These Are The Keys To Localization In Manufacturing

January 14, 2024


China’s nickname, “The World’s Factory,” says almost everything governments need to know about how the country sustains economic growth. “From 1992 to 2002, China implemented a series of very attractive incentives to attract foreign companies to its growing manufacturing sector,” said Blacksmith International, a management consultancy.

Those incentives were compelling enough for some of the world’s biggest engineering industries, including Apple, Nike, L’Oreal, and Samsung Electronics, to build factories there. According to data aggregator Statistica, China raised its contribution to global GDP from 2.5% in 1980 to 18.44% in 2022.

Egypt’s government also is working hard to promote manufacturing, notably engineering industries. Over the past year, it has amended regulations, introduced new ones, and offered incentives to reduce operational and bureaucratic costs. Meanwhile, international shifts in strategies are working to Egypt’s advantage as multinational companies look to diversify their supply chains.

Localization, so far

During the early 2000s, engineering industries came into the spotlight as local media focused on Egypt’s auto assembly boom. In the following decade, 19 auto assemblers built international car brands, including Jeep, Mercedes-Benz, BMW, and Nissan, mainly to meet local demand.

Smartphones were the latest to join the influx of locally made engineering industries in 2023, with Samsung, Nokia, Infinix, Oppo, and Xiaomi either starting production or building factories to meet local and international demand. According to local media reports, their combined investment exceeds EGP 2 billion ($67 million), producing as many as 20 million smartphones annually.

According to International Data Corporation, a data aggregator, a significant portion of that output likely will be exported, as local smartphone sales reached an all-time high of only 2.9 million units in the third quarter of 2021.

Smartphones join other electronic device manufacturers, including white goods, machinery, computers, transportation-related hardware, and medical and health equipment. Egypt also has “basic” engineering industries, such as cooking utensils, metalworks, and furniture.

According to Sherif El Sayad, head of the Engineering Industries Export Council, locally sourced components account for 20% to 70% of domestically manufactured finished products.

In December, the State Information Service (SIS) said manufacturing accounted for more than 16% of Egypt’s GDP in fiscal year 2021/2022, making it the most significant contributor to the economy. It also comprised 85% of the nation’s “non-oil peaceful” exports.

Favorable environment

In 2023, the government has been busy reforming and introducing new laws to create a better business environment for local and foreign investors.

In May, the Supreme Council for Investment, created just a month earlier, announced 22 law amendments to facilitate FDI.

The General Authority for Investment and Free Zones (GAFI) introduced updates to expedite the approval process when establishing a company, targeting a 10-day time frame. According to data curator Statistics, Egypt’s approval window averages slightly longer than 14 days.

Other amendments this year allow GAFI to establish a digital “one-stop shop” platform for investors to obtain all required permits. Another update involves legalizing digital signatures when dealing with the government.

GAFI also created a new department to restructure state enterprises, and the authority’s chairman heads a new internal unit that develops new policies, laws and regulations for startups and receives their grievances.

Also in 2023, Egypt’s top investment authority amended provisions for the Golden License, a comprehensive approval granted to eligible companies, announced in September 2022. The updates expand eligibility to “companies that are not establishing strategic [developmental] or national projects.” Other changes make companies established before the “Investment Law of 2017” eligible to apply.

The Ministry of Justice and Ministry of Trade and Industry introduced several reforms last year. The first was removing restrictions for non-Egyptians and foreign companies related to land ownership for investment purposes. They also allowed foreigners to register as importers for up to 10 years.

The Ministry of Finance issued several legislative amendments to level the playing field for private-sector companies competing with state-owned businesses, which used to get more favorable tax treatment.

Other amendments from the Cabinet in 2023 aim to facilitate working with the International Finance Corp. on individual projects, help the government develop a national manufacturing strategy, and make it easier to do business in Egypt.

Manufacturing targets

In December, the SIS said it aims to boost “industrial production” by 19% this fiscal year (FY) compared to FY 2022/2023. That is nearly 4.5 times the GDP growth rate the government forecasts for FY 2023/2024. By 2026, the government wants “industrial output” to increase by an average annual rate of 18%.

Such an expansion should significantly cut Egypt’s imports of engineering industry products. According to communications from the Chamber of Engineering Industries (CEI) in the Federation of Egyptian Industries, the country has the resources to localize 140 product types out of the 152 it currently imports.

In August, CEI Chairman Mohamed El Mohandes told the media most of those 140 imported product categories are intermediate goods for local producers. “The key to increasing localization is matchmaking, which is what the Chamber of Engineering Industries is prioritizing,” he said. “There is a lot of potential for new business links as rising prices of electronics equipment in Egypt and import restrictions in recent months are driving all local manufacturers to lower costs by using more locally made components.”

Meanwhile, the government wants to exit the manufacturing sector by selling a significant portion of state-owned enterprises (SOEs) to private foreign and local investors. In November, the Cabinet’s Information and Decision Support Center said it sold stakes in 13 SOEs, raising $5 billion from March 2022 to July 2023. It added that it wants to raise another $5 billion by selling another batch of SOEs by the end of June 2024.

Advantage Egypt?

An analysis note published by Singapore’s Nanyang Technological University (NTU) said Egypt is becoming particularly attractive to engineering industries’ brands.

The paper highlighted the interest of Chinese and other Asian manufacturers looking to open factories in Egypt. It singled out Haier, a Chinese white goods producer, which announced in April plans to build a new factory in Egypt. “Haier aims to leverage the North African country as a central hub for exporting its products,” the NTU paper said. It will “benefit from Egypt’s trade agreements that facilitate easier access to markets across Africa, the Middle East and Europe.”

The paper also noted, “Several other Asian appliance manufacturers have recognized the potential of the Egyptian market.” NTU highlighted that South Korea’s LG plans to add a $200 million refrigerator factory in Egypt. The university analysis also noted that Midea, another Chinese maker of home appliances, invested over $25 million on a dishwasher factory in the Suez Canal Economic Zone, primarily for export.

Lu Yucong is chairman of Guangdong Vanward New Electric, a Chinese water heater manufacturer that plans to build a facility in Egypt in 2024. “Growing concerns about China’s relations with Russia and the potential for sanctions are influencing decision-making,” Lu told NTU. “Rising tariffs on Chinese-made goods are also prompting companies … to shift some of their manufacturing operations abroad.”