment of assembly plants - which are effectively assembly operations for imported parts (often from ‘knocked-down’ kits which take advantage of cheap labour and low levels of automation); and the genuine local manufacturing plants - which will encourage the economic development of local supply chains.

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