Despite certain areas of weakness, South African component suppliers have advanced their competitiveness and productivity in recent years, shows the South African Automotive Supplier Industry Benchmarking Report 2018.

“It is clear that South African suppliers are making real progress, and that leading performance is attainable and possible within the local environment,” states the report.

This year’s report is the second one produced for the National Association of Automotive Component and Allied Manufacturers (Naacam) by B&M Analysts South Africa, a specialist benchmarking consultancy.

The benchmarking database primarily comprises comparators from Hungary, India, Mexico and South Africa. For the purpose of this analysis, comparators are grouped according to South Africa, Developed Country (DC) and Less Development Country (LDC).

Industry Growing
South African suppliers have increased their average rand sales by 13% in real terms over the 2015 to 2017 period, states the benchmarking report.

The growth is just behind the corresponding growth among LDC suppliers, although far stronger than the production volume growth of South African vehicle manufacturers (or original equipment manufacturers, OEMs), which declined in 2016 and 2017.

Another positive is that real sales growth in the upper quartile of the South Africa supply base (the top 25% performing local suppliers) was 15.8% in 2017.

Average South African supplier employment levels (including permanent and contract employees) increased by 8.7% over the 2015 to 2017 period, with the increase in 2017 at 2.5%.

The top 25% of suppliers grew employment by 6.3% in 2017.

An analysis of cost management by South African suppliers from 2015 to 2017 also reveals progress.

Variable costs, as a percentage of sales, which comprise materials, direct labour and manufacturing overheads, have declined.

This improvement, in conjunction with fixed costs being maintained, is reflected in an improved breakeven point, and has resulted in the average operating profit levels being achieved by South African suppliers in 2017 improving notably, states the benchmarking report.

“South African supplier operating profit, however, remains substantially lower than the LDC level.”

More positive news is that South African OEM customer satisfaction levels improved again in 2017 to 87.3%, up from 86.2% in 2016.

Albeit minor, the overall OEM rating for reliability did decline in 2017.

In addition, more than three-quarters (77.2%) of all South African OEM respondents believe there are opportunities to increase their buy allocation from local suppliers.

This is linked not only to increasing their current volumes, but also increasing the range of products they buy from local suppliers, especially by working with suppliers to develop new products.

The South African Automotive Supplier Industry Benchmarking Report 2018 also considered the overall cost competitiveness of South African suppliers relative to a LDC and DC proxy – namely, India and Hungary, respectively.

This cost competitiveness assessment considers the contribution of employment, utilities (electricity and water), rental, and operational waste costs (the costs associated with inventory, quality, reliability, flexibility and human resources).

The assessment of suppliers for 2017 reveals that South African suppliers are positioned ahead of Hungarian counterparts, and just behind suppliers in India.

The analysis further highlights that, while minimal, “definite cost competitiveness progress” has been evident in recent years at South African suppliers, with the top 25% of suppliers indicating that “leading performance is present in South Africa”.

Utility and rental cost data reveal that the average South African supplier has an advantage in this area.

Waste costs remain a notable portion of total costs, with the average sitting at 25% in 2017.

In terms of productivity, the South African Automotive Supplier Industry Benchmarking Report 2018 shows that the productivity of the average South African supplier (calculated in terms of local value addition as a function of employment costs and capital depreciation) has improved by 9.8% over the past two years, to a ratio of 2.7.

However, this remains lower than the equivalent ratio for the average LDC supplier of 4.3, suggesting a need for local suppliers to substantially bolster their productivity.

Also, capital investment levels, an important enabler of productivity improvement and driver of sustainable competitiveness, remained low in 2017, at 3.6% of sales.

In contrast, LDC suppliers invested an average of 6.7% of sales, while DC suppliers averaged 6.6%.

Investment in people, a second key enabler of productivity improvement, delivers some better news, with training expenditure as a percentage of remuneration at 1.5% among local suppliers.

This is an improvement on the 2015 and 2016 levels of 1.2% and 1.4% respectively, with the local firms also positioned ahead of the latest LDC level of 1.4%.

It is also positive to note that absenteeism levels among South African suppliers are well below those reported for LDC and DC suppliers.

Over the past two years, absenteeism improved by 14.2% to more than 3%, while the upper quartile level of South Africa firms are at 1.7%. The lower quartile level of 4.1% is also ahead of the latest LDC and DC figures.

OEMs Want to Increase Local Content
The customer benchmark findings confirm that local OEMs want to increase their purchases from South African component suppliers, says Naacam executive director Renai Moothilal.

There seems to have been a step change in the way localisation has been viewed and is “possibly reflective of OEMs starting to plan for a future production environment that rewards higher localisation”, says Moothilal.

He says government’s soon to be announced post-2020 automotive policy is expected to have a heightened focus on localisation in the sector, with work done to date highlighting the importance of improving the current localisation average in South Africa of less than 40%, to 60% by 2035.

“The automotive sector remains a priority South African manufacturing sector, contributing significantly to the country’s gross domestic product and export basket. Whilst the production of the local OEMs is crucial, the largest economic spinoffs will be realised in the supply chain,” says Moothilal.