THE IMPACT OF BANK CONSOLIDATION ON AUTOMOTIVE INDUSTRY FINANCING IN NIGERIA
Abstract
The study examined the impact of bank consolidation on automotive industry financing.
61 respondents selected through strategic random sampling technique from GM Motors Nigeria Ltd formed the population for the study.
Data was collected using a survey instrument designed by the researcher. Chi-Square Statistical method was used to test the hypotheses and all findings held at 0.05 alpha significant level. The Analysis of the data revealed that the participants almost unanimously agreed that bank consolidation had impacted positively to the automobile sector in Nigerian economy.
Based on the findings, it was therefore recommended among others things that a regular review of automotive industry in Nigeria by the appropriate authorities while effort should be made to improve the power system (electricity situation) in Nigeria.
INTRODUCTION
Background of the Study
Mergers and acquisitions should be taken seriously as an instrument for enhancing banking efficiency, size, and developmental roles in every economy. Mergers and acquisitions especially in the banking industry is now a global phenomenon.
All over the world and given the role of finance, size has become an important ingredient for success in the globalizing world. The last few years have witnessed the creation of the world’s big banking groups through mergers and acquisitions. The trend has been influenced by factors such as prospects of cost-savings due to economies of scale as well as more efficient allocation of resources, enhanced efficiency in resource allocation, and risk reduction arising from improved management. However, the automotive industry is not left out in the process of alliances. Over the years the industry has witnessed different types of global alliances. For instances Renault- Nissan, VW-Skoda, GM-Daewoo to mention a few them
In the past, the small size of most Nigerian banks, each with expensive headquarters, heavy fixed costs and operating expenses and with bunching of branches in few commercial centers had lead to very high average cost for the industry. This in turn has implications for the cost of intermediation, the spread between deposit and lending rates, and puts undue pressures on banks to engage in sharp practices as means of survival. In an effort to survive the hurdle, the Central Bank of Nigeria introduced the 25 billion Naira minimum capital base for banks in an effort to make our banks much stronger and to able to compete favorably with other banks in the world in providing credit facilities to other sectors of Nigeria economy.
However, in 2004 as part of economic reform in some emerging economies, the Nigerian banking system underwent remarkable change, in terms of the number of institutions, ownership structure, as well as depth and breadth of operations. Banks begin to merge with other banks; while bigger banks begin to acquire smaller ones while automotive industry has become an increasingly pertinent contributor to country’s’ gross domestic product, mainly through strong growth in the motor industries in terms of increasing volume of local production and number of sales. And this is not peculiar to Nigeria alone.
This scenario raises the question “what impact of banks consolidation on automotive industry financing in Nigeria? It is important to envision this evolution from a life cycle of production assembly and sales that have impacted on the financial statements of GM Motors Nig LTD. In order to sustain this process, the automotive industry as a whole requires huge capital intensity from strong and reliable financial back- up to remain viable in the economy and optimize their environmental impact, communicate positive steps to non-governmental organization and other stakeholders to discharge their social corporate responsibilities while maintaining design of product, service system from a sustainability point of view. Hence this work is set to assess the impact of bank consolidation and capital provision for the automotive industry financing in Nigeria (A case study of GM Nigeria ltd)
COOPERATE PROFILE OF GM MOTORS LTD
GM Nigeria is a foremost player in the automotive industry and one of the leading motor vehicle assemblers and marketers in the country. GM Nigeria is a joint venture company between UAC of Nigeria Plc – one of the biggest conglomerates in Nigeria and General Motors Corporation of Detroit, the world’s largest automobile manufacturers. The relationship of these two companies gives them the best support and advantage in all facets of their operations, i.e. Sales, Parts, Services and Assembling.
About GM Global
General Motors Corp. (NYSE: GM), the world’s largest automaker, has been the global industry sales leader since 1931. Founded in 1908, GM today employs about 321,000 people around the world. It has manufacturing operations in 32 countries and its vehicles are sold in 200 countries. GM’s automotive brands are Buick, Cadillac, Chevrolet, GMC, Holden, HUMMER, Oldsmobile, Opel, Pontiac, Saab, Saturn and Vauxhall. In some countries, the GM distribution network also markets vehicles manufactured by GM Daewoo, Isuzu, Subaru and Suzuki
Brief History of GM Motors in Nigeria
1920 – Started as a Company called Miller Brothers Nigeria Limited which imported cars in to West Africa
1927 – Started importing completely assembled Bedford commercial vehicles into Nigeria.
1929 – Became the Motors Department of then UAC, now known as UACN Plc
1931 – Name changed to Niger Motors Limited. Continued importing built vehicles.
1949 – Commercial Vehicles were shipped in as double unit packs which contained partially assembled chassis for two vehicles in one pack and the wheels in the second pack to be assembled locally.
1959 – Established Nigeria’s First Vehicle Assembly Plant at Apapa. The Company assembled the popular Bedford Trucks of various models.
