South Africa’s Automotive Industry 2011 TABLE OF CONTENTS

List of abbreviations 1

Key developments 2

Automotive demand 3–5 Factors affecting sales

Automotive production 6–12 Sector support Investment Local content Labour issues Future production Global position and competitiveness

Automotive exports 13–14 Component exports

Automotive imports 15–16

Major OEMs 17–23 BMW South Africa Ford Motor Company of Southern Africa General Motors South Africa Mercedes-Benz South Africa Nissan South Africa Toyota South Africa Motors Volkswagen Group South Africa

Prospects 24

Main sources 25–26

The material contained in this report was compiled by Shona Kohler and the Research Unit of Creamer Media (Pty) Ltd, based in Johannesburg, South Africa. To subscribe to Research Channel Africa or purchase this report contact: Creamer Media, Tel: +27 11 622 3744 or email [email protected]. Published: June 2011 Cover pictures by Creamer Media, Volkswagen Group South Africa, and Ford Motor Company of Southern Africa.

South Africa’s automotive industry 2011 List of abbreviations

AIS – Automotive Investment Scheme MBSA – Mercedes-Benz South Africa AMH – Associated Motor Holdings MHCV – medium and heavy commercial vehicle APDP – Automotive Production and Development MIDP – Motor Industry Development Programme Programme MSA – Mahindra South Africa CCIG – Catalytic Converter Interest Group Naacam – National Association of Automotive capex – capital expenditure Component and Allied Manufacturers CBU – completely built-up Naamsa – National Association of Automobile CKD – completely knocked-down Manufacturers of South Africa DTI – Department of Trade and Industry Nafta – North American Free Trade Agreement Elidz – East London Industrial Development Zone OEM – original equipment manufacturer FMCSA – Ford Motor Company of Southern Africa OICA – International Organisation of Motor Vehicle GM – General Motors Manufacturers GMSA – General Motors South Africa PAA – Productive Asset Allowance Ipap2 – Industrial Policy Action Plan 2 TSAM – Toyota South Africa Motors IRCC – import rebate credit certificate Volkswagen Group South Africa – VW Group SA JV – joint venture WTO – World Trade Organisation LCV – light commercial vehicle

1 South Africa’s automotive industry 2011 Key developments

August 2010: The National Union of Metalworkers embarks on a national strike affecting production at BMW South Africa, Ford Motor Company of Southern Africa, General Motors South Africa, Mercedes-Benz South Africa, Nissan South Africa, Toyota South Africa Motors and Volkswagen Group South Africa. September 2010: South African vehicle production grinds to a halt owing to a strike in the components industry. September 2010: General Motors South Africa announces that it has been awarded a contract to build the new Chevrolet Spark vehicle at its Struandale plant in Port Elizabeth. The vehicle will be sold locally as well as exported. October 2010: The Department of Trade and Industry reveals that it has received ten applications under the Automotive Investment Scheme. October 2010: Mazda reveals that it will produce its new BT-50 pick-up range in South Africa. October 2010: The Ford Motor Company of Southern Africa reveals the new Ranger vehicle that will be produced at its Silverton plant, in Gauteng, at a rate of 110 000 vehicles a year. The local company will also produce the engine, and engine parts, for the new Ranger vehicle at its Struandale plant, in the Eastern Cape. The Ranger and engine will be sold in the local and export markets. November 2010: General Motors South Africa opens its R250-million parts distribution centre in the Coega Industrial Development Zone in the Eastern Cape. December 2010: Chinese auto manufacturer Geely reveals that it intends to expand its activities in the South African market in 2011. December 2010: Mercedes-Benz South Africa clinches the contract to produce the next-generation C-Class vehicle at its Eastern Cape plant, for local sale and export, with production to start in 2014. The contract will require a R2-billion investment, which will increase the plant’s capacity to 65 000 vehicles a year. January 2011: Nissan announces that it is targeting 2012 to launch its Leaf electric vehicle in South Africa, but reveals that certain hurdles remain. January 2011: It is announced that Toyota was the market leader in South Africa’s new vehicle market in 2010, with a market share of 20,5%. It is followed by Volkswagen, with a 14,3% market share. January 2011: It is revealed that the South African government is in discussions with Toyota South Africa Motors over the possible assembly of a minibus vehicle. January 2011: The Ford Motor Company of Southern Africa and the government of Gauteng launch a R100-million initiative to promote black-owned small and medium-sized enterprise development in the automotive industry. February 2011: Volkswagen Group South Africa celebrates the export of the 100 000th new generation Polo vehicle from its Uitenhage plant, in the Eastern Cape. February 2011: Vehicle importer Hyundai Automotive South Africa reveals that it is aiming to be the number one selling brand in the South African passenger car market. March 2011: Indian conglomerate Mahindra & Mahindra indicates that it is hoping to start production of a bakkie in South Africa by the end of 2011 or in early 2012. March 2011: Volkswagen Group South Africa starts construction on a new R500-million press shop at its Uitenhage plant, in the Eastern Cape. March 2011: BMW South Africa indicates that it is planning to expand its exports by 5 000 in 2011. March 2011: A nine-magnitude earthquake strikes in Japan, followed by a tsunami, with a substantial impact on the global automotive industry in the following months. March 2011: Mercedes-Benz South Africa, the Department of Trade and Industry and the East London Industrial Development Zone embark on a roadshow to Germany to lure additional component companies to South Africa to participate in the production of the new C-Class vehicle. March 2011: Nissan South Africa reveals that it is aiming to double production capacity at its Rosslyn plant, in Gauteng, to 100 000 vehicles a year by 2015. April 2011: The National Association of Automobile Manufacturers of South Africa reveals that new vehicle sales in the first quarter of 2011 increased by 22,2%. However, the association cautions that growth may slow as the year progresses. April 2011: Toyota announces its return to South Africa’s booming small-car market, indicating that it will launch the Aygo and Etios vehicles during the course of the year.

South Africa’s automotive industry 2011 2 Automotive demand

After an extremely difficult year in 2009, new vehicle 10,5% in 2009. The company does not report model- sales in South Africa registered strong growth in all specific sales. segments in 2010, albeit off a low base. In total, 492 907 Other significant holders of market share in 2010 were new vehicles were sold in the country in 2010, which General Motors South Africa (GMSA) (11,2%), Ford was a significant 24,7% increase on total new vehicle Motor Company of Southern Africa (FMCSA) (8,8%) and sales in the country in 2009. New-vehicle-related sales Nissan South Africa (7%). Each of these companies has turnover rose by about 20% for the year, reaching some manufacturing facilities in South Africa, as well as selling R130-billion. imported models. In the passenger car segment, 337 130 vehicles were The top-selling passenger car for 2010 was the sold in 2010, marking a 30,6% increase on sales in 2009. Volkswagen Polo Vivo, of which 23 297 units were sold. This is the highest year-on-year growth rate recorded It was followed by Toyota’s Corolla/Verso/Auris range, in the car market since 1963. In the light commercial the new Polo, the Mercedes-Benz C-Class, the BMW vehicle (LCV) sector, which recorded sales of 133 756 3 Series, the Toyota Fortuner, the Toyota Yaris, the Ford units in 2010, growth was a more moderate 13,2%. Fiesta, and General Motors’ Chevrolet Spark and Aveo. In the medium and heavy commercial vehicle (MHCV) Of these, the top six are all manufactured in South Africa. sector, growth of 16,3% was recorded, with sales in The fastest growing passenger vehicle sector in South the segment amounting to 22 021 vehicles for 2010. Africa is the small-car sector, with growth in this segment In addition to new vehicle sales, an estimated 600 000 far outstripping growth in the new-vehicle market units were sold in the used-vehicle market in 2010. generally. For example, in January and February 2011, In all segments of the new-vehicle market, sales in 2010 new vehicle sales increased by 22% compared with the remained below the peak levels achieved in 2006 and corresponding period in 2010, while sales of entry-level 2007, although growth far exceeded the 10% expansion vehicles in this period jumped by 80% compared with forecast at the beginning of 2010. 2010. In part, the growth in sales in the small-car market New vehicle sales in South Africa in 2010 were dominated has been achieved at the expense of the used-car by Toyota South Africa Motors (TSAM), which held a 20,5% market, and the benefit that the South African economy share of the market. This market dominance was achieved derives from the growth in small vehicle sales may be despite the fact that the company’s share of the market limited as, of the 140 variants available on the local fell from 22,9% in 2009. The fall was a result of difficulties market for under R200 000, only 23 are manufactured in filling the gap left in the entry-level market since the locally, with the balance being imported. company stopped selling its popular low-cost Tazz model. Audit, tax and advisory firm KPMG indicates that Volkswagen Group South Africa (VW Group SA) was the entry-level vehicle pricing increased by 77% from 2000 second-largest seller of new vehicles in South Africa in to 2010, which was below inflation for this period, which 2010, with a market share of 14,3%. This represented stood at 79%. In contrast, luxury vehicle prices increased a percentage point improvement on the company’s by between 113% and 126% during this period. 2009 market share. Both Toyota and Volkswagen have In the LCV segment, the Toyota Hilux was the top manufacturing facilities in South Africa, and supplement selling vehicle in 2010, with 31 856 units sold, followed their local production with imported models. by General Motors’ Corsa Utility, the Toyota Quantum, The third-largest seller of new vehicles in South the Isuzu KB and the Nissan NP300. Africa in 2010 was Associated Motor Holdings (AMH), In the MHCV sector, sales were led by the extra-heavy which does not have any local manufacturing facilities commercial vehicle segment, which held a 38% share but imports ten brands into South Africa, of which of the market. This was up from the 34% share held by three are in joint venture (JV). These are Daihatsu, Kia, this segment in 2009. Combined sales of medium-sized Hyundai, SsangYong, Bentley, Lotus and Lamborghini, trucks and vans finished 2010 with a market share of with Renault, Kawasaki and Tata being JVs. AMH 34%, down from 38% in 2009, while the heavy truck held a 13,6% share of the market in 2010, up from segment maintained a market share of 20%.

