Tuesday, May 21, 2024
InterviewIs Ethiopia Volkswagen’s next destination?

Is Ethiopia Volkswagen’s next destination?

Volkswagen

VW’s Africa Chief sees a glimpse of promise

Volkswagen (VW), primarily based in South Africa for its regional market hub, is looking into new African markets by duplicating its regional-based market approach across Africa. Martina Biene, Volkswagen’s African managing director and chairperson, and her group spoke with Ethiopian authorities last week about reviving the memorandum of understanding (MoU) VW signed three years ago with the Ethiopian Investment Commission (EIC). Biene talked with The Reporter’s Ashneafi Endale and Sisay Sahlu about her recent visit and conversations with Ethiopian officials over the country’s current attempt to create an automotive policy that would allow global car manufacturers entering Ethiopia. EXCERPTS:

The Reporter: Is this your first trip to Addis?

Martina Biene: I became CEO and managing director of Volkswagen Group South Africa last November. VW runs its Africa business from South Africa. I was in South Africa before as head of the VW passenger car brand from 2018-2020. I wasn’t involved in the Africa business then. So, this is my first time in Addis.

Can you tell me the brand of the car that brought you to The Reporter’s office? Is it VW?

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We couldn’t find many officially imported VWs in Addis. We used another product, but took nice photos of a well-maintained old VW Beetle, which is nice to see.

How would you describe your observations of car consumers in Ethiopia?

Running our African operations from South Africa, we are quite busy at the moment exploring opportunities. The African Continental Free Trade Agreement (AfCFTA), if ratified, provides huge opportunity as the largest free trade zone. That is the first prerequisite. Policies crafted in countries regarding the automotive industry must also accommodate the industry.

So, considering that and with a 120 million people, there’s huge car market potential. Ethiopia’s car density of two per 100,000 people is one of Africa’s lowest, signaling opportunity not just for sales but for providing mobility solutions. We discussed public transport plans and mobility solutions with the Minister of Transport.

In general, Ethiopia has great potential in terms of population, GDP growth, growth aspirations and mobility needs.

What brought you to Ethiopia, and have you had any conversations with Ethiopian officials about your previous plan to establish a factory in Addis?

Ethiopia’s population growth and low car density show potential for VW. We brought the African Association of Automotive Manufacturers (AAAM). VW is AAAM member, along with other manufacturers. We lobby together for automotive policies to accommodate the industry and assist countries in setting up the industry and finding space in the automotive value chain.

Africa’s current new car market is 1.1 million vehicles; almost half is in South Africa. Forecasts range from 3.3 million to five million vehicles in Africa yearly. With uncoordinated factories, models and manufacturers, opportunities will be missed.

We must consider regional hubs, full manufacturing stages, different models per country, and ensure countries find space to participate. I am not saying we will immediately open a VW plant in Ethiopia because it has prerequisites, but we see the potential.

We are willing and committed to work together and our discussions revealed there is a strong political will to accommodate the industry in Ethiopia.

Do you view the low density of cars in Ethiopia as an opportunity for VW?

Low new car demand is an opportunity across Africa for several reasons. Imported used grey market cars are cheaper but older. This addresses affordability but Africa becomes a dumping ground. Countries wanting automotive industries must increase new car demand – our industry relies on economies of scale and can’t manufacture only 400 vehicles a year.

We’re finding ways to increase new car sales: banning used imports means providing compelling new car financing schemes, which we piloted in Rwanda.

VW’s mobility solution startup in Rwanda combines ride-hailing, car sharing, to hotels and airport – pay per use, you don’t necessary buy it. This delivers sustainable mobility. We resell the cars after two years, creating a used market and lowering prices. There are ways to increase sales beyond just new car purchases.

How has your progress on affordability and financing been in Ethiopia so far?

We’re looking for partners and connecting with some banks, but governments must create an attractive business environment for industry. Vehicle financing schemes require government action. We make this an automotive policy demand – governments must facilitate financing.

