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Possible labour issues a challenge for automotive industry

RISK FACTOR
South Africa’s automotive industry, government and labour are continuously engaging to avoid another strike to protect the industry and retain employment

RISK FACTOR South Africa’s automotive industry, government and labour are continuously engaging to avoid another strike to protect the industry and retain employment

Photo by Duane Daws

2nd October 2015

By: Mia Breytenbach

Creamer Media Deputy Editor: Features

  

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In addition to mitigating rising manufacturing input costs, a potential prolonged strike in 2016 is the most significant challenge the automotive components sector could face, avers professional services firm KPMG.

“The previous strike created considerable negative sentiment towards South Africa. If a similar occurrence takes place, there is a good possibility that more business will be lost by local automotive component suppliers, as business will simply move to other locations,” says KPMG automotive sector director Alan Barr.

Consequently, industry, government and labour are engaged in continuous discussions to avoid another prolonged strike to protect the industry and retain employment, he highlights.

Reuters reported in August 2013 that “South Africa’s auto manufacturing industry came to a near standstill . . . when about 30 000 workers downed tools”. Subsequently, in 2014, vehicle manufacturers halted production at some of their plants, as the supply of car components was interrupted during the National Union of Metalworkers of South Africa-led metals and engineering sector strike.

While Barr notes that the industry is diverse, and therefore difficult to predict, he believes that 2015 nevertheless has been a tough year.

“There is need for a two-tiered labour force to provide flexibility for a greater informal workforce to create more employment, but at a lower cost,” he suggests.

Additionally, Barr proposes that the localised supply of raw material, through greater beneficiation, should be increased. “To make this viable, component suppliers will need to secure export contracts and ensure increased collaboration among all industry players – including government. They will also have to position South Africa as a key destination for high-quality, cost-effective products.”

Barr believes that the automotive industry is “below par” in terms of labour productivity, compared with other countries. However, there are pockets of excellence where manufacturers are achieving high levels of labour productivity, he says, noting that a key factor contributing to this is effective leadership and workforce management.

Core Contribution
Barr cites the Automotive Export Manual 2015 South Africa to highlight the importance of the automotive-component industry. The manual indicates that, together with vehicle manufacturers, these industries represent 30.2% of total manufacturing in 2014, with automotive component exports amounting to R45.7-billion in the same year.

Further, the total automotive sector contributed 7.2% to the overall gross domestic product in 2014, with the vehicle and components manufacturing sector contributing 4.4%.

Meanwhile, in terms of component sector revenue for 2014, the National Association of Automotive Component and Allied Manufacturers recorded a turnover of R78.4-billion, excluding R45.7-billion for exports.

Nevertheless, the sector faces additional challenges, including pressure from customers for yearly price reductions, increased competition from other suppliers – such as production facilities within the same multinational group – the need to employ skilled workers and the distance to market.

“Consumers and the automotive industry are directly affected by automotive component prices, as they affect the overall price of the vehicle,” says Barr, acknowledging that vehicle manufacturers need to consider supply costs and the introduction of new technologies when pricing vehicles.

Other key industry trends putting pressure on the industry and negatively impacting on the economy are lower production volumes, following global declining sales volumes, and the need for capital investment in new-vehicle technologies and procurement departments for future contracts. This includes considering new manufacturing locations that can reliably produce the right quality of components at the best price, Barr explains.

Further, he points out that a volatile and weakening rand, which has assisted exporters in offsetting declining volumes, has also had a negative impact on local suppliers that import components.

While exporters can offset reduced volumes with the weakened rand, exports will be negatively affected should the rand strengthen significantly, Barr says, adding that manufacturers who do not have export contracts will also be affected.

Nevertheless, he emphasises that the export potential for the industry is significant, particularly with a weak currency, as it allows for more revenue generation. Potential opportunities exist in traditional export markets and new export areas such as the Middle East, Africa and South-East Asia.

“South Africa is, however, at risk of losing out on the US export market – the second-highest component export destination after Germany – should the US-signed African Growth and Opportunity Act (Agoa) not be renewed for South Africa,” he warns.

Agoa provides incentives for African countries to continue their efforts to open their economies and build free markets. Business Day reported last month that, “SA’s car exports to the US soared in value from $289-million in 2001 to $1.4-billion last year, making the country an Agoa success story”.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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