Vehicle sales in South Africa 2011 2005 2006 2007 2008 2009 2010 (projection) New cars 419 868 481 558 434 653 329 262 258 129 337 130 375 000

New LCVs 170 132 199 677 204 386 169 466 118 159 133 756 155 000

New MHCVs 27 406 33 080 37 069 34 659 18 934 22 021 25 000 Total domestic 617 406 714 315 676 108 533 387 395 222 492 907 555 000 sales Source: Compiled from Naamsa industry Naamsa from Compiled Source: 2011 statistics, March

3 South Africa’s automotive industry 2011 The industry has expressed concerns over the tax, KPMG Survey: including that it adds, on average, 2,5% to the price Global car market expectations of a new car, although, on some vehicles, the increase In March 2011, it was reported that three-quarters of the 200 is as high as 6%. Further, the industry has contended executive-level respondents in KPMG’s Global Automotive that more vehicles could fall within the 120 g limit if so- Executive Survey 2011 expected German carmaker called “green” fuels, such as Euro IV petrol and diesel, Volkswagen to make the most gains in market share over were available in South Africa. However, it is unlikely that the next five years, surpassing 2010’s number one in such fuels will be available in the country until 2016 and, expectations Hyundai/Kia. Just over 80% of respondents, however, also believed that Chinese brands, as a group, until such time, it will not make sense for automotive would grow their market share. Indian brands were thought companies to manufacture or import vehicles that make to be expanding at a slower rate. Respondents believed use of more environment-friendly fuels. Thus, there are that US brand Chrysler would suffer the greatest decline in concerns that the automotive industry is being penalised market share over the next five years. for shortcomings in the liquid fuels sector. In addition, Almost all respondents agreed that China would remain the the automotive industry has claimed that the introduction largest producer and seller of cars over the next five years. of the tax on LCVs is out of line with global trends, with China was also considered the biggest investment target, 2014 being the earliest that world markets are planning with 58% of respondents expecting to increase their money- flow to this Asian country. However, 50% of respondents on imposing an emissions tax on light commercials, to also believed that China’s automotive industry would have give industries time to adjust. excess capacity by 2015, with 42% expecting the same A suggestion has been made that it would make of the Indian industry. Close to two-thirds of all survey more sense for an emissions tax to be imposed at participants believed that the US had the most excess fuel pumps, as this would mean that older vehicles – capacity, followed by Japan and Germany.

Source: KPMG: Global Automotive Executive Survey, 2011, as discussed in Engineering News KPMG: Global Automotive Executive Survey, Source: many of which are the worst contributors to pollution – would also carry the burden. Further, drivers that incur Factors affecting sales higher levels of fuel consumption would assume more The improved vehicle sales figures achieved in South responsibility. Africa in 2010 were tied to the country’s recovery from While several industry participants and commentators the global economic slowdown. The South African believe that the carbon tax could depress demand for economy officially moved out of recession during the new vehicles, it is generally expected that new vehicle third quarter of 2009 and, while economic recovery demand will continue to grow, supported by ongoing levels were relatively subdued for some time, there was higher levels of economic activity and the current a marked improvement in consumer sentiment and positive sales momentum. The National Association of business confidence. These factors were supported by Automobile Manufacturers of South Africa (Naamsa) has lower interest rates and declining inflationary pressures. also highlighted that demand from the car rental industry The vehicle market also benefitted from improved loan is expected to remain relatively strong on the back of approval rates and pent-up replacement demand for further growth in tourism and business travel, while in vehicles, as well as from strong demand in the car rental the MHCV sector, sales are expected to benefit from industry, tied to South Africa’s hosting of the 2010 FIFA the gradual recovery in fixed investment activity in South World Cup. Africa. Generally, new vehicle prices in South Africa were Certainly, vehicle sales got off to a healthy start in relatively stable in 2010, on the back of the exceptionally the first months of 2011, and Naamsa stated that first- strong rand, which made imports cheaper. In fact, car quarter sales showed that all memories of the recession retailers offered significant discounts through the year. had faded. This contributed to the slowdown in used car sales as However, rising inflationary pressures and the possibility new vehicles became more affordable and delivered of upward pressure on interest rates in the second half of greater value to consumers. In fact, in 2010, 1,79 used 2011 could constrain the rate at which the local vehicle cars were sold for every new car that was sold, compared market continues to expand. to 2,16 used cars sold for every new car sale in 2009. Further, the 2011/12 Budget reinforced motor industry However, in September 2010, government introduced concerns about the rising tax burden on buyers and an environmental tax on the purchase of new passenger users of new motor vehicles in South Africa. In addition vehicles, based on their certified carbon dioxide (CO2) to the carbon taxes now facing buyers of new cars emissions. The tax levies a penalty of R75 (excluding and LCVs, the budget proposed an increase in the ad value-added tax) for every gram of emissions above 120 valorem tax on new motor vehicles with a purchase price g that a car emits per kilometre. An emissions tax was above R900 000. Vehicle users are also facing increases also introduced on double-cab bakkies in March 2011. in fuel levies and an increase in company car fringe In response to the introduction of the carbon tax, benefit taxation, along with the impending introduction of passenger vehicle sales showed something of a spike in toll fees for motorists using Gauteng freeways, and rising August 2010 and a slowdown the following month. A similar fuel prices. increase was seen in the LCV market in February 2011. It is Another potential negative influence on the vehicle believed that these increases reflected pre-emptive buying sales market in South Africa is the country’s ratio of ahead of the introduction of the carbon tax. household debt to disposable income, which stands at

South Africa’s automotive industry 2011 4 close to 80%. Further, the increasing prevalence of entry- level vehicles in total sales figures means that industry SA auto sales in context revenue is not increasing in line with the increase in While vehicle sales in South Africa are showing strong sales volumes, which could have an impact on industry growth for the second consecutive year, the country profitability. Also affecting industry profitability is the accounts for less than 1% of the global vehicle market. lengthening of vehicle replacement cycles. South Africa’s new Brics partners – Brazil, Russia, India Naamsa is forecasting total new vehicle sales of and China – all have vehicle markets that are significantly larger than the local market. China, for example, sells over 555 000 in 2011, which marks growth of 12,6% over 15-million vehicles a year, and both Brazil and Russia are 2010. Passenger car sales are expected to grow to expected to sell four-million vehicles a year within five years. 375 000 units, LCV sales are forecast to grow to 155 000 Over the same period, India, which already sells over two- units, and MHCV sales are expected to reach 25 000 million vehicles a year, is forecast to overtake Japan and units. An ongoing battle is expected to be seen between Germany to become the world’s third-biggest vehicle market after China and the US. local manufacturers and importers. Source: KPMG: Global Automotive Executive Survey, 2011, KPMG: Global Automotive Executive Survey, Source: as discussed in Engineering News

5 South Africa’s automotive industry 2011 Automotive production

As confidence seemingly returned to South Africa’s This situation is a result of the country’s high levels of automotive industry in 2010, revived local and export vehicle imports, with imported vehicles making little use demand underpinned increased local production. In of locally made parts, including in the aftermarket, as well total, 472 049 vehicles were produced in the country as the low levels of local content in locally manufactured in the year, including 295 394 passenger cars, 153 773 vehicles. In addition, local components companies face LCVs and 22 882 MHCVs. Total production was 26,2% significant cost increases, many of which are above up on production in 2009, with particularly strong growth inflation, including for wages, electricity and transport. being recorded in the passenger car segment, where Also plaguing the local components sector is the production in 2010 was 32,5% up on production in 2009. strength of the local currency against the dollar and Passenger car production in the country is undertaken the euro, which has wreaked havoc with margins, as by the local subsidiaries of seven global automotive component makers now receive significantly fewer rands companies – BMW, Ford, General Motors (GM), Daimler for the components they export. Companies also find (Mercedes-Benz), Nissan, Toyota and Volkswagen. business planning activities challenging in the context of Average industry capacity utilisation levels in 2010 for a volatile currency. the production of cars were 77,1%, which was up from 59,4% in 2009. Sector support Certain of the local car manufacturers also participate Like automotive industries around the world, South in the production of LCVs and MHCVs, with commercial Africa’s automotive industry receives significant vehicles also being produced by a small number of government support and has done so since the first dedicated truck manufacturers. Capacity utilisation levels automotive operations were established in the country in the LCV segment were 68,4% in 2010, up from 56,5% in the 1920s. in 2009. In the medium commercial vehicle segment, Currently, the bulk of this support is directed through capacity utilisation in 2010 was 77,2%, compared with a set of incentives known as the Motor Industry 64,6% in 2009, and for heavy commercial vehicles, Development Programme (MIDP), which was introduced capacity utilisation in 2010 was 77,5%, compared with in September 1995, and was initially set to run until 2002. 66,1% in 2009. Following a midterm review in 2000, the programme was Local vehicle manufacturers make use of a mix of extended to 2007, and a second review process further local and imported components. The local components extended the programme to 2012. industry consists of about 300 companies producing The programme has phased down import tariffs, at a parts exclusively for the automotive industry, as well as steeper rate than required by South Africa’s World Trade a number of companies that supply the industry on a Organisation (WTO) obligations, and allows for registered nonexclusive basis. industry producers to further reduce the duties payable The local components industry is currently struggling through various mechanisms – a duty-free allowance, an to survive, and almost 20 companies in the sector have import/export complementation scheme, a small vehicle closed over the past two years. incentive, and a productive asset allowance (PAA). The range of challenges facing components In terms of the duty-free allowance, vehicle manufacturers is vast. Many companies in the sector manufacturers are entitled to import original equipment struggle to be awarded contracts when competing against components, duty free, to the amount of 27% of the international components suppliers, and a number of wholesale value of the vehicle. local component makers have been informed by vehicle Under the import/export complementation scheme, manufacturers that they will not be contracted to supply import duties on vehicles, components and materials and/or export parts for incoming vehicle models. In part, can be offset by import rebate credit certificates (IRCCs), this is related to cost competitiveness issues brought derived from the exportation of vehicles and components, about as a result of the difficulties facing South African or bought from manufacturers that have sold, on the components companies in achieving economies of scale. open market, credits earned through exporting.