Are you considering partnering with a local bank, or are you looking at foreign banks?

Ethiopia lacks an automotive policy still. First, the government must indicate willingness to jointly craft a policy and strategy. We heard interest in public transport and mobility – we need to align priorities. Then we can discuss financing.

Have you provided any feedback or recommendations on the governments draft automotive policy?

We commend the electric vehicle policy – very progressive. Also the intent for renewable energy, though implementation remains. High imported used car taxes are good. There are promising pockets of policy. We agreed for joint industry, government and private sector gatherings in the next three months to align understandings, identify gaps, and move the policy forward. A piecemeal approach won’t suffice – a comprehensive policy addressing all topics is needed. The electric vehicle policy is great but other areas need development too. Working together on an inclusive policy is our commitment.

What recommendations do you have for the automotive policy issue in Ethiopia, and do you have a model country that Ethiopia could consider?

South Africa is a good policy example for Ethiopia. South Africa banned used car imports early on to create a local market. But they realized their market was too small to sustain automakers, so they introduced export incentives to increase vehicle production and exports.

Egypt has almost copied South Africa’s automotive policy, although different countries adopt good examples while considering their own circumstances.

What is your opinion on the decision by Ethiopia’s Ministry of Transport and Logistics to temporarily halt imports of Chinese-made Volkswagen cars into the country?

We asked for support because personnel in Ethiopia are not trained to service these electric vehicles, which require high voltage technician training. There are also no software updates for the vehicles here. We want to train technicians in Ethiopia and officially release our own European-made vehicles to ensure quality service and provide software updates. This car +built with Chinese software.

What would happen to the Chinese-imported Volkswagen cars if any glitches were found in some of them?

If glitches happen, I say disconnect the car and only open the bonnet. We have not officially released these vehicles, so cannot support them. We are working to officially release our European production with trained personnel to provide the Volkswagen quality service we are known for.

As vehicle manufacturers are transitioning from fuel to electric, what are Volkswagen’s plans regarding electric car production?

African countries are moving slower than other regions in adopting electric vehicles due to lacking policies and market sizes. I do not see many African electric vehicle manufacturers before 2035.

It is not only assembly, but also localization and supply. And I don’t see many policies encouraging that to meet the huge growth demand. Countries need to grow demand now through import policies, charging infrastructure, and policies supportive of electrification.

We are lobbying many countries. For instance, though a small market, Mauritius is moving fast. Others include Rwanda Cape Verde, and Kenya. It starts with imports and then demand. It needs growth and time in terms of EVs. 

How is Volkswagen dealing with the current global issue of carbon emissions?

As a group, Volkswagen aims to be carbon neutral by 2050 globally and in our production processes by 2030. We will produce carbon neutral vehicles for Europe where combustion engine cars will be banned after 2035.

In Africa, many countries still lack strict emission standards. We are first working to increase emission standards for combustion engine vehicles to reduce CO2 before transitioning to electric vehicles.

If VW expands to East Africa, like Ethiopia, and plans to export to other African countries due to the limited size of the Ethiopian market, what is your plan regarding the AfCFTA?

When the AfCFTA is fully implemented, I see southern, eastern, western and northern African hubs emerging to supply the entire continent. Regional hubs will make it easier for countries to cooperate and find spaces in the value chain.

We will advise countries to facilitate multilateral agreements to realize regional hubs.

Does VW consider the value chain across the Horn of Africa region, such as having one production hub in the region or various assembly plants in the region?

We must determine which countries want to participate- for components, raw materials or vehicle assembly. It’s what we currently try to figure out to help countries find a space in the automotive value chain.

The price of vehicles in Ethiopia is currently quite expensive, which remains a challenge. Do you believe that the price of vehicles would become more affordable if VW were to establish a manufacturing assembly in Ethiopia?

Localization will help lower costs through reduced logistics expenses and attracting suppliers – but countries need to scale by at least five-digit number of vehicles produced annually.

Does Ethiopia fit this minimum requirement?

