{"id":633408,"date":"2024-07-14T00:00:00","date_gmt":"2024-07-14T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/inside_industry\/the-lowdown-on-the-states-component-based-scheme-for-export-support\/"},"modified":"2024-07-14T00:00:00","modified_gmt":"2024-07-14T00:00:00","slug":"the-lowdown-on-the-states-component-based-scheme-for-export-support","status":"publish","type":"inside_industry","link":"https:\/\/enterpriseam.com\/egypt\/inside_industry\/the-lowdown-on-the-states-component-based-scheme-for-export-support\/","title":{"rendered":"The lowdown on the state\u2019s component-based scheme for export support"},"content":{"rendered":"

Gov\u2019t wants to base its <\/strong>export <\/strong>support program on the localization of <\/strong>components:<\/strong> In a bid to double the local components<\/a> in manufactured goods annually over the next four to five years, the government wants to roll out a system to give more export support and rebates to manufacturers who ramp up local components, according to a cabinet statement<\/a> released in May. The government has held discussions with local export councils and industrial chambers on the proposed plan, which aims to boost and deepen local industry whilst improving the quality of local products. Enterprise spoke with a handful of industry veterans to gather their insights on how this plan may best be carried out and what obstacles stand in the way.<\/p>\n

The caveat: <\/strong>Under the plan, manufacturers with low local component percentages would face substantial cuts in export support within five years \u2014 a time frame that sources we spoke with interpret as a grace period for manufacturers to work towards compliance.<\/p>\n

Breaking the mold: <\/strong>Several industries still benefit from the government\u2019s export and support rebates program even though their local components constitute no more than 40% of their exports, a shortfall that the government seeks to address, according to the statement.<\/p>\n

Export support can be a lifeline: <\/strong>Many companies export their products at cost price, relying on export support from the government as profits to continue production amid continuous rises in manufacturing costs over time, an exporter who preferred to remain anonymous told Enterprise.<\/p>\n

How far have we come on the road to our export ambitions?<\/strong> Egypt's non-oil exports stood at USD 35.6 bn in 2023<\/a>. The government aims to ramp up exports to USD 130 bn by fiscal year 2026-27<\/a> \u2014 whilst growing industrial output by 31.2% a year during that time frame \u2014 before pushing exports to USD 145 bn by 2030<\/a>.<\/p>\n

Manufacturing imports are on the decline: <\/strong>Egypt imported some USD 10.4 bn worth of primary raw materials for manufacturing in 2023, down from USD 12.8 bn the previous year, according to figures from state statistics agency Capmas. Meanwhile, imports of intermediate materials \u2014 semi-finished products used in the production of other goods \u2014 dropped to USD 30.3 bn at the end of 2023 from USD 36.5 bn the previous year.<\/p>\n

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ROADMAP-<\/p>\n

A clear-cut game plan is the first order of business: <\/strong>A well-defined strategic program is needed to expand the domestic production of raw materials and manufacturing components, suggested Sherif El Sayad, Chairman of the Engineering Export Council of Egypt. The program would delineate the mechanisms of localization, focusing on specific high-value feeder industries, such as plastics or stainless steel. While domestic consumption of plastic is large, local production remains minimal. Meanwhile, the country doesn\u2019t produce any types of stainless steel, relying solely on imports despite its local feasibility, El Sayad explained.<\/p>\n

Investment incentives are needed to attract foreign capital: <\/strong>Offering robust investment incentives to attract foreign investment in the coming years can be a major driver of expanding local component production, El Sayad said. Meetings should be held with targeted investors to understand and fulfill their needs, such as skilled labor or industrial land.<\/p>\n

Quality should be the name of the game: <\/strong>While cost-competitiveness is important, the state's efforts to expand local component production should prioritize quality and production efficiency to ensure that the final product meets international export requirements, an exporter told us. Many markets value more than just the lowest price tag, they explained, citing unfruitful efforts by local SMEs as an example. While there has been a surge of investments in local component production by SMEs, many of these companies struggle to meet the stringent quality standards demanded by global markets, they said. This ultimately undermines their competitiveness despite lower production costs.<\/p>\n

More can be done for and by exporters: <\/strong>More players are needed on the export arena, said Hani Kassis, a member of the Egyptian Industries Federation. The foreign exchange crunch, while challenging, prompted many manufacturers to export their products in a bid to secure hard currency, Kassis said, adding that he hopes these companies remain active on the export front even as the crisis abates. It\u2019s crucial to train exporters in effective marketing strategies and market research to enable them to penetrate international markets, he added.<\/p>\n

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SETBACKS-<\/p>\n

Do we have what it takes to carry out the state\u2019s plan? <\/strong>Linking export support to the local component percentage in exported goods may prove infeasible, seeing as Egypt currently lacks readily available raw materials for key industries, a source in the petrochemicals sector said. The proposed policy of withholding support from exporters who are unable to ramp up exports could therefore disadvantage certain export sectors, they explained.<\/p>\n

Export support is often delayed and underfunded: <\/strong>Export support payments are often delayed for over two years, our source in the petrochemicals sector said, adding that the backlog owed by the government to local exporters stands at nearly EGP 30 bn. Additionally, funds allocated to export support are insufficient, they said, given the growing number of exporters entering the market each year. Seeing as all countries provide some form of export support, this underfunding risks putting local companies at a disadvantage in the global marketplace, they explained.<\/p>\n

Localization vs. integration: <\/strong>Given the scarcity of raw materials, the real focus should go beyond locally manufacturing components and prioritize industrial integration to create added value, a source in the building materials sector said. Egypt's steel industry is a prime example. While the country lacks significant domestic reserves of primary materials like iron ore, it boasts large-scale factories with impressive investments exceeding EGP 500 bn, they said. These factories import raw materials and then put them through a meticulous manufacturing process, transforming them into finished steel products. The added value generated from these manufacturing stages benefits the industry as a whole.<\/p>\n

A case in point: <\/strong>When a foreign investor approached the Engineering Export Council with a proposal to manufacture LED light bulbs solely for export, the council suggested that the investor gather information on the international suppliers for potential investment in the country, El Sayad said. This strategy embodies the concept of industrial integration \u2013 focusing on attracting industries that provide the building blocks for export-oriented manufacturing.<\/p>\n

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