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Ghana 1994: Like Cuba for Japanese compact cars. “Do they build any cars here?”

How it All Started

The citizens of Cuba are well known for maintaining the late 1950s American sedans and convertibles that dot their roads. In the early 1960s, the island nation banned the import of foreign vehicles, leaving late '50s Fords, Oldsmobiles, Chevrolets, and Plymouths as the dominant era and brands of cars on the streets of Havana.

It had been over a decade since I had seen so many late '70s Datsun B210 sedans, Toyota Corona and Subaru DL wagons, and Mazda GLC sport hatchbacks. They all were here as taxis, driving down the crowded six-lane road past the massive Kaneshie market off Winneba Road in Accra, the capital city of Ghana. My taxi was a four-door Datsun B210 with the oil light on. A common practice among taxi drivers in Ghana to save fuel was for the driver to shut off the car’s engine every time he came to a stop at a red light or in the heavy traffic, and restart the motor once the light turned green or the heavy traffic allowed him to proceed. I had owned a rust-covered turquoise-blue 1976 version of the same model back in high school. It was the first car I purchased on my own, with money I earned from working at D.B. Kaplan’s restaurant in downtown Chicago. I remembered every detail of that Datsun. The ride that afternoon was like a trip back in time.

During the summer of 1994, between the first and second year of my MBA program at the University of Michigan Ross School of Business, I participated in the school’s African Business Development Corps (Africa Corps) summer internship program. I worked as a business strategy consultant for the government of Ghana. My assignment was to develop business plans for several of the government-owned businesses that were in process of being privatized, i.e., converted from government-owned companies to investor-owned businesses. This summer internship was the first time that I, or anyone in my immediate family, had visited the African continent. For the duration of my three-month assignment in Accra, these old Japanese compact car-based taxis were my primary mode of transportation. Day after day I would ride to and from work in these “should have been scrapped” vehicles that were enduring severe use as taxis and being held together by the ingenuity of the African taxi drivers and roadside mechanics. Sometimes, the driver and mechanic were the same person. The mechanics displayed the same level of ingenuity and industriousness as a Cuban owner of a black-and-red 1958 Oldsmobile Super 88 convertible, struggling to keep his car running and on the road in Havana.

During the spring of that same year, and before traveling to Ghana for my extended stay, I also had the opportunity to make my first visit to Asia. I visited Hong Kong (three years before the United Kingdom returned control to China), mainland China, and Indonesia. During this visit, I had the opportunity to tour a Toyota pickup truck plant in Jakarta, Indonesia. After observing the ingenuity and industriousness of the Ghanaian taxi drivers and their mechanics, and thinking about the Toyota plant in Indonesia, I began to wonder out loud, “Do they build any cars here in Ghana?” I remember asking many of the taxi drivers, several of my local work colleagues, other professionals, and anyone else that I met, whether any cars were being built in the country. There were none. The locals and expats that I encountered who had any interest in the car business primarily saw the region as a ready market to import secondhand spare parts from the US or Europe, to service the all-imported cars on the road. It became apparent to me then that Ghana, the West Africa region, and the entire African continent had great potential for automobile manufacturing and other industrial endeavors.

I finished my project in late August, and it was time to return to Ann Arbor for the second year of my Michigan MBA program. My summer in Ghana left me with a love for Africa. Not just for the beautiful people, cultures, beaches, and landscapes in the typical tourist sense, but also a strong interest in Africa’s economic development. I left Accra with the deep desire to, at some point in my career, combine my automotive passion and the industry experience, that I was still acquiring at the time, with this new-found interest in emerging markets and Africa’s development. What if those ingenious and industrious taxi mechanics around Accra could direct their self-taught automotive skills towards the development of their economies and the improvement of their living standards?

Strong Auto Sector, Strong Economy

In the twenty-three years since my first experiences in Africa, when I first wondered if they built any cars there, I have had the opportunity to work with auto manufacturers all over the world, not only throughout the US and Europe, but also in China, India, Mexico, Brazil, and South Korea. Every automaker in every market wants the same thing: growth, market leadership, and profits. Their home countries want them to succeed as well. A thriving auto manufacturing sector is a reliable indicator of a strong economy. If you look at countries and regions that have developed a local automotive industry over the last 20-40 years, you will see a strong relationship between their industrialization success and the growth of their respective economies.

