Globalisation has resulted in a challenging automotive manufacturing environment that is changing at a rapid pace, resulting in growing competition between international and domestic car manufacturers, research and consultancy firm Frost & Sullivan industry analyst Laura Peinke tells Engineering News.
In a study of the key trends and policy decisions that impact on the automotive industry, which was released at the beginning of this year, Frost & Sullivan states that globalisation has placed cost pressures on producers, requiring them to outsource low-cost manufacturing processes and to place increasing emphasis on quality and productivity measures.
“This is aligned with the growth that is currently being seen in emerging markets and, in particular, in South America, India, China and Eastern Europe,” Peinke says.
The research also found that the increasing pressure placed on manufacturers to reduce carbon emissions is shifting the focus of research and development initiatives towards finding innovative energy solutions.
“This, coupled with the volatility of oil supply, has increased the pressure on automakers to innovate around alternative energy sources, such as hydrogen and biofuels,” Peinke explains.
She adds that new emissions control technologies, such as exhaust gas recirculation, are being driven by stringent legislation for engine emissions control that often extend beyond original-equipment manufacturers (OEMs) and component manufacturers, forcing other suppliers to adhere to similar standards.
She expects this to drive the focus towards natural gas, ethanol-based and hybrid cars. However, these engines are not mass-produced owing to the fact that they are too costly for the lower- to middle-income consumer.
“As combustion engines require catalytic converters or diesel particulate filters, the demand for emissions control devices will remain strong,” she adds.
Peinke states that the global market value of catalytic converters is estimated at about $9,9-billion, with South Africa producing roughly 48% of the global catalytic converters.
She adds that local research in terms of diesel particulate filters is well under way.
“The purpose of diesel particulate filters is not only to reduce emissions, but also to make use of cleaner metals, such as platinum, and therefore assist in decreasing its carbon footprint. South Africa has an advantage in the development and manufacturing of these filters as we have the required platinum resources,” she says.
This will also create value-added employment opportunities through the use of raw materials supplied by local platinum mines. She says that cellular ceramic substrates and diesel particulate filter supplier Corning Environmental Technologies has upgraded its plant in Port Elizabeth to accommodate the production of these filters.
“They will combine the new filters with older catalytic converter technology, with the aim to ultimately stop producing catalytic converters that don’t reduce emissions,” she adds.
Frost & Sullivan expects this environment-friendly technological advance to be quickly taken up in the global market owing to its ability to reduce emissions by up to 95%.
“We are looking at a global compound annual growth rate (CAGR) of just over 15% over the next six years in this specific area,” she explains.
Peinke says that the requirements that go hand in hand with sales growth in developing economies are diverse and this will increasingly force companies to rethink traditional vehicle designs.
“It is estimated that, by 2015, the compact car segment will contribute 30% towards global automotive production,” she adds.
Further, the current focus on developing safe, cost-effective vehicle electronics is expected to intensify further as vehicles have become more reliant on electronics and less reliant on mechanics over the past ten years.
“The cost of electronics contributes almost 35% to the total cost of the vehicle, despite there being a lot of research done on cost-effective, safe electronics, such as the output of hybrid vehicles and the full use of fuel cells towards the end of 2015. The revolution in vehicle electronics is yet to happen,” she says.
SA Automotive Industry Trends
Meanwhile, Peinke says that the local market has seen increasing investment in industry development over the past decade owing to a strong political and economic climate in the mid- to late 1990s.
“Foreign firms invested in large assembly companies and the industry had changed from 37% foreign ownership to nearly 85% foreign ownership by 2006,” she says.
The latest investments in the local industry include a R2,2-billion infrastructure upgrade by BMW, Daimler’s R2-billion investment in the Mercedes-Benz plant, in East London, for the production of the new C-class and the Department of Trade and Industry’s R23,5-million boost for skills development and training.
“These large investments, as well as new investment support structures, have been, and will continue to be, a key driving factor for the automotive industry,” Peinke adds.
Automotive manufacturers are still far from finding technology that can easily be implemented at an acceptable cost, despite energy costs placing additional pressure on consumers.
Peinke says that the South African government has provided funding, through the Innovation Fund, which now falls under the Technology Innovation Agency, to Optimal Energy to roll out production of the Joule, an electric vehicle set to compete with international developments. However, while there are some initiatives in the market, South Africa still lags behind the European Union in terms of environmental awareness.
“Since the local market has become mostly foreign owned, the use of locally devel- oped technologies in the local industry has declined. Local assembly plants and vehicle exports also limit the amount of value-add the industry can provide, since local assembly plants use their own technologies that were implemented by their parent companies,” Peinke says.
In addition, expert skills are still imported into the country for machine maintenance, repair and technology upgrades, as opposed to using local skills.
Imported components account for 65% of local vehicle content, reducing the cost competitiveness of local components and vehicle exports. Frost & Sullivan states that this can increase vehicle prices by as much as 30% as a result of the high import tariffs and the time delays owing to long supply chains.
