The automotive sector aims to build on its regional strengths, despite the ongoing challenge of repairing labour relations

Accounting for 7% of GDP, 30% of national manufacturing output and 11.1% of all manufacturing exports, South Africa’s automotive sector is often referenced as a case study for dynamic industrial policy. With leading global original equipment manufacturers (OEMs) including Toyota, BMW, Mercedes Benz, Volkswagen, Ford, Nissan and General Motors all operate sizeable production plants in the country and are able to tap into a range of incentives offered by the Automotive Production and Development Programme (APDP), the industry also demonstrates what can be accomplished when constructive collaboration between all stakeholders takes place.

Collective capacity, according to the National Association of Automobile Manufacturers of South Africa (NAAMSA), stands at around 850,000 vehicles per annum, with the association projecting 571,400 units will be built over the course of 2014, of which slightly more than half (301,400) will be exported. Labour unrest continues to be a concern, as plants experienced disruption in production arising from shortfalls in the supply of critical components as a series of strikes affected the metals industry in July.

Broadening Exports

In 2013, automotive exports, including commercial vehicle and buses, were destined for 152 countries, providing R102.7bn ($9.73bn) in foreign earnings. Europe remained the most important trading region, accounting for 34% of all exports, while Germany was the single largest export market, followed by the US. South Africa ranked as the world’s 24th largest automotive manufacturer with a global market share of 0.63% in 2013. The APDP aspires to reach production of 1.2m vehicles by 2020, a goal that would require reaching roughly 1% of the global total. Expanding export volumes to Africa will prove essential to achieving these levels, as there remains uncertainty over when and by how much Europe and North America will be able to recover economically. “It will take time for Africa to develop a viable public transport system so for now, subject to affordability, cars remain the preferred mode of transport. In Europe, transportation trends are moving in the other direction,” Mike Whitfield, the managing director of Nissan South Africa, told OBG.

Although North Africa – and Morocco in particular – has been receiving significant inflows into its automotive sector in recent years, South Africa continued to account for 72% of the continent’s vehicle production in 2013, and the Southern African Development Community region made up 21% of all South African exports. “The domestic market has its limitations, but if you add SADC to the mix you go from a market of 52m to 280m people. If you then also include the Common Market for Eastern and Southern Africa where free trade agreement negotiations are ongoing to secure duty-free exemption, you attain a market of 550m,” Norman Lamprecht, NAAMSA’s executive manager, told OBG. While most of the leading OEMs are exploring or in the early stages of setting up production in newly lucrative African markets, it will take decades for other African states to match the infrastructure and supplier base South Africa has accumulated, giving South Africa a first mover advantage it must work hard to retain.

Shifting Gears

In 2013, the APDP succeeded the Motor Industry Development Programme (MIDP), which had been in effect since 1995, as the sector’s governing investment scheme. While much of the framework from the MIDP has been retained, the main difference between the two programmes is that duty-free import credits will be measured on value addition and scale rather than export volumes.

While the MIDP has contributed significantly to the growth of automotive and component exports since its inception, South Africa’s motor industry has remained a net user of foreign exchange. Under the ADPD, the hope is that capital-intensive, high-value components will be made locally through the encouragement of more domestic parts and components sourcing. “Sustainability of the industry depends on the ability to develop a strong local supply base as this reduces currency risk and lowers logistics costs,” said NAAMSA’s Lamprecht.

Spoiled For Choice

To be eligible for the some of the scheme’s rebates, manufacturers will also need their production volumes to exceed 50,000 units. The scheme is structured such that the more volume produced in South Africa, the greater the allowance OEMs have to import other models from overseas to compliment their local sales mix. In 2013 around 45% of local consumption was imported. According to NAAMSA, there are currently 51 brands and 2295 passenger car model derivatives available for consumers to select between. NAAMSA asserts that this offers car owners the greatest choice to market size ratio of anywhere in the world. “South Africa has a very large volume of premium models in the general passenger car market, which in part is a result of the large local manufacturing base,” Suraiya Naidoo, divisional manager for sales at Mercedes Benz South Africa, told OBG. As of July 2014, domestic new vehicle sales were down 5% from the same period for 2013. Despite interest rates remaining low and vehicle financing being more affordable as a result, consumer confidence in general is down and demand for cars specifically has been impacted negatively by fuel price increases and new highway tolls.

Supply Disruption

The decline in sales and the resultant excess stock may help buffer production slowdowns, with some domestic plants reducing production as component supply was interrupted by a nationwide strike in July 2014 by the national union of metalworkers in the steel and engineering sector. For automobile makers, the strike came as a significant blow as it comes less than a year after production levels suffered from a strike undertaken by its own vehicle assembly workers that lasted seven weeks. “Last year we were around 60,000 vehicles below target because of the strike,” said NAAMSA’s Lamprecht. “The economic growth rate over the strike period was 0.7% rather than the expected 3.5%, which shows the importance of the industry to the overall economy.” Such labour unrest is of course not unique to South Africa and has to be understood within the context of the country’s distinct social and economic challenges. The four-week strike action in July, however, prompted a number of country heads to make statements to local press about how companies view South Africa as an increasingly risky proposition. “While a weakening rand and labour unrest are factors that could slow down industrialisation efforts in South Africa, a lack of electricity and water capacity will be the major issues going forward,” Laurent Langellier, CEO of Air Liquide, told OBG, “South Africa must unleash its fantastic human resources and talents to overcome these impending challenges.”

E-Vehicles

IPAP includes a dedicated roadmap for electronic vehicle (EV) production, but this portion of the programme has not yet gained substantial traction, with questions over whether the market economics make sense. According to NAAMSA’s Lamprecht, electronic vehicles might have limited uptake due to affordability constraints given the expenses involved, suggesting that if the government wanted EVs to hit critical mass, some sort of demand-side incentive would need to be offered.

Pick-Up Trucks

One vehicle type that ADPD incentives do not currently provide additional support to is pick-up trucks, which are referred to colloquially as “bakkies”. “Considering we have the capacity to make pick up trucks on a competitive basis, why doesn’t South Africa, like Thailand, institute selective policies to stimulate that particular segment?” asked Whitfield. Pick-up trucks remain popular in many African markets, especially for small business owners. “As Africa’s construction and mining sector springs up, so too is demand for bakkies,” Mazwi Tunyiswa, the head of the Industrial Development Corporation’s Metals, Transport and Machinery Products special business unit, told OBG.

Engine Revving

Despite labour unrest, growth still appears to be on track. In early July, China’s First Automotive Works opened a new R600m ($56.82m) assembly plant in the Coega Industrial Zone. In February 2014, Mercedes Benz South Africa announced that it would be spending R5bn ($473.5m) to upgrade its East London production facility, one of only four facilities in the world producing its next-generation C-Class. Around 800 new jobs will be created in the process, adding to the R22.5bn ($2.13bn) and 9756 new jobs that the sector as a whole has provided the country since 2009. In May 2014, NAAMSA projections for 2014 were for record industry cap-ex of R7.92bn ($750.02m), far surpassing the R4.35bn ($411.95m) recorded in 2013 and the R4.68bn ($443.2m) recorded in 2012. South Africa remains an integral component of the global automotive production chain and, it is one in which investors remain confident for the long term. “There is always room for improvement in other areas, but the APDP offers sound and consistent policy,” said Nissan’s Whitfield.