About the authors:
africon GmbH is a Germany based consulting companies, supporting companies from all over the world to expand their business in Africa. With representations in Nigeria, Kenya and Tanzania, as well as a network of partners across the country, we have over the past years worked on more than 30 projects in the automotive market across Africa. Much of the automotive data noted in this article was gathered locally in African countries during africon’s research projects.
1. Africa rising: why Nigeria and Kenya?
Over the past two decades, many countries in Africa have recorded significant economic growth and development. Not too long ago, the continent’s image was heavily influenced by poverty, violence and hunger. This is now increasingly changing. More and more actors globally are noticing opportunities on the continent – from national governments promoting Africa initiatives, to companies placing an increasing emphasis on the continent.
Much of this attention can be attributed to larger macroeconomic trends. Africa’s population is one of the fastest growing in the world. Every year, more and more people are entering the labour force[1]. Though this development poses significant risks in terms of the need for job creation, it also drives the growth of an emerging middle class.
In the automotive space particularly, the continent has registered an increasing interest from global actors over the past years. As the sector is under pressure in many parts of the world due to peaking vehicle fleets and technological disruptions, Africa is one of the last regions with ample room for growth of the “traditional” automotive aftermarket. Motorisation rates are still low, but the number of vehicles on the road in many countries is rising, driven by a growing urban middle class. Many of these vehicles are also relatively old, requiring larger maintenance efforts. Electric vehicles are in large parts unlikely to gain significant market shares over the short to medium term, mainly due to infrastructural constraints.
Nigeria and Kenya are two particularly interesting countries in this regard. Both have from a global point of view relatively low income levels with vast opportunities for growth. Both are in Sub Sahara Africa, which for many international aftermarket companies is the last underexplored market. Both are home to the largest automotive aftermarkets in their respective regions of West and East Africa. Despite these superficial similarities however, both countries’ aftermarkets are structured very differently, are driven by different dynamics and generally require international aftermarket firms to act very differently. In the following, this paper will elaborate how and why.
2. The bigger picture: macroeconomics
From a macroeconomic point of view, Nigeria is often referred to as the “giant of Africa”. With more than 200 million inhabitants and a gross domestic product of roughly $450 billion, it dwarfs much of the rest of the continent. Even on a global scale, only 6 countries have more inhabitants. Kenya on the other side “only” has a population of approximately 50 million people, a bit more than Spain. Its GDP is also much smaller than that of Nigeria, currently standing at approx. $96 billion.
However, the picture reverses when looking at dynamism. Since 2010, Kenya has rarely seen years with annual economic growth of less than 5%. Nigeria on the other hand only emerged from recession in 2016. Since then, growth has not exceeded 2.5% - though growth prior to the Corona pandemic had increased every year since 2016. Overall, Nigeria somewhat lives of its sheer size and large market, while the regulatory environment is still very challenging. The country currently ranks 131st out of 190 on the “Ease of Doing Business”. Kenya’s bet on reform and regional integration has helped it perform significantly better. It ranks currently ranks 56th on the “Ease of Doing Business”, one of the best in Africa and higher than India or Mexico[3]. The “East African Community”, of which Kenya is a member, is widely regarded as one of the most integrated economic blocks on the continent.
3. The automotive aftermarket: Fleets
In terms of the pure number of vehicles on the road in both countries, Nigeria once again dwarfs Kenya. With a whooping roughly 12 million vehicles spread across Lagos, Abuja and various other larger cities, Nigeria’s fleet is second to none on the continent. “Only” slightly less than 2 million vehicles can be found on Kenyan streets, most of them in Nairobi and Mombasa. In both cases, Asian brands, particularly Toyota, dominate the passenger vehicle segment. However, while the Toyotas in Nigeria are largely used right-hand-drives from the United States, Kenya as a left-hand-drive country is one of the leading buyers of used vehicles from Japan – including the Toyota brand. Consequently, model names and many part numbers in both countries differ. Also due to the large share of used vehicle imports, the average age of them is quite high in both countries. In Kenya for example, more than 60% of all vehicles are older than 15 years.
In terms of new technologies, electric drive vehicles are an absolute exception in both countries. In Nigeria in particular, power supply is too unreliable. Large oil reserves and a huge refinery project might well further complicate a short-medium-term take-off in this electric segment. Kenya has better power supply, but extremely low new passenger vehicle sales have so far been one of the hurdles. A technology that is already becoming more widespread in both countries is ride sharing: platforms like Uber have rolled out in both countries and increasingly became a common sight.
4. The aftermarket parts market
Owing to the far larger fleet, the parts market in Nigeria is far larger than that of Kenya. Though precise numbers are difficult to come by, the Nigerian parts market overall might stand at approx. $4 billion per year. In Kenya, the total might stand at around $500 million. In both countries, the (reported) imports of parts have increased by an average of 5% per year between 2008 and 2018 [4]. However, these numbers do not tell the full story.