 As China developed its local auto industry, total vehicle production grew from 500 thousand units in 1990 to 24.5 million units in 2015, 49X (49 times the initial production). Nominal GDP (gross domestic product) grew from US $360 billion to US $10 trillion, 27X during the same time.

 As South Korea developed its local auto industry, total vehicle production grew from 123 thousand units in 1980 to 4.5 million units in 2015, 37X. Nominal GDP grew from US $68 billion to US $1.4 trillion, 21X, during the same period.

 As India developed its local auto industry, total vehicle production grew from 114 thousand units in 1980 to 4.1 million units, 36X, in 2015. Nominal GDP grew from US $190 billion to US $2 trillion, 11X, during the same period.

 As Brazil developed its local auto industry, total vehicle production grew from 416 thousand units in 1970, to a peak year of 3.7 million units, 9X, in 2013, then declining to 2.4 million in 2015 due to government and financial challenges. Nominal GDP grew from US $42 billion to US $2.4 trillion, 57X, during the same period prior to the 2015 local economic crisis.

By comparison, the two African countries that produced the largest number of vehicles in 2016 were South Africa, with 600 thousand units and a nominal GDP of US $295 billion; and Morocco, with 345 thousand units and a nominal GDP of US $101 billion. Given the above examples from Asia and Latin America, the potential for South Africa, Morocco, and other economies on the African continent to grow from automotive industrialization is significant.

Sources: Vehicle production-OICA, International Organization of Auto Manufacturers 2015; Nominal GDP-World Bank statistics; Number of vehicles on the road in the US-US Dept. of Energy; Number of vehicles on the road across the African continent-McKinsey & Company

The best way to capitalize on the African market potential is to create more potential local car buyers. The best way to create more local car buyers is to create opportunities to earn higher income levels. The best way to create higher income levels is to create more local entrepreneurs, local businesses, and local jobs. The best way to create more local entrepreneurs, local businesses, and local jobs is sustainable industrialization. If locally focused companies do not pursue this opportunity, foreign and multinational corporations will likely take over many of the high-margin opportunities in these markets. These multinational companies may not always prioritize what is best for the local region.

How Motoring Africa is Organized... and my Initial Premise

This book is organized into three sections. The fifteen chapters will flow from defining and making the case for industrialization, to presenting examples of automotive industrialization from other regions of the world, to the presentation of a proposed plan to sustainably industrialize automobile production on the African continent.

Part 1 – What, Whys, and How – will define the concept of industrialization in detail. I will discuss how industrializataion impacts the cost structure of a product, and how it reduces risks and improves the profit potential of a manufacturing enterprise. I also explain why industrial manufacturing creates more jobs and results in more lasting improvements to a nation’s productive capability, vs. other business sectors or approaches to economic development. This section makes the case for the automobile industry. A car is the most complex consumer product that an individual will purchase: highly technical, heavily regulated, and expensive to buy, operate and maintain. Countries that invest in developing the industrial capacity to create and manufacture motor vehicles will build businesses, create jobs, grow their economies, and generate skills and capabilities that are transferrable to multiple industries and sectors.

Part 1 will also cover the topic of sustainability, from both business longevity and environmental perspectives. How do countries and businesses industrialize auto production in a manner that results in companies that are profitable and able to sustain through economic cycles, foreign exchange fluctuations, increased competitive threats, and changes in consumer tastes? How do you industrialize auto production in a manner that yields a car parc–industry vernacular for the number of vehicles on the road in a market–with minimal negative impact on the environment? How do you industrialize automobile production with advanced manufacturing processes and supply chain networks that will have minimal negative impact on the environment? How do you create businesses that serve their local communities as well as serving the needs of their shareholders?

