Diversification Helps GB Auto Survive; FT

Buying a new car is not a priority for most people during a political crisis. Yet Egypt’s leading auto supplier has not only weathered the turmoil of the past three years, it is expected to emerge stronger when calm is restored.

Ghabbour, or GB Auto (AUTO), is a household name in Egypt. Founded by two brothers in the 1940s, it went public in 2007 and is now the largest automotive company in the Middle East and north Africa, assembling and manufacturing passenger cars, motorbikes, commercial vehicles and construction equipment and offering financing and aftersales service.

Diversification, including regional expansion, has insulated GB from the battering its home economy has taken in the past three years. In 2010, it began a joint venture in Iraq that now accounts for 30 per cent of car sales, and has begun operations in Algeria and Libya as well as Jordan. It is also developing export markets to sub-Saharan Africa.

But the majority of GB’s business remains in Egypt. “If you look at our business, you get the economy in a nutshell,” says Menatalla Sadek, director of corporate finance and investments. It has been a variable picture, particularly in the third quarter of 2013 when, as Raouf Ghabbour, chief executive, wrote in the Q3 earnings release, “consumer confidence hit its nadir”.

Net income in the third quarter fell 89 per cent from E£65.4m to E£7.5m year on year. The second quarter was only marginally better, with a 72 per cent drop on Q2 2012.

Despite the economic gloom, the company is seeing an increase in sales. “September through to November have been phenomenal,” says Ms Sadek.

Passenger car sales, about 70 per cent of GB’s business, are a main indicator of middle class consumer sentiment and have followed the vagaries of the political situation.

They have dropped in Egypt by about a third since 2010, staying broadly flat year on year, although the company has kept 30 per cent market share.

But Ms Sadek is confident that car sales will improve. “Egypt is an underpenetrated market, with only 32 cars to every 1,000 people,” she points out. “In comparable regional countries, it is far higher: Iraq is 77 per thousand and Algeria is 114.”

Despite uncertainty, GB has stuck to its pre-2011 plans to move into other sectors of the home market to strengthen its business. It spotted an opportunity in the lack of consumer financing options for people wanting to buy cars in Egypt – 70 per cent are paid for in cash, making them unaffordable for many.

“We decided to launch our own consumer finance in the second quarter of 2012 and it’s going very well,” Ms Sadek says.

The company has embarked on a micro-financing venture to boost sales of the Bajaj brand auto-rickshaws it assembles. Known locally as “tuk-tuks”, sales have been resilient in the past three years. GB sold nearly 70,000 in 2012, up from 40,000 before the revolution.

Although it may seem risky to lend money to the poorest part of the population, Ms Sadek points out the microfinancing project, called Mashroey, has been successful. “We have had no non-performing loans for our tuk-tuks. Zero,” she says.

Despite these successes, she admits 2013 has been challenging. “The third quarter was a perfect storm,” she says. Unrest after the coup that overthrew Mohamed Morsi in July shook consumer confidence, affecting passenger vehicle sales. Violence also hit the company’s supply chain.

“Usually good performance in other sectors makes up for poor car sales, particularly three-wheelers,” says Ms Sadek. Although demand for tuk-tuks was strong, GB could not maintain supply after unrest in Sinai prompted the army to close a bridge linking the mainland to the port where parts are imported.

The gloom seems to be dissipating, reflecting a general improvement in business sentiment. Sales of passenger cars and commercial vehicles have jumped in the fourth quarter. “Only time will tell if this is pent-up demand or a sustainable improvement,” she says. “We’re not seeing signs of a slowdown, but the next few months are critical.”

Source: Financial Times