Mercedes Closes Assembly Lines

By Amwal Al Ghad English On May 9, 2015

Mercedes-Benz, the German luxury car producer, has announced that it will shut down its car-assembly lines in Egypt while keeping its after-sales services. A company statement issued last week made the announcement and denied rumours that the company is pulling out of Egypt.

Mercedes-Benz Egypt, the local producer, explained that it has decided to change its business model in Egypt towards producing components for other car companies while continuing to produce and export brake discs for brands produced by Daimler AG, the Mercedes mother company.

The decision came as the gradual application of tariff reductions on imported European cars will make locally assembled Mercedes vehicles non-competitively priced. According to Egypt’s Association Agreement with the EU, tariffs on European cars will be lowered by ten per cent annually to reach zero by 2019.

The Association Agreement, which entered into force in June 2004, stipulates the gradual elimination of tariffs on some European industrial products, including cars, according to a schedule from 2004 to 2019, giving Egypt 15 years as a maximum transitional period.

The agreement exempts some Egyptian products, such as clothes and agricultural exports, from customs duties when entering European markets.

The transitional period for passenger cars is from 1 January 2010 to 1 January 2019, with a ten per cent reduction imposed annually to reach total abolition in 2019.

Egypt has implemented the agreement on schedule since 2009. Due to political and economic instability following the 25 January Revolution, however, the government asked to postpone the ten per cent cut in tariffs on cars due in January 2014, and the EU agreed.

Egypt currently imposes 40 per cent of a car’s price as a tariff on a vehicle less than 1600 cc and 135 per cent on cars of 1600 cc or more. Experts believe that the application of the agreement will harm the local car-assembly industry and its feeder industries, and that the decision by Mercedes-Benz is just the beginning of a longer process.

The gradual abolition of tariffs is likely to harm other companies assembling European cars in Egypt, including BMW and Opel. “The whole car-assembly industry will be threatened,” said Effat Abdel-Atti, head of the Car Agents and Distributors Division at the Cairo Chamber of Commerce.

There have been rumours in the market that BMW is considering taking the same step.

The government, represented by Minister of Trade and Industry Mounir Fakhri Abdel-Nour, should explain how it intends to handle the repercussions of such large investors pulling out of Egyptian car-assembly, Abdel-Atti said.

“We all know that Egypt is obliged to apply tariff cuts to meet its commitments under the EU Agreement, but this will negatively affect the economy,” he added.

The end of the car-assembly business of a large company like Mercedes-Benz in Egypt means a significant loss of added value to the economy as car-assemblers use at least 40 per cent of locally produced components, according to Abdel-Atti.

Moreover, the closure of such factories will increase the unemployment rate at a time when the labour market is struggling to absorb large numbers of Egyptian workers from war-torn Libya, Yemen and Syria.

“The government should discuss solutions to this problem with representatives of the automotive sector before 2019, in order to save the industry and keep the rights of the labour force,” Abdel-Atti said.

Car-industry expert Adel Gazareen said that the local automotive sector relies on being protected by tariffs. “If this goes ahead, all local car assemblers will be expected to close within the coming few years because they will not be able to compete with tariff-free imported cars,” Gazareen said.

Gazareen, a former chairman of the state-owned Al-Nasr Automotive Company, explained that the cost-price of cars assembled in Egypt is higher than the cost of vehicles produced in European countries where mass production reduces the cost per unit.

He said the negative impact of the changes had already started to become clear over the past two years as sales of imported cars increased to represent 55 per cent and 60 per cent of total cars sales in Egypt in 2013 and 2014, respectively.

“Manufacturers and companies operating in the automotive industry sector of the Egyptian market will have to create new strategies for developing the industry,” Gazareen said.

One survival technique suggested by Gazareen would be for factories in the automotive sector to come together and use the same capacities and production lines.

“One giant factory used by all the companies could produce 150,000 cars annually to meet local market needs in addition to the possibility of exporting to countries with which Egypt has signed free-trade agreements,” Gazareen said.

Ahmed Fekri Abdel-Wahab, a board member at the Federation of Egyptian Industries, told the Weekly that the abolition of tariffs will not only affect European car assemblers. Some Korean and Japanese companies produce cars in European countries and will take the opportunity to enter the Egyptian market at reduced tariffs.

According to Abdel-Wahab, the car industry in Egypt includes 15 car-assembling factories and 75 factories in the feeder industries, together employing 75,000 workers. Egyptian production capacity increased to 300,000 cars and buses in 2014, and is expected to reach 750,000 in 2020.

Abdel-Wahab said that the government, along with automotive producers, should take measures to help the sector become more competitive and able to export at least to the region within seven or eight years.

“We can benefit from procedures applied by countries such as South Africa, Algeria and Brazil. When they had the same problem many years ago, they succeeded in encouraging their local industries to grow and be able to export,” Abdel-Wahab said.

A further negative impact of the tariff cuts could be an imbalance in car prices in local markets, with Japanese Toyota cars becoming more expensive than Mercedes-Benz.

Reductions in tariffs usually mean more imports and an increase in the number of imported cars, according to Abdel-Wahab, placing a further burden on Egypt’s foreign currencies market.

One car customer, Ali Hassan, a teacher, said that the prices of cars had increased over the past two years. “For example, all cars that were priced at around LE150,000 have jumped to LE200,000. I do care more about the price of a car and its specifications than whether it is locally assembled or imported,” Hassan said.