Nigeria’s auto-import tariff reversal threatens the local auto industry
The dream of mass-market Nigeria-made cars is well on its way to the gallows. On November 18, 2020, the Nigerian government approved a reversal of import duties on tractors from 35% to 10%; reduction of duties on motor vehicles for the transportation of goods from 35% to 10%; and reduction of levies on motor vehicles for the transportation of persons from 35% to 5%.
This is a complete turnaround from the existing directive on auto import tariffs which was announced exactly the same time seven years ago to encourage local auto production.
At the time, the government announced the increase of import tariffs on imported new and used vehicles as well as imported new tyres. A fully built car was to be subject to combined duties and levies of 70% of the value (previously 22%).
Fully built commercial vehicles saw a tariff increase from 10 to 35%. For used cars, the same duty applies, based on a 10-year (for cars) or 15-year depreciation period, with a minimum customs value of 30% of the value of the new vehicle equivalent.
Conversely, local automotive plants can import completely knocked down (CKD) vehicles for assembly free of duties and semi-knocked down (SKD) vehicles at 5%.
This move has attracted new investment into the auto industry in Nigeria, with the likes of Innoson Vehicle Motors increasing capacity and ramping up job creation of up to 7,000 workers.
The local auto manufacturing space has also seen couple of other new entrants since then. As of the end of 2020, there were at least 58 auto assembly companies in the country, according to this LIST by the Bureau of Public Procurement.
The new turn
So, seven years down the lane, what has changed? Well, the government said the decision is intended “to address the socio-economic problems arising from the COVID-19 pandemic and the recent hikes in the pump price of petrol and electricity tariff”.
No one is sure about this but the challenge imposed by the high tariff in imported cars included an increase in smuggling activities through the land borders from the Benin Republic. Car importers have also had to divert their cargo through the Benin port, which meant the Nigerian government lost duty revenue from auto imports.
Meanwhile, the economy had worsened since then, with the speed limit of economic growth below 2% over the period, forcing a dramatic decline in demand for new but expensive locally assembled cars.
Now, the government is choosing between the crawling local auto industry and much-needed revenue from import duties. Cash is king, they say and the government is taking sides with the king.
The local automakers are crying foul already. Chief Executive of Innoson Vehicles Manufacturing Company Limited, IVM, Chief Innocent Chukwuma told Vanguard that the reversal of the auto import tariffs would effectively run the local automakers out of business.
“It is discouraging to hear that government is coming up with a policy that favours importation, rather than encouraging those making impact in the auto industry and the economy generally,” Chukwuma said.
However, it does appear the government has made up its mind on the cash, especially with auto-import estimated at over 1 million units, worth about $8 billion per annum; revenue from that import looks irresistible for a near-broke government.
Foreign automakers vote with their feet
This decision has far-reaching implications on foreign direct investment in the country, especially as it concerns auto manufacturing.
Recall that in 2019, auto giant Toyota expanded into West Africa and decided to set up an assembly plant in Ghana, instead of Nigeria where the bulk of its inventory would go to. So, even though more than 80 per cent of the demand for Toyota cars will come from Nigeria, the automaker settled for Ghana citing fear of policy inconsistency in Africa’s largest economy. This turnaround on import tariff by Nigeria government has now proved Toyota’s fears.
Like Toyota, other automakers have settled to expand into other countries on the continent, leaving giant of Africa behind. For instance, last week, Ford announced plans to invest $1B to expand its manufacturing presence in South Africa and adding 1,200 jobs over the coming years.