Egypt’s GB Auto urges Govt support for industry to avert future crisis

Egypt’s largest car assembler and distributor GB Auto (AUTO.CA) says it is pushing ahead with its expansion plans despite a dollar shortage that disrupted production this year, and urged the country’s government to support manufacturing to avert future crises.

GB Auto was forced to halt production for 20 days in September and October because a shortage of dollars and central bank restrictions meant it was unable to clear shipments of manufacturing components for a period of about six weeks.

Despite the stoppage, strong demand saw the company post a near 90 percent increase in profit in the third quarter, but Chief Executive Officer Raouf Ghabbour said earnings would have been 20 percent higher still if not for the disruptions.

Speaking at his office on the edge of Cairo, Ghabbour told Reuters the impact on the bottom line would diminish further in the last quarter after banks supplied $1.8 billion dollars to the market this month to clear the import bottleneck.

But he warned that Egypt needed to rethink wider economic policies and focus on encouraging manufacturing, which can dampen dollar demand and bring in foreign currency, to avert future crises.

“The Egyptian government must decide: are we serious about transforming Egypt into the automotive manufacturing hub of the region or do we forget about supporting manufacturing and go back to all being importers?” said Ghabbour, leaning back in his office chair and pulling out a large cigar.

“If they don’t make a decision…I can go back to a small number of employees, open letters of credit worth hundreds of millions of dollars a year and benefit while the country goes into a foreign exchange crunch, rather than bringing in billions of dollars of revenues of hard currency.”

Egypt, which depends on imports, has faced economic turmoil since the 2011 uprising that ended Hosni Mubarak’s 30-year rule. Foreign investors and tourists, on which the country relies for foreign currency earnings, have stayed away.

The country’s foreign currency reserves have fallen from $36 billion before the 2011 revolt to about $16.4 billion in October, leaving the central bank with little firepower to defend the Egyptian pound from mounting pressure.

In February, the outgoing central bank governor imposed restrictions on the amount of dollars companies could deposit in banks. The aim was to crush the dollar black market but it made it difficult for companies to open letters of credit to pay for imports of luxury goods and industrial components.

GB Auto, Egypt’s distributor of three-wheeler tuk-tuks and motorbikes made by India’s Bajaj, was able to use dollars earned from its exports to partly finance imports.

“I wouldn’t say the problem is 100 percent solved but in a big way it is,” he told Reuters.

EXPANSION PLANS

Ghabbour said his company, which operates five plants employing almost 3,000 people, was pushing ahead with major expansion plans for now.

It expects to begin construction on a plant making three-wheelers and motorcycles in the first quarter of 2016 with a view to entering production in early 2017.

The plant will have a capacity of 120,000 tuk-tuks and 120,000 motorcycles but Ghabbour is considering doubling that capacity as it would require minimal extra investment.

A tyre plant — with a capacity for 1 million truck tyres and 6 million passenger car tyres — will take two-and-a-half years to build and a further two years of rampup and would not enter production until 2019 at the earliest.

“We are still in negotiations with the know-how provider, I hope by year end we will have something to announce,” he said, adding that the tyre plant was intended largely to serve larger Gulf Arab markets.

Ghabbour sees most growth potential in the motorcycle market, which he said was the vehicle of choice in other emerging economies with similar demographics to Egypt.

“I used to sell 12,000 motorbikes a year, this year I am getting to about 60,000… I think this exponential growth should continue as the total market should reach 900,000 or a million,” he said.

Source: Reuters