The local automotive industry contri- buted 7,3% to South Africa’s gross domestic product in 2008.

Exports from the vehicle and component manufacturing sectors amounted to 4,1% of all South African exports in 1995, jumping to 11,1% in 2000, and 13,7% in 2007.

Local vehicle manufacturers export cars – including the coveted BMW, Mercedes-Benz, Toyota and Volkswagen badges – to Japan, the US, Europe and the rest of Africa.

But, if Volkswagen of South Africa MD and National Association of Automobile Manufacturers of South Africa president Dave Powels is to be believed, the industry is not only in an unhealthy state, owing to declining sales, but also possibly in imminent danger of collapse.

He says the global recession, coupled with a protracted government decision-making process on aid to the local industry, as well as a lack of global competitiveness, is putting the survival of the industry at risk.

Powels even places a very real deadline on the table, saying South Africa may see its automotive industry close down in seven to ten years.

“It does not mean we have seven to ten years. We need to go, to move quickly. We need to do something in the next 18 months.”

Recession Ructions, Competitiveness Concerns

Each month, an increasing number of questions are reportedly being posed to local vehicle manufacturers by their parent com-panies about why they should continue to invest in South Africa when there is spare capacity available in other, more competitive, manufacturing locations, such as China and Russia, says Powels.

This spare capacity – 36-million units worldwide – has been brought on by the global recession, which has seen vehicle demand plummet sharply since last year.

In 2007, the global industry had the capacity to produce 83-million vehicles a year, with demand at 59-million units. In 2009, in the midst of the global economic crisis, capacity is at 85,7-million units, while demand is a paltry 49,4-million units.

South Africa is also learning that politics is as unforgiving as economics. “The honeymoon period for South Africa PTY LTD, as we moved to a democratic society, is over,” says Powels.

“Global companies are saying that they would like to invest in South Africa, but that the country is uncompetitive. [They] have spare capacity in other countries, so why should [they] renew [their] investment, or invest in South Africa? We have to do things differently,” emphasises Powels.

South Africa’s lack of competitiveness as an automotive manufacturing destination stems from a number of factors, but rising relative costs and expensive logistics chains feature strongly.

On average, South Africa is 20% more expensive as a vehicle manufacturing base than Western Europe, with China 12% less expensive than Western Europe, says Powels.

“We are 30% to 40% more expensive than China or India.”

Powels adds that the average local content on vehicles produced in South Africa is at 35%, but that this needed to grow to 70%, or 75%, in order to negate the costs of importing components using long supply chains and weathering a fluctuating currency.

“Clearly, we’ll never be globally competitive if we import 65% of our components.”

Toyota Motors South Africa president and CEO Dr Johan van Zyl concurs, noting that it makes little sense to source parts abroad, bring them here, and then assemble a vehicle that often goes back to the markets where the parts come from.

In terms of the 19% electrical content of any car produced in South Africa, only 5% is made locally. In terms of bodywork, it is 6% out of 15%, 3% out of 10% for the exterior, and 7% out of 23% for the interior.

Logistics costs also add to the local manu-facturing bill. This relates not only to the pure distance involved, but also to built-in inefficiencies.

Powels laments high local port charges, at $821,6 to move one forty-foot container, with Argentina at $470, Brazil at $364, and China at $80.

“We have engaged Transnet on this over the years, but it has not delivered the desired results. We need a better partnership with Transnet. They are not addressing our needs. This is not intended as a confrontation, but we need faster progress on the issue.”

Powels says the local automotive industry is now forced to look to Maputo to export vehicles, because it is “far cheaper”, a situation he describes as “absolutely tragic”.

“We are being forced to leave our ports half-empty, creating employment in Mozambique.”

Foot off the Policy Accelerator

Powels also criticises government’s slow progress in putting in place a new automotive sector support programme.

Government has, to date, not yet tabled a final version of its new Automotive Production and Development Programme (APDP), set to replace the Motor Industry Development Programme (MIDP), which comes to an end in 2012.

Details are still being thrashed out in working groups.

Further, certain elements of the APDP were promised to be introduced before 2012, such as an investment allowance, originally intended for launch in July this year.

This incentive is to replace the MIDP’s production asset allowance, and will amount to between 20% and 30% of project value over a three-year period.

Its introduction has been delayed.

When luxury German car manufacturer BMW South Africa announced in early October that it will invest R2,2-billion in upgrading its local plant, it did so on the back of a letter from government, promising that it will qualify for the APDP allowance.

“The fact that BMW needed a letter from government tells you a story,” says Powels. “If the programme was clear, and government’s commitment strong, BMW would not have needed a letter.

“Certain programmes have not been put to bed, timelines have been exceeded. We need certainty.”

Again referring to the BMW investment programme, Powels says the industry has to guard against exuberance regarding this move from the German manufacturer.

“This might very well be the last roll of the dice. If we don’t improve our competitiveness, there may not be another roll of the dice.”

Powels says government, parastatals, unions and industry need to work together to remedy the situation.

