South Africa’s automotive industry has seen some growth in recent years, most notably in RHD vehicle exports. But the industry faces considerable challenges ahead in its need to be internationally competitive. Many of the industry’s participants recently met at a conference in South Africa to discuss the issues. Dave Leggett was there.
The first ‘South Africa Automotive Conference’ (SAAC) took place in Port Elizabeth (PE), a large industrial town and port in South Africa’s Eastern Cape region. The location is significant in the context of SA’s highly competitive regional backdrop. For example, the local Coega Development Corporation played a significant role in sponsoring and supporting the event. The nearby bosses from Volkswagen and GM SA (formerly Delta, but GM recently took control) were present and speaking. But other OEMs were pretty thin on the ground, in spite of the fact that – in the absence of any similar event – the conference developed a de facto national outlook.
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Even (relatively) nearby DaimlerChrysler, having initially expressed interest in attending the conference eventually pulled out. The conference organisers reported that DaimlerChrysler had decided to withdraw because attendance would have meant that it ‘might be seen to be supporting the Coega Industrial Development Zone (IDZ)’. DaimlerChrysler, based near to East London, a little further up the SA eastern coast, apparently views itself as a part of the East London IDZ – a competitor to Coega. And, as expected, there were no representatives from the Pretoria/Johannesburg area (Gauteng) where Nissan/Fiat, Ford and BMW have their operations. Gauteng has its own auto industry investment projects too.
But the conference aired a number of key issues for South Africa’s auto industry and I certainly enjoyed going along to make a presentation and report on the event for just-auto (sunny PE by the sea makes a nice change from, say, the likes of Detroit or Frankfurt).
SA auto industry’s history and the role of the MIDP
South Africa’s automotive industry grew up in an era of isolation 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 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:
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By GlobalData- 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;
- · 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. Duty credits were also made available.
After a review, the MIDP was extended to 2007 with further reductions in protection. A second review in 2002 resulted in the extension of the MIDP to 2012. Import duties will continue to phase down but at a slower rate. Duties on light vehicles will decline from 30% in 2007 (the current level is 40%) to 25% in 2012. For completely knocked down (CKD) components, duties will decline from 25% in 2007 (currently 30%) to 20% in 2012.
The MIDP is widely recognised to have been instrumental in maintaining a vehicle assembly and some supplier base in South Africa although question marks remain. The main issue is the need to be internationally competitive and achieve scale in the face of a relatively small domestic marketplace that has historically been crowded with a large number of manufacturers, import tariffs making CBU strategies too expensive.
The volume question
The South African new car market has been firmly in the 200,000-300,000-unit per annum range (comparable in size to the markets of Austria or Greece), depending largely on the state of the economy and new car prices – which are highly sensitive to fluctuations in the rand exchange rate. CBU imports are small and there are some seven manufacturers meeting local demand. There is potential for demand growth among the large section of South Africa’s population who currently have low incomes, but that is recognised as a long-term economic development issue (‘if you’re getting running water for the first time today, you won’t be driving a car tomorrow’). Nevertheless, potential for market growth in South Africa is present.
On the export front, South Africa has developed as a global source for RHD supply on some models for a number of manufacturers. That has clearly suited the OEMs concerned, who have been able to rationalise operations and benefit from export duty credits while also supplying the local market.
The big problem facing South Africa is that there appear to be too many carmakers, with too many platforms and model variants operating at insufficient production scale. Roger Pitot, speaking to the SAAC on behalf of NAAMSA, maintained that average volume per model produced in South Africa in 2003 was 16,200 units. That’s a big improvement on a comparable figure of 9,000 units for 1995, but it is still very low by international standards. He also estimated that local content in the South African vehicle manufacturing industry is of the order of 56%.
One variable that gets everyone excited in South Africa is the rand exchange rate. If the rate is too low, that may be good for exports but it makes imported parts – and they are very significant given prevailing local content levels – more expensive and that is quickly passed on in final prices to consumers. On the other hand, a high rand makes exporting from SA less profitable. Given the complex nature of the MIDP, exchange rate movements can dramatically impact upon firms’ strategies. The consensus view among economists and auto industry analysts is that the rand is currently overvalued by a significant margin and most commentators foresee some weakening eventually.
Economic stability boosts domestic market
Anthony Twine of Johannesburg-based Econometrix, told the SAAC conference that South Africa’s car market could bounce back to close to 300,000 units a year, a figure not seen since the heady days of the early 1980s. Twine based his forecast on strong economic indicators. Interest rates are currently at a 23-year low and the main danger was unexpected inflation, he said.
Since 1994, GDP had averaged 2.7% a year and he was predicting that it might reach 3% this year. “We are forecasting 3.5% growth between 2005 and 2010, the most sustained period of growth since the 1970s,” said Mr Twine who reminded delegates that SA’s economy today was 54% bigger than it was in 1980.
Table 1: South Africa’s car market by make, 2002-2003
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Source: Naamsa/Response Group Trendline
‘Affordable’ cars?