South African vehicle production 2011 2005 2006 2007 2008 2009 2010 (projection) Cars 324 875 334 482 276 018 321 124 222 981 295 394 333 000 LCVs 172 522 219 618 220 753 205 955 131 177 153 773 200 000 MHCVs * * * * * * * Total vehicle 525 227 587 719 534 490 562 965 373 923 472 049 556 000 production

*Figures not available Naamsa industry Compiled from Source: 2011 statistics, March

South Africa’s automotive industry 2011 6 Initially, the scheme allowed that for every rand of been particularly hard hit by the increase in imports completely built-up (CBU) exports, one rand’s worth that the programme has enabled. Further, relatively few of CBU vehicles or components could be imported components dominate the component export basket. duty free, and for every rand of components exported, While the successes and failures of the MIDP have either R0,65 of CBU imports or one rand’s worth of been widely debated, the commonality of the arguments components could be brought into the country duty free. is that support to the automotive sector, beyond the end Since 2003, the value that may be imported for every of the MIDP in 2012, is critical if South Africa’s automotive rand of local content exported has begun to be phased industry is to remain viable. down, reaching 70% in 2009, where it will stay until 2012. However, government has been slow in finalising the The complementation scheme has encouraged form that the new system of support will take, a delay exports, and vehicle manufacturers have used IRCCs that has attracted much criticism from the industry, with to import those vehicles and components not produced global automakers having become cautious about their locally. future involvement in the country as they awaited the Until 2003, vehicle assemblers could further reduce details of the new package. In September 2008, the the duties paid through the small-vehicle incentive, Department of Trade and Industry (DTI) released the which provided a subsidy for the manufacture of more proposed structure and provisions of the new support affordable vehicles. The incentive has since fallen away, arrangement, known as the Automotive Production and however, as a result of having had a limited effect on Development Programme (APDP), and is now finalising making vehicles more affordable. the regulations for the programme. The PAA, which was introduced following the second The new programme will cover the period 2013 to review of the MIDP, allows for a reduction in the duties 2020, and will serve to redress some of the challenges paid as a reward for vehicle manufacturing companies faced by the MIDP, including the failure of its export investing in productive assets in the country. It allows incentive to comply with the rules of the WTO. As a investors in new plants and equipment to qualify for a result, the APDP is production rather than export based. duty credit certificate of up to 20% of the value of their The new programme is structured around four main investment, spread equally over five years. elements – stable and moderate import tariffs, a local Reviews of the MIDP have shown that the programme assembly allowance, a production incentive, and an has successfully ensured the rationalisation and automotive investment allowance. restructuring of South Africa’s automotive sector on a The programme will set import tariffs at 25% for built- more efficient basis. Further, the programme is believed up vehicles and 20% for components from 2013. These to have facilitated significant competitiveness gains, tariffs are intended to provide just sufficient protection to while ensuring that, since its introduction, the sector justify continued local vehicle assembly. has achieved significant growth in production volumes, The local assembly allowance will enable vehicle exports and investment. Further, the sector continues to manufacturers producing more than 50 000 vehicles employ a significant number of people. a year to import 20% of their components duty free, However, the export incentive of the MIDP has been reducing to 18% over three years. The support will criticised for failing to comply with the rules of the WTO, effectively provide a lower duty rate for local assemblers which prohibit direct export incentives. Further, the and should provide encouragement for high-volume programme has not facilitated sufficient growth for the production. Initially, the DTI indicated that the 50 000 local automotive sector to have an impact on the global units would have to be linked to a single vehicle platform industry. but, in its final announcement of the APDP, introduced a Probably the most significant shortcoming of the note of flexibility, by requiring that the 50 000 units rather MIDP has been its facilitation of a significant increase in be linked to a single plant, although manufacturers will automotive imports, owing to the programme’s import/ still be required to demonstrate that they have a model in export complementation scheme. This has resulted in an high-volume production. ongoing trade deficit in the sector, exacerbated by low The production incentive will take the form of a tradable levels of local content in exported vehicles, with the local duty credit of 55% on the value-added element of a content requirements of previous support structures component, measured as the selling price less the raw- having been abolished by the MIDP. material input. This will reduce to 50% over five years, On the other hand, the abolition of local content although an additional 5% will be available for vulnerable requirements has resulted in component sourcing based subsectors. The production incentive is aimed at raising purely on economics, lowering the industry’s input costs. production value-add along the automotive value chain, However, the extent to which these reduced costs have been with potential positive spin-offs for employment creation. carried through to the consumer remains questionable, and The investment allowance of the APDP, known as the it appears that the MIDP has not been obviously successful automotive investment scheme (AIS), will see 20% of a in improving the affordability of vehicles. project’s value returned to investors over a three-year Additional criticism of the MIDP has stated that the period, in an effort to support investment in new plant programme is biased in favour of the original equipment and machinery. manufacturers (OEMs) and has not resulted in the same The AIS is available to vehicle and component benefits to component manufacturers, which have manufacturers alike. To qualify, a light motor vehicle

7 South Africa’s automotive industry 2011 manufacturer has to introduce a new or replacement this could be an opportunity for the component sector to model for production and demonstrate that it will achieve a grow its base and create additional jobs. prescribed minimum production within a ramp-up period Ipap2 also makes provision for assistance to encourage of three years. A component manufacturer has to prove South African production of electric vehicles and related that a contract has been awarded for the manufacture components. The plan has been well-received by the of components to supply into the light motor vehicle automotive industry, which has commented that Ipap2 manufacturing supply chain, and that the investment will seemingly recognises the deficiencies of the current achieve at least 25% of total entity turnover from the light industrialisation strategy, as well as the inequalities in motor vehicle manufacturing supply chain. the unfair competition South African manufacturers face The DTI has also reported that an additional taxable from imports. cash grant of 5% or 10% over and above the 20% taxable The programmes outlined in the Ipap2 document were cash grant is available to projects that demonstrate that consolidated and strengthened in a revised document the investment will result in base-year employment levels (Ipap2 2011/12 – 2013/14) released in February 2011. being maintained throughout the incentive period and, in While a number of benefits have accrued to the the case of light motor vehicle manufacturers, that these automotive industry, owing to policy support to the levels will be maintained during the model phase-out industry, it has been suggested that the policies are, at period. Companies that wish to qualify for this additional times, contradicted by other policies and regulations grant will also have to prove that the investment will result released by government. in a number of economic benefits. The AIS was launched in June 2010, and a budget Investment allocation of R2,69-billion was made available for the Flowing from the MIDP, South Africa’s automotive scheme for the three financial years starting in 2010/11 industry has, over the past 15 or so years, been the and ending in 2012/13. By late 2010, the DTI had already recipient of significant foreign direct investment and, as a received ten applications for these funds. result of the incoming incentives under the APDP, is likely In addition to the four main elements of the APDP, the to continue to receive investment support. scheme will also include company-specific allowances Figures from Naamsa show that, in 2010, capital to offset costs associated with training, technology expenditure (capex) in South Africa’s vehicle transfer, localisation, research and development, and manufacturing industry was R3,995-billion. (These commissioning. These will be based on direct negotiation figures reflect data supplied by the seven major vehicle with the DTI. manufacturers and two truck producers). Total capex Government’s ongoing commitment to the country’s for the year was significantly up on the R2,469-billion automotive industry is also evident in its revised Industrial spent in 2009, with expenditure that year having been Policy Action Plan (Ipap2), released in early in 2010, constrained as a result of the global financial and with the document identifying vehicle and component economic crisis. However, 2010 expenditure remained manufacturing as a priority sector. well below the peak of R6,215-billion spent in 2006, One proposed area of intervention in Ipap2 is to although it must be noted that the 2006 peak was due to broaden and deepen localisation in the automotive a major capacity expansion by Toyota. industry, including through the identification of new As companies begin to gear up for the introduction localisation opportunities in various subsectors. of the APDP and AIS, announcements are being made Further, Ipap2 proposes to improve competitiveness of about substantial upcoming investments into the component manufacturers and to facilitate easier access South African automotive industry. In 2010, investment for such companies to concessional industrial finance for projects collectively valued at more than R11-billion were approved projects. announced by global automotive manufacturers with In terms of support to the MHCV sector, including the facilities in South Africa, and projects are being planned, country’s truck, bus, capital equipment and agricultural are under way or have recently been completed for all vehicle industries, the Ipap2 document acknowledges seven of the car-manufacturing companies operating in that the MHCV sector has ‘not received adequate policy the country. A further R4-billion-worth of investment has attention’. There is the potential to resuscitate bus been announced in the components sector. Together, production in South Africa, as well as the production of the vehicle- and component-manufacturing investment other MHCVs, through leveraging opportunities, such as projects could create more than 20 000 jobs. the roll-out of the bus rapid transit system and the growing BMW South Africa is in the process of spending demand for MHCVs in areas such as infrastructure, R2,2-billion to produce the next-generation 3 Series construction, mining and, possibly, agriculture. vehicle, which will be introduced in 2012. The investment Ipap2 puts forward an MHCV development action plan will increase the company’s capacity to 87 000 vehicles that revolves around the completion of a study to identify a year, from a current level of between 50 000 and opportunities and interventions to revive the sector. The 55 000. rationale behind this plan is the fact that the MHCV FMCSA, which has already made multibillion-rand sector is labour intensive in terms of assembly, while a investments in South Africa, announced in April 2010 that more active sector could also broaden South Africa’s it would be investing more than R3-billion in the coming component manufacturing industry. It is believed that years to facilitate a new global export programme. The

South Africa’s automotive industry 2011 8 investment will include expanding the company’s vehicle value. Thus between 60% and 65% of the components manufacturing plant to produce the next-generation used in South African-manufactured vehicles are Ranger pick-up vehicle at a rate of 110 000 a year. This currently imported. In part, the low levels of local content is up from a current capacity of about 55 000 vehicles a in South African-manufactured vehicles are linked to the year. The investment will also support the expansion of foreign ownership of local vehicle manufacturers and the the company’s engine manufacturing facility, which will fact that this pattern of ownership means that sourcing produce the engine for the new pick-up range. and investment decisions are often taken overseas, GMSA, which invested over R3-billion in its local where group interests override South African interests. operations between 2004 and 2009, is currently spending Certain companies, however, have achieved higher about R1-billion, including R530-million in 2011, to levels of localisation, and are making noteworthy efforts facilitate the production of new model Isuzu KB pick- to further the use of South African-manufactured up and Chevrolet utility vehicles, as well as to introduce components. For example, VW Group SA has increased the production of Chevrolet Spark vehicles to the local the local content in its Polo vehicles from 39% in the old facility. The current investment project will increase the Polo to around 70% in the new model, as well as for the company’s capacity to about 60 000 vehicles a year, up Polo Vivo. The company is now aiming to increase local from current production levels of about 35 000 vehicles content to 80%. No specific timeframe has been set for a year. achieving this ambition, although it is expected that it Mercedes-Benz South Africa (MBSA) will invest could take between five and ten years. R2-billion in its local manufacturing plant to meet the MBSA reports having 40% local content in its C-Class terms of its contract to produce the next-generation vehicles, and this is expected to increase when the new C-Class vehicle. The investment – which will entail new C-Class model is launched in 2014. However, owing plant and equipment, as well as training and technology to the premium nature of Mercedes-Benz vehicles, – will expand the local facility’s capacity from a current and their use of high-tech components not currently level of about 55 000 vehicles a year to 65 000 vehicles produced in South Africa, the company will not be able a year. to achieve localisation levels as high as VW Group SA. Nissan South Africa has indicated that it plans to Nevertheless, the company has embarked on a strategy increase the capacity of its local facility to over 100 000 aimed at encouraging more international component vehicles a year, although it has not yet quantified the makers to establish facilities in South Africa to supply investment that will be required to achieve this goal. MBSA, as well as other global Daimler plants. As part TSAM, which has invested some R8-billion in its of this strategy, a delegation including representatives Prospecton manufacturing facility, in KwaZulu-Natal, over from MBSA, the East London Industrial Development the past five years, has not announced any major new Zone (Elidz), the DTI and selected local component investments, although the company does plan to spend manufacturers visited Germany in March 2011 to R363-million on a new parts distribution warehouse encourage German components companies to consider in Ekurhuleni, in Gauteng. The facility will serve the South Africa as an investment destination. company’s local and export markets, and the potential Despite the noteworthy efforts of certain companies, exists for a second-phase expansion, which would bring however, for the most part, local content levels in South the size of the warehouse to 80 000 m2. African-manufactured vehicles remain low and, while VW Group SA has recently undertaken a R4,5-billion certain participants in the industry believe that average investment in its local facilities, implemented over a period local content levels could easily be increased, there of four years, to meet its current production and export are those that contend that the aspiration of increasing commitments, which include the output of the new Polo, local content is “easier said than done”. For example, the Polo Vivo and the CrossPolo, and substantial exports some high-tech parts, such as power trains and of the Polo and the CrossPolo. electronic components, are not manufactured in South Naamsa expects that, in 2011, capex in South Africa’s Africa. Further, manufacture of other parts is centralised automotive industry will reach R4,455-billion. elsewhere, or may be cheaper elsewhere, such as in India or Thailand. Nevertheless, the National Association Local content of Automotive Component and Allied Manufacturers Local content levels in vehicles manufactured in South (Naacam) contends that the average local content in Africa are currently between 35% and 40% in terms of vehicles produced in South Africa could be increased