The largest of the recently developed and developing auto markets, specifically urban centers in China and India, are facing significant challenges due to traffic congestion and air quality. Is It wise to accelerate the introduction of more vehicles into a market only to force gridlock on the public, increase pollution, and have these vehicles sit parked and unused for 90% of the time? What if African markets and investors, looking to participate in the industrialization of automobile production, decided to leapfrog the historical practices and create a local auto industry where alternative propulsion systems (electric vehicles), advanced manufacturing tools and processes, shared vehicle usage, and ride sharing were part of the development of the industry at the outset, instead of retrofitting these advancements later?

Africa sustainably industrializing automobile production does not mean doing things exactly as in China. While China is the country and market most recently and most significantly transformed through the development of their automobile manufacturing and design capabilities, the industry has continued to evolve. Lower local wage rates, compared to developed nations, are not the only reason to invest in automotive industrialization. African nations must also adopt the latest manufacturing process technologies to optimize productivity and costs. Industry 4.0 tools, the internet of things (IoT) and increased data computational offerings have enabled the development of advanced manufacturing tools that have the potential to reduce capital investment and production costs, while improving product consistency and quality. Tools and technologies like additive manufacturing (also known as 3D printing), advanced robotics, product performance simulation, and manufacturing process simulation are driving product innovation and efficiency. Industrializing with these tools at the outset will provide African regions with the treble benefits of lower manufacturing and labor costs, optimal productivity, and proximity to growing markets.

When my British Airways flight first landed in Ghana for my summer 1994 project, the phone system throughout most of Accra was not working, due to damage from severe weather the night before. Of the few people who had land lines, most were out of service. I had to wait two days to make a “safe arrival” call back to my family in the US. I mention this because I have made multiple visits back to Ghana and other parts of Africa since the mid-90s. By the early 2000s, nearly everyone had a cell phone and internet cafés were sprouting up all over the city of Accra. Most Africans have leapfrogged directly to cell phones and lived their entire adult lives without having a land line. By the early 2010s, local African ingenuity had made mobile payments by phone a reality, using Kenya’s M-Pesa.

The ability to innovate and develop new products and technologies that excite the customer are foundational to developing great brands, value creation, and sustainable business success. The ability to innovate is also critical to the creation of environmentally sustainable personal mobility solutions. Twenty years ago, Accra’s resource-conscious taxi drivers would shut off their engines at every red light or traffic jam to save fuel. Today, new vehicles are being designed with stop-start systems that automatically do this for the driver. Stop-start technology is being introduced on typical internal combustion engine vehicles in every segment and price point around the world. What other eco-technologies have been or could be developed by leveraging the local ingenuity in these African markets? Both sustainability of the business and sustainability of the environment will be covered, and the reality is that they need not be conflicting objectives.

Part 2 – The Latest Models – walks through examples of where the industrialization of automobile production has 1) been exemplary, 2) where strong progress is being made, and 3) where automotive industrialization remains a work in progress. Examples of automakers and governments from emerging markets in Asia, Latin America, and Africa will be unpacked, and lessons-learned discussed. The most successful companies and regions have moved beyond importing kits made up of the parts from partially disassembled vehicles from a global original equipment manufacturer (OEM) known as semi-knockdown kits (SKDs), or kits made up of the parts from fully disassembled vehicles known as complete-knockdown kits (CKDs), and locally assembling them into finished vehicles. The successful companies and regions have also developed local parts manufacturers, developed local design and engineering capabilities, and created their own brands. The most successful companies have also invested in the development of new technologies and innovative products for their local markets. A key to their success has also been their drive to build their vehicles at a world-class quality level suitable for sophisticated export markets. As an example, the BMW 3 Series plant, soon to be X3 plant, in Rosslyn, Gauteng Province, South Africa is part of BMW’s global manufacturing system and regularly achieves internal production quality scores that surpass all other BMW assembly plants in the world!

From a parts supply-chain perspective, regions that have successfully industrialized automobile production have also developed, and often have equity ownership stakes in, local parts manufacturers. Building parts in a lower labor cost local region typically results in a lower total cost of the parts. Local production in the intended market of sale yields lower parts shipping and logistics costs, and reduces risk from foreign currency exchange rate fluctuation.

