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DA IMLER AG S SMART CAR IsitsoSmartintheEmergingMarketsofIndonesiaandNigeria?
Master of International Business Case Study
Fa13-EIB-B238-01-International Business Strategy
Professor Bhaskar Chakravorti
Submitted by Team 7
August 21, 2013
2013 TEAM 7
htt : fletcher.tufts.edu
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DaimlerAGsSmartcar:IsitsosmartintheEmergingMarketsofIndonesia
andNigeria?
TheEmergenceoftheMicrocarIn2008,whentherewasaglobalfinancialdownturnandthebiggestcarmakeroftheworldGeneral
Motorswentbankrupt,thedemandforcarsincreasedacrosstheemergingmarkets.
Themajorcarmakersoftheworldbeganfocusingonmakingsmallcars.Therewasatimewhenthere
wereonlytwotochoosefrominlargestemergingeconomies:ChinaandIndia.However,whenMaruti
800 was launched, things changed. Suddenly, consumers wanted to go for this car because of its
featuresandpricerange.Now,therearemanydifferentmodelsofmicrocarsavailable.
Withtheincreaseofthenewfleetofmodelsinthemarket,customershaveabigrangetochoose
from.Whyallofasuddenpeoplearegoingformicrocars?Itisbecauseofthecongestedroadtraffic,
parkingproblems,risingfuelpricesandnewemissionsnorms,increasedcostofinputs,pricerangeand
the car loan facilities available. While China and India were early adopters of microcars, other
emergingmarketssuchasIndonesiaandNigeriabegantoseeanincreaseddemand.WouldDaimler
AGssmartcarbeabletotakeadvantageofthisexpandingmarket?
smartCAR
Smart is an automotive brand of Daimler AG that specializes in manufacturing microcars. Smart is
headquarteredinBblingen,GermanyandhasitsmainfactoryinHambach,France.
The design conceptfor smartcarsbegan inthe late 1980s, associatedatthetimewiththe Swatch
brandof watches. Aftera period ofbackingby Volkswagon,thefirstmodel was finally launchedby
Daimler-BenzinOctober1998.Severalvariantsontheoriginaldesignhavebeenintroduced,butthe
originaldesign,nowcalledtheFortwo,isthemostenduring.Itisnowinitssecondgeneration,andan
electricversionisalsoavailable.
SmartismarketedwidelyincludinginAsia,NorthandSouthAmerica,Australia,andEurope.Theyhave
been the subject of many conversions and design improvements by third parties, including electric
conversions, performance upgrades, anddesign enrichments. Sales from2011 to 2012increased by
6%,asshownintheExhibit11.
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IndonesiaandtheEconomicsofTransportation
IndonesianEconomy
Indonesiatodayisthe16 thlargesteconomyintheworld,has45millionmembersoftheconsuming
class,has53%ofthepopulationincitiesproducing74%ofGDP,andcontains55millionskilledworkersintheIndonesianeconomy2.Intheyear2030,Indonesiaissettobethe7 thlargesteconomyinthe
world,willhave135millionmembersoftheconsumingclass,willhave71%ofthepopulationincities
producing 86% ofGDP,and will need 113 million skilled workers3.Exhibit24 below represents how
Indonesias GDP has performed in relation to other to both non-emerging markets and emerging
markets in 2011. According to Exhibit 35, the current expected trajectory of growth for Indonesia
showsanadditional90millionIndonesianscouldjointheglobalconsumingclassby2030,poweredby
thecontinuedriseofurbanIndonesia.
PopulationDensity
Population density is a key indicator for the assessment of future needs for public transport
infrastructuredevelopment.Theworldspopulationiscontinuingtoexpandandisexpectedtogrowby
1.4billionby20306.AccordingtotheUnitedNations,in2015,emergingmarketswillalreadyaccount
fornearlythreequartersoftheworldsurbanpopulation.Indonesiastandsoutasacountry,which
will needextensive infrastructure enhancements, giventhat its already-high population density will
increasebyfurther32%by2030 7.EstimatessuggestthatIndonesiawillbehometosome322people
persquarekilometer8.
