Untitled Document South Africa's automotive industry continues to experience mixed fortunes - in line with developments for the South African economy. On the plus side, the South African vehicle market is easily the largest on the African continent. It also has a relatively well-developed supplier infrastructure and vehicle assembly industry. In recent years, there have been signs that some vehicle makers - most notably Volkswagen - are serious about integrating their South African operations into their global structures. But low scale economies, a crowded market and a history of protectionism - which is only gradually being eroded - leaves a lingering suspicion that South Africa's auto industry is still a long way from being internationally competitive. Increasing exposure to international standards and benchmarks - for South Africa's vehicle manufacturers and component makers - poses a huge challenge for the future.

An industry emerging from isolationism and protectionism

South Africa's automotive industry grew up in an era of isolationism and strong protectionism. During the apartheid era, the industry was largely excluded from exporting to world markets and was protected from international competition by import duties which could amount to more than 100% on completely built-up vehicles. Its integration into the international economy has presented policy-makers and industry participants with a series of difficult transitional issues. Chief among the problems facing the industry is the problem of too many vehicle assemblers (15) in view of the size of the domestic market. The problem of insufficient scale - a problem which has also created structural problems in the automotive components sector - led in 1995 to the publication of a specific plan for the industry, the Motor Industry Development Plan (MIDP). The MIDP is designed to help the local industry come to terms with operating in a global framework. The MIDP's main objectives were to:

· improve the competitiveness of the South African automotive industry;
· improve the affordability of vehicles in the domestic market - something which would lift demand and support local manufacture;
· increase vehicle manufacture - both through expanding the domestic market and generating increased exports;
· increase component production via increased vehicle manufacture, import substitution and component exports;
· open the South African Customs Union (SACU) to international competition (Botswana has developed a significant auto-assembly facility under the 'Wheels of Africa' aegis);
· stabilise employment levels in the industry;
· create a better balance between the industry's foreign exchange needs (for imports) and earnings (through exports).

A key element in the strategy was a series of changes to import duty and local content rules, including the steady reduction of import duties and the elimination of rules surrounding local content requirements. A separate tariff reduction programme was announced for commercial vehicles. Later in 2000, the MIDP is expected to be re-tuned further, so that volumes per model produced/assembled in South Africa will be raised substantially by the end of the decade.

Some progress, yes, but major restructuring ahead

While there has been a degree of progress achieved in bringing about the development of South Africa's automotive industry in line with the core objectives of the MIDP, hard challenges lie ahead. On the positive side, there has been progress in achieving increased exports - with BMW and VW taking a lead role in developing their South African manufacturing operations in terms of their international vehicle sourcing strategies. There was also evidence of some stimulus to component exports and for a general acceleration of vehicle makers' modernisation plans. There has also been a very substantial shakeout of labour costs in the industry over the last five years. Employment in the automotive industry is estimated to have declined by around 50% over that period, to stand at 290,000 people.

More negatively, the existing vehicle supply structure seems set to change substantially. It is inconceivable that a market of less than 300,000 units will support the current level of assembly activity. Parts of it will clearly survive as viable elements in a global automotive industry, but some parts clearly will not as the regime governing import tariffs changes and makers prefer to import CBU units.

A complex market

Some of the curiosities of the South African automotive scene - such as the collaborations between manufacturers which are not mirrored elsewhere in the world, and the continued manufacture of model lines discontinued elsewhere (often alongside the introduction of current generation models) - remain very much in place. That points to the essential complexities in South Africa's emerging market dynamics. BMW and Mercedes-Benz have both been present in South Africa for some time and have been hit by the increases to company car taxation of recent years. On the demand side, the downsizing shift that has already taken place looks certain to become part of the broader preoccupation with meeting the affordability concerns of the embryonic black middle class. Therein lies the key to the untapped demand potential that the vehicle manufacturers could exploit to achieve the economies of scale that would truly justify a presence in South Africa.

