Industry Trend Analysis - Fuso Plant To Benefit From Improving Economy And Construction Sector - JAN 2018

BMI View : A recovery in commercial vehicle demand, aided by an acceleration of economic growth, an uptick in construction sector activity and greater currency stability, will create a favourable consumer environment to help drive sales of Fuso ' s new domestically assembled trucks in Nigeria.

In November 2017, CFAO Group in partnership with Mitsubishi Fuso Truck and Bus Corporation (MFTBC) inaugurated a new Fuso assembly plant in Lagos. The new facility is expected to produce 500 units of the Canter truck annually.

As a result of the inauguration of this new production facility, we are revising up our vehicle production forecast for Nigeria over 2018-2021. We now forecast total vehicle production to grow at an annual average rate of 17.7% between 2018 and 2021, up from average annual growth of 14.6% previously, albeit coming from a low base. We believe that MFTBC's truck range will benefit from having a competitive edge in the market due to these vehicles being assembled domestically and therefore being exempt from high tariffs imposed on imported vehicles (as high as 75%).

Production Ticking Upwards
Nigeria - Total Vehicle Production
e/f = BMI estimate/forecast. Source: OICA, BMI

Helping to drive demand for these trucks will be a recovery in the commercial vehicle (CV) market, supported by an acceleration of economic growth, an uptick in construction sector activity and greater currency stability. While we do not have a breakdown for the different vehicle segments in our Nigeria database, we believe the above-mentioned factors will help drive growth of 2.8% in total new vehicle sales in Nigeria in 2018, and average annual growth of 4.1% over 2018-2021.

Market Slowly Recovering
Nigeria - Total Vehicle Sales, Units
e/f = BMI estimate/forecast. Source: Nigeria Customs Service, Local Car Makers, BMI

Our Country Risk team forecasts real GDP growth of 3.0% and 3.5% for the Nigerian economy in 2018 and 2019 respectively on the back of an improving outlook for the country's dominant hydrocarbons industry, which we believe will benefit from both rising crude oil prices and increasing output ( see ' Ongoing Recovery Remains Susceptible To Downside Risk ' , October 27). We therefore expect an acceleration of economic activity over the coming quarters to help lead to improving levels of business confidence, which will help drive sales of MFTBC's new domestically produced trucks.

Uptick In Construction Industry Growth A Positive For CV Demand

We also expect an uptick in construction sector activity to drive demand for both light and heavy CVs, which will help create the supportive market for MFTBC's trucks. Our Infrastructure team forecasts real growth of 5.5% and 6.8% for the Nigerian construction industry in 2018 and 2019 respectively, up from a projected 1.8% in 2017, as pressure on the private sector eases as liquidity in the economy improves and the government moves ahead with financing projects as oil revenues rise. With sales of CVs positively correlated with the performance of the construction industry, we expect this bullish outlook to translate into positive growth in sales of both light commercial vehicles and heavy trucks, thereby creating demand for MFTBC's locally produced product range.

Stabilising Currency To Ease Production Costs

We believe that a stabilising naira will help ease the costs of imported vehicle components required by MFTBC in the vehicle manufacturing process. Our Country Risk team forecasts the naira to average NGN337/USD in 2018, representing an average depreciation of 5.4%, following an estimated average depreciation of 23.8% in 2017. Since vehicle assembly is susceptible to exchange rate volatility, this improving outlook for the naira will be a positive for domestic vehicle manufacturers.