Algeria bets on Stellantis plant to relaunch country's automotive sector
Al-Monitor Pro Members
Journalist and analyst specialized in North Africa
April 25, 2023
In 2023, carmaker Stellantis will set up a manufacturing plant to produce Fiat cars in Tafraoui in western Algeria. The $213 million investment marks the return of car manufacturing to Algeria, and authorities hope it will attract other auto markets to the country. But after years of back and forth, developing a sustainable auto-manufacturing cluster will require stable industrial policy and the development of a supplier network.
Authorities have said that Algerian-made Fiat vehicles will be available in late 2023. Algeria wants to replicate Morocco’s successful auto-manufacturing model — in 2022, Moroccan auto exports reached Dh115.5 billion ($11.2 billion).
But car making in Algeria has a checkered history. Policy restrictions, political upheaval and corruption cases have derailed the sector in the past.
A decade ago, Algeria lured car manufacturers by easing access to industrial land, offering tax exemptions on spare parts and other incentives. Several international car builders came to service the growing market potential of over 40 million people.
Investment rules limited foreign ownership of businesses to 49%, forcing carmakers to partner with Algerian firms. The 2014 finance law required auto distributors and importers to transform into manufacturers in three years, an unrealistic prospect. Foreign investors and local businesses partnered to build car assembly lines.
Renault opened a car factory in Oran in November 2014, aiming to build 25,000 cars a year and raise production to 75,000 by 2019. South-Korea’s Hyundai inaugurated a $250 million assembly plant in Tiaret in 2016, hoping to expand annual car output from 30,000 to 200,000 in five years. Germany’s Volkswagen Group opened its factory in Relizane in 2017. Kia, majority-owned by Hyundai, opened its unit in Batna in 2018, planning to build 50,000 cars annually.
This paradox was encapsulated in the images of nearly completed Hyundai vehicles needing little more than to have their wheels attached, which circulated on social media in 2017 and triggered a government investigation.
Authorities clamped down on what they classified as vehicle imports disguised as manufacturing. Licenses for new car assembly projects were suspended.
Political disarray accelerated the sector’s collapse. Protests against a fifth presidential term by President Abdelaziz Bouteflika led to his removal by the military in 2019. Bouteflika’s downfall triggered corruption investigations against businessmen linked to power, many of whom had interests in car-assembly factories. Several Algerian partners of foreign car makers were jailed for corruption and fraudulent imports. Algeria blocked the free import of SKD and CKD kits.
Import limitations were enacted by capping the total value of assembly kits that manufacturers could import. These restrictions impacted output. For instance, after making over 53,000 vehicles in 2018, Volkswagen Group assembled only 25,000 cars in 2019 after it reached its $600 million cap of auto kits it could import, pausing production that year. Kia’s factory produced roughly 10,000 cars before suspending its operation in May 2020. Soon after, the government banned the preferential regime for spare parts imports.
Authorities also blocked the import of new vehicles in 2019. Acquiring a car became so difficult that second-hand cars often sold for higher than their initial price.
By 2020, to stem the lack of vehicles in the market, the government allowed the import of used vehicles less than three years old.
Given the pressures on car supply, the restart of domestic manufacturing is welcome news. Algeria also allowed imports of new cars to restart beginning in January 2023.
Set to produce four Fiat models, the Stellantis factory will be completed in August 2023. It will create 2,000 jobs and produce 90,000 cars annually by 2026. Stellantis plans to run a program to develop small- and medium-sized enterprises and expand the supplier base. Authorities expect to create an auto cluster.
But this will take time. By 2026, Stellantis is set to reach a 30% local integration rate. If the environment for the sector becomes attractive for more manufacturers to return, integration will advance faster.
The market is there. Algerian car demand was 450,000 units a year in 2021. Demand is rising as higher energy revenues will increase disposable income in segments of the population.
Car manufacturing will focus on domestic customers. Ambitions of regional exports will first require a supplier base to develop. This can’t be achieved by decree. Authorities want to maximize domestic integration. But forcing auto manufacturers to locally procure inputs that can’t yet be produced to standard would threaten long-term development.
Technology transfer will be critical. Electric cars are impacting consumer demand. The European Union aims to ban new combustion-engine cars from 2035. Algeria’s auto-industry is forced make strategic choices from the start. Stellantis manufactures electric cars in neighboring Morocco, but it has yet to announce similar plans for Algeria.
Algeria’s automotive industry struggles to grow manufacturing capacity and technicity. To potentially have a chance at competing in the European markets in the medium-term, it will need a long-term strategy and be patient with results.
Scenario 1: The Stellantis factory accelerates the establishment of an automotive cluster and domestic integration.
The new plant attracts additional carmakers to Algeria. Foreign interest is supported by government commitments to maintain stable regulation and allow the import of manufacturing inputs for the sector without restrictions. Government investment in workforce training programs help to develop a sizeable industrial human resource pool. Incentives for suppliers to set up in Algeria allow for the establishment of an automotive production cluster over the coming five years, which accelerates domestic integration past the 30% initially envisioned by the government. Fulfillment of domestic demand builds the sector to expand into small-scale regional exports by the end of the decade.
This scenario would benefit Algerian industry, especially component suppliers. But given the long way auto manufacturing still has to go, establishing a large-enough pool of domestic suppliers and workforce training resources will take consistent policies for seven to 10 years.
Scenario 2: The Stellantis factory fails to attract additional auto makers.
Locally made cars find a domestic market, helping to stabilize the car market and fulfilling growing demand. But the impact on the broader manufacturing is limited. Other car makers, reeling from past regulatory instability, avoid establishing in-country manufacturing, opting to supply Algeria through exports.
It is unlikely that the Stellantis plant fails to attract other manufacturers. The demand is there, as is the potential to eventually service regional markets in Africa and the Middle East. Algerian authorities will likely improve entry conditions for carmakers to return.
Conclusion - Most Likely Scenario:
The sector is relaunched through the new manufacturing capacity, but domestic integration lags behind. The Stellantis factory, and better state incentives, encourages other manufacturers. But operations start at a small scale, and it will be close to a decade before integration levels become relevant enough for Algeria to begin to see the emergence of a relevant automotive cluster. Auto manufactures that settle in Algeria will continue to import a majority of their manufacturing inputs for several years. But they are able to slowly attract a growing number of suppliers of components, if industrial policy follows through.
For this scenario to materialize, the government will need to adopt a long-term approach that encourages investment and supports industrial training programs, without enforcing unrealistic local integration objectives on carmakers in the short term. Attempting to attract auto component suppliers based in neighboring Tunisia, recently impacted by an economic crisis, might allow Algeria to accelerate technology and know-how transfer onto its own auto industry. Over the next decade, if regulatory stability is kept, Algeria is able to establish a relatively skillful auto industry with the potential to service export markets with a moderate level of sophistication.
Francisco Serrano is a writer and analyst who focuses mainly on North Africa. He has been published in several outlets, including Foreign Policy, World Politics Review and the Middle East Institute. His second book, "As Ruínas da Década," about the past decade in the Middle East, was published in March 2022.
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