As the South African car market has become more competitive, the proportion of sales made through dealers is declining - with manufacturers bypassing dealers to make direct sales to national and provincial governments with large discounts reported. There are now also considerable quantities of single unit new vehicle sales being reported, with makers helping to boost their returns by buying in part of their production when market demand is slack - and then selling on.

Economic recovery in 2000 could be undermined by Zimbabwe crisis

In the latter part of 1998 and into 1999, economic conditions in South Africa deteriorated sharply. The generalised crisis of confidence hitting emerging markets was felt in South Africa too. Interest rates climbed and consumer demand fell off. The new car market declined from a peak of almost 250,000 units in 1996, to just 189,000 units in 1999. In the latter part of 1999 and early part of 2000, it seemed that South Africa's economic fundamentals were improving. The exchange rate appeared stable, interest rates were coming down and business confidence was recovering. Exports were picking up in the context of a growing global economy. After less than 1% growth in 1999, the economy was expected to grow by at least 3% per annum in 2000 and 2001. The new car market was therefore confidently forecast to expand by around 10-15% in 2000 as consumer demand grew. We still believe this is achievable and a new car market of 208,000 units for 2000 forms our central forecast.

However, the growing political crisis in Zimbabwe is affecting South Africa's economy too. The rand depreciated by 3% in April alone - although that was also explained by the weakness of the euro, which is the main currency in the rand's trade-weighted index. The South African stock market and business confidence also deteriorated in the spring. Although the month of April was distorted by the falling of public holidays, it was still the lowest month for new car sales over the last twelve months. Overall, there is a degree of downside risk posed by the crisis in neighbouring Zimbabwe and the extent to which business confidence is hit in South Africa. The respective paths of the stock market, rand exchange rate and interest rates will be crucial over the next six months. Much rests on the attitude of the South African government to events in Zimbabwe.

Chart 1: South Africa's new car market 1995-2000 (forecast)

units thousands

Volkswagen takes market leadership from Toyota in 1999

In 1999, Volkswagen took car market leadership away from Toyota. In the relatively weak market, Volkswagen's sales held up rather better than Toyota's. The VW Polo was a particularly strong seller, as was the Passat (introduced in 1999). Audi sales were also strong. Although the Citigolf (actually a Mark 1 Golf, circa 1980, built locally) was down, it still finds a sizeable market among price sensitive buyers. Toyota did, however, enjoy the distinction of having the two top selling models in South Africa in 1999 - with the Conquest (a Corolla relation) and Corolla. Toyota also leads in light commercials where the Hilux is the leading 'Bakkie' or pick-up.

BMW enjoyed another good year, with the new generation E46 3 Series range making a big impact. Indeed, the 3 Series was the fourth best selling model in South Africa in 1999. In the affordability stakes, the VW Polo (formerly 'Fox') and Citigolf are big sellers for VW at number three and five respectively in the 1999 sales league.

Table 1: Sales of new cars by make and model, 1998 and 1999.

Make

Model

1998

1999

%ch

BMW

3-Series

10,952

12,166

11.1%

5-Series

2,239

1,453

-35.1%

7-Series

251

151

-39.8%

Other

2

3

50.0%

Total BMW

13,444

13,773

2.4%

Daewoo

Cielo

1,889

0

-100.0%

Matiz

0

1,972

n/a

Espero

999

4

-99.6%

Lanos

2,485

2,302

-7.4%

Nubira

1,414

1,174

-17.0%

Total Daewoo

6,787

5,452

-19.7%

Chrysler

Neon

129

14

-89.1%

Voyager

585

368

-37.1%

Jeep

1,010

871

-13.8%

Total Chrysler

1,724

1,253

-27.3%

Honda

Bal/Civic

0

6,454

n/a

Imports

0

1,062

n/a

Other

8,990

0

-100.0%

Total Honda

8,990

7,516

-16.4%

Mercedes-Benz

C-Class

6,166

6,143

-0.4%

E-Class

2,102

2,041

-2.9%

S-Class

55

433

687.3%

Other

478

1,231

157.5%

Total Mercedes-Benz

8,801

9,848

11.9%

Peugeot

306

171

158

-7.6%

406

287

218

-24.0%

806

52

28

-46.2%

Total Peugeot

510

404

-20.8%

Delta (GM)