Investment approvals in the automotive industry* (R millions) 2011 2005 2006 2007 2008 2009 2010 (projection) Product/local/content/export 2 805,3 5 058,1 2 458,7 2 807,7 2 215,9 3 351,1 3 752,4 investment/production facilities Land and buildings 512,1 758,0 382,4 329,1 178,7 441,2 459,9 Support infrastructure 258,7 398,8 254,4 153,1 74,1 202,4 242,3 Total 3 576,1 6 214,9 3 095,5 3 289,9 2 468,7 3 994,7 4 454,6 *Figures reflect data supplied by the seven major vehicle manufacturers and two truck producers Source: Naamsa Quarterly Review of Business Source: Conditions, Q4 2010

9 South Africa’s automotive industry 2011 to 50% without any major technological challenges. These figures differ somewhat from numbers provided Further, the association contends that there is scope for by the DTI in its Ipap2 2011/12-2012/13 document, tier one OEM suppliers to buy an increasing portion of in which it is stated that the industry employs at least subcomponents and materials locally. 129 000 people in the manufacturing of accessories, Increasing local content would be positive for the components and vehicles, while the retail segment South African economy, in that it would create jobs and employs about 200 000 people. Despite the differences, improve the trade balance. Further, it would enable certain however, the point is clear that the automotive industry is components companies to achieve economies of scale a major source of employment. and would thereby enhance their cost competitiveness. Strike action had a significant impact on the South Naacam has approached the DTI with proposed African automotive industry in 2010. In the second changes to the APDP in an effort to further the extent to quarter of the year, production was affected by supply which the programme encourages localisation. However, disruptions, as a result of industrial action at State- government has indicated that it will be very difficult to owned transport companies Transnet and Portnet. The make major changes to the APDP at this stage. automotive industry is heavily reliant on inbound and Meanwhile, an OEM purchasing council has been outbound logistics and a continuous flow of production established to offer a degree of support to the local parts and finished goods, and the transport strike had a components sector, although the potential for this initiative cascade effect through the automotive value chain. may be limited. The initiative started off informally in the This was followed by crippling strike action in the vehicle early 2000s between the German vehicle manufacturers assembly and components sectors in the third quarter based in South Africa and has, more recently, been of the year. At the same time, there was a prolonged expanded to all seven local vehicle assemblers. The strike in the tyre manufacturing industry, with production initiative aims to increase the volumes and economies at South Africa’s four major tyre manufacturers – Apollo of scale of automotive component suppliers through the Tyres, Goodyear, Continental and Bridgestone Firestone pooling of orders. – coming to a standstill. However, the purchasing council faces numerous As a result of the industrial action, vehicle production challenges, with the head of the council emphasising that at all South Africa’s major assembly operations came it is not an easy task for multiple vehicle manufacturers to a standstill. The strike in the assembly industry alone to source a similar component from a single supplier. caused the loss of some 17 000 units of production, and OEMs cannot simply share all information about parts, this was compounded by the action in the components especially if there are intellectual property rights or and tyre sectors. specifications involved. Also, the OEMs may not share The longer-term risk of strike action in the automotive any pricing information as this would be a breach of industry is that it erodes investor confidence and competition law. As a result, it is not expected that the compromises the industry’s fragile track record as a purchasing council will yield overwhelming success. reliable supplier of automotive products, vehicles and Nevertheless, the use of local components offer the components. While no specific vehicle manufacturer has obvious benefit of allowing OEMs to hedge against publicly indicated that it plans to cut its investment in exchange rate volatility and to avoid some of the global South Africa as a result of labour action, the situation supply chain interruptions that have been experienced in could have repercussions for the ease with which the importing of parts. South Africa is able to attract future investment. This is particularly true for those automotive companies whose Labour issues local facilities compete with sister manufacturing plants South Africa’s automotive industry is a significant around the world for export contracts. employer. Naamsa figures show that about 28 000 people Certainly, a number of industry participants have are employed in the new vehicle manufacturing industry, voiced their frustrations over the situation. For example, including at the country’s seven car manufacturing VW Group SA has explained that, while its German plants and at specialist commercial vehicle and bus parent company accepts that any country will have manufacturers. The sector showed employment growth “industrial issues from time to time”, the real concern in 2010, following declines during the recession and, while is that the strike action in South Africa was protracted, a single production shift remains the norm, an increasing and the company lost about a month of production number of manufacturers are operating double shifts in time. Similarly, Ford has cautioned that it will take some selected areas, such as machining, press shops, paint time for South Africa to regain its credibility as a stable shop operations and body shops. manufacturing location. The Retail Motor Industry Association contends that a further 250 000 people are employed by importers of Future production vehicles, component manufacturers and after-market Naamsa is projecting that vehicle production in South suppliers and service providers. Within this context there Africa will rise by about 17,8% in 2011, to 556 000 has also been employment growth in recent months, vehicles, including 330 000 passenger cars, 200 000 following the recessionary declines, although many of the LCVs and 26 000 MHCVs. Production is expected to rise jobs created in 2010 were temporary, as employers waited further, to 655 200, in 2012, while Ipap2 has articulated to see whether the recovery of the market was sustainable. a longer-term target of increasing vehicle production

South Africa’s automotive industry 2011 10 to 1,2-million vehicles a year, with higher levels of local kits, although the price differential would be somewhat content, by 2020. eroded by the manufacturing costs. In addition to the investments being planned by The company expects that local assembly would automotive companies with existing operations in South require “very minimal” investment, as it would use Africa, there have been reports that Indian vehicle existing infrastructure, with the primary expenditure manufacturer, Mahindra & Mahindra, is considering being on manpower for research and development, undertaking the assembly of one of its vehicles locally, skills training, and monitoring of the local manufacturing using a contract assembler. Such a move would reduce facility. Mahindra expects that some jobs would be the company’s current cycle of vehicle ordering from created, including at the assembly facility, as well as in more than two months to about ten days, while there the domestic component manufacturing sector, as it could also be a reduction in costs, as the 25% import would localise certain components. duty on CBU vehicles would be replaced with an import Mahindra South Africa (MSA), which is 100%-owned duty of about 10% on completely knocked-down (CKD) by its Indian parent company, sold about 2 000 vehicles in South Africa in 2010, and expects sales of more than 4 000 vehicles in 2011 owing to new product launches. The impact of the Japanese earthquake If the local assembly project proceeds, the South African on the global and South African automotive facility could also supply some of Mahindra’s other African industries markets, including in West Africa, which also suffers from long supply lead times. The earthquake and subsequent tsunami that hit Japan in March 2011 had an impact on the global automotive In addition to the Mahindra project, there have been industry. The areas affected by the natural disaster included reports about the possible establishment of multivehicle various automotive production hubs, and Japanese car and manufacturing platforms in Elidz. Initially, a single plant was component manufacturers were shut down immediately proposed, but the concept has since expanded into two following the disaster to conserve electricity. plants – one for passenger vehicles and one for MHCVs Japanese companies – such as Toyota, Isuzu, Nissan and – with 2014 being suggested as a possible starting date. Mazda – were the hardest hit. The plants would be based on a model where several For example, the Nissan Motor Company reported damage vehicle brands are built using the same assembly to buildings and equipment at its Oppama, Tochigi, Kyushu, facilities, such as the paintshop, body shop and trim Yokohama and Shatai plants. However, production resumed and assembly lines. Elidz will provide the facilities, and a at these facilities within two weeks of the earthquake, professional vehicle assembler will be contracted to build although it was limited to overseas manufacturing and repair parts, with vehicle manufacturing resuming slightly later. the vehicles. At the company’s Iwaki engine plant, which was heavily The concept is being marketed to newcomer Asian affected by aftershocks, the restoration of operations took vehicle brands selling low volumes in South Africa, and longer. Damage was also reported to 1 300 Nissan vehicles participants could qualify for incentives under the APDP earmarked for the US market, as well as to buildings and if the required volume is achieved. equipment of Nissan affiliate companies in the Kanto region, close to Tokyo. Global position Non-Japanese companies were also affected, owing to the use of Japanese parts as well as the presence of established and competitiveness business relationships with Japan, and several automotive While South Africa’s vehicle production is on an upward companies operating in South Africa reported being affected trajectory and the sector is significant to the country’s by the disaster. economy, the local automotive industry is small in global For example, Toyota South Africa Motors, a subsidiary of terms, with South Africa being the source of just 0,6% of Japan’s Toyota Motor Corporation, stopped all overtime total global vehicle output in 2010. work and Saturday operations in the period following the Altogether, some 77,6-million vehicles were produced disaster, and implemented a mini shutdown from April globally in 2010. The largest producer was China, 22 to May 4. The company also expressed concern over the importation of completely built-up vehicles, including which manufactured 18,2-million vehicles, accounting trucks. Isuzu Trucks reduced operations at its Port Elizabeth for 25% of total global output. In second position was plant to a four-day working week, and Nissan South Africa Japan, with production of 9,6-million vehicles (21% of warned that it could run out of imported vehicles. Ford the global total), followed by the US, which produced Motor Company of Southern Africa began using air-freight 7,8-million vehicles (10% of the global total). There were to bring in supplies for its Rosslyn factory, and instituted a shutdown while it awaited the supply of parts. BMW South 17 countries, which recorded a vehicle output of over Africa reported that it had put vehicles intended for export to one-million vehicles. Japan into storage, as it was unable to deliver the shipment If South Africa is to achieve production of more than to the country. one-million vehicles a year, as is being targeted, the In the wake of the natural disasters, it seems likely that Japan country will need to enhance its competitiveness to will seek to diversify its automotive supply sources and attract further global automotive contracts. locations to avoid future supply disruptions. South Africa, Key to this is enhanced competitiveness in the local which is midway between Japan and its major western components industry. Currently, a number of OEMs markets in Europe and South America, could benefit from new investment as a result. contend that local components are more expensive