One part of the volume question for South Africa’s policymakers is the possibility of tapping into latent new car demand in South Africa among the large body of the population described as economically disadvantage or low-income. One problem with the South African vehicle market is that prices are relatively high, reflecting the high cost of imported kits and parts and relatively high unit costs due to low scale economies.
Roger Pitot, who chairs the ‘affordability’ MIDP task group, told the SAAC that changes to rules on leasing and financing could extend car affordability to the extent that a ‘doubling’ of the car market would be a real possibility. The MIDP affordability task force is investigating a variety of entry-level options, although there seemed to be some scepticism concerning the idea of a purpose-built ‘popular’ or people’s car. As GM’s Ian Nicholls put it, “The trouble is, South Africa is a third world market with first world tastes. I see new consumers preferring say, a used BMW rather than some of the ill-conceived so-called affordable car concepts that people are talking about.”
Nevertheless, affordable car concepts are being discussed and could eventually gain more backing in South Africa, with support possibly along the lines of Brazil’s popular car measures. If an affordable car works in South Africa, maybe it could work in other African countries also – these markets are dominated by used cars (new vehicle sales in the whole of Africa, including SA, are estimated at under one million units in 2003).
Perhaps the most bizarre proposal surrounds the prospect of reviving the l former East German-built Trabant as a people’s car in Africa. A group of people are working part time are trying to find second-stage funding to launch the so-called ‘AfriCar’ in South Africa. The group includes former engineers from the defunct Sachsenring Fahrzeugtechnik GmbH, which used to build the Trabant in Zwickau from 1958 to 1991. Group members expect they will need to find a replacement for the original two-stroke engine.
The Trabant was slow, smoky and outdated technically, but it had one major attribute that its supporters see as its primary selling point in Africa: it was cheap. The Trabi promoters claim they can sell it in Africa for less than €3,000.
Also, there could potentially be an African dimension for the new crop of low-cost emerging market models that some of the large vehicle manufacturing groups are working on, such as Renault‘s X90 or Volkswagen’s Brazilian lead plant-built Fox (‘Project 249’).
Table 2: Car demand parameters – SA and selected countries
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Exports show RHD strategy success, but ‘into Africa’ volumes paltry
South Africa has developed, under the protectionist umbrella of the MIDP, a whole vehicle export business that is closely tied to exporting high-margin RHD cars to RHD markets – notably UK, Japan and Australia. Mercedes-Benz builds all of its right-hand drive C-class sedans in South Africa while BMW and VW ship 3 Series saloons and Golf hatchbacks. Toyota South Africa ships Corolla sedans to Australia whose Toyota operation in turn ships locally-built Camrys the other way.
There are also some LHD exports by Volkswagen and BMW and BMW exports the 3 Series to the USA, something of a feather in the cap for the industry down here. But these are high-margin vehicles exported to a handful of developed markets.
In 1997, South Africa exported some 10,500 cars. By 2003, car exports had risen to almost 115,000 units. However, export shipments have been overwhelmingly of high-margin cars to developed RHD markets.
Exports to other countries and more particularly, other markets in Africa are extremely small by comparison (see table below). Northern African markets are dominated by small volumes of SKD/CKD from French and Italian makers (eg operations in Egypt, Morocco), with a strong element of used car trade from Europe. The sub-Saharan region reportedly relies heavily on used cars from Japan (especially RHD markets such as Kenya) while used vehicles from Europe figure more prominently in the LHD and francophone markets of western Africa.
Much of the African continent is characterised by old vehicle parcs, a lack of roadworthiness regulations (or their enforcement) and a low level of economic development. But if economic development in some countries of the continent does pick up, demand for cheap cars with a multi-purpose aspect (ie able to carry substantial loads as well as people) could accelerate. Pick-ups could sell well in that scenario (Nissan is already exporting small numbers of its SA-produced Hardbody pick-up to Sub-Saharan African markets).
The local Ford operation has announced a one billion rand programme which will see the company exporting a passenger vehicle in the first quarter of 2005. Target volume is in the region of 30,000 vehicles but no details of what model will be involved are being revealed at this stage. However, there is strong speculation that the passenger car will be a new Ford ‘world model’ which is still under wraps.
Maureen Kempston-Darkes, GM president for Latin America, Africa and the Middle East puts it like this: “We’re looking to grow our business in South Africa and we’re looking to use South Africa as a basis for growth in the African continent, and over some period of time, we’ll consider looking at potential export programmes that could take place.”
That surely, is the long-term USP for South Africa. Africa’s springboard, Africa’s giant economy. The RHD business is fine – and not to be derided – but it is ultimately of limited scale.
Table 3: Passenger car exports by make, 2000-2003
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Source: Naamsa/Response Group Trendline
Table 4: SA passenger car exports 2003 – out of Africa and in to Africa
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Source: Naamsa/Response Group Trendline
An industrial ‘niche’ strategy needed?
Should South Africa concentrate on being a niche automotive manufacturer or try to be a global player? That was the question posed by consultant Johan Cloete at the SAAC conference.
“We must recognise that we are not going to be a big player. Global capacity keeps growing – five years ago everyone was talking about Brazil and a lot of investment went there. Now it’s China,” said Cloete.