Owing in parts to weaker governance, fakes are a massive problem in most if not all product categories in Nigeria, for some parts accounting for 70% and more of the market. The cause of the problem here are manifold: customs and standards authority lack resources and skills. Corruption is further complicating matters. Along the distribution chain, many resellers and mechanics equally lack skills and resources, as well as – in some parts – the will to tackle the problem. Parts manufacturers themselves have too few “boots on the ground”. On consumer level, many individuals lack the necessary “cash in hand” to buy more expensive, higher quality parts. As elsewhere in the world, few private individuals possess the skills to identify especially better made fakes.
In Kenya, like in most other developing countries, fake parts are also still a problem, though to a different extent compared to Nigeria. In service parts, the fake share stands at around 30%. Various factors likely contribute to this better picture, stronger institutions like customs and the Kenya Bureau of Standards (KEBS) are some of them.
With stronger institutions in Kenya also comes a more formal distribution structure. Some local factories are producing parts like filters domestically. Majority of parts are however imported, mostly by smaller, formal companies, the larger of which having turnovers of a few million dollars or several hundreds of thousands of dollars. Owed to the integration of the above mentioned East African Community, some of these companies also directly (with own subsidiaries) or indirectly (through other resellers/customer requests) supply their products to neighbouring countries such as Uganda and eventually also Rwanda. This makes Kenya an interesting regional hub for aftermarket companies. Kenya therein benefits from the fact that some of its neighbours lack access to seaports and have market sizes which are too small to be efficiently supplied with full container loads by individual international suppliers. Even Kenyan importers themselves often buy mixed containers from Dubai based trading companies. In total, around 25% of all reported Kenyan parts imports come from Dubai. This makes Dubai the second most important supplier of parts to Kenya after China. Out of the top 5 supplier countries, 2 are European (Germany & the United Kingdom).
Distribution structures in Nigeria are somewhat chaotic to an outsider’s eye. There are little to no local producers, parts are (almost) exclusively imported. These imports come from different sources: the leading one are Chinese producers and traders, some come from traders in the Middle East, some from global manufacturers directly and European traders. Due to the large number of “American” vehicles on the road, the USA also account for around a fifth of parts imports. Independent of their source, around 80-90% of these imports then in one way or the other pass though one of the large (physical) markets like Trade Fair market in Lagos and/or Onitsha Market in Eastern Nigeria. In some instances, different traders “share” full container loads, in other parts are smuggled in for example used vehicles. Some traders in these markets are likely the largest parts traders in the country yet identifying the sizable ones in the specific product categories is no easy feat. Compliance and perception challenges additionally make it difficult for Western suppliers to directly engage with these firms. Relatively few larger formal IAM parts traders exist in Nigeria – and those that do exist, are mostly also very active on these markets.
One theme that both markets have in common is a small but growing e-commerce segment: with a quickly rising share of people with internet access, more suppliers are bringing their offering online. Though challenges remain, e-commerce might well play a more significant role over the medium term.
A challenge that does not exist in Kenya, but at times poses one of the most significant challenges to firms operating in Nigeria, is the scarcity of foreign currency for imports. Over the past 1-2 years, this scarcity has improved. Though most recently it was a severe problem during Nigeria’s recession: a mix of declining export earnings (oil), as well as a “debateable” policy on the valuation of Nigeria’s currency, the Naira, had led to restricted access to any foreign currency in Nigeria. This effectively delayed or halted import activities for many local companies.
5. Way ahead for the countries
Overall, Nigeria presents itself as the far larger opportunity in absolute numbers. Due to its size, opportunities exist not only in the large, very price sensitive market, but also in a relatively smaller, yet still significant higher value segment. The challenge here is to identify the right target segments, along with the right channels to address them. For the foreseeable future however, the regulatory environment is going to remain challenging and partially heavy market fluctuations will continue to appear.
Kenya is the significantly smaller market. However, the market environment is generally more transparent and stable. Fakes are a smaller problem and market fluctuations – probably including Covid – are generally less dramatic in its business implications. With a continuously expanding economy, the aftermarket is likely to keep growing over the medium term. Additional opportunities are likely to arise from rising neighbouring countries – many of which are growing at least as quickly as Kenya.
Both countries certainly do offer opportunities. For many global players in the aftermarket, the key first step to realising these is to decide to start engaging with these markets more actively.
[1] See for example: The Economist (2020): https://www.economist.com/special-report/2020/03/26/africas-population-will-double-by-2050
[2] Worldbank (2019)
[3] World Bank : Ease of Doing Business Index (2020)
[4] International Trade Statistics (2020)
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- 2021