Source: Business Day, Engineering News Business Day, Source: than those sourced internationally. In part, this may be

11 South Africa’s automotive industry 2011 While sourcing parts from overseas may be more cost Global automotive output 2010 effective, it comes with additional challenges. GMSA, for (provisional figures) example, explains that it has to pay for about eight weeks of Commercial % Country Cars Total shipping costs when it brings in components, and then has vehicles change to contend with the low efficiency of South Africa’s ports. The Argentina 508 401 208 139 716 540 39,7 country’s geographical location also has cost implications Australia 205 334 38 161 243 495 7,1 for the shipping of completed goods, and the long supply Austria 86 000 18 814 104 814 44,9 chain, in both directions, is vulnerable to disruptions. Belgium 313 520 24 770 338 290 -37 For example, supplies were affected by the volcanic ash Brazil 2 828 273 820 085 3 648 358 14,6 cloud that shut down air travel for some time in 2010. Canada 968 860 1 102 166 2 071 026 39 Another factor affecting local competitiveness is input China 13 897 083 4 367 584 18 264 667 32,4 cost increases, with companies operating in South Africa Czech Rep 1 069 518 6 867 1 076 385 9,5 facing rising electricity and transport costs. Operators in South Africa have also faced steel price increases and Egypt 44 480 24 580 69 060 -25,2 steel supply disruptions. Finland 6 500 0 6 500 -40,8 South African labour tends to be expensive when France 1 922 339 305 403 2 227 742 8,8 compared with rival manufacturing locations in other Germany 5 552 409 353 576 5 905 985 13,4 emerging markets, such as India and China, and labour Hungary 165 000 2 890 167 890 25,9 unrest in the South African automotive industry has India 2 814 584 722 199 3 536 783 33,9 reduced productivity, which is already below that of other Indonesia 528 200 176 515 704 715 51,6 vehicle manufacturing locations. However, it must be Iran 1 367 014 232 440 1 599 454 14,7 noted, that industrial action has also been witnessed by Italy 573 169 284 190 857 359 1,7 carmakers in India and China, where workers are seeking Japan 8 307 382 1 318 558 9 625 940 21,3 wage increases. Malaysia 522 568 45 147 567 715 16 A positive for the South African automotive industry Mexico 1 390 163 954 961 2 345 124 50,2 is that locally manufactured vehicles are generally well regarded for their quality. MBSA, for example, in 2010 Netherlands 48 025 46 081 94 106 22,6 again received a top award in the JD Power & Associates Poland 785 000 84 376 869 376 -1,1 Initial Quality Study, which measures the quality of Portugal 114 563 44 160 158 723 26 vehicles supplied to the US market. With only 28 defects Romania 323 587 27 325 350 912 18,4 for every 100 vehicles, MBSA’s East London plant has Russia 1 208 362 194 882 1 403 244 93,5 reached the top ranking for all global plants serving the Serbia 5 620 850 6 470 -35,8 American market. Slovakia 556 941 0 556 941 20,7 Slovenia 195 207 10 504 205 711 -3,3 South Africa 295 394 176 655 472 049 26,2 Case study: A comparison of South Korea 3 866 206 405 735 4 271 941 21,6 South Africa and Thailand as auto Spain 1 913 513 474 387 2 387 900 10 manufacturing locations

Sweden 177 084 40 000 217 084 38,8 A study conducted by the private sector and the Durban Taiwan 251 490 51 966 303 456 34,1 Automotive Cluster, comparing the competitiveness of Thailand 554 387 1 090 126 1 644 513 64,6 automotive manufacturing activities in KwaZulu-Natal (KZN) with the same activities in Thailand, has shown Thailand to Turkey 603 394 491 163 1 094 557 25,9 have a 34,7% cost benefit over KZN (including trade access) Ukraine 75 261 7 872 83 133 20 and a 15% benefit excluding trade access. UK 1 270 444 123 019 1 393 463 27,8 The average cost for each management employee in the USA 2 731 105 5 030 338 7 761 443 35,4 automotive industry in KZN was found to be R428 000 Uzbekistan 130 400 26 480 156 880 33,1 a year, compared with R158 148 a year in Thailand. Supplementary 227 987 101 302 329 289 9,8 Further, the average cost for an artisan in KwaZulu-Natal is R267 000, while in Thailand it is only R22 080. Total 58 264 344 19 345 557 77 609 901 25,8 Source: International Organisation of Motor Vehicle Manufacturers (OICA) Manufacturers International Source: Organisation of Motor Vehicle The study also found that South Africa’s industrial policy is related the absence of economies of scale in the local “far” less protectionist than that of Thailand, giving the Asian producer an advantage when investors compare the two components sector, which could be improved, not only locations as prospective investment sites. through additional local vehicle manufacture but also if local content were to be increased in local vehicles. The study concluded that KZN vehicle manufacturers needed to enhance their operational competitiveness to reduce the In vehicle manufacturing locations, such as China and cost gap with Thailand. If factory rentals or shipping costs India, local content is extremely high. in the province are to increase in line with recent electricity The competitiveness of local component exports is prices, the province will soon have no areas of competitive affected by the current strength of the rand and Naacam advantage over Thailand, except for preferential access to has cautioned that certain local companies may have to the South African market.

cancel export contracts, as they are running at a loss. Business Day Source:

South Africa’s automotive industry 2011 12 Automotive exports

Vehicle exports, which are believed to be leading the MBSA expects to export between 30 000 and 35 000 recovery in South Africa’s automotive industry, became C-Class vehicles to the US in 2011, and has recently significant to the local automotive industry as a result been awarded a contract to produce the next-generation of the introduction of the MIDP, which was structured C-Class vehicle for local and export sale. This contract around incentives that were offered on the basis of export will see the company expanding its export markets to figures. Under the programme, South African automotive include countries in Africa and the Asia Pacific region. exports increased significantly, from a level of just over Further, to facilitate MBSA’s exports, an expansion has 15 000 vehicles in 1995 to almost 300 000 vehicles been undertaken at the East London harbour, in the when exports in the sector reached their peak in 2008. Eastern Cape. In 2010, local vehicle manufacturers exported 239 465, Nissan South Africa is expanding its production and including 181 654 cars, 56 950 LCVs and 861 MHCVs. expects its 2011 exports to include Africa and Western These figures were 37% up from 174 947 in 2009, when Europe, as well as Russia and Turkey. The company is the global economic downturn caused the market to planning to increase its production to benefit from the slump. The resurgence of export sales continued into APDP, and this will likely see further export activity. 2011, with the 29 254 vehicles exported in March 2011 TSAM exports the Hilux bakkie, the Fortuner SUV and being the highest number of vehicles ever exported from the Corolla/Auris, as well as parts for such vehicles, to the country in a single month. more than 56 destinations. BMW South Africa currently exports about 85% of its VW Group SA manufactures and exports Polo production, through the Durban and Maputo harbours. vehicles to all right-hand drive markets, and has also Of the exported vehicles, 50% are delivered to the US received orders for the left-hand-drive markets in China and a further 5% to Canada. Other markets receiving and Germany. The company also exports CrossPolo South African-manufactured BMWs include Japan, vehicles to all right-hand- and left-hand-drive markets in Australia, New Zealand and various markets in East Asia. the world. In 2010, the local Volkswagen plant exported In addition to the vehicles being exported by BMW South more than 75 000 vehicles, and expects to increase this Africa, the company has also recently started exporting to 81 000 vehicles in 2011. painted BMW 3 Series bodies and hang-on parts to Naamsa is forecasting export sales of 291 000 vehicles markets such as India, for CKD assembly. Exports from for 2011 as a whole, rising to 366 200 vehicles in 2012. BMW South Africa are expected to continue, with the However, future growth in South African automotive local plant currently gearing up for the production of the exports will be determined by the sustainability of the new 3 Series model, at a rate of 87 000 vehicles a year. global economic recovery and the health of international Similarly, the Ford plant in South Africa is preparing for automotive demand. Further, with both China and India a new export programme that will entail the manufacture expected to have excess automotive production capacity of the company’s next-generation Ranger pick-up within five years, South African manufacturers cannot vehicle, at a rate of 110 000 vehicles a year, as well as assume that foreign markets will buy their vehicles the engine for the new pick-up range. About 75% of the indefinitely. Thus, global competitiveness becomes a key new vehicles produced will be exported into Africa, as differentiating factor for local manufacturers to consider. well as to Europe, Russia and Turkey, while the engine parts will be exported to Ford’s engine plants in Argentina Component exports and Thailand. In addition to its fully built-up exports, South Africa’s GMSA is preparing to export about 50% of its Spark automotive industry also ships vast quantities of production to New Zealand, Australia and other right- components to international markets. Key component hand-drive markets in the Asia Pacific area. Further, exports include catalytic converters, which account for the company currently exports its Chevrolet utility to almost half of component exports, leather seat kits and Botswana, Namibia, Swaziland and Mozambique, and engine parts. sells Isuzu pick-up vehicles in Mozambique, Zimbabwe, Catalytic converters and leather seat kits are Zambia, Malawi and Mauritius. The company believes considered to be raw material intensive, and government that Nigeria, Angola, Senegal, Ghana and Kenya offer contends that the concentration of component exports significant potential for future export sales. in such products reveals a weakness in the MIDP, Vehicle exports from South Africa 2011 2005 2006 2007 2008 2009 2010 (projection) Cars 113 899 119 171 106 460 195 670 128 602 181 654 200 000 LCVs 25 589 60 149 64 127 87 314 45 514 56 950 90 000 MHCVs 424 539 650 1 227 831 861 1 000 Total exports 139 912 179 859 171 237 284 211 174 947 239 465 291 000 Source: Compiled from Naamsa Compiled from Source: 2011 industry statistics, March

