EXECUTIVE SUMMARY

• Morocco is an economic powerhouse in Northwest Africa with extensive ties with France and Spain. With an aim to integrate into the regional economy, Morocco is fairly open in trade and strives to maintain political stability.
• The Moroccan government has introduced an industry-upgrade programme – Plan Emergence, to diversify into other industries to reduce reliance on the volatile agricultural sector. Target industries include garment, electronics, automotive, aeronautics, information technology outsourcing (ITO) and business process outsourcing (BPO).
• Some industries have been growing since the implementation of the Plan, such as electronics. Hong Kong companies now have a wider scope to supply industrial inputs to certain Moroccan industries, also benefiting from a bigger consumer market as Morocco’s middle-class size grows. Worth noting is that Morocco’s GDP per capita (US$2,900) is at levels similar to that of the Chinese mainland (US$3,300).
• Most Moroccan retailers are small businesses. They often do not have the resources to do international sourcing, and thus rely on importers to supply them products. Against such a backdrop, importing business in Morocco is fairly vibrant, with a large pool of importers sourcing various kinds of goods internationally. Compared to the meagre margin associated with Morocco-bound exports, importers enjoy more comfortable margins, especially for those importers who have established distribution networks.
• The Moroccan market is likely to prove challenging to Hong Kong companies wanting to tap its consumer market directly. Such difficulties include limited distribution channels for middle-to-high-end goods. However, the situation is expected to improve when more shopping malls are built.

Morocco: A Reforming Market with Opportunities

Morocco is situated at the northwestern tip of Africa. The country gained independence from France in 1956; despite its colonial history, Morocco enjoys an amiable relationship with France at present. With a strong French connection and colonial heritage, for those Hong Kong companies with trading experience with France, Morocco would appear a fairly familiar place.

Morocco’s economy has been reliant on a few industries, namely, agriculture, phosphates mining, garment and tourism. Things are starting to change, however. The Moroccan government realises that over-reliance on these industries would put Morocco’s economic growth on a wide swing. For example, agriculture employs about half of Moroccan’s working population, and it accounted for 12% of GDP in 2007. In times of poor harvest, Morocco’s economic growth would be greatly compromised. This was evident in 2007, when a shortfall in rain caused Morocco’s GDP growth to plummet from 7.8% in 2006 to a mere 2.7%. Morocco’s garment manufacturing industry also faces strong competition from Asian suppliers, and there is a growing need to rebalance Morocco’s export portfolio.

The Moroccan government devised Plan Emergence in 2007, a blueprint for the country to upgrade its industry to achieve sustainable economic growth. The Plan aims to breed new industries to diversify Morocco’s economic structure, to strengthen international competitiveness in traditional industries, and to improve Morocco’s business environment.

New industries targeted for upgrade include information technology outsourcing (ITO), business process outsourcing (BPO), automotive, electronics, and aeronautics, among others. The majority of Moroccans speak French, and many of those living in northern Morocco speak Spanish. With its low-cost labour who receives education heavily skewed to the French system, Morocco is poised to take advantage of outsourcing opportunities from France, and to some extent, Spain. Currently, the industry employs 41,000 people and employment is increasing. Workers in this profession are paid at US$820 or above, substantially higher than the national average of US$240.

Morocco also has an expanding electronics industry. Low-cost, but skilled labour in Morocco has prompted some European firms to outsource low-value-added electronic parts and components manufacturing to Morocco, such as cable and wires, batteries, etc. Electronics became the third largest export earner for Morocco in 2007, with a value of US$521 million.

The automotive industry is another target for industry upgrade. Morocco has successfully attracted Renault to set up assembly plants in the Tanger-Med Free Zone, at the northern tip of the country overlooking Spain across the Mediterranean.

With its geographical and cultural proximity to France and Spain, combined with its low-cost labour and improving infrastructure, Morocco is increasingly becoming an outsourcing platform for the two countries.