AutomobileIndustry
Many factors, like easilyobtainablecredit and low interestrates, coupled with a strong increase in
consumer lending by banks and an abundance of new, low-priced models assembled locally, have
fueled a car boom in Indonesia. Slow improvements to Indonesian infrastructure, policy, and tax
incentiveshavecontributedtoincreasingforeigninvestmentinthesector,andhasbecomeakeypillar
of the economy with investments raising more than $7 billion and generating employment of over
600,0009.Theeconomyexpandedby14.1%in201110,mainlyspurredbyconsumption,andisexpected
tocontinueontrack,spurringhopesofcontinueddemandforcars.
The current Indonesian automobile volume is estimated at approximately 11.25 million. The major
concerninIndonesiarelatingtovehiclepopulationgrowthispredominatelyfocusedoninfrastructure.
Theroadsinmanyregionsarewellbelowacceptableinternationalstandards,andtrafficincitieslikeJakartaisalreadyatchokinglevels.Thecompactcaristhelargestandfastestgrowingsegmentofthe
Indonesianmarket.Compactcarsaremostlytwo-wheeldrive,howeverfour-wheeldrivevariantsare
available.Compactcarsarefavoredbecauseofitslowprice,fuelefficiency,andsmallersizetoavoid
trafficjams.AsshowninExhibit427,thetoptenmanufacturersof vehiclespurchasedbyIndonesians
arepredominantlyfromJapan.Currently,dutyonimportedpartsrangesfrom0%to40%duty.The
Government has committed to working towards a 0% tariff on all auto parts imports by 2020. In
addition,thereisaVATof10%.Importationisquiteeasy,althoughalocalpartnerispreferred.Inorder
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tominimizeduties,itisquitecommonforpartstobetransshippedthroughSingapore.Dutiesbetween
SingaporeandIndonesiaarecurrentlyzero.Thereisawell-establishedinfrastructurethatcanfacilitate
thesemovements.
ComponentproducersinIndonesiacontinuetoproducelesssophisticateditemsthatlackvalueadded
processesandarethereforefacingincreasedcompetition.UndertheASEANfreetradeareaandtheASEAN China free trade agreement, import tariffs onauto components are set atzero. Japanese
producers have maintained their own production of high technology components due to the weak
enforcementofintellectualpropertylawinproductionbasessuchasIndonesiatoprotecttheircore
business.Thehighrateofinvestmentneededtoestablishfacilitiescapableofproducingsophisticated
components has also held back manufacturers from making the decisive shift tocentralize all their
production processes. Local component producers are therefore keen to establish financial and
technologypartnershipsinordertoaddvaluetotheproductionprocessandboostfutureexports11
.
Onthemanufacturingandexportside,Indonesiahasnotyetreachedtheproductivitylevelstomeet
itspotentialasamanufacturinghub.Incarexports,numbersregisteredbelow100,000unitsayear,
andlessthan30,000formotorcycles,for20092010.AccordingtoGaikindo12,importsofcarsstoodat 72,646 units in 2008 then dropping to 32,628 in 2009 but sharply increasing to 76,520 in 2010.
Issuesofredtape,lackofqualifiedhumanresources,highlogisticalcostsfrompoorinfrastructureand
unreliableelectricitysupplyhaveheldcarproducersbackinthepast.Tofillthegapbetweenthelack
ofsupplywiththehighdemand,companiessuchasHyundaiandToyotamakinglarge-scaleinvestment
toincreasecapacityinthecountry,inlightofthepoliticalturmoilinThailandandthedamagecaused
bytheJapaneseearthquake.Audiannouncedatthebeginningof2011thatitwouldbesettingupacar
assembly plant in Indonesia toproduce 2,700cars by2015 for the Indonesian market. Suzuki also
statedintentionstoinvest$800millioninanewautoengineplanttodoublecapacityatitsexisting
facility.The domesticmarket has beenthe main attraction for car producers aswellasthe modest
incentivessuchasthe2008regulationthatprovidesa6yearincometaxbreakonupto5%ofthetotalinvestmentandexemptionofimportdutiesforcertainrawmaterials.Morewillfollowsuit,suchas
Europeancarmakers,ifthegovernmentgoesaheadwithincentivesthatwillputIndonesiaonparwith
thoseofferedinThailandaswellasimprovinginfrastructure.
