Battle for Soul of Nigeria’s Automotive Industry
Dike Onwuamaeze writes that the reduction of the import tariffs on automobiles as contained in the Finance Act 2020 has triggered a war of attrition between automotive manufacturers and the federal government over the future and viability of the industry
When the PwC surveyed over 800 online respondents made up of business owners, chief executive officers, executive directors, tax managers and government officials on their perspectives on the Finance Act 2020, 92 per cent gave the legislation their approval.
These respondents also indicated that the top three changes in the Finance Act that excited them are the reduction of the minimum tax rate from 0.5 per cent to 0.25 per cent, the use of emails and other electronic means of communications with FIRS and the potential exemption of Small and Medium Enterprises from preparing audited financial statements.
They also showed that the top three changes they most disagreed with are the proposed establishment of unclaimed funds trust fund for unclaimed dividends and dormant bank balances, the plan to introduce excise duty on telecommunication services and the deployment of technology by FIRS for tax compliance monitoring.
None of these responses indicated wide-scale disapproval of the Finance Act or suggested that a raging storm is gathering around the act, especially on a section of the law that reduced import tariffs for automobiles from 70 per cent to 40 per cent.
The new import tariffs, as stated in the Finance Act, provides for a reduction in the import levy on cars from 30 per cent to five per cent, import duty on tractors from 35 per cent to five per cent as well as a reduction of imported duty on mass transit vehicles for the transportation of more than 10 persons and trucks from 35 per cent to 10 per cent.
The levy component of the tariff was set aside for the growth of the automotive industry in Nigeria while the import goes to the government.
However, the first sign that all is not calm about the policy manifested when the Manufacturers Association of Nigeria (MAN) and the Executive Director of Nigerian Automotive Manufacturers Association (NAMA), Mr. Remi Olaofe, aired their views on the reduction of tariffs on the importation of vehicles into the country as provided in Section 38 of the Finance Act 2020.
They said the reduction would destroy the market for sale of locally assembled automobiles.
Olaofe, described the reduction of the tariffs as deceit that would not enhance the welfare of Nigerians, which is being perpetrated by an administration that did not have full understanding of what the Nigerian Automobile Industry Development Plan (NAIDP) is all about.
He told THISDAY that it was sad that this is coming up at a time Nigeria should be working hard to remove its name from the lists of import-dependent nations and migrate to export-driven countries.
He said: “The sad part of it is that I am not even sure this administration has a good understanding of what we are doing. Because if it has had the understanding of this plan their approach to this issue would have been completely different from what they are doing.
“How can someone be saying that he is reducing tariffs because he wants to reduce transport costs? He is simply destroying the industry. They are not even giving a damn. Do you know how much people have pumped to this business and the government doesn’t even care? People that have been sent abroad to be trained are going to be laid off.
“The offshoot industries that are attached to assembly plants will be off the ground again. And all we will be doing is to be going to Apapa to collect vehicles that have been produced in Japan and Korea and very soon from Rwanda and Ghana.
“This is a shame that Rwanda will be shipping vehicles to Nigeria,” adding that the government is treating an ailment with a wrong medication because, “we have over the time confirmed that the correlation between duty paid on vehicles and the transportation fares is totally infinitesimal and almost not seen.”
The executive director of the NAMA in a tone that was laden with a feeling of betrayal said with the policy, the government was turning its back on those it has lured to invest in the country’s automotive sector to assemble cars within the concept of NAIDP.
“We invested hundreds of billions of naira based on the government’s policy and now all these are going to go down the drain. The fundamental mistake behind this policy is that government is thinking that this only affects us as auto assemblers, which is an error.
“Nigeria is going to be viewed in the eyes of investors as a country that cannot abide by its investment policy.”
Olaofe, stated that the NAIDP envisioned that operators of assembly plants would grow in phases from the importation of Semi-Knocked Down one (SKD1) components to the importation of SKD 2 and later to the Completely-Knocked Down (CKD) components at which point the original equipment manufacturers (OEMs) would begin to operate in Nigeria to produce components for automotive manufacturing in Nigeria.
Although many assemblers are still at the SKD level, there are some assemblers of trucks that have moved to the CKD stage.
He claimed that a lot of progress would have been made if the government had signed that automotive development policy into law, which would have given it a legal backing and encouraged investors to put more money into this sector.
“You cannot bring the OEMs into the country when they are unsure of the depth of your market. We want to grow volume first and foremost. It is volume that will drive every line of the business.
“So, the government came up with an executive order that said that government must patronise locally assembled vehicles. You can go around and check to see how many parastatals have locally assembled cars parked in front of their premises? People are expecting magic.”
This suggests that the implementation of the executive order has been observed in the breach.
