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Egypt ups trade ante | Monday, 5 June 2006

Egypt ups trade ante

by Michael Thorne

The World Economic Forum on the Middle East concluded in Egypt last month with the drawing up of a list of objectives aimed at driving the continued growth of the regional economy. In the wake of these talks one thing is clear; business in many sectors is booming and Egypt’s manufacturing industry is reaping the rewards of the Arab Free Trade Agreement (AFTA) and effective initiatives implemented by the Egyptian Ministry of Trade and Industry.

Key initiatives to be implemented as a result of the Forum include a Middle East-wide branding campaign under the banner ‘Red Tape Out, Red Carpet In’, which will be funded by the private sector, and the Egyptian Education Initiative (EEI), which advocates claim will benefit 820,000 students in 2,000 schools and over 3,000 colleges.

The EEI aims to benefit trade and industry by improving the standards of information and communication technology in the country’s schools and colleges through partnerships with private firms. CA, Cisco, HP, IBM, Intel, Microsoft, Oracle and Siemens, each signed a letter of intent supporting the initiative.

“By implementing these partnerships, the government of Egypt, together with the World Economic Forum member countries and organisations, will pave the way for the transformation of our society to a knowledge society and contribute to the development and prosperity of our community,” says Egyptian Education Initiative Programme director, Hoda Baraka.

If these initiatives are effectively implemented they will not only boost the Egyptian economy, but those across the Middle East region. Egypt has built a strong manufacturing industry catering to the regional consumer electronics and household appliance sector with a host of local vendors gaining market share in recent years.

Multinational companies (MNCs) have also invested heavily in the country, using it as a base to launch commercial assaults on the Middle East, Africa, the CIS and even Europe, harnessing the plentiful cheap land and labour, and leveraging the infrastructure support and tax concessions offered by the Egyptian government.

“The Egyptian government is trying to make it easier for Egyptian companies to increase their competitiveness through greater volumes and implementing new, modern technologies and manufacturing methods,” explains Hesham Hamdy, portfolio manager for the Egyptian Exporters Association (EEA).

“The government provides technical and financial support in a number of ways, including establishing free trade zones and providing financial and infrastructure incentives designed to encourage vendors to establish manufacturing facilities and make business investments in Egypt.”

The EEA is just one example of the various initiatives that have been implemented to promote Egyptian manufactured goods abroad under the auspices of the Egyptian Industrial Modernisation Programme (IMP).

The IMP helps companies finance investments inside Egypt’s industrial zones by offering subsidies for new tools and machinery, usually around 10% of the total cost, in addition to financing trips to foreign exhibitions for representatives of Egyptian manufacturers.

Attendees are sponsored by the organisation’s Expo Link programme, which covers 85% of their travel and accommodation costs to attend international trade events.

“Our aim is to increase the volume of exports from Egypt by helping the industry become more competitive,” Hamdy explains. “Expo Link is involved in organising specialised trade exhibitions around the world. We are associated with the IMP, which is jointly funded by the European Union and the Egyptian government under the umbrella of the Ministry of Trade and Industry in Egypt. Eighteen months ago, we formed an alliance with the EU on the basis of a protocol between it and the Egyptian government to promote trade in developing countries,” he says.

“Egypt has an advantage over European, and even other Arab countries, in terms of manpower and the cost of land, which encourages investors to establish a manufacturing presence in the country. In addition, the domestic market for consumer electronics goods is huge, with the home appliance market doing particularly well.”

Hamdy claims that building a factory or assembly plant in Egypt provides vendors with some key advantages, including avoiding the high tariffs placed on imported goods by Egyptian authorities. It is also in a prime geographical location, at the juncture of Europe, the Middle East and Africa, making it an ideal base for distributors servicing markets in each region.

“Foreign companies bring high technology expertise and experience in exporting while their local partners provide the manpower, facilities and location,” he says.

Egyptian consumer electronics and household appliance manufacturers are enjoying record sales both in Egypt and the broader region.

Booming industy

Egypt’s large population provides manufacturers with a strong domestic market, while booming population growth and a well-developed higher-education system supports the case for the country’s call to foreign investors.

“Egypt is the oldest industrial base in the Middle East and Africa for most products, including home appliances and electronics. The country has more than 75 million consumers. However, the entry of new players is forcing a market adjustment in terms of consumer price points, which is impacting margins in the channel sector,” says Khaled Hegab, export director for Olympic Group, one of Egypt’s largest appliance manufacturers.

Egypt also has the advantage of being a signatory to two regional trade agreements; the Arab Free Trade Area Agreement (AFTAA), and the Common Market for Eastern and Southern Africa (COMESA), placing it in an ideal position to reap the benefits of both initiatives.

AFTAA, which came into effect in January 1998, was designed to implement a staggered decline in trade tariffs between Arab states, targeting their complete removal by July 2007.

Egyptian exporters perceive a reduction in tariffs as having a major influence on their ability to compete commercially in the Arab world, although Hegab says that the rules have not been strictly enforced.

“The zero percent customs agreement gives us an advantage when doing business with other Arab countries and this has helped us gain market share in the region,” he says.