Traditional industries have also been given a boost. The government will invest into the agricultural sector to improve yields, support the textile and garment industries, and will invest in tourism infrastructure to achieve a 10-million-visitor-per-year target by 2010. These include the building of seaside resorts, residences, shopping malls and entertainment zones. Emaar, a UAE-based developer, is in charge of developing the Moroccan capital’s waterfront, integrating it with the wider coastal development zone. Another prominent project is the Morocco Mall in Casablanca. The 10-hectare mixed development is designed by the international engineering firm Arup, includes 185,000 sqm of retail space, and is scheduled for opening in 2010. In 2007, 7.4 million tourists visited Morocco, and the government is stepping up efforts to meet the 10-million target for 2010. This target may be difficult to meet under the current economic environment, but with the massive investment in tourist infrastructure, the target is likely to be achievable at a later stage.

On improving the business environment, the Moroccan government has taken multiple approaches to making Morocco a better place to do business. First, the government has reduced corporate tax from 35% to 30%. For certain sectors included in Plan Emergence, the tax rates are substantially lower. For example, the export sector only pays a tax rate of 17.5% instead of the standard rate of 30%.

The government has also progressively approached its main trading partners to enter into free trade agreements (FTAs), allowing easier access for Moroccan products into different markets. These FTAs include an agreement with the EU in 2004, one with the US in 2005, as well as a number of agreements with other countries that came into force in 2006 (Turkey, Egypt, Tunisia, and Jordan).

The Moroccan government has also set up a free zone and a large port in Tangier, at the northern tip of the country. The Tanger-Med Port was established with an aim to make it the largest port in North Africa. The government invited Maersk to operate the port and it achieved a throughput of 600,000 TEUs in 2007. The Tangier Free Zone exempts all import taxes and duties, thus offering a friendly environment for processing trade.


Opportunities for Hong Kong Companies

The industrial sector in Morocco has a huge appetite for electronic intermediate goods. Under Plan Emergence, electronics is an industry targeted for growth. Morocco has an electronics industry, but its main products are low-value cables and wires, batteries and generators. Hong Kong companies are in an advantageous position to supply electronic components to Morocco for local assembly, including some automotive electronics. This is evident from Hong Kong’s robust exports of electrical machinery to the country.

For Morocco’s consumer market, the country’s population is young, with more than 60% of its population under 29. The young generation is receptive to new and creative electronic gadgets and entertainment devices. At present, there is yet to be a strong brand culture in Morocco. Consumers generally put more focus on affordability and functions of a product rather than the name that it carries.

Morocco’s garment market also offers some potential for Hong Kong exporters. Though a Muslim country, Morocco is heavily influenced by France. Moroccans’ taste for fashion is no exception, and they are relatively liberal in what to wear compared with other Arab countries. Hong Kong companies can provide clothing with less-than-conservative design to the Moroccan market to meet the demands of a population with gradually rising incomes. As can be seen in the chart below, Hong Kong exports of clothing to Morocco increased rapidly in the five years to 2008, surging from US$728,000 in 2004 to US$2.6 million in 2008, with an average annual growth of close to 40%.

The government plan to enhance its tourism infrastructure, by building seaside resorts, residences, shopping malls and entertainment zones, may provide some business opportunities for Hong Kong’s infrastructure and real estate service suppliers.


Risks and Challenges

While Morocco is undergoing reform to boost economic growth, its retail market is fairly challenging for middle-to-high-end products. For one, limited appropriate channels to distribute middle-to-high-end goods present a problem. Shopping malls and supermarkets are still fairly limited compared with Egypt, the largest market in North Africa, while the low-end market is fraught with competition.

Taxes and duties are also obstacles for successful penetration into the market. Despite the government’s efforts to lower taxes, progress has been moderate. Income tax was lowered from 44% to 42% in 2008, while corporate tax was lowered from 35% to 30%, which is still high. Morocco also imposes a value-added tax (VAT) of 20% on consumer goods. Besides, with import tariffs ranging from 2.5% to 40%, products from countries without an FTA with Morocco will need to be extra competitive to penetrate the Moroccan consumer market.

Although Morocco’s Plan Emergence is showing signs of success, Hong Kong companies with an interest in the Moroccan market will need to take a longer-term view to bear fruit from the country’s economic diversification programme.

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