Local Industry Structure
Peinke states that the South African automotive industry is mainly a manufacturing and assembly-based industry, with most of the research, development and design being done abroad.
This is despite the fact that eight of the top ten global OEMs, including General Motors, Toyota, DaimlerChrysler and Volkswagen (VW), as well as major international tyre manufacturers, such as Continental and Bridgestone, have a presence in the local automotive sector.
Statistics provided by Frost & Sullivan, the National Association of Automobile Manufacturers of South Africa and the National Association of Automotive Component and Allied Manufacturers indicate that Toyota was the top local vehicle manufacturer, in terms of passenger and commercial vehicles in 2009, producing 84 576 passenger vehicles and 94 591 commercial vehicles, for a combined total of 179 167 vehicles.
The runner-up, VW, produced a total of 91 654 passenger vehicles in 2009.
Peinke does not believe there is currently a substantial skills deficit in South Africa, but does see a problem looming in the future caused by increasing competition from China and India.
“South Africa’s problem lies with its labour law and not the skills shortage. The hiring of adequate personnel and firing of those who don’t do their jobs pose numerous complications, which nega- tively impact on the country’s productivity. “Our current production level is in the 60% bracket, 10% to 15% lower than most inter- national manufacturing countries. This, in turn, cautions foreign companies against investment in South Africa,” she says.
However, the ‘Automotive Scarce Skills Survey of 2008’, which looked at the critical skills required in the industry by the eight local OEMs, including BMW South Africa, General Motors South Africa, Ford Motor Company of Southern Africa, Toyota South Africa, Nissan South Africa, Mercedes-Benz South Africa, Fiat Group Automobiles South Africa and VW Group South Africa, revealed the critical skills requirements in the industry.
“The shortage is mainly for mechanical and electrical engineers, as well as industrial engineers, while autoelectricians and motor mechanics are in short supply for apprenticeships,” Peinke says.
She adds that, in 2009, learnerships were the most critical skills requirement, with Frost & Sullivan’s calculation of 525 positions needing to be filled in 2010.
MIDP vs APDP
Peinke says that the automotive industry was previously well supported through the Motor Industry Development Programme (MIDP), which will be replaced by the Automotive Production and Development Programme (APDP) in 2012.
She says some of the key concerns the automotive OEMs and component manu- facturers have concerning the APDP centre on budgets, cheap labour, electricity, manufacturing costs and loss of key companies from the local industry.
Under the APDP, automo- tive tariffs and, thus, the level of protection offered to industry, will remain at 25% and 20% for completely built-up and completely knocked down components respectively, as under the MIDP.
Peinke adds that the MIDP allows local OEMs manufacturing for the local market a duty-free allowance (DFA), which allows for a 27% discount on duties they incur when importing vehicles. The DFA will remain in place until 2012.
Under the APDP, the DFA will be replaced by the local assembly allowance (LAA) and will be gradually reduced to 18% by 2015, remaining fixed until 2020. Local assemblers will also only be able to access the LAA if their total plant production volumes exceed 50 000 units a year.
Peinke states that a fundamental difference, however, is that the LAA will cover all vehicles assembled in South Africa irrespective of their market focus.
When the APDP is introduced, the MIDP’s export incentive will be replaced with a production incentive that calculates benefits on the basis of actual local production value and not material costs.
She adds that the majority of automotive companies, there- fore, need to start considering this aspect of the new programme in terms of their long-term strategies and planning.
Capital Investment Assistance
The MIDP’s productive assistance allowance (PAA) will be replaced by the APDP’s automotive investment allowance (AIA), but will offer the same level of support as under the current programme, namely 20%.
Peinke states that the AIA will be far less restrictive than the PAA owing to the fact that it will be accessible to vehicle assembly and automotive component manufacturers.
Importantly, supplier investments will not need to be focused on or underwritten by an OEM, with the prerequisite that the investment must be automotive.
Secondly, the AIA will be payable over three years and not five years, as is the case with the PAA. This will mean that the yearly benefit that firms receive will be 6,67% over three years, as opposed to the current 4% over five years.
Thirdly, Peinke states that an additional 10% may be made available to firms for high-tech investments, and investment-linked training. This is related to the high additional costs that are incurred through implementing advanced capital requirements and technologies.
Frost & Sullivan expects that the AIA will lead to substantially higher investment levels in the future.
Market Demand Dynamics
Peinke says that, in 2009, electronics, safety features and body panels showed the largest demand by application type in the local automotive industry.
She adds that Frost & Sullivan expects that advanced safety and driver assistance applications could grow at a CAGR of up to 30% between 2009 and 2020.
Further, Peinke has determined that the polypropylene (plastic polymer) local market CAGR between 2009 and 2016 is likely to be 4,6%, which represents a decrease from the market growth of 9,8% recorded in 2006.
However, she believes that in the next ten years there will still be significant demand for metal body parts to be replaced with plastic components. This can serve as a means for chemical companies to support the automotive industry in its quest to reduce its carbon footprint.
“The global automotive sector has been restructured as a result of environmental legislation, which resulted in increased recycling of chemical and material components,” she says.