Another factor that is hindering effective implementation of the NAIDP apart from the absence of legislation to back it up, is the lack of standardised components for automotive manufacturing in the country.
The NAMA told THISDAY that the designs for the standardised components like windscreen should be done by the National Automotive Design and Development Council (NADDC) and distributed to licensed assemblers for them to produce to specification.
“This is what we have been looking for to kick start by having standardised basic items for everyone. So, it will be easier for the equipment manufacturers to produce to that specification because they have the volume to support them,” he said.
It was expected that the volume attained with the standardised components would drive the addition of local content in the industry. According to the NAMA, the people that would mold seats, manufacture the windscreen, do the brake pads, and other components are already in this country. But they would not start operation without a sizable market to support them.
“So, we say that government should come up with a standardised vehicle template for Nigeria. This will be backed by the auto finance scheme that will enable people to buy the vehicles and the volume will pick up. Then the original manufacturers will come in,” Olaofe said, adding that “we should create a road map and have milestones that must be achieved at a specified period. If it could not be attained, then let us do a variation analysis to ask why are we not where we should have been? Do we have such a guideline? The answer is no. So, what they are measuring us with does not even exist.”
Olaofe, therefore, described the provision in the current Finance Act that lowered the import tariffs for automobiles as an opportunity for some people to make money instead of the government putting the right infrastructures in place and allow businesses to sort themselves out. “So, there is no argument the government can put up that will stand the test of time. It is just total rubbish,” he said.
Similarly, the Director General of the MAN, Mr. Segun Ajayi-Kadir, described the reduction in tariff as an avoidable erosion of the traction we have gained in the implementation of the NAIDP.
“As you are aware, government in its wisdom has encouraged investors in the industry, as part of the anticipatory approval of National Automotive Industry Development Policy (NAIDP), to key into importing the Complete Knock Down (CKD) and Semi-Knock Down (SKD) for assembling of cars, buses and trucks in Nigeria.
“So, this section of the Finance Act is an affront on the NAIDP. It is not consistent with the earlier stated objectives of government in this sector that holds so much promise for Nigeria, especially in the West African region.
“As you would have seen, this has created confusion in the automotive sector and brought to question investor confidence in Nigeria,” Ajayi-Kadir said, adding that the government’s departure from the NAIDP is a negative signal to the investing community that Nigeria is a country with an unstable investment climate.
In the same manner, the Director General of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Ambassador Ayo Olukanni, pointed out that the policy on reduction of import levies on cars, and passenger transport vehicles would not augur well for Nigeria’s local automotive industry which is struggling to cope in a harsh economic environment. “We must protect these producers and encourage them,’ Olukanni said.
Yet, THISDAY’s investigation also showed that there are strong arguments in support of the downward review of tariffs on imported vehicle from 70 per cent to 40 per cent.
The Minister of Industry, Trade and Investment, Mr. Niyi Adebayo, told THISDAY that the Finance Act 2020 is a significant milestone for Nigeria, as it marked a return to an era of active fiscal supervision geared towards making incremental adjustments to fiscal policy in order to stimulate the economy.
Adebayo, said the Finance Act 2020 was aimed at exploring various avenues to boost government revenue by addressing immediate and short-term issues affecting certain sectors across the economy.
“Accordingly, the Act seeks to relieve the pressure of high transportation and food cost brought about by fuel price and exchange rate changes that resulted from the COVID-19 pandemic. Section 38 of the Finance Act 2020 proposes significant reduction to the tariffs on importation of vehicles.
“On a general note, we have received various comments and even criticisms regarding what some are calling a policy somersault. It is important to distinguish between a policy somersault and what is essentially an absolutely critical review of an existing policy that requires adjustment,” Adebayo said.
He also argued that the Federal Ministry of Industry, Trade and Investment (FMITI) has been the foremost champion and advocate for a robust automotive sector by robustly defending the tariff regime, pushing for access to credit for both producers and consumers and planning to build infrastructure such as automotive clusters.
He averred that the automotive industry could have a catalytic effect on the industrialisation of a country as it drives mass production, local content, localisation of production techniques and job creation.
“It also stimulated growth of other sectors such as glass, rubber, asphalt, wood, gasoline, insurance and road construction. These are the kinds of benefits that we sought from the inclusion of the Automotive Sector in the Nigerian Industrial Revolution Plan (NIRP),” he said.
Some of the achievements of the NAIDP, according to the minister, include renewed investors’ confidence in the automotive industry in Nigeria; the attraction over $1 billion in foreign direct investment with installed capacity to assemble over 400,000 vehicles per annum. He added that over 30 companies are currently engaged in vehicle assembly operations in Nigeria and have created over 5,000 direct jobs and over 20,000 indirect jobs.