1965 – The Assembly Plant was renamed Federated Motors Industries, Then popularly known as “FMI” and the distribution arm remained “Niger Motors”.
1979 – FMI started the assembly of trucks from “completely knocked down” (CRD) components.
1980 – The Federal Government accorded FMI the “Progressive Vehicle Manufacturer” status, under the Approved User Scheme. This nomenclature was to attest to its high standard and quality products at that period. FMI and Niger Motors were converted into divisions of UACN Plc.
1991 – UACN Plc and General Motors Corporation of USA incorporated GM Nigeria Limited as a Joint Venture Company. The Assets of FMI and Niger Motors were then transferred to GM Nigeria Limited.
Vision
To be number one in the commercial segment of the automotive industry by providing exceptional value to our customers.
Mission
To provide automotive products of such quality as to enable our customers enjoy superior value while delighting other stakeholders
Incorporation and Address
GM Nigeria Limited is incorporated in Nigeria under the Companies & Allied Matters Act 1990 as a private limited liability company, and domiciled in Nigeria. The address of its registered office is:
31, Mobolaji Johnson Street ,
Oregun Ikeja, Lagos .
Principal Activities
The principal activities of the company are: assembly of SKD (Semi Knocked Down) motor components to produce medium and heavy commercial trucks, importation of FBU (Fully Built Unit) pick-ups, marketing and distribution of vehicles through its network or branches and dealers nationwide. The company provides product support for parts and service at its Oregun plant, Port Harcourt branch, Abuja branch and through its numerous Parts and services dealers. The company is also involved in provision of technical training for employees, dealers and fleet customer’s personnel.
The company’s product range includes Isuzu Light, medium and heavy commercial vehicles (all with various body applications).
Shareholding Of Gm Nigeria Ltd
According to the register of members at 31st December, 2007, the following shareholders of the company held more than 10% of the capital issued shared capital of the company:
Shareholder
Number of Shares
Percentage Held (%)
UAC of Nigeria Plc
72,000,000
60
General Motors, USA
36,000,000
30
Staff of GM motors Nigeria 12,000,000 10
Source financial statement GM motors 2007
1.2 STATEMENT OF THE PROBLEM
Serious national efforts towards the development of the automotive industry in Nigeria took place in the early 1970s, with initial joint venture agreements between Peugeot and Volkswagen companies. By 2001, there were over 20 different enterprises manufacturing different types of vehicles, from boats to trucks, including motorcycles and bicycles automobiles in Nigeria. The capacity utilization of the majority of these companies is, however, very low, largely due to the high cost of importing the components needed to assemble vehicles, non government patronage and poor capital base of some of these organizations. By the introduction of the policy of bank consolidation a lot of Nigeria feels that the banking sector will see to the end of this problem. But on the contrary, Nigeria roads are littered with imported second hand vehicle, many of them as old as 10years, as the country is an attractive dumping ground for all kinds of toxic waste while a lot of automotive companies in Nigeria winding up. Hence this study is sets to examine the impact of bank consolidation on automotive financing in Nigeria.
THE OBJECTIVES OF THE STUDY
This study sets out to:
To establish the effects of bank consolidation on capital provision for the automobile sector in Nigeria. To provide a research oriented framework for the development of good understanding of the basic aspects and importance of bank consolidation as it affects automotive industry in any economy. To determine the inherent relationship between bank consolidation and capital provision for the automotive industry Determine the resent increase financial statement of GM motors and the working capital available for the industry
RESEARCH QUESTIONS
The following Research Questions will thus guild this study:
In what way does the bank consolidation affect funding for the automotive industry in Nigeria? What are the benefits that the automotive sector has derive from bank consolidation exercise? To what extent does Banks consolidation provide a vehicle for automotive industry survival in a dynamic business environment? To what extent does bank consolidation enhance growth in the automotive industries? To what extent does the resultant effect of banks consolidation increase the market potential of the automotive industry
STATEMENT OF HYPOTHESES
The following stated research hypotheses will guild this study:
HYPOTHESIS 1
Ho: There is no significant impact of bank consolidation and capital provision for the automotive industry in Nigeria.
H1: There is a significant impact of bank consolidation and capital provision for the automotive industry in Nigeria.
HYPOTHESIS 2
Ho: Banks consolidation do not provides a vehicle for automotive industry survival and growth, in a dynamic business environment.
H1: Banks consolidation provides a vehicle for automotive industry survival in a dynamic business environment.
HYPOTHESIS 3
H0: The effect banks mergers does not increase the market potential of the automotive industry
H1: The effect of banks merger increases the market potential of the automotive industry
1.6 SIGNIFICANCE OF THE STUDY
The research is significant in the following ways: Firstly, it will help investors in the automobile industry to appropriate the opportunities provided by the consolidation exercise in that particular sector.
Secondly, it will further assist entrepreneurs to understand the relevance of consolidation of banks to capital provision and finally, it will serve as useful source of material for researchers and students.
1.7 THE SCOPE/DELIMITATION OF THE STUDY
This Study will be limited to Sixty one staffs of GM motor Nigeria Ltd. It will covers the funding of the automotive industry in Nigeria.