MovingForward
InMay2013,theIndonesianGovernmentannouncedandimmediatelyimplementedanewregulation,
theLowCostGreenCar(LCGC)project,encouragingtheproductionoflowcost,cheaper,fuelefficient
cars.Theregulationwouldseetheluxurytax(10%-75%)currentlyleviedoncarsreducedbybetween
25% and 100% for the LCGC cars specifically. Gaikindo, the Association of Indonesian Automotive
Industries have appeared to welcome the regulation and encouraged their members, includingMercedes Benz (Smart), to produce LCGC as quickly as possible
13. All brands within Gaikindo are
foreign,andsotheassumedabilitytoreceiveincreasedforeigndirectinvestment(FDI)throughthe
establishedchannelsisclear,providingtherightframeworkforthisFDIisinplace.Itcouldbeargued
that,ifaninterventionistpolicywereatplay,IndonesiasbilateraltradeagreementswithChina,South
KoreaandJapan,couldfavorbiasforparticularbrandswithintheautomotivemarket.
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Inaddition,accordingtothePoliticalandEconomicRiskConsultancyLtdsMarch20,2013reportand
rankings, Asia Intelligence, No 871, Indonesia is perceived tobe the most corrupt nation in Asia,
behindIndia.Withrelationtothemanufacturingindustry,however,thereisanemphasisonletting
themarketmechanismsdictateitsgrowthandexpansion,withlittleinterferencefromgovernmentor
otherpublicinstitutions.JongkieSugiarto,ChairmanofGaikindo,isofthefirmbeliefthatpriceandbuyerpowerwillbethetwothingsthatdeterminewhetheracarisbought-ifacaristooexpensive,it
willnotsell14.Inaddition,evenwithlargescalerisesof44%tominimumpayinIndonesia,thelabor
costsstillremainlowat$226permonth15.LCGCmarketpricesmustandcan,therefore,remainlowin
orderforsufficientrevenuetobegeneratedinacompetitivemarket.
NigeriaandtheEconomicsofTransportation
NigerianEconomy
Located in West Africas rain forest belt, 20% of Lagos' 3,600 sq km geographical area is mostly
waterways; however,90% ofcommutertravel inthe state isroad based. City authorities predict a
350% growth in the number of vehicles in the state over the next 25 years, with the population
doublingto40millionby2030.
PopulationDensity&Infrastructure
Lagosisarguablyoneofthefastestgrowingcitiesintheworld,andisWestAfricasleadingcommercial
hubwiththeregionslargestairandseaports.Lagosgenerates25%ofnationalgrossdomesticproduct
and its 20 million citizens account for 12% of Nigerias population. Lagos will continue to be a
significantpatchofAfricaseconomicsuccessstory,"saidTaiwoOtiti,IBMsCountryGeneralManager
forWestAfrica16
.Nigeriastruggleswithunreliablepublictransportation.Forexample,busesareof
poorqualityandrunmostlybyindividualbusoperators,whoareavitalpartofLagostransportation
network.Withclosetosixteenmillionbustripsmadedailyinthecity,thestreetsareteemingwith
over75,000minibuses.Thelackofplanningandmanagementcapacitycontributedtothepoorlevelof
urban transport services. Improving the capacity of the public transport system to cope with the
populationgrowthisclearlyofcriticalimportanceforLagos17.
NigeriainaContextualSpotlight
As a WestAfricanpowerhouse, Nigeria hashadlittle trade disagreement andis encouraging FDIbyproviding investment incentives to boost economic growth. Similarly to Indonesia, the Nigerian
government(bothFederalandStateGovernments)hasinvestedindevelopinginfrastructurethrough
partnershipswiththeprivatesector18.Withgrowingconsumerism,alargepopulationandarapidly
growingmiddleclass,therulingelitecanafford[...]top-endcarsthat,acrossWestAfrica,haveledto
thesobriquetWabenzi,orpeopleoftheMercedes-Benz19
.
