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Rising costs, Nigerian growth could spell danger for SA auto sector, says Aus academic

Australian Advanced Manufacturing Council head Professor Goran Roos

Australian Advanced Manufacturing Council head Professor Goran Roos

Photo by Duane Daws

14th October 2014

By: Irma Venter

Creamer Media Senior Deputy Editor

  

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Danger signs that South Africa’s automotive industry might follow in the footsteps of Australia’s soon to be defunct vehicle assembly sector included a rapid increase in costs, primarily in labour and energy, an inability to produce goods competitively because of volume issues, and the growth of a new regional market – “in your case, Nigeria” -  said head of the Advanced Manufacturing Council in Adelaide, Australia, and advisor to the Australian government on industrial policy, Professor Goran Roos, on Tuesday.

If these factors reared their head, “you better take some action”, he urged South African component makers especially, noting that they should diversify from only supplying local vehicle manufacturers.

Component suppliers must have at least 70% of their business outside South Africa in order to survive any possible end to vehicle assembly in the country, with a healthy percentage of their turnover spent on research and development.

Addressing the South African Automotive Week conference in Midrand, Roos said Australia had, in 2008, produced vehicles at a lower cost than the US. However, the demand for raw material in China saw resource-rich Australia’s dollar increase in value by 40% in a “very short period”.

This, coupled with a rapid increase in energy and labour costs, saw vehicle production in Australia become 30% more expensive than the US. In fact, said Roos, Australia had become more expensive than Switzerland.

However, today Switzerland “was still doing well” as a manufacturing hub, as companies in this European country knew how to manufacture in a high cost environment.

Australian companies were set up to operate in a low cost environment, noted Roos, leading to a large number of manufacturing companies “going under”.

He noted that there were three vehicle manufacturers in Australia – General Motors (GM Holden), Ford and Toyota – as well as a raft of component suppliers.

All three vehicle manufacturers were expected to close their doors by 2018. This would cost Australia around 17 000 jobs, and another 30 000 to 40 000 in the supplier industry, as well as the A$2-billion the industry contributed to the economy.

Around 75% of the supply base would disappear, as diversification took around seven years, and only three years remained until 2018, noted Roos.

Moreover, if the GM Holden plant closed, for example, 725 companies in Adelaide would be impacted, most of these in the service sector, and not in the vehicle supply chain.

“This will be a huge problem. There is nothing else to do in Adelaide.”

Australia was one of thirteen countries in the world that could design and produce a car and its components from scratch, said Roos. Now this club would have one less member.

THE ROLE OF SUBSIDIES, THAILAND
Another reason for the Australian assembly sector’s demise had been a pullback in subsidies.

As was the case in a competitive automotive world where “subsidies were a reality”, vehicle manufacturers in Australia also received subsidies.

For each A$150-million that GM Holden received, for example, it generated $2.7-billion of economic activity, said Roos.

“Subsidies are critical to maintain an industry of this nature.”

If vehicle manufacturers did not make money, they would leave, he emphasised, especially as rising costs made it impossible for Australia’s three vehicle manufacturers to compete on a global level.

However Australia’s Treasury “in December last year basically told the three OEMs [vehicle manufacturers] to go away”, said Roos, as it was unwilling to provide “handouts” to uncompetitive sectors – a message the Australian government had communicated persistently in the last 12 months.

Roos suspected the decision was driven by ideology, rather than rational thought.

A better solution would have been to still provide support, but with the expectation of something in return, such as improved supplier competitiveness.

However, Australia provided the money, “and that was it”.

Roos believed two vehicle manufacturers would have stayed if they had been able to renegotiate a minor change in the government support package. However, government made it clear that it no longer wanted to host the assembly plants.

Vehicle manufacturers were, in general, not as concerned with the form of support they received, added Roos, as long as it was “a good predictable package”.

He was not in favour of tariff protection, as “companies became too comfortable” and uncompetitive.

Another problem the Australian automotive industry had faced in recent years was the rise of near, low cost Asian production hubs, such as Thailand.

Thailand could produce a vehicle at $3 000 less than Australia.

Roos said South Africa could one day see Nigeria play a similar role.

“You may not have China and Thailand on your doorstep . . . but you have Nigeria.”

He believed it would only be a matter of time before the South African automotive industry started to see some “pull forces” from  the West African country as it tried to grow its automotive industry.

He predicted that South Africa could work well with Nigeria over the next 10 to 15 years as South Africa helped Nigeria to develop its automotive industry; however, at some point Nigeria’s economic growth might slow down, as was the case in China, and it would start scouting for growth opportunities, perhaps pushing its automotive industry into the export market.

LABOUR COSTS
Roos also noted that labour costs in Australia had expanded dramatically in recent years, compounding the demise of the automotive industry. However, he did not blame labour unions, but rather management.

As global vehicle manufacturers tended to rotate CEOs, bringing them in from other countries on short-term contracts, they often worked hard to prevent strikes and missing targets during their tenure by allowing larger than necessary wage and salary increases.

“I’m not saying this will happen in South Africa, but it happened in Australia,” said Roos.

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Edited by Creamer Media Reporter

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