What will it take for Uganda’s Kiira EV to succeed where the Nyayo Pioneer failed?

Tuesday December 16 2014

The Kiira EV Smack built by students of

The Kiira EV Smack built by students of Makerere University’s Department of Engineering on display at the Kenyatta International Convention Centre in Nairobi Kenya. PHOTO | SALATON NJAU NATION MEDIA GROUP

By EDWARD SSEKALO

The business of making — and selling — cars ranks among the more complex industrial operations, with a capital-and labour-intensive value chain, a fiercely competitive market environment and an often tough regulatory climate to contend with.

This is the kind of market Uganda’s Kiira Motors Corporation (KMC) wants to enter. After successful tests of concepts designed by engineering students at Makerere University, KMC was set up as the platform through which the Kiira EV Smack hybrid car would get to commercial production. KMC’s vehicle production plant requires $350 million to set up and the projects’ promoters are confident the venture will put East Africa’s first locally-produced sedan on regional roads by mid 2018.

An attempt to mass produce a car that primarily serves private transport needs has been made before in East Africa— the Nyayo Pioneer in Kenya in 1986. That project failed — not a single vehicle was sold as the weight of lack of funds ensured its collapse by 1990.

Like the Nyayo Pioneer venture, the Kiira EV Project has attracted significant government interest, and has so far raised $70 million, the seed funding being provided by the Uganda government through Uganda Development Corporation, its investment arm and KMC’s sole owner for now.

But KMC’s manoeuvres suggest it wants some of the fundamentals handled differently: Kiira EV Smack was launched in Nairobi last month in a bid to attract investors. That Nairobi trip, the project managers say, brought on board people “speaking in less abstract terms” with regard to supporting the initiative, even if they remain tight-lipped about who exactly has expressed interest. Broadly, the idea is to nurture solid partnerships.

“The government may not be able to handle all capital requirements, but will link the project to partners for more funding,” Uganda’s Trade Minister Amelia Kyambadde told journalists in July this year. She also said the project is likely to bring jobs for youth, create an avenue for transforming raw materials and encourage a culture of innovation.

Yet beyond the rhetoric about such projects promoting industrialisation, and despite the promise of financial and technical partnerships to drive it forward, the reality, according to one industry expert, is that challenges such as energy and inadequate skills mean KMC could easily end up with such high costs of production that their cars would either be uncompetitive or unprofitable.

“We are talking about electricity that is needed to do foundry works, specialised skills to do trims; you need someone who will do a clean stitch,” said Philip Sempijja who has several years’ experience with the Mercedes Benz franchise in Uganda. “Even if you bring in the right machinery, before you train the workforce it will be useless”.

Way out

Paul Musasizi, the Kiira EV project’s head of innovation and engineering, acknowledged there are capacity and infrastructure issues, but said training will address the former while the various energy projects in the pipeline, complemented by preferential energy tariffs for KMC, should address the latter.

There are also market and industry dynamics to contend with. The Kiira EV Project targets its first product as a D-segment vehicle, a sedan built for high ranking government official and corporate East Africa’s upper crust whose employers buy them brand new cars and can afford the $20,000 price tag the Kiira EV Smack is expected to retail at.

Data from the Kenya Motor Industry, the Kenyan vehicle assemblers lobby, however, shows new vehicle sales across the EAC region last year were 14,542 units, with buses, pick-ups, and trucks comprising most of the demand. A representative at Motorcare, Nissan’s franchise holder in Uganda, also indicated pick-ups were their best selling new vehicle.

KMC says it hopes to ride on the proposition of affordability — the other brand new cars in the segment cost between $25,000 and $30,000 — to chip away at the market share of the likes of Toyota. Even then, it is a relatively small market; about 20,000 new cars are bought in the EAC, KMC’s primary target market, and it would take some very aggressive marketing before the venture can sell anywhere near the optimum number of units for it to breakthrough.

KMC hopes to start by producing 300 cars per month, later rising to 830 units. It must sell almost all because as Mr Musasizi noted, an auto maker has to sell at least 7,000 units a year in order for it to be meaningful.

He was upbeat, though, about an even bigger market becoming available. “The signing of the Tripartite Free Trade Area agreement was very important. With SADC and Comesa we have a wider catchment area.”

However, getting partner states to sign free trade pacts is the easy part. The suspension of the common external tariff by Burundi, Rwanda, Uganda and Tanzania in the past has forced buses and trucks assembled in Kenya to compete for the regional market with imported options.

If similar treatment were meted out to KMC’s products, it would choke the venture, given that Uganda’s domestic market for new vehicles—a paltry 4,000—is too small to sustain the Kiira project. In October, The EastAfrican reported that Kenya had renewed the push to have its neighbours apply EAC tariffs ratified in 2009 in order to support its automotive industry.

The need for unhindered market access became more pertinent with the launch by Kenya of the Mobius II, low-cost car, with an eye on the East African rural transport market. General Motors East Africa, another Kenyan assembler that KMC would do well to understudy, is familiar with the hurdles that come with trying to break into the regional market.

Its frustrations have ranged from the arbitrary application of tax rules to EAC rules of origin, with Tanzania denying entry to its products in the past purportedly because they did not meet the 35 per cent threshold for value addition that would qualify the company’s products for duty exemption.

That is a challenge Kiira EV Smack is likely to have to confront. Although KMC has been touted as an original equipment manufacturer (OEM), Mr Musasizi admitted that leveraging the existing parts manufacturers is the only way to fast track the project. If that turns out to be the case, only a fraction of the car’s production will be local — initially focusing on aspects like body work and the interior trim — which would make a lot of business sense and even be consonant with global industry practice, but possibly fall short of basic EAC Customs Union requirements.

Mr Musasizi also hopes the government, will take special interest in regulating the kind of vehicles coming into the country.

“If we are to allow in cars that are over eight years then let’s do so with disincentives, so that they don’t distort the market,” he said.

Incentives

“We will need other incentives from our governments, for example, we need a holiday on VAT. If you are selling a few cars and are paying 18 per cent VAT you may not be able to move,” he added.

The seemingly countless hurdles however, will not deter KMC from pursuing a home-grown automotive industry for Uganda, with benefits that go beyond the creation of jobs. There is the “heritage value” the industry Mr Musasizi said manufacturing cars would give the country but most importantly, it would spur the establishment of an industrial base around the automotive industry’s value chain.

“Spark plugs [manufacturers] need to be here, not only for our cars but the other cars as well, tyre makers… [fone manufacturer attracts others],” he said.

Sceptics remain unmoved, however, believing the Kiira MV project, complete with its government stimulus, questionable viability and a potentially harsh operating environment, has the perfect ingredients to become another white elephant. Others have made the argument that Uganda should have focused on producing commercial vehicles like buses, trucks and tractors.

“There isn’t a single car that can meet the needs of everyone. It goes back to who your target is,” Mr Musasizi said. “Our long term plan is to have an end-to-end product portfolio that caters for different classes of vehicles,” he added saying that a bus is under development and should be ready by early next year.

As South Africa’s example on the continent proves, there are rewards in making the automotive industry work: In 2013 it contributed about seven per cent of the country’s GDP and the myriad franchises operating plants in the Eastern Cape and Gauteng Provinces accounted for more than 40,000 employees.

KMC’s promoters are adamant that Uganda can achieve something similar.