SUMMARY:Africa is likely to be the next growth frontier in the automotive industry, and automakers are transforming North Africa into the world's newest car-manufacturing cluster. Companies including Volkswagen, Renault, Peugeot, Hyundai and Toyota have invested billions in Africa in recent years. Given the history of political instability in the region, there are risks of doing business in Africa, but local governments are eager to attract foreign investment. Government policies encourage local production rather using imports to serve the growing African market. Adding to their sources of production also allows companies to configure their global supply chains to address trade barriers.

QUESTIONS:

1. Why is Africa becoming an important production base in the automotive industry?
2. How are African governments encouraging foreign direct investment in the automotive industry?
3. What are the advantages and disadvantages for an automobile company that builds a production facility in Africa?

The article is below

Car Makers Turning North Africa into Auto Hub; Seeing high potential for growth, auto makers are transforming North Africa into a regional manufacturing center

BERLIN--Auto manufacturers are betting on Africa as the next growth frontier, and they're building a new production hub to power it.

In a rare industrialization success story for the continent, some of the largest car makers have been transforming North Africa into the world's newest car-manufacturing cluster. Volkswagen AG, Renault SA, Peugeot SA, Hyundai Motor Co. and Toyota Motor Corp. have invested billions in Africa in recent years, drawn by growth prospects that maturer auto markets no longer offer. New-car sales in the U.S., China and Europe are ebbing after a bumper decade.

The new car-building cluster, largely meant to serve local and regional demand, could become the model for companies rethinking their global supply chains as trade barriers rise around the world, largely spurred by President Trump's policies.

While still a small market, the Middle East and Africa are expected to have 90 million vehicles on the road by 2040, up from 59 million today, according to OPEC forecasts.

Morocco has already overtaken South Africa as the continent's automotive hub and is soon expected to produce more cars a year than Italy. The kingdom is also becoming a major supplier for European auto factories, including Ford Motor Co.'s high-tech plant in Valencia, Spain, which imports car seats, interiors, wiring and other components from Morocco.

Auto makers' investments in the region are expanding partly because several African nations have begun shunning auto imports to attract production capacity.

Since last year, Algeria has required nearly all new cars sold in the country to be produced there. That decision helped convince Volkswagen to build a new assembly plant in Relizane, Algeria, which began churning out cars from several of its volume brands there, including the Caddy small delivery van, popular with tradesmen, and the Polo compact. SEAT, the company's Spanish unit, is producing the Ibiza compact sedan and the Arona, a compact sport-utility vehicle, while Czech subsidiary Skoda makes its popular Octavia sedan at the Relizane plant.

In Morocco, Renault, which has a more-than 40% market share in the region, has built two assembly plants in the past five years that produce more than 200,000 cars a year. Peugeot, on a major expansion drive, is building a plant in Morocco that is set to go online later this year.

Volkswagen is among the most active investors in Africa's budding automotive industry, having also opened factories in Kenya and Rwanda. It recently announced plans to build assembly plants in Nigeria and Ghana as well. Local governments eager to attract foreign investment--in part to pay off infrastructure loans from China--are adopting business-friendly policies such as relaxing currency controls, creating free-trade zones and providing financial incentives. Some are also building or expanding roads, rail links and deep sea ports.

The International Monetary Fund in a May report praised policy makers in Northern Africa and the Middle East for pursuing market reforms after the Arab Spring uprisings, seeking ways to end decades of economic stagnation.

Car makers are aware of the risks of doing business in Africa, where combinations of corruption, economic instability, terrorism or political turbulence run high in many countries. Past forays into foreign markets such as South America, Russia and India once seemed promising but have largely drained the auto industry's finances. Mass youth unemployment across the Maghreb has fueled emigration, crime and Islamist extremism, all problems that widening economic opportunity could alleviate. European governments, meanwhile, see stability and prosperity in the region as key to their own security.

"Of course, there are risks," says Erdem Kizildere, an executive at Volkswagen's SEAT brand and head of the company's Algerian plant, which is expected to assemble 50,000 cars this year. "But what we see is the potential of the region. It is a very young market that is growing more industrial everyday."

Foreign direct investment in North Africa rose from just under $5 billion in 2011 to $12 billion in 2016, largely driven by auto makers' investment, according to Frost &Sullivan, an industry research group.

"The situation on the continent is stabilizing," said Thomas Schfer, a Volkswagen official, as he inked deals with Ghana and Nigeria in August to build assembly plants in those countries in exchange for government assurances to protect investment.

"The last hurdles blocking development of a local auto industry are being cleared. This is a huge opportunity for us."