13 South Africa’s automotive industry 2011 with the programme having made it “too easy” to only vehicle-scrapping schemes during the recession to manufacture simpler components, to the detriment of stimulate demand for new vehicles, with some success. value-added components. However, European markets are now being challenged In 2010, about R30-billion-worth of components were by mounting government debt and budget deficits, exported by local manufacturers, marking an estimated and efforts to tackle these challenges, such as public- 12% increased on component exports in 2009. However, sector wage freezes and increases to value-added tax, this remains well below the levels of exports achieved are dampening consumer demand, including in the in the boom years of 2006 and 2008. For example, in automotive sector. 2008, R44-billion-worth of components were exported. Further, while vehicle exports support demand for While exports offer an avenue of support to the components, the components sector has indicated struggling components sector, there are numerous that South Africa remains in need of stronger local sales challenges facing component exports, key of which of locally manufactured vehicles, as this is where the are exchange rate-related difficulties. In particular, the best opportunity lies for components companies. The strength of the local currency has diminished profit spokesperson for the association has explained that, margins for local component exporters. One component when a car is built for the local market, the component company that exports to the US reportedly informed manufacturer will generally also supply the replacement Naacam that below R7,40 to the dollar, the company is parts. However, when a car is exported, the replacement not profitable in its export activities. By the beginning of parts are usually sourced elsewhere. May 2011, the rand was trading at R6,59 to the dollar. As is the case for South African vehicle manufacturers, Further, currency volatility makes it difficult for South African component companies involved in exports component exporters to undertake confident business must be innovative if they are to maintain their positions planning. in international supply chains, as competition is fierce. An example of a company that has been significantly affected by the exchange rate is the Shatterprufe division Catalytic converter companies of PG Glass, which previously exported about 50% of its concerned over the Automotive South African production, and had a warehousing facility Production and Development Programme in Charleston in the US. However, its US facility was South Africa’s catalytic converter industry, which is the closed in the first half of 2010, as a direct result of the country’s largest component export sector, has long strong rand/weak dollar scenario. The company’s export expressed concerns over the levels of government support activities were also negatively affected by cheap Chinese that will be available to it under the incoming Automotive imports into the US market. Production and Development Programme (APDP) and, by Components companies have suggested that late 2010, the Catalytic Converter Interest Group (CCIG) was hinting at contract losses and the closure of plants government build up reserves and buy dollars, and should the Department of Trade and Industry (DTI) not perhaps set the level of the rand against major currencies increase the level of support available to companies in this every three months, as is done with much success in sector. The CCIG contends that the incentive regime for some South-East Asian countries. catalytic converters under the APDP is “extremely low in Vehicle exporting companies are less affected by the comparison to what was and is currently enjoyed under the Motor Industry Development Programme”. currency issue than component exporters, as vehicle exports form part of long-term contractual arrangements However, the DTI has indicated that it is not able to expand that can be adjusted depending on demand in specific on the offer already on the table under the APDP, unless the industry increases its international competitiveness. The markets. sector has confirmed that it is undertaking a study on how Also challenging local component exporters is the to achieve this, but has not made any concrete statements fact that more than 50% of exports are to European about how it will raise its competitiveness. Until then, markets, where tough trading conditions are expected government will not consider raising the level of support.

until 2012. Some European governments implemented Engineering News Source:

South Africa’s automotive industry 2011 14 South African automotive imports

South Africa’s automotive sales have a strong tendency further reduce the import duties owed through earning towards imported vehicles. In 2010, for example, 66% export credits. In 1995, when the MIDP was first of the cars sold in South Africa were imported. In part, introduced, imported cars comprised only 9% of total imports for the year were supported by the industrial car sales. action that negatively affected local vehicle manufacturers In addition to importing high numbers of fully built up as, while stocks of locally manufactured vehicles ran low, vehicles, South Africa’s automotive industry also imports stocks of imported vehicles remained high. significant quantities of components. In 2010, some Further, the share of imports in the South African vehicle R35-billion-worth of components were imported for sales mix could grow going forward. While Naamsa is CKD vehicle assembly, and a further R23-billion-worth of forecasting that imports as a percentage of car sales components were imported as replacement parts. Some will remain relatively stable over the next two years, the of the most commonly imported components include country’s biggest vehicle importer, AMH, expects that engine parts, automotive tooling, tyres, stitched leather car imports could rise to over 80% in the next few years. components, gauges and brake parts. There are certain Two of the strongest growing imported brands in components, such as crankshafts and gearboxes, South Africa are Kia and Hyundai, both South Korean that have to be imported as they are not currently brands, which are brought into the country by AMH. manufactured in South Africa. These brands are already serving as serious competitors It is clear that imported vehicles and components to established South African market leaders Toyota and have limited potential for employment creation and skills Volkswagen, and it appears likely that their market share development in South Africa; and some believe that will grow. Hyundai, for example, has clearly indicated its imports are one of the biggest challenges facing South growth ambitions for the South African market, and is Africa’s automotive industry and threatening its long- aiming to be the number one selling brand in the South term sustainability. African passenger car market within the next five years. The automotive components sector is particularly The company grew its market share by 45% in 2010, at risk as a result of the import situation. Not only are and the sales volume for the group could improve by at companies in this sector negatively affected by the high least another 10% to 15% in 2011. levels of component imports but they also suffer as a Chinese brands are also growing their presence in the result of the high levels of vehicle imports, as imported South African market. Although they currently account for vehicles make little use of locally made parts in the a far smaller share than companies such as Hyundai and aftermarket. For example, Hyundai, which undertakes no Kia, Geely and Chery, two of China’s largest independent local manufacture, also makes use of no local parts in the carmakers, are seemingly keen to expand their market aftermarket. While AMH, which distributes Hyundai, has share in South Africa. Geely believes it is finding indicated that it will never consider local manufacturing, increasing acceptance among South Africa’s emerging the company contends that it does contribute to the local black middle class, with 65% of its sales currently being economy through taxes and employment, noting that it to this segment of the population. employs 4 500 people directly and possibly between Other countries from which South Africa imports 15 000 and 20 000 indirectly. Further, AMH contends that significant quantities of passenger cars and LCVs include it buys between R250-million and R300-million-worth Germany and Japan. of parts a year from local suppliers, such as batteries The high level of imports is a situation that has evolved, and tyres. perhaps unintentionally, as a result of the MIDP, under Vehicle manufacturing companies appear relatively which import duties on vehicles and components have unconcerned about the import situation and it has declined, and vehicle manufacturers have been able to been suggested that, provided the industry continues

Imports as a percentage of South Africa’s total car sales 2011 2005 2006 2007 2008 2009 2010 (projection) Total domestic car sales 419 868 481 558 434 653 329 262 258 129 337 130 375 000 Imported car sales 208 892 266 247 265 095 203 808 163 750 223 390 245 000 Imports as a percentage of total 50% 55% 61% 62% 63% 66% 65% car sales Imports as a percentage of South Africa’s total LCV sales Total domestic LCV sales 170 132 199 677 204 386 169 466 118 159 133 756 155 000 Imported LCV sales 23 199 40 208 47 760 50 825 32 496 36 911 45 000 Imports as a percentage of total 14% 20% 23% 30% 28% 20% 29% LCV sales Source: Compiled from Naamsa industry statistics, March Naamsa industry statistics, March Compiled from Source: 2011

15 South Africa’s automotive industry 2011 to expand its exports and comes close to the target of imports to enable them to offer full product ranges in achieving vehicle production of 1,2-million vehicles a the local market. Certainly, an upside of the explosion of year by 2020, the presence of imports will not be overly imports is that South African consumers have significant negative. All local vehicle manufacturers make use of choice when it comes to purchasing vehicles.

Global environment trends

KPMG’s Global Automotive Executive Survey 2011 shows that, given the desire for more economical engines, the vast majority of automotive executives believe that hybrids (84% of respondents) and electric cars (77% of respondents) will enjoy the biggest sales growth of any vehicle category over the next five years. Thus, most of the auto industry’s investment in alternative fuel technologies is being targeted at developing hybrid fuel systems and battery electric power. However, the majority of respondents in the survey do not foresee a reasonably priced, mass-market electric vehicle being available for at least five years. More than 40% of executives expect government subsidies for electric vehicles to decrease, but an almost equal percentage are convinced that government subsidies are necessary to make electric cars more affordable to the public. Source: KPMG: Global Automotive Executive Survey Source: 2011, as discussed in Engineering News

