While South African component suppliers are, on average, holding their own in the international automotive industry, there are one or two warning lights flashing that all is not 100% within the industry.
This is, in short, the finding of the newest South Africa Automotive Supplier Performance Report, produced yearly for the National Association of Automotive Component and Allied Manufacturers (Naacam) by B&M Analysts South Africa.
The benchmarking study included automotive component suppliers located in Canada, China, Hungary, India, Mexico, the US and South Africa.
The firms were divided into three groups, namely South Africa (with 92 component manufacturers participating); developed countries (DC, with 64 companies participating, such as in the US) and less development countries (LDC, with 97 companies participating, such as in India).
The benchmark analysis also includes average, upper quartile (UQ), median and lower quartile performance indicators in terms of South Africa-based firms, with the UQ encompassing the 25% best performers.
This year’s South African Automotive Supplier Performance Report indicates that capital expenditure (capex) among South African component firms remains a major concern, says B&M Analysts MD Douglas Comrie.
After increasing in 2017 to almost 5% of sales, levels dropped in 2018 to under 4%.
This is well behind the comparative averages for the DC and LDC firms of 8.9% and 7.2%, respectively.
Also, the data highlights that 50% of local firms spent less than 2% of sales on capex in 2018, with 25% spending less than 0.6%.
This confirms that a significant portion of South African suppliers are allocating insufficient funds to upgrade their capabilities and technology, says Comrie.
“Around 7% to 8% should be the absolute minimum.”
If capex spending numbers do not increase, it would be difficult for the South African automotive industry to reach its short-term target of 42% local parts content on domestically produced vehicles by 2023 and 60% by 2035.
Also problematic is that supplier investment in skills development reflects a slight decline in the past year to just 1.4% of remuneration.
Further to this, 50% of local suppliers spend 1% or less of their remuneration bill on training and development, confirming that a significant portion of suppliers are spending insufficient funds to improve productivity and, therefore, competitiveness.
A significant focus on capital upgrading, as well as the introduction of the associated technology and investment in skills, are required by the local supplier industry if productivity is to be bolstered, competitiveness enhanced, and growth opportunities realised, emphasises Comrie.
A failure to focus on investment in operations in line with industry requirements will place significant pressure on local suppliers going forward.
Comrie adds that a major observation from the latest benchmarking findings, especially when considering the spread of performance, is the differential between the top 25% performers (the upper quartile) and the rest of the local suppliers (the lower quartile)
While the top performers are doing well, the performance of the bottom 25% and, in several instances, the bottom 50%, is “highly concerning”, he says.
This highlights that up to half of local suppliers require increased focus and support in bolstering their performance in key operational areas.
Some good news in the South Africa Automotive Supplier Performance Report 2019 is that South African suppliers increased their average rand sales by 10.7% in real terms from 2016 to 2018.
This means local suppliers’ growth is far stronger than the comparative production volume growth at South African vehicle manufacturers.
Average local supplier employment levels, which include both permanent and contract employees, increased by 3.5% from 2016 to 2018, with the increase in 2018 being 2.8%.
However, a review of operating profitability levels for local suppliers highlights that, after improving to 6.2% in 2017, the 2018 average declined to 4.3%.
The South African suppliers’ profitability levels remain well behind the comparative DC and LDC averages, with the UQ level of 12% ahead of the LDC average, but behind the latest DC level.
The South African Automotive Supplier Performance Report is part of Naacam’s effort to keep its membership appraised of industry trends and to provide empirically assessed performance information, says Naacam executive director Renai Moothilal.
“We believe this is key to unlocking any blind-spots within the supplier community itself, whilst also giving industry stakeholders valuable insight into influencing factors within the sector, often through a shop-floor lens.”