The effects of Standard & Poor’s and Fitch Ratings having downgraded South Africa to junk status will wash “through the entire value chain of automotive production”, warns Frost & Sullivan Mobility Africa programme manager Craig Parker.
The impact of the downgrade, leading to a weaker rand, among other effects, will be felt in a number of ways, he notes.
Firstly, the price of imported components will have a negative impact on vehicle manufacturers (original equipment manufacturers, or OEMs) from a cost perspective, often not mitigated by the export of the finished product at a weaker rand value.
“Secondly, local component producers feeding into the value chain are impacted by the higher cost of imported input into their components. They are not benefited by exporting at a weaker rand, as they are selling their product to local buyers. The secondary impact of higher fuel prices will also translate into higher logistics costs across the board,” explains Parker.
The current local content contribution into vehicles rolling from assembly lines at South African OEMs is, on average, 38%.
It will be difficult to grow this number, says Parker, despite goals to the contrary.
Higher living costs as a results of the downgrading will also impact employees in the local automotive value chain, as well as at OEMs. This will result in a loss of disposable income to employees, owing to higher inflation.
This means automotive manufacturers will, most likely, face demands for higher wage increases, which could lead to a loss of production, as has happened in the past when employers and trade unions could not agree on acceptable wage increases, says Parker.
The local demand for new vehicles will also be negatively impacted as rising debt levels will impact heavily on spending power and the willingness and ability of financial institutions to grant credit.
Finally, the investment potential of the automotive sector will decline as a result of a less favourable business climate in South Africa, where the risk versus reward and return on investment equations are negatively impacted, notes Parker.
Securing investment from foreign tier 1 and tier 2 component manufacturers into South Africa will become increasingly difficult, he says.
“Also, getting these manufacturers to sell an equity share, to comply with equity requirements of the empowerment procurement stipulations in the value chain, will be more difficult as uncertainty and a lack of trust in the financial stability of the economy will discourage international investors from allowing local equity partners into their business.”