The Automotive Industry in South Africa Faces a Crisis of Competitiveness
You can also listen to this podcast on iono.fm here.
JEREMY MAGGS: South Africa’s automotive masterplan aimed to foster a larger and more competitive industry while creating a significant number of jobs. While it has succeeded in keeping major vehicle assembly plants operational, localisation remains below 40%.
Imports continue to dominate the domestic market, and job growth has not met expectations.
Currently, there are suggestions to reassess a strategy that critics argue focuses excessively on manufacturing while overlooking the larger retail and aftermarket sectors. We aim to connect these various aspects.
Joining us now is Dr. Justin Barnes, executive director of the Toyota Wessels Institute for Manufacturing Studies (TWIMS). Welcome, Justin. So, concerning the automotive masterplan, has it succeeded in expanding the industry, or has it merely prevented further decline?
JUSTIN BARNES: Hi, Jeremy. Its main accomplishment has been stabilizing the industry. The masterplan has effectively bolstered the industry’s export focus, but it has not provided enough support for the domestic market, where local production has faced challenges for quite some time.
JEREMY MAGGS: In terms of local content, it was expected to increase to over 60%, yet it sits below 40%. Why do you think localisation has regressed?
JUSTIN BARNES: The primary issue is that the local content in our exported vehicles is significantly lower than in vehicles produced for the domestic market. As production shifts towards exports, local content inevitably suffers.
We currently have around 37% local content in our exported vehicles and about 45% in our domestic offerings.
Of the 600,000 vehicles manufactured last year, only 170,000 were directed to the local market, while 430,000 were exported. This disparity results in a local content level of approximately 39%.
JEREMY MAGGS: Is quality a problem here?
JUSTIN BARNES: Quality is not the issue. We are exporting vehicles that possess far superior technology compared to those produced for our local market.
For instance, when supplying to the European Union (EU), which has rigorous safety and engine standards, those vehicles, in terms of their overall value, have a lesser proportion dedicated to manufacturing the bodies, glass components, bumpers, and other plastics.
ADVERTISEMENT
CONTINUE READING BELOW
Read: SA auto industry faces threats from increasing imports
The result is a decline in local content percentage as a share of vehicle value. Interestingly, while the absolute local content per vehicle has actually increased, the overall vehicle value has risen even more, which affects the percentage figure.
It’s somewhat misleading to say that local content has decreased; in reality, we have higher local content per exported vehicle compared to those meant for the local market, yet the percentage is considerably lower.
JEREMY MAGGS: Regarding this issue, government incentives appear to be effective. If this is true, why are we not witnessing stronger supplier development and consequently more job creation in the sector?
JUSTIN BARNES: The challenges for local market supply often arise due to deviations from established principles. It’s possible to source supplies for the local market from head offices in Japan, Germany, or the United States and obtain variations.
However, such deviations are not an option in the global market since vehicles can originate from multiple plants, with South Africa being just one of them.
Read:
Toyota increases its SA market share in light of Chinese competition
The remarkable rise of Chinese SUVs in South Africa
As a result, there’s little room for risk when it comes to smaller firms when exporting.
In the domestic market, companies have a bit more flexibility, though not much, which is why we see slightly higher local content for local sales. Unfortunately, the lackluster performance of the domestic market has hindered local producers.
JEREMY MAGGS: I understand the risks associated with the deviation quotient you’ve mentioned. But shouldn’t the incentives include stricter and perhaps more enforceable conditions for localisation and employment? Is that a feasible option?
JUSTIN BARNES: One must tread carefully with the imposition of too many conditions on incentives. The automotive policy operates on the principle that incentives are granted based on demonstrated value addition, which means these incentives are not given without merit.
The benefits are derived from actual value creation.
ADVERTISEMENT:
CONTINUE READING BELOW
Excessive conditions may lead to adverse effects, potentially making South Africa less appealing for exports compared to sister plants in other regions that could also serve those markets.
The reason I highlight this, Jeremy, is due to the critical role of the domestic market for the future of our auto industry, which has performed poorly for an extended period.
We face a significant issue with vehicle affordability; it’s not that vehicles are overly expensive, but rather that consumers lack the funds to purchase them.
Read: Strength of the rand is ‘positive news’ for new vehicle prices
Currently, 10.5 million adults in South Africa can afford a car. Interestingly, 20 years ago, in 2006, we also had 10.5 million adults who could afford a vehicle.
There has been no growth in this market over the last two decades regarding the number of individuals who can purchase a vehicle.
JEREMY MAGGS: As I imagine, a contributing factor for local manufacturers is the aggressive pricing strategies of Chinese and Indian brands. This suggests that locally produced vehicles are currently uncompetitive or struggling to compete.
JUSTIN BARNES: Indeed, that’s the crux of the challenge we face. We are highly capable of producing vehicles to a specific standard. However, our domestic market does not match the quality that our production can achieve.
Our manufacturing capabilities allow us to produce vehicles of a far superior standard than what the local market can access, leading to a structural issue.
JEREMY MAGGS: What approach can be taken to address this structural issue? It seems almost impossible to rectify.
JUSTIN BARNES: It undoubtedly is a challenge. For some companies, especially luxury brands, it might be exceptionally tough. However, mass producers need to focus on reorienting their production. That presents a risk.
South Africa’s situation is precarious.
ADVERTISEMENT:
CONTINUE READING BELOW
Improving our standing in the domestic market is crucial, given our proven track record with exports. That could produce significant volume.
Read: How SA auto manufacturers can seize global shifts
However, we must discover ways to enhance our competitiveness in the domestic market. Failing to do so could jeopardize our export potential as the viability of production in South Africa relies on a balance between local demand and export production.
This balance justifies the substantial investments in our plants. If we only maintain the capacity to export, we risk compromising our position.
JEREMY MAGGS: So what strategies can we employ to boost our local competitiveness?
JUSTIN BARNES: The fundamental problem in South Africa is that our foundations for competitiveness are significantly undermined.
Our infrastructure is not where it should be. Our competitors have advanced regarding port efficiencies, road, and rail systems. Additionally, our energy costs have escalated dramatically. These factors have diminished our capacity to produce efficiently and have had negative repercussions.
Thus, we find ourselves in a challenging predicament. The automotive industry is not thriving in South Africa.
I am concerned that there is much discussion concerning incentives, yet I maintain that incentives are not the core issue. They function effectively; they deliver the intended results.
Read: The dtic evaluates ad valorem tax adjustments to lower vehicle prices
However, when faced with 15%, 18%, or even 20% increases over a decade across energy, water, waste disposal, transportation, and all potential cost drivers, you end up with a cost base that is uncompetitive. That is the current reality in South Africa.
JEREMY MAGGS: Thank you, Dr. Justin Barnes, for your insights. Time is against us. I appreciate you joining us today, executive director of the Toyota Wessels Institute for Manufacturing Studies.