Significance of the automotive industry in the context of South Africa

Significance of the automotive industry in the context of South Africa

Dr. Norman Lamprecht, Executive Manager of the National Association of Automobile Manufacturers of South Africa (NAAMSA) as well as the Automotive Industry Export Council (AIEC) has released his 2018 Automotive Export Manual publication on 4 May 2018, which he produces annually on behalf of the AIEC.

According to Lamprecht, since the first of two motor programmes were implemented in 1995, South Africa already exported more than 4 million vehicles worldwide while the export value in nominal rand value terms of the vehicle and automotive component exports up to 2017 amounted to R1 478,1 billion.

In 2017, vehicle and component production, as the largest manufacturing sector in the country’s economy, accounted for 30,1% of South Africa’s manufacturing output. The broader automotive industry’s contribution to the GDP was 6,9% (4,4% manufacturing and 2,5% retail). Investment is the principal means by which economic policy goals are translated into reality and in this regard the seven major light vehicle OEMs invested a record R8,2 billion, along with a substantial R4 billion by the automotive component manufacturers. Total automotive industry exports for 2017 amounted to R164,9 billion and comprised a significant 13,9% of South Africa’s total export earnings. A stronger rand exchange rate as well as the time effect of major new model introductions during the fourth quarter of 2017 resulted in just falling short of the previous export record of R171,1 billion in 2016. However, the export value represented the second highest export level on record. Total automotive revenue in the ambit of the automotive business sphere in South Africa amounted to over R500 billion in 2017.

A total of 338 093 right- as well as left-hand drive vehicles along with a diverse range of automotive components were exported to 149 countries in 2017 with the export value to 16 destinations more than doubling on a year-on-year basis. The UK, with 98 358 vehicles was South Africa’s top destinations for vehicle exports in 2017. The high-value, domestically beneficiated, logistics friendly catalytic converters remained the most popular component exported followed by engines and parts, tyres and radiators.

The domestic automotive industry’s top export markets in value terms were Germany, with R46,7 billion, followed by the USA, with R18,8 billion. The importance of the trade arrangements that South Africa enjoys with the EU, allowing for duty free vehicle and automotive component exports to the 28 countries in the region as well as the AGOA trade arrangement with the USA, enhanced exports to these countries. Africa remains a priority focus for the South African automotive industry and automotive exports to 40 countries on the continent amounted to R29,7 billion, or 18% of the country’s total automotive exports of R164,9 billion in 2017. The motorization rate at 42 per 1 000 persons, compared to the global average of 180 vehicles per 1 000 persons, remains the lowest by any region in the world. Considering a population of over 1,2 billion as well as a burgeoning middle-class, there is enormous potential for growing vehicle demand on the continent. In this regard regional integration would unlock intra-Africa trade, better customs co-operation between countries, the elimination of tariff and non-tariff barriers, and the improvement of investments on the back of economies of scale. Opportunities relating to the proposed “Cape to Cairo” free trade area, including 26 African countries, as well as pursuing partnerships with other countries in Africa interested in vehicle assembly would contribute to the domestic automotive industry’s export performance.

The import value of vehicle imports increased from R56,2 billion in 2016 to R59,8 billion in 2017, aligned with a first modest year-on-year increase of 1,9% in the domestic new vehicle market following three successive years of decline. India, with 88 110 units, or 29,9% of total light vehicles imported, was the top country of origin in volume terms for passenger cars and LCVs imported into South Africa in 2017. The majority of high-volume entry-level models available in South Africa are manufactured overseas, mainly in India. Volkswagen’s Polo Vivo and General Motor’s Chevrolet Spark, which were manufactured in South Africa in 2017, are the two exceptions.The value of vehicle imports from Germany, which included the premium brands, however, was nearly double of those imported from India. According to Lamprecht only one or two selected high volume models are manufactured by each manufacturer in South Africa linked to export contracts to obtain economies of scale benefits, coupled with imports of low volume models. Every brand has a benchmark product in just about every segment of the market. The domestic model mix is thus arranged to provide the most effective marketing combination of domestically manufactured and imported models to satisfy a consumer-driven market. South Africa currently has one of the most competitive trading environments in the world and in 2017 offered no fewer than 53 passenger car brands and 3 236 model derivatives and in the light commercial vehicle segment 34 brands with 698 model derivatives for consumers to select from. This afforded car buyers the widest choice to market-size ratio anywhere in the world.

Imports of original equipment components used to manufacture the vehicles amounted to R89,6 billion and originated mainly from Germany, Thailand and Japan. Capital intensive and complex components such as engines, gear boxes and electronic interiors components are mainly imported where the relatively low volumes make the projects not economically viable in the domestic market. However, significant value adding processes take place in South Africa where after the vehicles are subsequently manufactured on behalf of parent companies abroad and exported to global markets. The rand strengthened in 2017 on a nominal trade weighted basis, resulting in only a modest increase in the automotive import values. The rand exchange rate, however, has reacted differently to different countries and this is particularly important with regard to the exchange rate of source countries for South African imports. At an individual company level, depending on the particular firm’s exposure to imports and exports and the firm’s balance of trade, the impact of exchange rate fluctuations may also vary.

Although South Africa produced 56,4% of Africa’s vehicle production in 2017, the industry remains relatively small in a global context and with production of 601 178 units was ranked 22nd in respect of global vehicle manufacturing with a market share of 0,62%. Currency volatility, logistics costs and international economic developments are challenges the industry has to confront on a daily basis and which fall outside of the control of the automotive policy programme. South Africa has to compete against major automotive forces such as China, India, Thailand and Mexico, amongst others, for investments in new generation models while these countries also export vehicles and automotive components to world markets.

South Africa’s automotive industry remains a vital element in the country’s economy. The industry plays both a strategic and catalytic role in economic development in view of its significant investments, modern, advanced manufacturing activities, provider of quality employment, contribution to the country’s GDP, earner of forex as well as its significant multiplier effect in the economy. Long-term policy certainty is a key reason for the continuous health and success of the country’s automotive sector. In this regard the role of the Department of Trade and Industry, custodian of the MIDP implemented in 1995, and current APDP, implemented in 2013 as well as the SA Automotive Masterplan 2021-2035, set to succeed the APDP, is imperative. The manufacturing sector has been singled out as a crucial driver to place the country’s economy on a path of sustainable growth and development. Considering that vehicle and component manufacturing comprises nearly a third of the country’s manufacturing output, Lamprecht emphasised that the automotive industry is and will remain essential to the growth and success of the South African economy.

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Automotive Export Manual 2018