In their search for lower-cost production, European automakers are looking to North Africa, a vast region where relatively stable countries sit alongside those grappling with political instability.
Renault, which builds about 400,000 cars annually at two factories in Morocco, has long been the production leader in North Africa. In recent years PSA Group and Volkswagen Group have started production in the region.
Meanwhile, Daimler last year signed a memorandum of understanding to restart production of Mercedes-Benz cars in Egypt after a four-year halt.
On the sales side, analysts expect the region to substantially outperform the global market in the next few years, although volumes remain small in North Africa's main countries of Algeria, Egypt, Morocco and Tunisia.
PSA in particular has focused an important part of its production in North Africa. A small factory in Tunisia assembles pickups for the African market, and the automaker has plans for a factory in Algeria with a capacity of 50,000 vehicles. It is in Morocco, however, where PSA is expanding most rapidly, centered on its new 557 million-euro ($617 million) factory in Kenitra.
In September, PSA started to build the Peugeot 208, the automaker's best-seller, in Kenitra, largely for export to Europe. In December, it signed an agreement to conduct some of its R&D in Morocco, and Segula Technologies, an engineering company that works closely with PSA, is opening an automotive "center of excellence" in Agadir, which is about 260km southwest of Marrakesh.
PSA CEO Carlos Tavares announced in February plans to double annual capacity to 200,000 vehicles at Kenitra by the middle of this year, three years ahead of schedule.
By the end of 2022, PSA and Renault could have a total production capacity of about 700,000 vehicles in Morocco. If that happens Morocco would move ahead of Poland.
As with factories around the world, Moroccan plants were shut down in March to combat the spread of the coronavirus. There was no word when the country's restrictions might be lifted.
Morocco model
Morocco has been North Africa's model for how to build an automotive industry, with generous incentives and policies that support investment, free-trade zones and a new roll-on/roll-off port facility in Tangier. Morocco's industry is built on an export model, with more than 90 percent of vehicles destined for Europe, the rest of Africa and the Middle East, and even South America.
"These things combined make it a very attractive destination for manufacturing," said Joshua Cobb, an automotive analyst at Fitch Solutions who studies the African market, adding that "in recent years the country has been able to build up a very good local supply industry. I think this is one of the main reasons we are seeing more interest in expanding production in Morocco."
With the automotive industry -- and the global economy -- shaken by the coronavirus outbreak, the country could become more attractive, Cobb said, because of its proximity to Europe. "I wouldn't be surprised to see more investment in Morocco," he said.
Speaking about PSA's expansion plan for Kenitra, Tavares said, "That will give us more competitiveness in the small-sized cars that we are selling all over the world."
Part of that competitiveness is due to the low cost of labor in Morocco, which analysts say is about 25 percent that of the nearest European country, Spain, where the average auto worker's wage was 26 euros an hour last year, according to Eurostat. Wages in Morocco are also considerably less than in eastern Europe, where rates range from 8 euros to 18 euros an hour, which is why many automakers moved production there from western Europe in the last few decades.
Renault has also taken steps to reinforce production in Morocco. In 2019 it became the sole owner of its factory in Casablanca, where it builds about 80,000 Logan and Sandero cars annually (the cars are sold either as Renaults or Dacias depending on the market), buying out PSA's remaining share. Moroccan media has reported that Renault will increase annual production to 500,000 vehicles.
Renault declined to comment on the report.
Both PSA and Renault have attracted dozens of suppliers, large and small, to Morocco. Some 50 percent of content used at their factories comes from local suppliers, with a national target of
65 percent by 2022. Tier 1 suppliers that have set up factories include Valeo, Faurecia, Lear, Marelli and Denso.
"PSA is moving toward 100 percent local supply in Morocco," said Cobb. "That shows how strong the local component manufacturing industry is." PSA said it had spent 850 million euros on sourcing in the country in 2019, with 66 companies.
Morocco's sales market has been dominated by Renault, with the budget Dacia brand holding a 31 percent share in 2019 in a total market of around 143,000 cars and light trucks. The total market was down 9 percent in 2019 after three years of growth, but Fitch is forecasting that sales in Morocco will increase by 5.4 percent annually until 2022, as the economy grows and the government adopts an expansionary monetary policy.
Morocco is now hoping to move up the value chain as a supplier of home-grown engineering talent. That could be some way off, Cobb warned, because the country's higher-education system is not yet up to that level. One slight stumble has been Morocco's failure to attract a third major automaker, a stated goal of the government.
Egypt is another country seeking to emulate Morocco, but with a mobility industry centered on electric vehicles. Major agreements have been announced with Chinese companies, including truck maker Foton, which is planning to build up to 2,000 electric buses a year. Zhejiang Geely Holding Group, the parent company of Volvo Cars, is setting up production of EVs in Egypt, as is Dongfeng Motor, which builds electric cars with Renault in China.
EV ambitions
An Egyptian company, Revolta, is getting ready to produce charging stations, a solar farm, and eventually EVs; and a host of similar agreements have been announced. "Egypt wants to be an Industry 4.0 capital, based on electric vehicle production," Cobb said, referring to data-driven manufacturing. Many of those EVs and electric buses are destined for Egypt's future new capital city, rising between the Suez Canal and the Nile.
But one company, Daimler, is not waiting for future technologies to start production in Egypt. It signed a memorandum of understanding with the government last June to build a factory with local partners and re-start production.
The plant will assemble SUVs, although Daimler would not say which models, with the first vehicles rolling off the line in the second half of this year. Total car sales in Egypt were about 127,000 units, a drop of 7 percent from 2018, according to industry group AMIC. Fitch, however, expects sales to grow by 15 percent this year and an average of 6.6 percent until 2022. The market could be a regional key for European automakers, because the government lifted all tariffs on exports from the EU in 2019.