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However, the pervading issue of corruption still remains pertinent in Nigeria. Transparency
International,a bodymonitoringinternationalfinancialcorruption,rankedNigeria172nd worstinits
listof215countriessurveyed.Inaddition,lackofimportregulation,lowgovernmentpatronagefor
locallyproducedautomobiles;andadutyregimethatfavorsimportedcompetitors,areallperceived
tobemajorcontributorstothestalledautomobileindustryinNigeria20
.Thereisgrowingrecognition
thatgovernmentandkeystakeholdersneedtodomoretobolsterthedomesticassemblyindustry,but
thatdespitetheexistenceofgovernmentmandatesanddirectivestoregulateimportsandboostlocal
productivity,thegovernmentitself,withthelargestpurchasingpower,willcontinuetofavorimported
cars21
.ThefederalgovernmenthassinceissuedagreementswithautomobilemanufacturersinEurope
to importing new cars (both European and Asian brands). A reliance on imported cars, and the
resultingconsumerpreferencesforthem,couldbeseentonegateanywilltoproduce.
Withrelativelylowlaborcosts,aneducatedpopulation22,andanestimated300,000jobspotentially
created in a fully functioning automobile industry, the revival of the industry could be seen as
attractive forboththe Nigeriangovernment andfor foreign investors, providingthat theregulatory
frameworkwasmoreconducivetostablegrowth.Veryrecentevents,however,couldpotentiallybethe turning point for the automobile industry. Through an informal agreement with South Africa,
NigeriaislookingforSouthAfricasexpertisetobuildupitsmotorindustry,onthebasisthatNigeria
wouldhavetosignificantlyincreaseitsimporttariffs,seealargeincreaseindemandforvehicles,and
tackleitspreferenceforimportedcars(locallyproducedcarsareperceivedaslowerquality).Though
therelianceon importedcarscouldbeseenasproblematic,fromabrandperspective,foreignbrand
names havealready established manufacturing plants in South Africa, includingMercedesBenzand
Toyota,meaningthattheWabenziwouldstillbeabletodrivetheircarsandboosteconomicgrowth
andtraderelations.
The agreement between the two nations to produce the Zagerian car would undermine the grey
marketandsupportlocalproductivityandtrade,aswellasboostingappetiteforandentryintothemarket.
Inaddition,theexistenceofthegreymarket(importedbasic,taxfreeversionsofcarsacrossborders)
hasunderminedeffortstoregulate,suchasnewlyintroducedimportpoliciesandtheestablishmentof
theNationalAutomobileCouncil23
.Accordingtoarecentarticle(March2013)inthePremiumTimes
ofNigeria,revenueof$550millionhasbeenlosttothegreymarket,intheautomobileindustry,over
the lastfour years. Grey market carshaveprimarily beensourcedfromDubai andelsewhere inthe
Middle East.The Financial DerivativesCompany, referenced inthe article, states that Greymarket
productscanoriginatefromtheft,unreportedsaleofgoods,theleakingofexcessinventoryintothe
market,illegalsalesacrossborders(playingthepricearbitragegame),andmultiplesalesof thesame
productwherethemanufacturerreceivesrevenueonlyforthesalefirstreported.24
NigeriaSmartornot?
The sale of Smart cars is targeted towards urban populations, where the need for swift modes of
transportiscontendingwithincreasingtrafficandpopulationdensitygrowth.ThecurrentsaleofSmart
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carswithin emergingmarkets, asin Indonesia, isalsoin line withagrowingmiddle classwherethe
demandforsuchcarsisalsoincreasing.TherationaleforchoosingNigeria,asaprospectivemarket,is
asfollows:
Firstly,asinferred,AfricaistheonlycontinentinwhichSmarthasnotmadeanentry.Secondly,there
isproductionofMercedesBenzcarsalreadywithinSouthAfrica,butnotintheotherpowerhouseofAfrica, Nigeria. Thirdly, we consider statistics on population density, an incremental population of
middle-classconsumersandtheirgrowingpotentialtopurchasedurablegoodssuchasasmartcar.
22.8%oftheNigerianpopulationisconsideredmiddle-class,ofwhich45%donotcurrentlyownacar.
Inadditiontoincreaseddemandsforcars(seeExhibit925),Nigeriaistheoreticallyattractive26.Upon
furtherresearch,andfromapurelymacroeconomicperspective,itappearsthatthecontextaround
the industry within specific markets is massively impactful upon whether we choose to enter the
Nigerianmarket.
