South African automotive industry remains resilient

The automotive industry is the biggest contributor to manufacturing GDP and one of the most dynamic parts of the segment. While other industries are struggling, automotive firms have proven resilient, due to the segment’s strong degree of integration, with domestic component suppliers flourishing, a solid policy framework and export diversification.

Major Driver

The broader automotive sector contributed 7.2% to GDP in 2014, according to the Automotive Industry Export Council. The sector accounted for 30.2% of manufacturing output and 11.7% of export earnings, some R115.7bn ($10bn), a record and up 12.7% on 2013, Norman Lamprecht, who produced the “Export Manual” and is executive manager of the National Association of Automobile Manufacturers of South Africa (NAAMSA), told OBG. Of the export earnings, R70bn ($6bn) was generated by vehicles and R45.7bn ($3.9bn) by components. The sector exported to 148 countries. In 25 of these countries, exports more than doubled in 2014 alone.

Overall, South Africa produced 566,083 vehicles (ranking it the 24th-biggest vehicle manufacturer in the world and accounting for more than two-thirds of Africa’s total), exporting 276,873. Major international companies manufacturing in South Africa include Toyota, BMW, Mercedes Benz, Volkswagen, Ford, Nissan and General Motors, in part thanks to the country’s competitive advantages as an export base.

BMW, for example, exports to Australia, Japan, South Korea, New Zealand, Canada and the US from South Africa. In 2014 the firm produced 71,000 units in the country, 61,000 of which were exported. BMW has also announced a new R3bn ($259.2m) investment into upgrading and preparing their plant to build the new model X3 starting in 2019.

Investments

Vehicle manufacturers made record investments worth some R6.9bn ($570m) and component firms R2.7bn ($233m) – at a time when investment in South Africa has been limited by a weak rand and economic uncertainty. The domestic market has been affected by slowing growth, rising inflation and increasing uncertainty (this being a market sensitive to consumer confidence) – new vehicle sales in South Africa slipped 0.7% to 644,504 in 2014. This was the first decline in five years, and was followed by a 1.9% fall in the first half of 2015. However, Lamprecht is more upbeat about the prospects for the second half, partly because rental car companies tend to renew their fleets at that time of year. Meanwhile, exports were up a striking 45.2% in the first half of 2015 on the same period of the previous year – though the figure was boosted by the launch of exports by Mercedes in mid-2014. Lamprecht said the country is on track to export 325,000 units in 2015, up from 284,000 units achieved in 2008, the highest figure to date.

Key Strengths

The level of vertical integration in South Africa’s automotive industry, with a strong component sector supplying original equipment manufacturers (OEMs) is a key advantage. “Low inflation and a stable exchange rate are key to a vehicle manufacturer’s cost structure,” Johan van Zyl, CEO of Toyota South Africa, told OBG. “Since South Africa lacks both, we must maximise value-added for the value chain, from raw materials to components.” A stable, pro-investment policy framework has also benefitted the country. In 2013 the Automotive Production and Development Programme (APDP) replaced the Motor Industry Development Programme, which had been in effect since 1995. The new framework maintained many incentives, but places greater emphasis on building value in-country. “The APDP has been a success, attracting the world’s top OEMs to establish a manufacturing presence in the country,” Tim Abbott, managing director of BMW Group South Africa, told OBG. “The key to investment in the sector will be policy consistency and the development of a strong supplier base.” The APDP expires in 2020, but the government says that investment support will continue.