As of the second quarter of 2022, technology contributed more to Nigeria’s GDP than oil, which used to be the country’s top revenue driver. The country’s tech industry is driven by startups and businesses scattered across locations that are able to derive value from beyond geographical borders to spur growth. Whilst we celebrate the impact of technology and remote gains, the movement of people and goods across geographies remains as important as intellectual mobility.
The potential of regional trade in Africa remains largely under-exploited. Mobility is essential to economic and social development as it enables access to goods, services and information, as well as jobs, markets, family and friends. Nearly every trip ends with either an economic transaction or some other benefit to our quality of life. Although the African Continental Free Trade Area (AfCFTA) offers a unique opportunity to take Africa’s regional trade to the next level, mobility remains a major challenge for inter-African trade and productivity.
We have mapped key areas of startup activity in mobility with the most prominent startups in each area as per the graph below (non-exhaustive). As vehicle ownership deepens, ride-hailing services expand, and trucking solutions penetrate, the need for a vibrant servicing and support industry emerges. We have seen the most activity in the sales and procurement aspect of the value chain, with Moove raising mega rounds to provide Uber drivers with vehicle financing through their revenue sharing model and Autochek rapidly expanding across markets through acquisitions, aggregating dealerships and providing financing for customers. Companies like Mecho are catering to the service industry, providing on-demand repair services coupled with spare parts distribution, and newer models are focusing on making documentation and licensing easier.
However, as low purchasing power coupled with a burgeoning population keeps driving Africa’s demand for pre-owned vehicles, the spare parts market becomes even more pertinent than the market for vehicles. Also, African countries repeatedly rank at the bottom for road quality, and this contributes to the number of incidents and the reduced expected life of vehicles on the continent further increasing the need for replacement parts. These spare parts are often expensive and hard to find.
We see these catalysts creating an opportunity for companies to penetrate and disrupt the space and decided to take a closer look into what business models can be built to take advantage of the size of this growing market. As a result, we were able to uncover some insights that will prove useful when building for the spare parts market:
a. The informal spare parts market is made up of family run businesses
The automotive sales and aftermarket is peculiar in the way it is run in that these businesses are often family owned passed on from generation to generation - along with connections and business secrets. Car dealers have consortiums where they operate their back end as an organised group, and spare parts vendors have old time suppliers they have been working with for years helping to manage their pricing. The profile of a middle to large scale spare parts vendor is a middle aged or older semi-educated man managing operations with 2 or more apprentices (often his relatives) helping out with day to day activities.
Majority of the business owners have access to smartphones and mobile devices, and even computers. The apprentices/staff are internet savvy and the owners are open to tools that can help make operations more transparent and efficient so they do not get cheated by staff. This presents an opportunity for the vertical to be digitised.
b. Inventory management is painfully manual with stock susceptible to obsoletion
Spare parts imported/bought are offloaded based on batch and just stored in the warehouse with little stock taking, which makes items susceptible to theft. Inventory requirements are determined by applying rules of thumb based on sales and stock outs unsupported by data and forecasting. Any items left unsold continue accumulating warehouse and storage costs and the importer continues to stockpile and import more goods.
Whilst spare parts have no specified expiration date, they are very susceptible to obsoletion and this is how the vendors lose money as capital is tied down. Conversations with vendors showed that they still stock inventory that is over 10 - 15 years old, waiting for the day that someone somewhere would be in need, however unlikely that may be. And as inventory ages and salespeople come and go, chances are that the existence of old stock is forgotten, ultimately resulting in losses.
c. Distribution is still majorly offline and inadequate
Although the auto sales and aftermarket opportunity is huge, fragmentation across various brands/distributors reduces their power. Spare parts sales are still largely offline, and no well-developed distribution networks have been put in place to ensure part availability, especially outside urban areas.
