Feeling the pinch
The automotive industry in South Africa was hit very hard by the financial crisis over the past year. With vehicles sales down and with many major automotive companies experiencing major financial difficulties, it has been an extremely testing year. There have however been positive signs in the last two or three months indicating that the industry is beginning to recover. There is no doubt however, that it is just the beginning and a lot of work needs to go into lowering costs and improving efficiencies in the industry.
South Africa has developed a major automotive industry with local vehicle manufacturing plants for Volkswagen, BMW, Nissan, General Motors, Ford, Mercedes Benz and Toyota. There are also numerous component manufacturers, some of which supply the local market and others which supply the international market. Unfortunately South Africa’s competitiveness has been questioned on numerous occasions. Many industry leaders have suggested the need for further government incentives for the industry and also the improvement of the transport infrastructure. The ability to transport the finished products from the assembly plants to the ports, to clear the vehicles through the ports quickly and efficiently and to ship them to their intended destinations are all crucial elements of the supply chain. The South African supply side, led by Transnet, needs to improve in this area and some companies have resorted to using the Port of Maputo as a cheaper alternative. The importation of parts is another issue, which needs to be addressed, again dealing with the supply-side constraints.
Within the international automotive sector many governments are stepping in to aid their automotive industries. China and Brazil have substantially reduced their car sales taxes, while Germany has offered a car scrapping incentive of $3600 on cars nine years or older in order to encourage people to buy new cars. The US too, has introduced its own reduction in car sales taxes. There is a need for the South African government to introduce more incentives to help automotive manufacturers ride out the storm. It is particularly important to create a favourable environment for component suppliers in order to increase the percentage of local content in the make-up of vehicles manufactured here. The announcement of a large R178 million investment to be made in Nelson Mandela Bay Logistics Park by German components manufacturer, Benteler Automotive, is a hugely positive step for the parts and components manufacturing sub-sector and is one of the main contributing factors to Volkswagen South Africa’s (VWSA) plan to double its exports in 2010.
Another major challenge that the automotive industry has continued to face is the transport and supply infrastructure. Importing and transporting parts to the assembly plants as well as transporting and exporting the finished products are two critical steps in assembly and export process and the industry has been critical of the government's work in this regard. The port charges for example one controversial topic. At $821.6 to move one forty-foot container, in comparison with Argentina at $470, Brazil at $364, and China at $80, South Africa is not very competitive. The number of containers that can be cleared through the port per hour is also too low, with the port of Cape Town coming out as the most uncompetitive report among 17 ports included in a study conducted by the Automotive Industry Development Centre.
The industry is also still anticipating the roll out of the revised government incentive schemes and in particular the implementation of the Automotive Production and Development Programme – APDP – (which is to take over from the Motor Industry Development Programme). It was initially stated that the Automotive Investment Allowance – also referred to as the Automotive Investment Scheme (AIS) – would be rolled out in June or July of this year. This scheme sees an allowance of 20% of the qualifying investment paid back to participants over three years. At the time of publishing, this scheme had not yet materialised. On a positive note however, recent comments from the Managing Director of VWSA and also the president of the National Association of Automotive Manufacturers of South Africa (NAAMSA), David Powels, indicated that significant progress had been made in negotiations to finalise the AIS and the scheme would be backdated to July 2009, once finalised.
Positives to build on
| VWSA announced that it was looking at increasing its production by 50% and in the process doubling its export volumes |
There have been many positives to come out of the automotive sector in recent times. Just last week, VWSA announced that it was looking at increasing its production by 50% and in the process doubling its export volumes, specifically with the production of the new generation Polo. This would be a result of VWSA’s R3.5-billion investment that it announced in early October. BMW is also investing R2.2-billion in upgrading its Rosslyn plant in order to increase its capacity to 87 000 units. As mentioned earlier, there will also be a R178-million investment in the Nelson Mandela Bay Logisitics Park by the German components manufacturer Benteler Automotive. They are just one of five component manufacturers that are investing a total of R600-million in the logistics park.
These investments are particularly significant in light of concerns that the local content of vehicles manufactured in South Africa currently only sits at about 35%. In order to become more competitive, it has been suggested that this percentage needs to increase to 70% or more. The investment by international components manufacturers in South Africa is therefore a very positive sign.
Other suggestions that have been made to assist the ailing automotive sector are a 2% interest rate subsidy to the general manufacturing industry, increasing import duties to slow the importation of foreign cars and components, investing in skills development to make manufacturing plants more productive and providing incentives (through the DTI or IDC) to component and vehicle manufacturers.
The future looks encouraging
| "The new car market will continue its gradual recovery through 2010" |
There are also other positive signs for the local demand for vehicles. Chris de Kock, the Executive Head of Marketing and Sales and Wesbank, gave TradeInvestSA some positive comments to note:
According to the October vehicle sales report released by NAAMSA, October saw a second straight increase in month-on-month sales. NAAMSA noted in its 3 November report that the industry was at an early stage of recovery, albeit from a very low base. NAAMSA does expect the slow recovery to continue in 2010.
Chris de Kock’s outlook for the next 12-18 months is in a similar vein, measured yet positive: “We believe that the used car market will remain buoyant, but that the new car market will continue its gradual recovery through 2010. The availability of quality used car stock is becoming a major constraint to this segment. At WesBank, we are already seeing our new-to-used ratio retract slightly, showing that the strength in the used car market has stabilised. We further anticipate the recovery to increase in speed starting 2011.”
The South African automotive sector will have to continue to fight to remain locally viable and internationally competitive. On the local side, demand will have to be inched higher by vehicle financiers developing innovative ways to encourage new buyers. The industry will also have to make the best of the maintenance sub-sector, which will receive more attention as consumers hold onto their old cars. The 2010 Soccer World Cup will help drive some local demand, particularly for commercial vehicles used for transporting goods as well as the tens of thousands of tourists due to arrive.
From a competitiveness perspective, the local component manufacturers will have to increase their capacity, through focused government policy and financial assistance. The development of skills will also be crucial to helping not only component manufacturers but also vehicle manufacturers. The most important factor in reducing costs and improving competitiveness will be increasing the local content of locally produced vehicles. This will mitigate against the high costs of component imports as well as the logistical issues of having to import them. The transport and infrastructure issues will also have to be ironed out, with efficient and cost-effective port services being a cornerstone of a globally competitive automotive industry.
