10 (ten) Strategic management questions.

“This is not an Algerian production, because more than 90% of the assembled kits are imported for the cars assembly plants… An integration rate of at least 40% is required in order to be able to speak truly of domestic production“: Ahmed Ouyahia, Prime Minister at the inauguration of the 2018 International Fair of Algiers. There is a real cacophony after the Prime Minister announced in April 2018 a production for 2020 of 250,000 units and being contradicted a week later by the Department of Industry going for 500,000 units. Hence the problematic of the profitability of car assembly plants in Algeria is posed and cannot be swept away that easily.

The purpose of this contribution is not to enter polemics but to objectively raise the issue of the future profitability of car-assembly plants in Algeria, which must be part of a real economic strategy.

The World’s Cars market is structured as an oligopolistic market and it is in perpetual change.   

What is the future when according to some analysts, the size of the Chinese car market, not to mention India, if one remains in the current consumption model, will be multiplied by ten by 2030 horizon.  Experts from the International Monetary Fund (IMF) anticipated that in 2050, a 2.9 billion global park of passenger cars; this vision starting from the assumption of an increase in household income especially in emerging countries such as Russia, India or China representing markets with a high potential for the automotive industry. Thus, about 77,830,000 of cars should have been sold in 2017, compared to 74,380,000 in 2016 according to international estimates. Future technology prospects will be considering the new ecological challenge, with hybrid and electric cars. Therefore, a new model of energy consumption that is slowly taking place, the years ahead foreshadowing major geo-strategic and economic upheavals, China being on the way to becoming the world leader of all categories clean cars thus taking advantage of the “green” stimulus plans of the United States, Europe and Japan. In the short term, we are moving towards optimising the operation of petrol and diesel engines, with a reduction of 20 to 30% of their consumption, because of electric cars, the lithium resources for the famous lithium-ion batteries are limited and that electric motors require magnets that are also manufactured with rare metals, a market of 70/80 million vehicles per year that cannot absorb large volumes of electric cars and that for another ten years, the conventional engines should remain the majority. To avoid this constraint, nanotechnology can revolutionize the storage of energy with in parallel exploring the Flex Fuel and hydrogen.

In the near future, with the loss of competitiveness of some countries to the benefit of emerging countries, we should be witnessing the reorganization of world production of vehicles in relation to the levels of training in the factories and research carried out by the motor companies. Obviously, factories that will maintain themselves in each country will be the most competitive; the priorities for the leaders of car manufacturers will be:

  • ·         Technology and Innovation, (Robotization,) especially in Japan whose labor cost is about ten times higher than that of China,
  • ·         Ethics and corporate governance,
  • ·         Collaborative approach,
  • ·         Better strategies for success,
  • ·         Environment and globalization.  

Algeria, witnessing some real confusion as to which coherent economic policy must be opted for in order to avoid in the long run any failures of manufacturers.

Then 10 (ten) questions come to mind and these are as follows:

·         First, what will it be with the inevitable depletion of all oil revenues in terms of economic profitability on the Algerians’ purchasing power?  

·         Second:  The Customs statistics as at end of 2017 show that imports of all entrants for cars assembly plants approached the $2 billion mark for about five manufacturers whose majority did not surpass 20,000 units/year or a total of about 100,000 units.  If it is hypothesized that the rate of integration varies between 15/20% between 2018 and 2020 and different manufacturers produce 500,000 units/year as announced by the Ministry of industry, the money outflow could be expected to reach $10 billion / year if not more with a significant impact on foreign reserves while all import restraint measures according to the former Minister of Commerce could save only $1.5 billion.

·         Third:  What will the cashflow balance of the assembly plants projected? Especially since many of the inputs will be all imported, including costs of transportation, training adapted to new technologies and wages, not to mention the lack of state fiscal revenues and bank earnings due to exemptions that currently have not allowed the price drop.

·         Fourth: International standards, for capacity threshold to the world is a range between 200,000 and 300,000/year for individual cars, about 100,000 and more units/year for trucks/buses and scalable with large concentrations since 2009. Analytical accounting distinguishes differing costs pinpointing to a break-even point for a competitive cost compared to international standards and the new mutations in this sector.

·         Fifth: What is the situation of subcontracting in Algeria to achieve an acceptable rate of integration that can reduce costs? By comparison with the neighbouring countries where the rate of integration is higher, experts stressed that in Tunisia, the number of subcontracting companies represents 20% of industrial enterprises (1,000 subcontracting companies among 5,000 industrial enterprises), while in Morocco the rate is 28% (2,000 outsourcing companies on 7,000 industrial companies). And that this sector of the industry currently accounts for only 6% of GDP, while the requirements for industrial equipment and other industrial components and spare parts are globally $25 billion. The number of sub-contractors listed in Algeria is currently insignificant and dominated by small enterprises (SMEs) with less than 10 employees and at about 9000, or 1%, activate for the industrial sector, the remainder operating in the commercial sector, distribution, services, building and infrastructure works.

·         Sixth:  For a coherent industrial policy vision, considering the strong international competition levels and the new technological changes, should not we have started by the selection of two or three manufacturers with foreign partnership, a clear definition of the required specifications and allow them, depending on their capacity, some tax and financial advantages. So, for an integration rate varying from 0 to 10%, the benefits must be limited to the maximum and having to fix them a production threshold in order to avoid that during this period, certain operators are tempted by an rentier’s annuity logic and reach to more than 30,000/50,000 units/year without integration, increasing the imports invoice of all required components.  

·         Seventh: Are we currently going for cars production for the local market when any strategic management objective would not but be regional and / or global to guarantee the financial profitability? How, do therefore, these micro-units often oriented towards the internal market, achieve the expected integration rate of 40/50% after about five years risking closure for failure to face international competition after having seen all the benefits from subsidies supported by the treasury, hence the importance of strict regulation? 

·         Eighth: An industrial policy without knowledge control is inevitably doomed to failure with a waste of financial resources. Also, the industry automobile having capitalized through digital programming towers eliminating intermediate jobs; what is the number of direct and indirect jobs created, referring to the necessity of qualification whilst considering the latest technologies as applied today to the automotive industry? And what will be the cost and the distribution network strategy to adapt to these technological changes?

·         Ninth: These cars, will they be gasoline, diesel, GPLC, Bupro, hybrid or solar driven, referring to the policy of generalized fuel subsidies that distorts the optimal allocation of resources? Between 2015 and 2016, the distribution of fuels was gasoline representing 65% and diesel 34%, whilst the use of GPLC being marginal. In an audit under my direction “For a new fuel policy in a competitive system” commissioned by the Ministry of Energy in 2007/2008 and assisted by senior executives of SONATRACH’s experts and Ernst Young, where one volume was devoted to subsidies and the other to the promotion of the GPLC and Bupro as linked at the time to a new transport policy. I had made a presentation on this subject with a broad debate before the members of the Economic Committee of the National People’s Assembly in 2007.

·         Tenth: How to penetrate the world market in the future with the rule of 49/51%; no reputable foreign firm would accept this rigid rule in the context of global exports and thus with the risk that Algeria will bear all the extra costs leading to debts especially since Algeria risks to know budget tensions between 2018 and 2020

In conclusion, all car assembly plants in Algeria must register within the internationalised sector to avoid tensions on foreign reserves at 2019/2020 horizon. And to test the true profitability of the car assembly units, in addition to all other products, subsidies of all kinds granted must be withdrawn, in order to prevent this from being a transfer of Indirect currencies at the expense. It is not a question of being against or for setting up a mechanical industry, but the latter must be carried out with coherence, pragmatism and realism.