“However we have seen demand for our products undercut in the market by distributors that change the certificate of origin of the goods they are importing. This is something that happens in the UAE’s Jebel Ali Free Zone and also in Jordan.

“Companies import Chinese-manufactured products at very low prices, they make minor adjustments - often just changing the brand name and occasionally not even doing that. Many do nothing except changing the certificate of origin to the UAE or Jordan, for example, and then they move the products out of the free zones into the Arab markets without paying any customs tariffs. These companies are making money but at the same time they are seriously jeopardising the future well-being of the industry in the Arab world,” he says.

On Egypt’s western flank the continent of Africa is also proving a lucrative market for manufacturers. The COMESA agreement was initiated in December 1994 when it was formed to replace the former Preferential Trade Area (PTA).

COMESA focuses on developing a large African trading unit capable of reducing the impact of some of the barriers experienced in individual states.

The member countries established a free trade area in October 2000, when the final nine member states eliminated their tariffs on products originating in COMESA. This has given Egyptian manufacturers open access to these markets on a level playing field with other African manufacturers and, given the ambitious plans of several Egyptian vendors, it has proved highly beneficial.

The members recently negotiated a roadmap for the introduction of a customs union that would mean all member states apply the same customs tariffs on imported goods from non-members. This is set to be introduced in 2008.

“The new approach by the government, coupled with the free trade deals has been very beneficial to the entire manufacturing industry in Egypt,” says Ahmed Gouda El Menoufi, board member of Egyptian home appliances manufacturer Electrostar.

“The government has opened a lot of new avenues to help facilitate this development process including the improvement of the country’s communications and transport infrastructure around industrial zones.”

Egyptian vendors cite the improving quality of Egyptian manufactured products, coupled with the declining competitiveness of their European, and particularly Italian, counterparts as being important aspects contributing to the growth of their industry.

“The profile of Egyptian brands has risen in the last three years,” says Mohamed Rady, export general manager for Egyptian home appliances manufacturer Universal.

“Six or seven years ago we had a hard time negotiating channel distribution deals because the market was flooded with European goods, mostly from Italy. However, because of our superior price advantage and increasing consumer confidence in the quality of our products we have taken market share from these players.”

Rady claims that the growth in demand has been so great that Universal has had to build three new factories in Cairo over the last two years.

“This just puts us in a stronger position in terms of flexibility and pricing as we have a bigger capacity now,” he says. “We are able to maintain our low prices and in some cases even bring them down slightly, despite the rising cost of raw materials.”

The route into Egypt

On the flipside, the route-to-market into Egypt for foreign vendors’ products remains significantly constricted due to import trade tariffs that are among the highest in the Middle East.

As a result of these tariffs, some vendors have had to adjust their strategies for dealing with the country. For example, US home appliance vendor GE Appliances only targets the high-end appliance market in Egypt because of the tariffs.

“People love to have branded products because of the prestige and the high quality,” says GE’s area sales and marketing manager, MEA, Hassan Kebbi.

“We can still, therefore, access the market to some extent. However, the customs duty on imports into Egypt is 40% to 45% and this is a major burden that reduces the competitiveness of imported products in terms of price, stopping us from increasing our market share. Egypt represents one of the more difficult countries in the Middle East to do business with in terms of imports. By comparison, customs tariffs are only 5% in the GCC and if you look at Libya for example, the customs tariffs are also lower at 15% to 20%.

“If you compare GE to other vendors such as York or Carrier, which are major US manufacturers, you will see that these companies have managed to form joint ventures in Egypt and therefore do not pay taxes.”

GE works with local distributor Egypt Automotive and Electrical Company, which also distributes Audi and Volkswagen cars. According to Hamdy this means that the company already has a premium portfolio of clients for GE to target.

GE is also looking to establish a gas oven manufacturing facility in Egypt to increase its competitiveness, gain a larger share of the domestic market and supply its African and Middle Eastern markets, as well as supplying some products to Europe.

“We are undertaking a study which is almost 70% complete, so at this stage it’s safe to say that we are seriously considering this option,” he says. “We have some contacts in Egypt and we have been working with our distributor to look at making this move.”

Hamdy notes that local manufacturers mostly target the low- to middle-income market, which places them at odds with GE’s push into the premium sector. However, Hamdy says GE is looking to increase its market share among middle-income consumers and recently introduced a new range of fridges targeting this bracket, which he claims are selling well.

“Our products are still around 20% to 25% more expensive than our competitors’ but this does not represent a hugely significant amount when you are talking about a major home appliance such as a refrigerator,” Kebbi says.

“We have been importing these fridges direct from our manufacturing facilities in China and Taiwan. However, if you were to compare a similar GE fridge manufactured in the US it would be at least 50% more expensive in price.”

JVC has been represented in Egypt by its exclusive distributor Electronics Trading Centre for the past 15 years. It also operates a manufacturing facility in October City, 40km north-west of Cairo, which produces CRT TVs for the Egyptian market.

Electronics Trading Centre works with JVC on both the import and manufacturing operations helping to promote the vendor’s products throughout the country.

