A benchmarking study between South Africa, developed countries and less developed countries (India and Thailand) has shown South Africa’s automotive components manufacturers “to be somewhere in the middle”, says B&M Analysts chairperson Professor Justin Barnes.

B&M Analysts conducted the study.

“We are not where we need to be,” says Barnes. But, he adds, the picture is not nearly as bleak as in Australia, where the automotive assembly industry is set to close down by 2018.

He says the last 20 years have forced major restructuring in the South African components sector, leading to “substantial industrial upgrading”.

Average vehicle output in the automotive industry has increased from 9.7 vehicles per employee in 1995 to 16.9 in 2012.

However, the industry is not up to international standards, says Barnes, as these standards always reset, continuously inching upwards.

“The competitive pressures now are different [to what they were] in the 1990s.”

Comparing four components firms from each of South Africa, the UK and Thailand, the benchmarking study found that South African firms are 9% more expensive than Thailand, but with the UK 12% more expensive than Thailand.

While being more competitive than the UK is good news, “the UK is not our competitor – the East is”, says Barnes.

The study found that South Africa’s employment costs, as a percentage of sales, are the highest of the three countries.

South Africa’s operational waste as a percentage of sales is also the highest of the three countries. This number includes the waste costs associated with inventory control, quality management, production flexibility, production reliability and absenteeism.

Looking at the broader study, South Africa has the weakest productivity profile, compared with the developed and less developed countries.

“Our productivity has not improved nearly as much as it has in less developed countries,” says Barnes. “Our level of productivity remains flat relative to costs.

“Increases in employment costs have taken away the benefits of increased productivity.”

Employment costs do not refer to weekly wage earners only, adds Barnes.

“Management costs in South Africa have spiralled out of control. Because the State can no longer adequately supply services, managers have to fund an expat lifestyle in South Africa, paying for private medical aid, security and schools.”

Four Areas Need Attention
There are four areas that require attention, in order for South Africa’s automotive industry to improve its competitiveness, says Barnes.

Firms have to become leaner, they have to upgrade the technology they use and focus on skills development.

They must also increase localisation of parts in the vehicles assembled in South Africa, which currently stands at an average of 40% per vehicle, but which must be closer to 60%, says Barnes.

While the first tier of component suppliers – those providing parts directly to vehicle assemblers – is in a generally healthy state in South Africa, this is not the case at the lower end of the supply chain.

Globally, the second-, third- and fourth-tier components supplier network contribute 50% to the automotive supply chain, with this figure being 20% in South Africa.

“This is where the real wealth lies – the real knock-on effect in terms of job creation,” says Barnes.

“We need to clear away the challenges to increasing local content.”

These challenges include a lack of scale in the local automotive industry in terms of sales and production.

Yearly new-vehicle sales and production must reach 1-million to 1.2-million units, says Barnes.

“International investments will not flow if we are not a market of reasonable size. We really have to take this seriously.”

Components makers will also enjoy the benefits of economies of scale from vehicle assembly plants that produce 250 000 vehicles a year, with no plant in South Africa currently of this scale.

Scale could come from a growing middle class in sub-Saharan Africa, should the importation of second-hand vehicles be curbed, and the regulatory framework between countries be better aligned.

Barnes says it is of little use for South African components makers to see the glass half empty.

“Pessimism is the root cause of industrial failure. If we talk ourselves into a hole, we will find ourselves in one.

Yes, we have a substantial road ahead of us to close the competitive gap, but, in five to ten years, we could find ourselves in a very good neighbourhood with a population the size of China’s.”