Vendors typically carry a wide range of stock depending on what parts and brands they specialise in - from engines to bumpers to tires. Distribution is mostly inhouse and through classified marketplaces, limiting their reach.
d. Specialisation can help boost mechanics’ operations
It is common to see mechanics specialise in the kinds of vehicles they work on - either by manufacturer or country. However, the generalists who work on all types tend to use trial and error methods which could lead to problems worse than the original faults. A specialist would typically take less time to fix a car, deliver better results and is more likely to source parts better.
Roadside mechanics and technicians have complained about the time it takes to get to the market to find a part, bring it back, test it for fit and authenticity and then return it if it does not meet requirements. Majority of these mechanics do not have the capital to keep stock, especially for frequently replaced parts, in store and have to venture to markets and back to buy parts when requested. With specialisation and organised distribution, time it takes to find parts can be reduced and parts can easily be delivered and returned if need be. In the long run, financing products can be built for mechanics to stock their stores which can in turn improve their bottom line.
e. Margins are contracted due to fragmentation of the distribution chain
Even with the volumes that the African spare parts market pushes, vendors still often have to source from distributors abroad as opposed to manufacturers. The wide range of stock carried by a wide spread of small to medium scale businesses, whilst vast, is not enough to establish a clear and predictable demand for the market. This absence of data on needs then results in dead stock which in turn drives prices up as vendors have to make their margins across all goods.
Aggregating purchasing power of the various brand businesses to achieve the needed volumes to source parts directly from manufacturers could help drive down the price and increase the margins. It is also a long term source of aggregated data to help with supply planning. We’ve seen this work with companies like TopUp Mama aggregating for restaurants, and Marketforce & TradeDepot doing the same for FMCG retailers.
Building for the next stage of the spare parts supply chain
There is a billion dollar opportunity in providing enabling digital infrastructure for the offline spare parts market through a consolidated inventory management system.
One option could be to build a reliable spare parts supplier with omni channels and online distribution to meet and manage the mechanics where they are. Because of how segmented the market is, penetration would start with distributing commonly replaced parts providing a one-stop platform access for sourcing. Authenticity would be the name of the game here which would help minimise spare part returns from the mechanics and build a strong and standardised name which will then help with expansion.
An alternative could be partnering with incumbents to digitise their stock, make it transparent and available, and add convenient delivery methods through partnerships. Attempting to penetrate the spare parts market by competing directly with incumbents will require a large amount of capital and these incumbents have deep roots in the market and the loyalty of a vast number of the service market made up of the informal technicians. In contrast, this model would enable small scale spare parts retailers and distributors to sell their stock and reduce working capital while offering a convenient path for mechanics to find and access the stock on the other end.
We’re eager to see companies build out an aggregation system to formalise this industry, going beyond just websites for sales to systems for inventory management. This would bank on the first step of software and systems being able to properly identify and record spare parts SKUs and products. This helps in providing real time visibility into who owns and holds what and how to minimise costs for distribution. Concentrated and unified branding efforts will lead to even more vendors joining in - creating a flywheel for branding, distribution and financing and eventually sourcing.
In the long run here, there is a full blown data play to meet the needs of each segment. Car owners who have sent in their cars for repair get transparency as they can compare pricing and grades for the replacement parts they’ve been told by their mechanic that their car needs. Vendors have a system which shows where customers are concentrated, directing them to where they can set up shop next and what brands need their parts replaced more often than others. Vendors can further develop scale and increase demand for genuine parts. More widely, it could help in providing concrete evidence showing where car manufacturers can launch production/assembly plants on the continent for most value. Local manufacturers can focus their efforts on the fastest moving and highest yielding parts, and new technology can be developed that makes production of these essential parts cheaper and more accessible.
Africa has more than a billion people - 17% of the world's population, but accounts for only 1% of cars sold worldwide, compared with China's 30%, Europe's 22% and North America's 17%. The automobile industry has the capacity to create value and jobs and can unlock development opportunities for the continent.
Given the current growth and innovation we are beginning to see with vehicle penetration on the continent, we believe the opportunities in organising the spare parts and servicing market is significant. If you are, or know anyone, building for the spare parts supply chain, we (research@future.africa) would love to speak to learn more!