ComparativelywithIndonesia,theNigeriangovernmentswilltoimprovetheregulatoryframework,
induceforeigninvestmentthroughpublic-privatepartnerships,andintroduceamorefavorableLCGC
schemeisstrong.However,theIndonesianmodelhaslessinterventionandposesfewerobstaclesto
entry.This,combinedwithpurchasingpowerinIndonesiaandalackofmarketdominancebyanyone
playerintheautomobilemarketallsetthetoneforsmarttosuccessfullyenterthemicrocarmarketon
alevelplayingfield.
Nigeriasautomobileindustryisfledglingandcontrolledentirelybygovernment.Attemptstoestablish
newmanufacturingplantsinNigeriawouldrequirealargecapitalinvestmentforanymarketentrant.
In addition,anyhistorical attemptsto regulate import tariffs andboost local production have been
undermined bythegreymarket, lackof enforcement, andbyestablished consumerpreferences for
foreign made cars. The regulatory framework in Nigeria is not yet stable enough topenetrate the
automobileindustrywithconfidence.Simultaneously,consumermindsetsarecurrentlyattunedtooildependentcarsduetothesubsidiesgrantedbythegovernment.
Theeconomicsofsuchsubsidieswouldnotnegateamovetowardsgreenerformsoftransportinthe
future. Ifa low cost modelsuchas that inIndonesia couldalsobe adopted,macroeconomictrends
supportthehypothesisthatLCGCcouldbecomeamoreviableoptioninthefutureforNigeria.If the
trade agreement with South Africa proves successful and the Nigerian government is able to meet
SouthAfricas demands,the regulatory framework for our entry into the Nigerianmarket becomes
moreattractive.Themodelwewouldadopt,however,wouldfollowtheproposedtradeagreement.
ThiswouldmeanthatwewouldproduceSmartLCGCsinDaimlersalready-establishedSouthAfrican
manufacturingplantsandexporttoNigeria.
Inconclusion,whilethesmartcarmayhavea long-termfutureinNigeria,wewouldnotrecommend
currentlyexpandingintotheNigerianmarket.
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EXHIBITS
Exhibit1:UnitSalesMercedes-BenzCars
Exhibit 2: Vehicles import statistics in Nigeria (Data source: Manufacturers, OMI India).
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Exhibit3:GNIPerCapita,PPP,(Worldbank)
Exhibit427:ToptenimportedvehicleconsumptioninIndonesia
Pos Model 2012 % /11 2011 % Pos
1 ToyotaAvanza 192,146 17.20% 18% 162,367 18.20% 1
2 DaihatsuXenia 73,418 6.60% 10% 66,835 7.50% 2
3 ToyotaInnova 71,685 6.40% 31% 54,763 6.10% 3
4 MitsubishiTruckColtDiesel 55,604 5.00% n/a n/a n/a n/a
5 SuzukiCarryPick-up 43,926 3.90% n/a n/a n/a n/a6 DaihatsuGranMaxPick-up 37,948 3.40% n/a n/a n/a n/a
7 NissanGrandLivina 34,129 3.10% 35% 25,324 2.80% 5
8 SuzukiErtiga 34,074 3.10% new - 0.00% -
9 ToyotaRush 34,033 3.00% 36% 25,012 2.80% 6
10 ToyotaYaris 27,809 2.50% 69% 16,448 1.80% 8
0
2,000
4,000
6,000
2008 2009 2010 2011 2012
GNIperCapita,PPP(currentinternaonal$)Nigeria
Indonesia
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Exhibit5:Population(Worldbank)
Exhibit6:PopulationinLargestCity(Worldbank)
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
2008 2009 2010 2011 2012
Populaon
Nigeria
Indonesia
0
5,000,000
10,000,000
15,000,000
2008 2009 2010 2011
PopulaoninLargestCityNigeria
Indonesia
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Exhibit7:GDPperCapita(US$)
Exhibit8:Indonesia Imports by Commodity in US Dollars - Motor cars and other motorvehicles principally designed for the transport of persons... Yearly
www.indexmundi.com
0
500
1,000
1,500
2,000
2008 2009 2010 2011 2012
GDPperCapita(US$)
Nigeria
Indonesia
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Exhibit9:Nigeria Imports by Commodity in US Dollars - Motor cars and other motor vehicles
principally designed for the transport of persons... Yearly
www.indexmundi.com
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Endnotes
1DaimlerAnnualReport2012 ,p.144.
