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.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

View profiles in store

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData

Submit

UK USA Afghanistan Åland Islands Albania Algeria American Samoa Andorra Angola Anguilla Antarctica Antigua and Barbuda Argentina Armenia Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bhutan Bolivia Bonaire, Sint Eustatius and Saba Bosnia and Herzegovina Botswana Bouvet Island Brazil British Indian Ocean Territory Brunei Darussalam Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Cape Verde Cayman Islands Central African Republic Chad Chile China Christmas Island Cocos Islands Colombia Comoros Congo Democratic Republic of the Congo Cook Islands Costa Rica Côte d"Ivoire Croatia Cuba Curaçao Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Falkland Islands Faroe Islands Fiji Finland France French Guiana French Polynesia French Southern Territories Gabon Gambia Georgia Germany Ghana Gibraltar Greece Greenland Grenada Guadeloupe Guam Guatemala Guernsey Guinea Guinea-Bissau Guyana Haiti Heard Island and McDonald Islands Holy See Honduras Hong Kong Hungary Iceland India Indonesia Iran Iraq Ireland Isle of Man Israel Italy Jamaica Japan Jersey Jordan Kazakhstan Kenya Kiribati North Korea South Korea Kuwait Kyrgyzstan Lao Latvia Lebanon Lesotho Liberia Libyan Arab Jamahiriya Liechtenstein Lithuania Luxembourg Macao Macedonia, The Former Yugoslav Republic of Madagascar Malawi Malaysia Maldives Mali Malta Marshall Islands Martinique Mauritania Mauritius Mayotte Mexico Micronesia Moldova Monaco Mongolia Montenegro Montserrat Morocco Mozambique Myanmar Namibia Nauru Nepal Netherlands New Caledonia New Zealand Nicaragua Niger Nigeria Niue Norfolk Island Northern Mariana Islands Norway Oman Pakistan Palau Palestinian Territory Panama Papua New Guinea Paraguay Peru Philippines Pitcairn Poland Portugal Puerto Rico Qatar Réunion Romania Russian Federation Rwanda Saint Helena, Ascension and Tristan da Cunha Saint Kitts and Nevis Saint Lucia Saint Pierre and Miquelon Saint Vincent and The Grenadines Samoa San Marino Sao Tome and Principe Saudi Arabia Senegal Serbia Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Islands Somalia South Africa South Georgia and The South Sandwich Islands Spain Sri Lanka Sudan Suriname Svalbard and Jan Mayen Swaziland Sweden Switzerland Syrian Arab Republic Taiwan Tajikistan Tanzania Thailand Timor-Leste Togo Tokelau Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Turks and Caicos Islands Tuvalu Uganda Ukraine United Arab Emirates US Minor Outlying Islands Uruguay Uzbekistan Vanuatu Venezuela Vietnam British Virgin Islands US Virgin Islands Wallis and Futuna Western Sahara Yemen Zambia Zimbabwe Kosovo

Industry * Academia & Education Aerospace, Defense & Security Agriculture Asset Management Automotive Banking & Payments Chemicals Construction Consumer Foodservice Government, trade bodies and NGOs Health & Fitness Hospitals & Healthcare HR, Staffing & Recruitment Insurance Investment Banking Legal Services Management Consulting Marketing & Advertising Media & Publishing Medical Devices Mining Oil & Gas Packaging Pharmaceuticals Power & Utilities Private Equity Real Estate Retail Sport Technology Telecom Transportation & Logistics Travel, Tourism & Hospitality Venture Capital

Tick here to opt out of curated industry news, reports, and event updates from Just Auto.

Submit and download

Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

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.

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.

Sign up for our daily news round-up!

Give your business an edge with our leading industry insights.

Sign up