In the most successful recently industrialized regions, local manufacturing was followed by the development of local design and engineering capabilities. Building these capabilities allowed these automakers to innovate and move further up the value chain. Innovative and exciting designs and features that cause the consumer to fall in love with the product create the opportunity for price premiums and higher profit margins. Achieving profitability by participating in the highest-margin segments of the value chain is the aspiration of businesses everywhere in the world.

The emerging market regions and companies most successful at industrializing automobile production achieved this success with the support and partnership of their local governments. Their governments’ primary roles were to:

 Create the legal framework to support commerce and encourage and secure investments

 Create trade policy frameworks–e.g., tariffs and duties on imports, incentives on local production–to give the local auto companies time and space to succeed, and allow the benefits of industrialization to take root

 Educate the workforce

 Create the physical infrastructure such as highways, railways, and seaports, to allow parts and finished vehicles to move around the country and region

 Support the consistent availability of energy to run the manufacturing operations

For example, a key enabler to China achieving rapid growth in industrial capacity was the Chinese government's requirement that any global automaker wishing to build vehicles in China form a 50-50 joint venture with a local business partner. Nearly every major global automaker has formed a JV in China to gain access to its 1.3 billion consumers. The Chinese government understood the attractiveness of its growing consumer population, and leveraged this attraction to the benefit of its people. Lessons from these successful automakers, and the challenges from those still striving, will serve as a model for developing a plan for furthering the auto making industry in Africa.

Part 3 – The Strategy for Africa – is about “the rubber hitting the road.” How do you do it? Starting with the nascent African auto industry currently in place primarily in South Africa, and the auto production that is gaining momentum in Morocco, I lay out a plan to sustainably develop, manufacture, and sell cars and trucks on the African continent.

The auto manufacturing industry in Africa need not, and should not, develop exactly as it recently developed in China, Brazil, or Korea. This is a different era and unique forces are impacting our world and the auto industry. Use of the latest industry 4.0 advanced manufacturing tools, productivity optimization strategies, and customization enablers must be part of the plan. As of the 2016-2017 writing of Motoring Africa, the global automobile industry is at an inflection point. The pace by which gasoline combustion engines are being replaced by battery electric vehicles (BEVs) is accelerating. The ride sharing service Uber has an estimated valuation greater than most global OEMs. Several global automakers promise to have self-driving autonomous vehicles (AVs) available for sale by the early 2020s. Africa has the opportunity to jump on this train even though it is moving. Entrepreneurs, investors, and global automakers and parts manufacturers should build an African auto industry not simply to catch up, but should build an African auto industry that can thrive, win, and last.

Given the diversity and geographic size of the African continent, Motoring Africa will recommend industrializing automobile production in six countries–South Africa, Morocco, Kenya, Ghana, Ethiopia, and Nigeria–to serve the markets of their four respective local regions, the South, North, West, and East, plus exports outside of the continent. This section will also discuss the strategic decisions around the creation of mobility business models, product strategies, and supply chains, to optimize success. Options for financing the creation and launch of these industrial enterprises using public and private sources of capital will also be discussed. Public-private sector partnerships are also essential to industry development. They enable supportive trade policies, banking and financial institutions, energy and infrastructure plans, and workforce education and training resources.

Part 3 will conclude with a call to action for entrepreneurs, investors and interested participants in building industrial capacity for automobile production, or for manufacturing within other product sectors. For those of you who may feel that this is too far of a leap for Africa, I challenge you to think big, be bold, and go all-in. Africa is rising. Africa’s time is now. Africa will be the next economic miracle.

Motoring Africa is not only the title of this book, it is a movement. The sustainable industrialization of automobile production on the African continent will transform economies, create jobs, and create value for investors. There is sufficient supporting evidence to bet on the African population and economic growth macro. This book is a road map to execute. If you missed the chance to grow with the China macro over the last 20-30 years, here is your opportunity for redemption.