SA’s auto industry faces a competitiveness crisis

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JEREMY MAGGS: South Africa’s automotive masterplan was supposed to build a bigger, more competitive industry and create significantly more jobs. It has helped keep major vehicle assembly plants operating, but localisation does remain below 40%.

Imports dominate the domestic market, and employment growth has disappointed.

Now, as I understand it, there are calls to rethink a strategy that critics say focuses too heavily on manufacturing while neglecting the much larger retail and aftermarket economy. We try and pull all of those strands together.

I’m going to talk now to Dr Justin Barnes, executive director of the Toyota Wessels Institute for Manufacturing Studies (TWIMS). Justin, so this automotive master plan, and welcome to you, has it actually grown the industry or has it mainly stopped it from just shrinking or diminishing?

JUSTIN BARNES: Hi, Jeremy. I think its primary benefit has been to essentially maintain stability in the industry. The masterplan has positively supported the industry’s export orientation, but it has not supported the industry sufficiently in relation to the domestic market, where local production has struggled for a period of time now.

JEREMY MAGGS: Justin, in that respect, local content, as I understand it, was supposed to move towards and even beyond 60%. It’s below 40%. Why do you think localisation then has gone backwards?

JUSTIN BARNES: The primary reason is that the local content in our exported vehicles is substantially lower than the local content in the vehicles made for the local market, and so if production is rebalanced towards exports, then local content is going to struggle.

So I think we have about 37% local content in our exported vehicles, and we have around about 45% local content in our domestic vehicles.

But of the 600 000 vehicles we produced last year, only 170 000 went into the local market and 430 000 were exported. That’s why you end up with a local content level of around 39%.

JEREMY MAGGS: Is that a quality concern problem?

JUSTIN BARNES: It’s not a quality concern problem. We export much more technologically advanced products than we make for our own domestic market.

So if you supply into the European Union (EU), which has very advanced safety requirements, very advanced engine requirements, those vehicles as a proportion of their value, have a lower amount of value for fabricating the bodies and supplying the glass and doing the bumpers and all the plastic components.

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Read: SA auto industry faces threat from shift towards imported vehicles

The consequence is that local content goes down as a percentage of the vehicle. Ironically, the amount of local content per vehicle actually goes up, but the value of the vehicles also goes up by a further amount, which reduces the percentage level.

So it’s a little bit illusory to say that the local content goes down. We actually have higher local content in each exported vehicle than we do for vehicles in the local market, but the percentage is much lower.

JEREMY MAGGS: And assisting that process, as I understand it, are government incentives, which by and large seem to be working. If that’s the case, why are we not then seeing stronger supplier development and consequently more jobs being created in the sector?

JUSTIN BARNES: So the challenges for local market supply, one can invariably get deviations from the principles. So one can go to the head offices in Japan or Germany or the United States for supply into the local market, and you can get deviations.

You cannot when you’re supplying products to the global market, because the vehicles could come from a number of plants, of which South Africa’s only one.

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So consequently, there is no opportunity to take a chance on a small firm if you’re exporting.

In the domestic market, you get a little bit more latitude. Not a lot, but a little bit more latitude, which is why we have some additional local content for the local market. So the problem is that the domestic market has performed so poorly for the local producers.

JEREMY MAGGS: I do understand the risk attached to the deviation quotient that you’re outlining, but it would suggest then surely that the incentives should come with tougher, maybe more enforceable conditions when it comes to localisation and employment. Could that be ramped up, do you think?

JUSTIN BARNES: One has to be careful about putting too many conditions to incentives, because the way in which the automotive policy works is one gets incentives on the basis of demonstrated value addition, which means the incentives don’t come for free.

The incentives are achieved through the creation of demonstrated value.

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If you put too many conditions down, there’s potentially a negative consequence to that, which is that South Africa no longer looks attractive for exporting in relation to sister plants elsewhere that can also supply those export markets.

The reason why I’m making this point, Jeremy, is that the domestic market is really important for the future of our auto industry, and the market has performed terribly for a long period of time now.

We’ve got a real problem in this country with affordability around vehicles and it’s not that the vehicles are too expensive, it’s that people don’t have the money to buy them.

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So we have 10.5 million adults who can afford a motor car. In 2006, 20 years ago, we also had 10.5 million adults who could afford a motor car.

We have zero growth in this market and have had it now for two decades in terms of the number of people who can actually buy a motor car.

JEREMY MAGGS: And compounding the problem, I imagine, for local manufacturers is the fact that Chinese and Indian brands are winning consumers aggressively on price. It would suggest that locally produced vehicles are not genuinely competing at the moment or can’t.

JUSTIN BARNES: Well, I think that’s the real challenge we’ve got. The real challenge is that we are a formidable producer of vehicles to a particular standard. The problem is our domestic market does not align with the standard of our local production.

Our local production is able to make vehicles of a much higher standard than what the local market can afford. So we have a structural problem.

JEREMY MAGGS: So how do you right size that structural problem? It would seem to me almost insurmountable.

JUSTIN BARNES: It is a challenge. For some companies it’s going to be particularly difficult, especially if it’s a luxury brand. But for the mass producers, it’s really about reorienting production. And there’s the risk.

South Africa is in a difficult position.

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If we are able to improve our position in the domestic market, we’ve proven ourselves with exports, in combination that can give us some serious volume.

Read: How SA auto manufacturers can take advantage of global shifts

However, we have to find a way of being more competitive in the domestic market. If we don’t, we potentially end up losing our exports because the business case for production in South Africa is a balance between local production for the local market and local production for export.

That justifies the substantial investments in the plants. If we only have the ability to export, we may be compromised.

JEREMY MAGGS: So how do we become more competitive locally then?

JUSTIN BARNES: The fundamental problem in South Africa is that the foundations to our competitiveness are severely compromised.

Our infrastructure is not in the state that it should be. Our competitors have moved ahead of us in relation to our port efficiencies, road, rail. Our cost base in terms of energy has moved very, very considerably. These have undermined our ability to produce more cost effectively, which has had consequences for us.

So we are in a difficult position. The auto industry is not in a healthy position in South Africa.

My concern is that there’s a lot of debate around the incentives, and I look at it and I say, but the incentives are not the problem. The incentives work well. They do what they’re supposed to do.

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But if you get confronted with 15%, 18%, 20% increases and you compound that over 10 years, between energy, water, solid waste removal, ports, road, every potential cost factor has moved at two or three times the inflation rate for 10 years, you end up with a very uncompetitive cost base. That’s the reality that we have in South Africa.

JEREMY MAGGS: Dr Justin Barnes, I am going to leave it there. Thank you very much indeed. Time is against us. Executive director of the Toyota Wessels Institute for Manufacturing Studies. Appreciate your time. Thank you.

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