Corsa

10,344

9,280

-10.3%

Kadett

2,175

2,293

5.4%

Astra

5,967

7,256

21.6%

Saab

201

109

-45.8%

Other

1,771

0

-100.0%

Suz/Isuzu

0

1,902

n/a

Total Delta (GM)

20,458

20,840

1.9%

Land Rover

Defender

936

740

-20.9%

Freelander

1,775

1,800

1.4%

Discovery

1,040

1,382

32.9%

Range Rover

165

146

-11.5%

Total Land Rover

3,916

4,068

3.9%

Fiat Group

Uno

6,325

6,446

1.9%

Ulysse

0

51

n/a

Alfa

443

1,071

141.8%

Total Fiat Group

6,768

7,568

11.8%

Nissan

Sabre

722

368

-49.0%

Sentra

8,104

5,785

-28.6%

Primera

611

1,873

206.5%

Maxima

749

395

-47.3%

Other

1,135

982

-13.5%

Total Nissan

11,321

9,403

-16.9%

Samcor Ford

Laser

4,784

4,120

-13.9%

Fiesta

3,555

2,633

-25.9%

Escort

2,652

528

-80.1%

Falcon

792

622

-21.5%

Telstar

212

0

-100.0%

Mondeo

2,067

1,374

-33.5%

Other

299

296

-1.0%

Total Samcor Ford

14,361

9,573

-33.3%

Samcor MM

121

2,351

1,504

-36.0%

323

7,729

8,210

6.2%

Etude

1,861

2,891

55.3%

626/MX6

918

1,394

51.9%

Mitsubishi

1,510

1,620

7.3%

Total Samcor MM

14,369

15,619

8.7%

Subaru

Impreza

137

119

-13.1%

Legacy

77

74

-3.9%

SVX

2

0

-100.0%

Forester

98

97

-1.0%

Total Subaru

314

290

-7.6%

Toyota

Conquest

0

19,984

n/a

Corolla

42,807

17,523

-59.1%

Camry

3,266

1,712

-47.6%

Other

2,719

1,710

-37.1%

Total Toyota

48,792

40,929

-16.1%

Volkswagen

Citigolf

14,593

11,223

-23.1%

Polo

13,712

15,332

11.8%

Golf

4,275

5,511

28.9%

Jetta

4,454

3,413

-23.4%

Passat

0

347

n/a

Audi

5,016

5,252

4.7%

Other

1,216

1,669

37.3%

Total Volkswagen

43,266

42,747

-1.2%

Grand Total

203,821

189,283

-7.1%

Source: NAAMSA

Exports on upward path - led by Volkswagen

From a manufacturing perspective, the South African automotive industry is benefiting from a number of significant moves by some makers to integrate South African activities into broader global strategies. Volkswagen provides the most noticeable example. Volkswagen managed car exports outside of Africa of 39,260 units in 1999 - almost four-fifths of the total by all makers. Some 22,157 units went to the UK. The South African plant won a contract in 1998 to supply the UK and Ireland with the latest generation Golf - as capacity shortages in Germany caused delays in meeting orders for right-hand drive cars. Some exports from South Africa are also going to other European markets (Germany and Italy), as the line has been reconfigured to make left-hand drive models too.

Similarly, DaimlerChrysler is looking to use its East London plant as a significant export base. At the moment it serves the local market and also Australia, but in the longer term, there are plans to serve other southern hemisphere markets from there. Chrysler vehicles could be made there too.

The growing volume of exports out of Africa contrasts with a much lower volume of exports to countries inside Africa. In 1999, the largest African export market for South African cars was Mozambique (793 units) while the second largest was Zimbabwe with just 360 units - which has declined rapidly from 1,217 units as recently as 1997.