According to JVC Gulf FZE president Yoshikazu Yamamoto, the domestic market in Egypt for foreign consumer electronics goods has grown significantly in recent years, which has enabled the company to gain a significant foothold, aided by deals with hypermarket retailers such as Carrefour, which recently launched operations in the country.

“The market in Egypt used to be very small for JVC,” he explains. “But this year it will be one of our top five markets in the Middle East region.

“There are still major obstacles to trade in Egypt. There is a lot of room for development in Egypt’s retail sector; it has not reached the same level of sophistication as Saudi Arabia or the UAE, for example. There is also the issue of trade tariffs. We avoid these with our CRT range by manufacturing them in Cairo but our other products are less competitive in terms of pricing and therefore we tend to target the mid- to high-end market with these products guided by our distributor.

“We succeed to some extent simply because Egyptian manufacturers are not able to produce the same quality of electronics goods as we are and other vendors can’t set up manufacturing bases in the country for high-end goods, since local industry players cannot cater for that level of technology. If the tariffs were removed then both consumers and vendors would benefit since the market would become more competitive and the cost of goods would come down.”

Yamamoto does not believe that the future removal of trade tariffs in Egypt as a result of the international General Agreement on Trade and Tariffs (GATT) will have a significant impact on Egyptian manufacturers.

“Egyptian manufacturers target the lower end of the market where price is key. Local manufacturers should always have an advantage in this respect, as long as they maintain efficient operations. The fact is that they simply can’t compete when it comes to the development of cutting-edge technologies that appeal to consumers,” he says.

Egyptian manufacturers prepare for GATT

The primary aim of GATT is to foster trade. Egyptian manufacturers widely believe they must make the most of the current preferential economic conditions in order to streamline and develop their operations to compete with foreign vendors targeting the domestic market. The Chinese, it seems, pose the greatest threat in the eyes of major Egyptian manufacturers.

“With the free trade agreement coming up, Egyptian manufacturers will not be able to compete unless they modernise their operations now while still protected by the trade tariffs,” says Olympic Group’s Hegab.

“Companies like LG, GE Appliances, Bosche and Siemens, are going to expand their business rapidly in this market once the international trade barriers are removed.

“It boils down to price consciousness - adequate technology at reasonable prices - and the Chinese vendors are now achieving this, which has led to them improving their position in the market significantly in recent the years.

“Up until five years ago they weren’t quality conscious but now that they have the price edge, they are also coming out with much better designs. I would say it is almost inevitable: the Chinese are coming.”

Hegab emphasises that cultural ties between Arab countries go some way to facilitating trade, saying that sharing the same language, and in many cases, enduring similar barriers to trade, means that local manufacturers know how to do business in the region. He also explains that the technology gap between Egypt and global hubs such as Europe, the US and South-east Asia is a major barrier to competitiveness. He says this is an issue Egypt needs to overcome if its consumer electronics and household appliances manufacturing industry is to prosper in international markets.

“What we have in terms of consumer technology compared to the American market, for example is very primitive,” Hegab says.

“At the end of the day what will happen is more and more foreign goods, whether they be American, Japanese, Korean or European, will pour into the Middle East market since we don’t have what they need in terms of technology and design, but they have what we need.

“We will be forced to compete primarily on a price basis since the Egyptian market is very price sensitive. The per capita income is much lower than many developed countries so people want to spend less money, and that’s where Egyptian manufacturers come in. We produce adequate products that are adequately priced. The margins are tighter but the quantity of sales is very high,” he says.

Electostar’s El Menoufi agrees with Hegab’s sentiments regarding the impact of the removal of trade barriers. “With the coming GATT agreement not everyone will survive. Any Egyptian manufacturer that has not reached an appropriate level of quality and efficiency when this agreement comes into place will not survive in the face of increased competition from foreign vendors,” he says.

“This is part of the reason why we are looking to increase production by 10% to 15% per annum over the next five years, adding new products to our portfolio. We are also in the process of building two new factories in Sixth of October City, Giza, in order to facilitate this increase.”

For now, the Egyptian manufacturing industry is booming while the consumer electronics import channel into the country remains uncompetitive due to the high import tariffs.

If the Middle East succeeds in attracting increased investment from multinational vendors looking to service the surrounding markets by developing regional manufacturing and assembly hubs, then Egypt will be drawn into direct competition with the UAE. Its advantages include a large domestic market, an efficient labour force and similar tax concessions to the UAE’s free zones.

However, unpredictable government policy and a less well-defined development path may deter some investors who see the Emirates as a safer bet.

Developed infrastructure is also fundamental: ensuring that distribution channels out of Egypt are efficient and that industry can reap the rewards of contiguity with Africa and the Middle East and proximity to Europe.

Meanwhile, local manufacturers would benefit from closer ties with multinational vendors, such as those already in place between a number of Italian and Egyptian home appliance manufacturers, in order to facilitate technology sharing.

Increasing the number of tech-savvy graduates from Egyptian universities, capable of meeting the needs of high-tech companies, is also key to this process.