Other proponents of this argument believed that the previous rate had adverse impact on the cost of doing business, welfare of the people, government revenue and the capacity of the economy to create jobs as it has caused massive trade diversion to neighboring countries.
These proponents said that NAIDP, which was launched by former President Goodluck Jonathan, in 2013, is an import substitution industrialisation strategy aimed at reducing importation of vehicles and incentivise domestic vehicle assembly.
However, import substitution strategy would only thrive in the context of high domestic value addition in order for the economy to benefit from the inherent values of import substitution, which includes backward integration, economic inclusion, multiplier effects, conservation of foreign exchange, job creation and reduction of import bills.
They also contended that the cost of vehicles had risen beyond the reach of most citizens and corporate bodies and the impact has been negative with far-reaching consequences.
They further argued that the automotive policy, in its original form, is not in consonance with the NIRP, which is the main industrial policy document of the President Muhammadu Buhari’s administration that espoused the strategy of resource-based industrialisation.
The economy, according to them, has witnessed an increase in the price of vehicles by between 200 per cent and 400 per cent or more over the past seven years and the implication of the scenario for operational costs of organisations is worrisome.
The auto policy in its present form is most inappropriate for an economy that is heavily dependent on road transportation.
The Lagos Chamber of Commerce and Industry (LCCI) and the Nigerian Employers’ Consultative Assembly (NECA) have said that the new policy that reduced the import tariffs would redirect the Nigerian automobile industry on the path of manufacturing CKD automobile components in the country and pave the way for the emergence of truly made-in-Nigeria vehicles.
According to the Director-General of NECA, Mr. Timothy Olawale, critics of the new tariff policy should first understand the policy direction of the government and what it intends to achieve with it, which is to embrace a long term policy for the automotive sector.
Olawale said: “What we had before was the importation of SKD components from abroad to be coupled in Nigeria. That generates less employment and less income. What government is trying to do now is to reduce levies to discourage the imports of SKD and encourage the manufacture of CKD components in Nigeria. This is to stimulate the interest of those who have signified willingness in setting up auto industries in Nigeria to manufacture those components here. This will create the opportunity for value addition, jobs creation and more revenue.”
Similarly, the Director-General of the LCCI, Dr. Muda Yusuf, supported the new policy.
“What the government has done is to reduce the levy component of the tariffs to five per cent from 35 per cent. But the import duty of 35 per cent still subsists. The implication is that there is still a protective tariff of 40 per cent. If an industry cannot be competitive with a 40 per cent tariff protection, then we should interrogate our industrialisation strategy,” Yusuf said.
The Fiscal Policy Partner and West Africa Tax Leader of the PwC Nigeria, Mr. Taiwo Oyedele, said there was a need to review the NAIDP after seven years, especially when the local operators in the automotive industry have not been able to develop significant production capacity.
Oyedele said information the government had shared which has not been countered was that the operators are producing about 14,000 units per year while demand for cars is over 700,000 annually.
He advised the local auto assemblers to be content with the 40 per cent tariff because there are sectors that survive under five, 10 and 15 per cent import tariffs.
“So it does not make sense for citizens to be asked to pay 70 per cent import tariffs when the local producers cannot meet even 10 percent of the market demand.
“Secondly, government was not getting enough revenue even at the 70 per cent as a lot of smuggling was believed to be going on as only very few people, and well established companies, can pay that import tariffs.
“The point for me is that 40 per cent is high enough to discourage someone from importing a car from abroad. I still don’t think that the local assemblers have a demand problem. What they lack is the ability to supply the market.
“So it makes sense to reduce the tariff to avoid punishing your citizens for the inefficiency of the system. If imported cars are still cheaper at 40 per cent than those produced in Nigeria then we have a problem to address,” Oyedele said.
He advised the federal government to ensure that all agencies of government are compelled to patronize locally assemble vehicles as has been promised by the Vice President, Professor Yemi Osibanjo
Oyedele said: “I will tell the assemblers to first understand the policy properly. I have listened to some of them and in my view they have misinterpreted the policy. The second one is that they should sit down with the government with the spirit of partners in progress and provide data to proof that see what will be a better outcome for a win-win situation and prove that this 40 per cent is not going to solve problems. It must be a win-win for the investors, industry players, government and Nigerians because the citizens will not be penalised for the inefficiencies of the system.”
He, however, stated that the future is not promising for automotive assembling in the country not just because of this import tariff amendment.
“The reality is that producing vehicles require a lot of infrastructure, logistics, an ecosystem of supply and research support, which we do not have in Nigeria. It will not work effectively no matter the level of import duties that will be imposed.
“So, I am not very optimistic about the sector. Nigeria has to make choice between producing a whole car or just a part of it like engines, tyres etc. We must specialise on the area of our comparative advantage. We do not have to do everything,” Oyedele said.