“South Africa is part of the Middle East and Africa and there is a promising growth forecast for the region. The SA industry has various options. It could produce low cost cars for South Africa – standard car with content stripped out. It could allow imports with low tariffs, making cars more affordable, or does the country go back to high tariff barriers and protectionism which doesn’t make it globally competitive.”
There was also the option of pushing to become the Detroit of the southern hemisphere. “But to do that we would be competing against Brazil”.
Coete told the conference that concentrating on niche products had many attractions. Plants of the seven manufacturers already based in SA could become “mother” factories for the models produced. This would mean building one model that was produced nowhere else in the world, attracting the Tier 0.5 and Tier 1 component suppliers that the whole SA auto industry needed.
His vision was that the Tier 0.5 suppliers would be based within the factory with Tier 1 suppliers located very close within supplier parks while existing Tier 2 and Tier 3 suppliers would also be close, but not necessarily within the supplier parks.
“We could do much more as an industry together but we also need the government to do more by targeting the existing automotive industry training funds better – we need to take workers from here and place them in globally competitive facilities overseas so that they learn best practices and bring that learning back to South Africa,” said Cloete.
Cloete struck a welcome chord of hard but not harsh realism. Too many manufacturers, too many platforms, too many model variants. A national ‘strategy’ for South Africa’s auto industry, in some form and beyond the current MIDP, is clearly needed, given the pressures imposed by the global auto industry.
Components industry growing
South Africa has experienced some significant development of its automotive components industry in recent years, especially in areas where it has a natural advantage – such as catalytic converters for export – but also in other areas, like engines. South Africa now produces some 8% of the world’s catalytic converters. Seat components and leather seat covers have also emerged as a growth area.
More visibly, engine production for export is increasing. Volkswagen South Africa has recently won a $US2 billion contract to supply its parent company with engines over the next six years. The latest deal means engines are now second only to catalytic converters on the list of South Africa’s component exports. Ford manufactures 1.3 and 1.6 litre RoCam engines for export at its Pretoria plant and shipped about 240,000 kits and fully built up units last year.
And South Africa has been chosen by Federal Mogul Aftermarket to spearhead an international drive to increase parts sales for Asian-manufactured vehicles. South Africa was chosen as the hub of this activity because it was recognised that the country already had a high number of vehicles of Asian origin in its vehicle population. The project could see increased business for the company’s South African factories, which already manufacture OE and aftermarket items such as spark plugs, brake linings, gaskets and pistons for Asian vehicles.
But the SA auto components industry knows that the weight of international competition, especially from low-cost high volume places like China and India (but also Brazil) offers a considerable challenge for the future. And with OEMs reporting typical local content of the order of 55%, large gaps in the supplier industry clearly exist, especially in higher value added areas. Naturally, much hinges on the performance of the vehicle manufacturing industry and the ability to attract further international investment from Tier 1s.
Conclusions
South Africa is a country of contradictions. First world and third world co-exist in a country that takes diversity to a new level. It is also a country with a lively – and not always positive – political backdrop. The country’s politically charged regions seem, at times, to compete to the detriment of South Africa as a whole.
The RHD export niche has served (and will continue to do so) the country well, creating employment, added output volume and encouraging investment in the supplier industry. However, South Africa is always going to be handicapped if it relies solely on current industry volumes. As duties fall under the MIDP (rumoured to be against WTO rules even today) in upcoming years, international competition will become more of an issue. Seven vehicle manufacturing groups, local content typically around 55% and a circa 300,000 unit market all suggest that further rationalisation lies ahead.
The challenges ahead won’t be easy.
But there is an industrial base, labour costs are low and production is gradually becoming more streamlined. Even South Africa’s perennial volume question is not exactly wholly unanswerable. If, say, Toyota were to invest more in South Africa (and the company talks about possibly doubling its production towards 200,000 units by 2007) that would undoubtedly encourage more potential international investors to take the place seriously. Ford and Nissan have projects in the pipeline that will expand exports further. The OEMs are hanging in there with no sign of a mass exodus.
And the domestic market could grow strongly if the economy can support the growth of a sizeable demographic class with sufficient income levels. Long-term (okay, very long-term), prospects for ‘affordable’ cars could be positive too, with a significant northward-looking African element very possible – though dependent on a breakout of economic reform, political stability and common sense to the north.
An important starting point would be a national strategy that looks beyond the MIDP to an economic model that fits global auto industry parameters.
Does SA face big challenges? Of course – and not just in terms of keeping a foothold in the increasingly competitive global auto industry. The country’s main priorities right now lie in getting a substantial section of the population running water and electricity. Crisis-ridden Zimbabwe to the north is a little too close for comfort and the AIDS epidemic is depleting the working age population. In addition – and if all that was not enough – there’s an ever-increasing refugee problem as people move to SA from the poorer African nations to the north.
And maybe the post-’94 economic ‘peace-dividend’ period is coming to an end, with the suggestion that economic waters could get choppy. And keep an eye on that currency.
But South Africa has come a long, long way in the last ten years and the doomsayers have been proved very wrong so far.