2
RaoulOberman,RichardDobbs,AriefBudiman,FraserThompsonandMortenRoss,Thearchipelagoeconomy: Unleashing Indonesias potential, McKinsey Global Institute. September 2012,
http://www.mckinsey.com/insights/asia-pacific/the_archipelago_economy,accessedAugust20,2013.
3OrganizationforEconomicCo-OperationandDevelopment;Brazil,Russia,India,andChina,p.12.
4Manufacturers,OMIIndia.
5GNIPerCapita,PPP,(WorldBank).
6Transportation&Logistics2030,http://www.pwc.com/gx/en/transportation-
logistics/tl2030/index.jhtml.
7 OrganizationforEconomicCo-OperationandDevelopment;Brazil,Russia,India,andChina.
8Ibid.
9pwcfsviewpointReportMay2013,p.24.
10Indonesian Automotive Aftermarket Opportunities: Looking at potential Australian export
opportunitiesintheAutomotiveAftermarketinIndonesia,p.38.
11Global Business Guide, Automotive Industry: Driving Manufacturing., 2012,
http://www.gbgindonesia.com/en/manufacturing/article/2011/automotive_industry_driving_manufact
uring.php,accessedAugust20,2013
12GAIKINDODomesticAutoProductionbyCategoryJan-June2013.
13Jakarta Globe, Indonesia is Seen as Most Corrupt Nation in Asia-Pacific Region, March 9, 2010,
http://www.thejakartaglobe.com/archive/indonesia-is-seen-as-most-corrupt-nation-in-asia-pacific-
region/,accessedAugust20,2013.
14Ibid.
15ShamimAdam&SharonChen,AsiaSoaringWagesMeanRisingPricesWorldwide,Bloomberg,Apr2,
2013, http://www.bloomberg.com/news/2013-04-02/asia-soaring-wages-stoke-inflation-as-factory-
costs-rise.html,accessedAugust20,2013.
16IBM,IBMHelpsNigeria'sLagosStateDesignaTransportationSystemforFutureGrowth,14Jun2013,
http://www-03.ibm.com/press/us/en/pressrelease/41296.wss,accessedAugust20,2013.
17Ibid.
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18Mary Ekemezie (Bio), Kunle Durosinmi-Etti Folake Adebowale (Bio), The Guide to Worlds Leading
FinancialLaw Firms,http://www.iflr1000.com/LegislationGuide/838/Nigeria.html, accessedAugust 20,
2013
19MichelBurleigh,Acountrysocorruptitwouldbebettertoburnouraidmoney,MailOnline,8August
2013,http://www.dailymail.co.uk/debate/article-2387359/Nigeria-country-corrupt-better-burn-aid-money.html#ixzz2cYQMOxw0,accessedAugust20,2013.
20Taiwo Hassan, Leeway to revival of Nigerias auto industry, The Guardian Nigeria, 19 JULY 2013,
http://www.ngrguardiannews.com/auto-wheels/127415-leeway-to-revival-of-nigerias-auto-industry,
accessedAugust20,2013.
21Ibid.
22Mary Ekemezie (Bio), Kunle Durosinmi-Etti Folake Adebowale (Bio), The Guide to Worlds Leading
FinancialLaw Firms,http://www.iflr1000.com/LegislationGuide/838/Nigeria.html, accessedAugust 20,
2013
23Proshare,Nigerias Automobile Industry: A shadow of Itself, April 25, 2013,
http://www.proshareng.com/news/19796,accessedAugust20,2013.
24NigerialosesN90billiontoGreymarketautomobile.PremiumTimes.OluwaseyiBangudu.March16
2013.
25 NigeriaImportsbyCommodityinUSDollars-Motorcarsandothermotorvehiclesprincipallydesigned
forthetransportofpersons,www.indexmundi.com.
26Ibid.
27 http://bestsellingcarsblog.com/2013/01/15/indonesia-full-year-2012-toyota-avanza-kicks-goals-in-
record-market/