South Africa’s automotive industry 2011 16 Major OEMs BMW South Africa Another prominent export destination for South African The South African subsidiary of Germany-based car manufactured BMW vehicles is Japan, which is the maker BMW has a manufacturing plant in Rosslyn, recipient of about 15% of the vehicles exported from Pretoria, which currently has the capacity to produce the Rosslyn plant. Owing to the earthquake and tsunami between 50 000 and 55 000 vehicles a year. In 2010, the in Japan in early 2011, BMW South Africa had to place facility produced 49 029 vehicles, and was, unfortunately, vehicles destined for the Japanese market into storage unable to respond to a request for additional output for until that country was, once again, able to receive them. the year owing to a loss of production linked to labour Some 8,5% of South African manufactured BMWs are delivered to Australia and New Zealand, and 5,5% are action at the plant. The lost volume had to be reallocated exported to East Asian markets. Only 0,1% of the BMW to other BMW plants, and represented a loss of export vehicles exported from South Africa are for other African volume from South Africa. markets. By early 2011, BMW South Africa was reporting that In addition to its vehicle exports, BMW South Africa demand for its vehicles was soaring, and had resulted in has recently started exporting painted BMW 3 Series the introduction of operating shifts on certain weekend bodies and hang-on parts to other BMW markets, such days. The company expects that its 2011 production will as India, for CKD assembly. While the initial painted exceed its 2010 output. body volumes are to remain modest at an expected All the cars produced by BMW South Africa form part 1 800 units a year, it is a move that opens the door for the of the company’s 3 Series range, and the Rosslyn plant company to potentially produce painted bodies for CKD is able to produce all models of the 3 Series range, assembly on a larger scale. including the 3 Series xDrive all-wheel drive model, which BMW South Africa’s Rosslyn plant is currently gearing up the plant only recently started to manufacture. Previously, for the production of the new 3 Series model, which is likely the BMW plant in Munich was the only producer of the to be introduced in 2012. Towards this, the capacity of the 3 Series sedan xDrive model. facility is being expanded to 87 000 vehicles a year. This The bulk of BMW South Africa’s production is for export expansion has necessitated an investment of R2,2-billion. purposes, with some 85% of locally manufactured BMW Meanwhile, BMW South Africa has implemented an vehicles intended for delivery to other markets. The energy efficiency programme that, between 2006 and company exports its vehicles through the Durban and 2010, reduced electricity consumption at the plant Maputo harbours. by 28,1%, reduced gas consumption by 32,1%, and Of the vehicles exported by the BMW South Africa reduced the maximum electricity demand by 14,5%. The plant, 50% are delivered to the US and a further 5% are programme has also resulted in direct cost savings, with sent to Canada. BMW South Africa has streamlined its the company having saved R48,5-million between 2006 shipping channels to the region to better serve these and 2010, as a result of the initiative. markets, and now ships directly to either the West or the Key areas of energy expenditure for the company East Coast of the US. Previously, all vehicles bound for include heating, ventilation, cooling and lighting in the North American Free Trade Agreement (Nafta) area production areas, as well as the movement of vehicles from South Africa were shipped to Bremen, in Germany, between the various areas of the production line. Some and then transferred onto ships bound for the US. The of the measures that have resulted in cost savings new direct shipping route cuts South Africa’s lead times include the linking of the lighting in the production areas to the US by as much as 16 days, meeting customers’ to the production schedule, with the result that the lights demand for faster turnaround times. Vehicle handling is remain off on nonproduction days, and the installation of also reduced as a result of the direct route. 70 solar water heating panels in the paint shop to heat BMW South Africa’s direct shipment to the US was ablution water for the employees working in this area of enabled by a move to consolidate volumes with other the plant. In a later phase of the project, solar technology South African vehicle exporters to the Nafta region. This will be installed for use by employees in a different location allowed for the negotiation of competitive rates, and of the plant, as well as to heat the water for the canteen has enabled a bimonthly direct shipment. Previously, facilities. Unused areas of the plant have also been the relatively low volumes from South Africa to North mothballed, instead of standing empty with the lights on, America meant that it was difficult to use traditional while a new type of body sealant that does not require shipment methods between the two continents. Should oven curing has been introduced, meaning that the oven the consolidated volume decline for any reason, BMW used for this process has been decommissioned, saving South Africa has implemented an innovative container a large amount of gas every day. packing solution that allows for a direct shipment on The BMW models not manufactured locally are normal container vessels. imported.

17 South Africa’s automotive industry 2011 Ford Motor Company The Silverton plant is also likely to produce Mazda’s new BT-50 pick-up range, with the BT-50 and the of Southern Africa Ranger sharing the same platform. A similar dual- The FMCSA is a wholly owned subsidiary of US-based production system is in place at the joint Ford-Mazda Ford Motor Company, which struggled significantly during plant in Thailand. FMCSA distributes Mazda vehicles in the global economic downturn, although it managed to South Africa, and the local Ford-Mazda partnership has avoid having to apply for Chapter 11 protection from not been affected by the decision by the recent sale by bankruptcy, like rival companies General Motors and Ford of 7,5% of its 11% stake in Mazda. Local Ford and Chrysler. Globally, Ford is pursuing a strategy known Mazda vehicles sales also include imports. as One Ford, which embraces the principle of creating Meanwhile, the Struandale plant is being upgraded global products that look, perform and feel the same all to allow for the manufacture of the Puma diesel over the world, and the company’s South African facilities engine, which will be used in the Ranger vehicles. can be seen as forming part of this goal. This will include the production of 220 000 cylinder FMCSA operates two manufacturing plants – a heads, cylinder blocks and crankshafts a year for the vehicle plant, in Silverton, Pretoria, and an engine plant, in Struandale, Port Elizabeth. Ford is in the process of new Puma engine, of which 75 000 will be for the undertaking a R3-billion investment at its South African Silverton plant, while the balance will be exported to facilities to introduce a new global export programme Ford’s Argentina and Thailand engine plants. The that will see FMCSA manufacturing the company’s next- upgrade includes the import of more than 100 new generation Ranger pick-up vehicle, as well as the engine and refurbished component manufacturing machines, for the new pick-up range. as well as the development of a training centre at At the Silverton plant, the investment will facilitate the which Ford employees will learn the finer techniques of transition to a high-volume single platform line that will building the new-generation engine. Production of the have the capacity to produce 110 000 vehicles a year. new engine will start before mid-2011. South Africa is one of only three worldwide manufacturing Local suppliers have benefited from Ford’s latest destinations for the new Ranger, with the other plants investment in its South African facilities, as increased being located in Thailand and Argentina. The local plant local content is being sourced to enable the increased will supply the South African market, and will export the production levels. It is estimated that yearly spending vehicle to the rest of Africa, as well as Europe, Russia with local components companies will be as high as and Turkey. It is expected that about 75% of the plant’s R6,5-billion a year. Further, FMCSA, in partnership with total production will be exported. The new capacity of the Gauteng government, has launched a R100-million the South African plant is a significant leap from the initiative to promote black-owned small and medium- 28 000 Ranger, Focus and Bantam models assembled at sized enterprises. This has included the establishment the facility in 2009, although it must be noted that 2009 of South Africa’s first automotive broad-based black production was constrained by the global economic economic-empowerment incubation facility, which will downturn, and that the plant produced 55 000 units in provide selected entrepreneurs with the chance to enter 2008. The new Ranger will be available in South African the automotive component market through professional showrooms before the end of 2011. support and growth opportunities.

Mazda’s new Ranger BT-50 pick-up Ford’s Puma block line Source: FMCSA Source: Source: FMCSA Source:

South Africa’s automotive industry 2011 18 General Motors of the Spark will increase GMSA’s capacity to 60 000 vehicles a year. This is significantly up on the 26 000 South Africa vehicles produced in 2009, and the 32 000 vehicles GMSA is a wholly owned subsidiary of global vehicle produced in 2010. Output in 2011 is expected to reach 35 manufacturer GM, which filed for Chapter 11 bankruptcy 000 vehicles. The expanded production will necessitate protection in the US as a result of the global economic the introduction of a second shift to what was previously slowdown. A reorganisation process followed, and a one-shift operation. This will create an additional 500 GM returned to the New York Stock Exchange in direct jobs and 2 000 indirect jobs. November 2010. Also helping the company to achieve the 50 000 Following the investment of over R3-billion in South vehicle mark are efforts to grow its business in sub- Africa between 2004 and 2009, GMSA is in the process Saharan Africa, with GMSA being responsible for GM’s of investing R1-billion in its Struandale, Port Elizabeth plant, including about R530-million in 2011. The plant activities in the region. Currently, GMSA sells its Chevrolet currently produces Isuzu KB pick-up and Chevrolet utility utility in Botswana, Namibia, Swaziland, Zimbabwe vehicles, and the investment will enable the production and Mozambique and sells Isuzu pick-up vehicles in of the new models of these vehicles, which will be Mozambique, Zimbabwe, Zambia, Malawi and Mauritius. launched in 2012 and 2011 respectively. The investment It believes that countries offering significant potential for will also enable the plant to produce Chevrolet Spark future vehicle sales include Nigeria, Angola, Senegal, vehicles, which are currently imported to South Africa Ghana and Kenya. (Note, while Isuzu bakkies form part from Korea. Local production of the Spark will start in of GMSA, the sale of Isuzu trucks is the responsibility 2012 and, initially, about 15 000 of these vehicles will be of Isuzu Trucks South Africa, a JV between GMSA and manufactured at the plant each year. About 50% of these Japan’s Isuzu Motors.) will be exported to New Zealand, Australia and other In November 2010, GMSA opened a R250-million parts right-hand-drive markets in the Asia-Pacific area. Once distribution centre in the Coega Industrial Development all three new assembly programmes are implemented, Zone. The centre consolidates GMSA’s four existing parts the local content on GMSA’s vehicles will have risen to warehouses under one roof, accommodating 144 000 about 40%, from a previous level of 25%. part numbers and cutting delivery times to dealers from The production of the Spark will assist the plant in five days to less than 24 hours. In addition to distributing achieving the 50 000-vehicle-a-year output required to parts and accessories to GMSA’s 139 local dealers, it derive benefits from the APDP; in fact, the manufacture also distributes to Israel and ten African countries.

GMSA’s Chevy Spark, which will be exported to New Zealand Source: GMSA Source:

19 South Africa’s automotive industry 2011 Mercedes-Benz Production of the new model, which is set to start in 2014, will entail a R2-billion investment in the local South Africa facility. This will provide for extensive skills development, MBSA is a wholly owned subsidiary of Daimler. The as well as for new plant and equipment, as well as company markets and sells Mercedes-Benz passenger the introduction of some of the latest manufacturing cars and commercial vehicles; Maybach vehicles; smart technology. The investment will increase the capacity of vehicles; Mitsubishi passenger cars and LCVs; and the plant to 65 000 vehicles a year, and the plant has various truck brands in South Africa. the capacity to add a third shift, which would enable it Daimler has invested more than R5-billion in MBSA’s to run 24 hours a day, depending on market demand. East London manufacturing plant over the past ten The plant changes necessary for the production of the years. This investment has enabled the plant to produce new-generation cars will take place in a phased manner, the previous- and current-generation C-Class vehicle. allowing for the continued production of the current In 2009, MBSA produced some 41 000 vehicles, C-Class, right up to run-out. which fell well short of its 55 000 vehicle manufacturing The new vehicles will be sold locally and exported to capacity, owing to the global economic slowdown. markets in Africa and the Asia Pacific region. This is a However, output increased in 2010, to 52 200 C-Class shift from the company’s previous export programme, vehicles, and the company expects that it could achieve which targeted the US exclusively. production of 53 000 vehicles in 2011. The company Local content in the new model will be increased to also produced 1 700 Mitsubishi Triton units in 2010, and more than 40% – up from the current 35% – and MBSA 3 700 commercial vehicles. In 2011, MBSA expects to hopes to see several new suppliers entering the South produce some 53 000 vehicles and will export between African economy to allow for this. The company contends 30 000 and 35 000 C-Class vehicles to the US. that every supplier that locates a facility in South Africa MBSA has recently been awarded the contract to will reduce the logistics costs for producing the new produce the next-generation C-Class at its East London C-Class. In an attempt to lure component suppliers to plant. Globally, only three other plants – in Germany, China the local market, MBSA, together with the Elidz and the and the US – will manufacture these vehicles. MBSA’s DTI, undertook a roadshow to Germany in early 2011. selection as a manufacturing location for the new model The aim of the delegation was to encourage component was assisted by the local plant’s global recognition for suppliers to set up shop in South Africa, with the goal of quality, with the facility having achieved the top ranking supplying MBSA, as well as other Daimler plants and/or for global plants serving the US market in a JD Power & larger export markets. Local parts currently exported into Associates study. On the downside, of course, is the fact the global Mercedes-Benz network from South Africa that the local plant has a cost disadvantage owing to its include wheel rims, forged aluminium parts, catalytic distance from most export markets. converters, leather seat kits and engine parts.