Currently, no. That’s why I’m saying, it must be step-by-step growth. Together, we must increase new car demand. How can we increase volume in this country and how can we trade amongst other countries? How can we incentivize exports to get to this number and get to the suppliers together with the AAA? We are also looking into existing supply infrastructure in Africa.

Most likely, the entry is first about aftermarket parts and you look at something like filters. But we see very interesting examples in some countries that can be scaled or where we can encourage African investors.

So, as I said, it is the economy of scale. We must work on having a policy for the industry to come in, not only Volkswagen but also other manufacturers. Get an increase in new car demand and then slowly localize more and more parts.

Can you provide information on Volkswagen’s financing scheme and any agreements in place with banks to ensure affordability for Ethiopian customers?

As I said, we do not even have an automotive industry policy. So, there is no basis on which I could negotiate with any bank in Ethiopia to help us finance. Because we are not sure what the environment looks like. The first important part is getting the policy right.

Has VW started communication with any foreign banks regarding financing schemes for Ethiopian customers?

No, as of now, we have not.

Can you provide information on when VW plans to establish an assembly plant in Ethiopia?

It depends on how the policy is progressing and on how other countries move because there are other countries moving fast. And we are not a charity, we are a business. So we do not want to rip off Africa; that is definitely not the plan. But we are making business and profit.

Is Volkswagen comparing Ethiopia with other regional states when considering where to establish their company?

Definitely, yeah. You are competing. We were interested in Ethiopia and have signed a MoU, but I think the COVID virus stopped lots of these negotiations because we could not travel and continue the discussion in specific condition. It was also due to the unrest in Northern Ethiopia. So, we need a politically stable environment and the rule of law in countries to operate. I am not sure whether it has entirely stopped or not, but with the Pretoria agreement, I think there is a condition where we can carry on the discussions.

Having visited some parts of Addis Ababa and seeing some of the transport schemes, could you tell us some of your recommendations about the type of transport Ethiopia should adopt or follow as a means of easy transport mechanism?

I think the public transport system is a huge opportunity and a good point because of the low car density due to the high prices of new cars. One thing where you could focus on is mobility solution because there is a huge need for public transport.

It is a good space for the Ethiopian automotive policy to move beyond individual car sales and into mobility transport. What is really important for the industry for us to understand is where does Ethiopia see itself? Because for the few days where we were here, I see some contradictions, but I would rather keep that high-level meeting from observation in the different talks we had.

If Ethiopia and other regional countries ratify and implement the AfCFTA agreements, the policies across the countries will be similar, at least in the tax level. In this case, why is VW entering agreements with all the countries, when an individual country’s policy will be irrelevant?

We want to move faster in a way to preempt what the AfCFTA will do anyway, but I see that full implementation in almost all countries will take probably 10 to 15 years because it is not only about the automotive industry. Its different sectors. I just do not want to wait 10 to 15 years. So, that is why we are encouraging some countries where we see potential to move faster

Which Volkswagen model(s) are being considered for the Horn of Africa market?

In my final vision, we consider all the models, not only for the Horn of Africa but a variety of models produced in different African locations for Africa.

Do you see any potential partners or companies in Ethiopia that Volkswagen could collaborate with?

That would depend on what we are going to do. So, if we do trucks and buses, then it is a different story, as if we do passenger cars. If we do a mobility solution, it will be another story. So, first, we need to have a policy and figure out what we are going to do, and then we will find partners.

Can you provide information on when Volkswagen plans to make a decision on the type of factory they will establish in Ethiopia?

The business always starts with assembly. When we started in China, we began with assembly because you need to associate to increase the initial demand, and then you can grow the market. Then you attract suppliers and come with a higher degree of local content.

So, currently, we haven’t made any decision for Ethiopia. Other countries are moving faster, but we see a huge potential in Ethiopia. That’s why we are here, and that’s why we want to accelerate and help with the political framework to be put in place when it comes to the policy. Once we have taken the necessary steps, then we can discuss and decide further.

[speaker]
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