“Unless we clearly acknowledge the seriousness of the situation, we’ll put the industry at risk.”

For its part, the local component manu-facturing industry says it is going through “12 months of hell”. “We are in a severe crisis,” comments National Association of Automotive Com-ponent and Allied Manufacturers (Naacam) president and PG Group CEO Stewart Jennings.

He notes, however, that the newly elected government is far more aware of the need to help the manufacturing industry than the previous government.

Jennings says the component industry, facing declining vehicle sales and exports, is being “squeezed from all sides”.

He notes that a strong rand is making component exports less profit- able, with rising electricity prices and municipal rates increases pushing up manufacturing costs.

Jennings says reduced local production volumes are also creating difficulty in that it makes competing with global suppliers, which are achieving economies of scale, problematic.

South Africa built 497 000 cars in 2007 and 527 000 in 2008. However, this year, production will drop to between 330 000 and 340 000 units, dragging down local economies of scale.

Can the Tide Be Turned?

Jennings says there are indeed a handful of measures that can be employed to assist the local component manufacturing industry.

These include government immediately dropping the interest rate by 2%, or providing a 2% interest rate subsidy to the general manufacturing industry.

“We need a more competitive rand, and we need original-equipment manufacturers (OEMs, or vehicle manufacturers), to recognise that we are in a bigger crisis than they are.”

OEMs are reluctant to accept any price increases from component suppliers.

Jennings says government also has to increase import duties in order to slow imports, as 65% of vehicles sold in South Africa were imported – a situation which is clearly not aiding the local manufacturing industry. He says Naacam is in discussion with the Department of Trade and Industry (DTI) around this issue.

“This is not about protection, but nurturing the industry.”

Jennings also calls for a moratorium on electricity price increases to distressed manu- facturing sectors.

Eskom was granted a 31,3% tariff increase in June, and has submitted an application for another series of price hikes, which could be as high as 45% a year for the next three years. The National Energy Regulator of South Africa will make a final determination in February next year. But, while there could be additional subsidies for poor consumers, it is likely that industry will be expected to pay its way, while supporting conservation efforts.

Jennings also calls on South Africans to buy locally produced goods. “We must be passionate about buying South African.”

Powels believes there are some “silver bullets” that will enable the survival of the South African automotive sector – which he terms as significant to the local economy, but “minute” in global terms, producing less than 1% of global vehicle production.

“We have to do things differently,” he states.

Powels believes vehicle platform production has to increase to 50 000 units or more a year – precisely what the APDP seeks to secure and incentivise.

It is also necessary to increase productivity within the industry, in general.

The South African automotive industry currently produces 20 cars a year per employee.

“We need to do 30 cars or more a year. We need massive investment in skills develop- ment.”

He acknowledges that component suppliers play a vital role in the industry’s survival.

“We have to increase [component] supplier competitiveness. We need a major industral- isation strategy for the supplier industry, through the APDP and the Industrial Development Corporation (IDC).”

Powels says it is also necessary to grow the local content on vehicles produced in South Africa.

Work in this regard includes a joint Naacam/Naamsa initiative to increase the local content on South African-assembled vehicles from the current 35% average to more than 70%.

Jennings says the joint working group has identified 50 projects which are linked to local parts production.

“We are looking at the capability to make it here, and how to nurture it.”

Powels says the initiative is also looking at different vehicle manufacturers possibly sourcing from the same suppliers, thereby creating much needed economies of scale to these selected suppliers, bringing down their costs and increasing their viability and potential to also supply export markets competitively.

In this case, argues Jennings, competition is not necessarily the answer.

“This is not about being anticompetitive. There is not enough volume in the local market for two globally competitive suppliers. If you bring in competition, it would probably kill both companies.”

Jennings says work started on the project some three months ago, and that results will be gradual.

“We now need to bring in the DTI and the IDC to look at what incentives can be offered to the component manufacturers we have identified.”

As far as short-term measures are concerned – referring specifically to surviving the current economic crisis – Powels says: “South Africa Inc has not responded as aggressively as many other developing countries have done. Our reaction has not been as bold, as dramatic as other countries’.”

Support Measures

Governments worldwide have implemented a range of aid packages to assist their distressed automotive industries.

In Germany, for example, car owners have been offered scrapping allowances to assist them in taking their old vehicles off the road, and buy new cars. This move stimulated demand and, therefore, production.

The US saw cash-strapped General Motors and Chrysler file for chapter 11 bankruptcy protection, and the US government taking equity in these firms.

China offered tax breaks to consumers buying small vehicles. Russia imposed a 30% duty on imported cars.

The South African government’s response to the crisis includes reskilling training for laid-off workers, and the IDC offering loans to manu-facturing firms in distress, auto- motive companies included. These loans have been made available to companies often struggling to secure bank finance.

“So far, we have approved funding of R500-million to distressed companies. We have saved 2 500 jobs in the last financial year,” explains IDC divisional executive Shakeel Meer.