Hyundai stays out of the NAAMSA loop in 'Wheels of Africa'

Amid the uncertainty about the South African automotive industry's long-term future, a vehicle assembly operation in Botswana which takes full advantage of that country's customs union with South Africa continues to attract controversy. Policy conflicts have left the Botswana-based 'Wheels of Africa' group not reporting its sales through NAAMSA (around 30,000 Hyundai units per annum). In the run-up to the review of the MIDP, those policy differences seem to have intensified. NAAMSA members are objecting to the tax-free import advantages enjoyed by Hyundai operating out of Botswana. The manufacturing plant in Gaborone is strategically close to South Africa's Gauteng province - the most important vehicle market in Africa - and enjoys Botswana's much lower corporate tax rates, very few foreign exchange regulations, a more stable currency than the rand and a labour force immune to the impact that the National Union of Metalworkers of South Africa (NUMSA) is having on the industry.

There is currently speculation that other vehicle manufacturers could be prepared to switch operations from South Africa. Hyundai has now been joined in its Botswana operation by Volvo. Volvo has plans to make the S/V40 range at Gaborone with an output target set at a level approaching 10,000 units annually. Many of these units would be destined for export to Australia and New Zealand, but a major Volvo initiative in South Africa is likely, spearheaded by the new S80 as an import from Sweden at around 700 units annually - but with the main volume coming from the smaller Botswana-assembled models. Local strategies could also be influenced by Ford's takeover of the Volvo car business, particularly as Samcor has not been performing very well with Ford's premium models and there may be a feeling that the Volvo brand would have greater acceptance among premium buyers.

'Afrokaizen' concept could be right for South Africa

It has been speculated in the past that a radical rethink is necessary when looking at the auto industry in an African context. Senior South African government officials and leading figures in the industry have been attracted to a vehicle concept for South Africa that owes something to the much vaunted 'intermediate technology' premise that has emerged before as a possible answer to African (sub-Saharan) market requirements and operating conditions. Specifically, project 'Afrokaizen' envisages making car ownership and operation more affordable by bringing back old models considered particularly appropriate for African operating conditions. Research has indicated that the emerging market for new cars among the black population has in-built resistance to current technology - especially in respect of retail price and servicing costs. The plan is to establish assembly facilities in South Africa for assembling relatively uncomplicated older technology vehicles. Among possible models proposed for the scheme are the Mercedes 123 and the Peugeot 404. It is thought that the concept could be important to providing South Africa with a stable and growing middle class as millions are brought into car ownership. The idea has appeared to wane recently, but could be resuscitated. The main obstacle is finding a manufacturer to champion the concept and provide serious backing.

A unique set of assets and problems

Many auto industry visitors to South Africa are perplexed by the country's contradictions. The political, cultural and economic history of South Africa has had profound consequences for the country's industrial development. First world technology is side by side with third world. In an auto industry context, Volkswagen makes the current fourth generation Golf, but also makes a first generation Golf. There is a famed resourcefulness that has its roots in the country's isolation during the apartheid era. At that time, it was a case of 'if you want it, make it yourself'. This expertise remains. Also, a generally higher degree of labour input to production also creates a high degree of manufacturing flexibility. Labour costs are low, by international standards too.

But there are persistent problems too. A major shakeout in the industry is still needed to make it truly internationally competitive. Politically, that could be a hot potato. In early May, the main trade union federation - Cosatu - organised a one-day strike which compounded fears about political stability, as the crisis in Zimbabwe rumbled on. There is also a growing awareness among business and political leaders of the long-term problems presented by South Africa's HIV/AIDS epidemic. Recent studies suggest that a quarter of South Africa's working population may be infected by 2006. That would reduce productivity and increase labour costs to the point where the ability to compete globally is undermined. Employee benefits such as sick pay and healthcare cover could become prohibitively expensive. In addition, the economic impact of the epidemic could directly affect the new vehicle market.

But South Africa has overcome many hurdles to get to where it is today. The country has considerable natural resources and stands out as the economic giant of Africa. The South African automotive industry stands at the brink of a period of change and possibly, turmoil. However, it seems certain that South Africa's automotive industry will - in whatever form - remain a permanent fixture.