Nigeria Autos Report Q4 2009

The problems surrounding Peugeot Automobile Nigeria (PAN) intensified in Q309. After a temporary closure ordered by the Federal Inland Revenue Service (FIRS) the PAN plant was re-opened in September 2009, but the incident is likely to further erode the industry's dwindling output. The plant was closed for two days after the FIRS alleged that PAN had failed to pay a tax bill, which with interest and payment penalties had reached NGN1.29bn (US$8.38mn).

However, the FIRS was satisfied with the payment of a 'substantial amount' of money and PAN's explanation for the non-payment and agreed to reopen the facility. However, local media sources claim that the government owes PAN as much as NGN6bn (US$39mn), which puts the company’s plight over its tax bill into perspective. In August 2009, PAN announced that over 5,000 Peugeot cars imported into Nigeria to be used by Nigerian military personnel, have yet to be picked up and are still being stored by the company.

Managing Director Dr Haroun Ibrahim Aliyu has called for the government to pay PAN and take the cars, which would go some way to reducing the financial burden on the company. PAN reportedly entered into an agreement with the Federal government – called the Pioneer Consumer Credit Finance Scheme – to provide new cars to military officers. However, the scheme has faltered and PAN has yet to receive any payment for the cars. There have been similar claims of non-payment in the energy industry recently with the federal government accused of owing around NGN50bn (US$325.7mn) in unpaid oil subsidies.

On a positive note, PAN’s managing director, Alhaji Shehu Sani Dauda has said that the company will remain in business after months of speculation that the plant would close. BMI believes this is pivotal to maintaining the Nigeria's vehicle production as it is the country's only major car producer. Although PAN was forced to implement redundancies to remain operational, the carmaker is looking for government support, preferably in the form of patronage, to secure future business. Problems remain endemic throughout Nigeria’s autos industry.

One key issue is the lack of available credit, which prevents manufacturing plants from expanding capacity and upgrading machinery. As calculated by Business Day, the automobiles sector is operating at 19% capacity utilisation. The average capacity utilisation across all major industry sectors is an uninspiring 40%. The fact that the autos sector lags behind even this low benchmark demonstrates its current perilous state. As a result, Nigeria takes last position in BMI’s business environment rankings for the region.

We believe the industry will require significant foreign investment to finance a resurgence in domestic production. The privatisation of most assembly plants means that direct government intervention to support the industry has been removed. At present, however, the business environment is too risky for significant new investment, particularly in the current economic environment.