“We have set aside R6,1-billion to assist distressed companies over the next two years.”

Meer says the purpose of the IDC’s interventions is to rescue manufacturing capa-city and employment during the cyclical downturn.

“We want to help, but companies need a clear turnaround plan on how to get out of trouble.”

Meer also acknowledges, though, that the local automotive industry probably needs more assistance than what is currently on the table, but that the challenge is the time it takes within government to make a decision.

Deputy Trade and Industry Minister Thandi Tobias-Pokolo reiterates that the South African government remains committed to providing finance to industry, and to ensuring the embattled local automotive industry remains a key manufacturing sector.

However, she also notes that funds and resources are too limited to necessarily provide the vehicle and component manufacturing industry anything beyond the short-term crisis assistance which is currently on the table.

“Some say the incentives government offers are inadequate – I’ll agree – but we are forced to look at all government priorities, and social spending is key in this economic crisis,” says Tobias-Pokolo.

Global bail-outs have not neccesarily been a blanket success. In fact, Powels acknowledges that many of the bail-outs have come with unintended consequences and costs.

Germany’s scrapping allowance came to an end in August, with some dealers selling 80% fewer vehicles in September than in August.

“Scrapping allowances have had a profound short-term effect, but all they did was push forward demand.”

Powels also believes it is not all down to government to save the day, either.

He says banks can stimulate demand for vehicles by relaxing their strict credit criteria, allowing consumers to return to the market.

McCarthy CEO Brand Pretorius says credit approval rates are currently at 20%, compared with the 50% to 60% prior to the crisis.

Powels notes that the 10% growth possible in the market over the next year is “in the hands of the banks”.

Some Good News

There is little doubt the local automotive industry is in dire straits. However, there are some reasons for optimism.

BMW’s R2,2-billion investment in upgrading its Rosslyn plant and supplier base will enable maximum plant capacity to increase from 60 000 units a year to 87 000 units, while securing production in South Africa for the future by placing the plant on par with other BMW plants globally.

“By making an announcement of this magnitude during the worst known crisis the automotive industry has faced in recent times, we send a positive message to our staff not only about the long-term sustainability of BMW South Africa, but also about the future of South Africa as a whole,” says MD Bodo Donauer.

The BMW plant has, to date, produced 560 000 3-series models, with 385 000 of these exported to countries such as Japan, the US, Australia, and Canada.

The plant has already produced four generations of 3-series models.

“This year, our plant will be responsible for 25% of global 3-series production,” notes Donauer.

Almost 75% of this year’s production volume of 47 000 units will be exported.

While there is currently a strong focus on established vehicle brands within South Africa’s automotive production arena, such as BMW, many of these brands are expected to see increased competition from emerging Indian and Chinese vehicle manufacturers.

It would be an indication of some forward thinking to also welcome these manufacturers to South African shores.

The East London industrial development zone (IDZ) has now enabled the entry for such newcomers – and even-lower-volume-selling – vehicle brands into the local automotive manufacturing industry, in a model which should see them qualify for incentives under the APDP.

The IDZ has launched its multi-OEM manu-facturing facility, based on a model where a number of manufacturers will share the same assembly facilities, such as a paint shop, a body shop, and trim and assembly lines.

The concept has proved successful elsewhere in the world, says East London IDZ business development executive manager Tembela Zweni.

He says keen interest has already been shown in the facility by various OEMs, as well as companies which will provide the assembly services.

Most of the OEM interest came from Chinese and Indian companies, some of which are already present in the South African market.

Mahindra, for example, earlier this year indicated that it hoped to start local manu-facture, although it did not announce where this would take place.

Indian and Chinese companies are attracted by the potential of the African market, as well as the opportunities that South Africa provides for export to Europe and the US, says Zweni.

It is estimated that the multi-OEM facility will attract up to R4-billion of investment into the 40-ha manufacturing zone, he adds.

A logistics handling facility, a car storage area, a dedicated car terminal and a component and services supplier park are already in place, as Mercedes-Benz South Africa has its manufacturing plant nearby.

The first cars could be rolling off the new shared production lines by “mid-2011”, says East London IDZ adviser Corrie Kotze.

In its first phase, it is intended for the facility to meet government’s new APDP production target of 50 000 vehicles a year – the threshold for incentives to kick in.

OEMs coming into the market will benefit from the APDP incentives without having to hit the target on an individual basis.

The East London IDZ concept, therefore, reduces the risk for start-up or lower-volume-selling OEMs, as it enables them to test the market without having to make major capital investments.

Yet another positive move comes from government.

The guidelines of the automotive investment scheme (AIS), which falls under government’s new industry support programme, the APD), should be concluded by the end of the month, says Naamsa director Nico Vermeulen.

“We have some positive news on the progress of the AIS. We should have an agreed-upon set of guidelines, negotiated between government and industry, by the end of October.”

All in all, says Toyots’s Van Zyl, simply giving up on South Africa’s automotive sector is not the answer.

“We are not a give-up nation – we are a can-do nation.”