DELIMITATION OF THE STUDY
The study only looked at the impact of bank consolidation on the automotive industry. The population of the study covers only the staff of GM motors Ltd Oregun, Lagos. Therefore, this study may not be generalized.
As the researcher was the sole interviewer and instrument of this study, researcher bias may be possible in any of the interpretations. Though the researcher worked hard to keep out any personal opinions, the possibility of subjectivity may still be present.
Also, it is possible that respondents didnt give accurate information about their operations in other to maintain some level of social dignity. Human Resources manager of the organization also had to answer interview questions from the researcher. This provided a certain level of uncomfortableness and uncertainty as he was worried that he may be judged by his responses. And finally the dearth of literature materials in the automobile sector also was a major challenge
Summary of Findings
This work examined the impacts of banks consolidation on automotive industry financing, using G.M Motor Ltd as a case study. Sixty copies of questionnaires were distributed, fifty one were returned giving 85% response rate. The results of the findings show that: consolidation have provided a vehicle for automotive industry survival and growth in a dynamic business environment.
Again, automotive industry seems to grow due to banks consolidation that can provide huge capital requirement in case of expansion through new products development or acquisition of small automotive companies and this is usually a strategy to form global alliances designed to monopolize and expand the brand image when merger occur and achieve in some cases political power. Furthermore, banks consolidation provides a vehicle for automotive industry’s’ corporate survival and growth in a dynamic financial environment as it boosts the strength of automotive industry and thus it enhances automotive industry’s financial capacity. Also the results showed that banks merger provides economies of scale and achieve some form of synergy for the automotive industry and the resultant impact of banks consolidation increases the market potential of the automotive industry.
The research also revealed that banks consolidation result in a higher market price and higher earnings per share coupled with improvements in its stability though opinion is divided as to whether the dividend before and after automotive industry alliances cannot be maintained after the consolidation in order for the market price of the automotives stock to be established.
Banks consolidation seems to increase corporate power and improve market share in some cases, resulting in a higher price earning ratio. The work also showed that bank consolidation aids the automotive industry in financing that would not otherwise be possible to obtain, which helps to achieve some synergistic effect without strong bank’s financial capital base.
Also revealed by the study is the fact that banks Consolidation brings about adverse automotive industry financial sustainable effects because the anticipated benefits did not materialize for expected cost reductions were not forthcoming hence it should result in higher earnings or improve its stability. Furthermore, the findings showed that banks merger is vested in automotive industry ability to foster growth and the resultant profitability which will otherwise be difficult and nearly be impossible without banks strong capitalization
Conclusion
Nigerian’s automobile industry is one of the continent’s fastest growing sectors, but it lacks the necessary local technology and finance to fully harness its potential and contribute to national growth and development. This state of affairs has ensured that investing in the sector has become the preserve of just a few foreign companies in the automobile sector, largely based outside of the continent. Bank Consolidation introduced in Nigeria in 2005, is an expression of strong desire of Nigeria government to reinforce an instrument for enhancing banking efficiency, size, and developmental roles in her economy. It is pertinent to know that this exercise has assisted the automaker industry to raise capital that may be require in times of boom as well as depression and successful entry into products market as well as into new geographical markets in Nigeria. The primary purpose of corporate entities has been to increase the financial and operational strength. Banks, consolidation has helped in playing important roles of supporting the real sector like automotive industry in a global context hence banks have remained a new phenomenon in financing big projects in automotive industry in the corporate business world.
Outside the capital provision the automobile sector in Nigeria has also experienced a lot much neglect than other sectors ( Abiodun 2008). In seeking to achieve success in this sector vigorous efforts should be made to counter some of this factors which are known to have hindered achievement in this sector in the past like; power, local content policy and restriction on the importation of cars which can be locally assembled here. Effort should be made to sustain this little improvement that has been recorded in this sector as result of bank consolidation.
RECOMMENDATION
Based on the findings from the study and the facts at the disposal of the researchers, the following recommendations are made
Regular and study review of the automotive parts/components development industry in Nigeria by the appropriate authorities Government should provide incentive measures to encourage the local auto makers for ensuring compliance with approved local programmes; The right of inspection and other quality assurance activities in factories, ports and roads in pursuance of minimum standard of automobile on Nigeria Roads by the appropriate authorities Regular evaluation of the pricing structure and quality of the products of the assembly plants to ensure international competitiveness; Forecasting the demand and supply patterns for various types of automotive vehicles produced in Nigeria and the basic raw material requirements by the appropriate authorities The automobile sector should liaise with relevant organisations charged with the production of raw materials (such as sheet metal alloy and special steel) and make sure is available when needed
Finally, The Nigerian government as a matter of urgency should articulate policies that can promote the development of local technology. Basic technical capacities which should include discouraging imports of completely built up units, providing incentives to local assemblers to increase local content in production (tax reduction and subsidies) and regulations to ensure local content in varying percentages.