MBSA’s production line in the Eastern Cape, which produces the the C-Class Mercedes model for the local and US markets Source: MBSA Source:

South Africa’s automotive industry 2011 20 Nissan South Africa that the production of 100 000 vehicles will be needed to Japan-based Nissan Motor Company holds a see real benefits. It has not yet quantified the investment controlling interest in Nissan South Africa, which has a that will be required to enable the expanded production, manufacturing facility based in Rosslyn, Pretoria. The but expects that most will be model related. plant, which currently produces five vehicle models from Along with the expansion, Nissan South Africa plans four platforms, recorded an output of 48 000 vehicles in to rationalise its output to two platforms. These will be 2010, and expects its production volumes to increase to the 1 t pick-up platform, and the platform from which the NP200 half-ton bakkie and the Renault Sandero are beyond 50 000 in 2011. A portion of the plant’s output currently produced. As a result, Nissan South Africa’s is of Renault vehicles, owing to a strategic global alliance expanded output will consist of a mix of Nissan and between the Nissan Motor Company and France’s Renault vehicles, although Nissan products will far Renault group. outweigh those of the French brand. Of the 2011 production, Nissan expects to see Meanwhile, Nissan is hoping to introduce its Leaf expanded sales in South Africa, as well as additional electric vehicle to South Africa in 2012, although it does export sales into Africa and Western Europe. The not want to do so at a “massive premium to a petrol car”. company exports the Nissan Hardbody pick-up to left- As a result, the company is in talks with the South African and right-hand-drive markets, and from mid-2011, the government over possible incentives to aid the vehicle’s company will be exporting to Russia and Turkey. roll-out. These could include lower import duties, or lower Nissan South Africa is planning to double the capacity company car tax on electric vehicles. Nissan believes of its manufacturing plant to 100 000 vehicles a year by that if it could secure incentives that would enable the 2015 to leverage more benefits for the company and its cost of the Leaf to be comparable to the cost of a petrol component suppliers. The company contends that the car, it could sell 5 000 Leafs in South Africa over a five- 50 000 threshold of the APDP is not economical, and year period.

Nissan's Leaf electric vehicle, which it is targeting to launch in South Africa in 2012 The new Nissan Micra Source: Nissan South Africa Source: Source: Nissan South Africa Source:

21 South Africa’s automotive industry 2011 Toyota any taxi assembly programme will probably be excluded under the APDP, which is aimed at incentivising South Africa Motors passenger vehicle production, as well as the new support TSAM, a wholly owned subsidiary of the Toyota Motor programme currently being drafted for medium and Corporation, is the market leader for new vehicle sales heavy commercial vehicles. Thus, the DTI will need to in South Africa, holding 20,5% of the market in 2010. devise an appropriate support programme to encourage However, the company’s market share in 2010 was down TSAM to view the assembly of a minibus vehicle as a from previous years, owing to its failure to fill the gap favourable opportunity. in the market left when the company stopped selling its The company has invested some R8-billion in its low-cost Tazz vehicle. TSAM is now seeking to re-enter facilities in South Africa in recent years to facilitate its the affordable vehicle market in South Africa, announcing production and export activities, and is currently investing in April 2011 that it would be introducing the Aygo, which R363-million in a new parts distribution warehouse, has been available internationally for a number of years, under construction in Ekurhuleni. The warehouse, which and the Etios, to South African consumers. is being developed in two phases, will serve TSAM’s TSAM operates a plant in Durban, where it produces local and export markets. The first phase of the new Hilux, Fortuner and Corolla vehicles for the local and warehouse will open in May 2012, and the second phase European markets. The plant has the capacity to of the project is scheduled for completion by 2015. The manufacture over 200 000 vehicles a year, but has, facility will house more than 2,2-million parts, and will as a result of the global economic slowdown, been generate an expected turnover of more than R2,5-billion operating at below capacity. For example, in 2009, the a year. plant produced 102 886 vehicles. However, output is TSAM was affected by the earthquake and tsunami increasing on the back of the global economic recovery, disasters that hit Japan in early 2011, as the local and by late 2010, TSAM was reporting that its plant company imports parts, as well as RAV4, Quantum, would be manufacturing Hilux and Fortuner vehicles at a Yaris, Prius, Lexus and Land Cruiser vehicles from Japan, rate of 500 vehicles a day by the beginning of 2011, up where its parent company is based. from 380 vehicles a day in mid-2010. Toyota vehicles are generally known for their high Further, TSAM has entered into negotiations with the quality and, in 2010, TSAM received the Synovate award South African government over the possible assembly for the best local plant manufacturing light commercial of a minibus vehicle in South Africa. TSAM previously vehicles. TSAM maintains that its sales have not been manufactured the Siyaya vehicle, which, at one point, affected by the global Toyota recall programme of early captured about 80% of the minibus taxi market, at the 2010, when thousands of Corolla, Auris, Verso and Prius Durban plant but ceased production of this vehicle vehicles from around the world had to be returned to in 2007 when the plant shifted its focus to large-scale the company, owing to possible faulty acceleration assembly of the Hilux, Fortuner and Corolla. However, mechanisms and possible brake system failure.

Toyota’s Aygo, which has been available internationally for a number of years Source: TSMA Source:

South Africa’s automotive industry 2011 22 Volkswagen Group the company exported more than 75 000 vehicles, and expects this to increase to 81 000 in 2011. South Africa Volkswagen achieves local content of about 70% in VW Group SA is a wholly owned subsidiary of German the production of the Polo, and is aiming to increase this vehicle manufacturer Volkswagen. The company has a to 80% over the next five to ten years. The company vehicle manufacturing plant in Uitenhage, in the Eastern contends that second- and third-tier component Cape, where it produces the Polo Vivo, the Polo, and the suppliers will be pivotal to achieving this goal. CrossPolo. It held 14,3% of South Africa’s new vehicle The company undertook a R4,5-billion investment market in 2010, marking an improvement on its market in South Africa over a period of four years to facilitate share in the previous year, and placing it in second production to meet its export commitments. This position to TSAM. included expenditure on plant, equipment, training The Polo Vivo is sold in the local market, and is and product development. Further, the VW Group SA Volkswagen’s offering for entry-level buyers. The Polo is is currently building a R500-million press shop that also sold locally, as well as being exported to all right- will enable further local content gains and will allow hand-drive markets globally, and the local company for improvements to overall competitiveness. The has also received export orders for the left-hand-drive new press shop is expected to be fully operational by Chinese and German markets. Key export markets mid-2012. In 2009, it initiated a R200-million project for the vehicle are the UK, Ireland, Japan, Singapore, to construct a new parts distribution warehouse in Malaysia, Australia, New Zealand, Cyprus and Malta. Centurion. The CrossPolo is also sold locally, and is exported to VW Group SA imports the vehicle models that it does all right-hand- and left-hand-drive markets. In 2010, not manufacture locally.

VW Polos for export from Port Elizabeth Source: VW Group SA VW Group Source:

23 South Africa’s automotive industry 2011 Prospects

Prospects for South Africa’s vehicle manufacturers On the upside, the components sector may benefit appear bullish in terms of demand, production and from expected increased local vehicle production, with exports. Naamsa is forecasting total new vehicle sales Naamsa projecting that vehicle production will reach in the country of 555 000 in 2011, rising to 609 000 in 556 000 vehicles in 2011, rising to 655 200 in 2012, while 2012. a goal of producing 1,2-million vehicles a year by 2020 Positive impetus is expected from improved consumer is being pursued. Much of the increased production is and business sentiment as well as from expected further intended for the export market, with Naamsa forecasting growth in tourism and business travel. Factors that export sales of 291 000 vehicles in 2011, rising to could affect demand negatively include rising inflationary 366 200 vehicles in 2012. pressures and the possibility of upward pressure on Many local companies are pursuing investment interest rates, as well as the rising tax burden facing the programmes to facilitate the expected production and buyers of new vehicles and the impending introduction export expansions, and there have been suggestions that of significant toll fees for motorists using the Gauteng additional vehicle manufacturers are being encouraged freeway system. Another potential future negative to consider South Africa as an investment destination, influence on vehicle sales in South Africa is the country’s including through a possible multivehicle manufacturing ratio of household debt to disposable income. plant mooted for the Elidz. Future vehicle sales in the South African market are However, any future growth of South Africa’s expected to see an ongoing battle between locally automotive industry will be dependent on the manufactured vehicles and imports, with imports expected sustained recovery of the global economy and on to maintain a prominent position in the market. Naamsa is the perception of the local industry as a reliable and forecasting that imports will continue to account for over competitive manufacturing destination. The industrial 65% of vehicles sold in the country in 2011 and 2012. action that affected the industry in 2010 did much to This ratio will have ongoing negative implications for the dent perceptions of the country in this regard, and the local components sector, which is also struggling under industry has emphasised the importance of avoiding the weight of the strong local currency. such action in future.

South Africa’s automotive industry 2011 24 Main sources

Automobile Manufacturers Employers Organisation (AMEO). Media release on the industrial action in the South African new vehicle manufacturing industry (August 20, 2010).

Business Day. New automotive incentive plan includes smaller suppliers (June 3, 2010). Business Day. Automotive workers embark on major strike (August 11, 2010). Business Day. Automotive companies strike deal with Numsa (August 20, 2010). Business Day. Vehicle sales soar ahead of carbon tax (September 3, 2010). Business Day. Strikes ‘damage SA’s reputation as base for car making, jeopardising contracts’ (September 20, 2010). Business Day. Two automotive facilities to be opened in Port Elizabeth area (November 1, 2010). Business Day. KwaZulu-Natal losing automotive competitive edge – study (November 4, 2010). Business Day. VWSA supplier opens Uitenhage plant (November 12, 2010). Business Day. Rise in new vehicle sales points to growing consumer confidence (February 3, 2011). Business Day. Nissan plans to cash in on boom in small cars (March 11, 2011). Business Day. BMW in SA ‘to stay’, but wants more clarity on auto plan (March 22, 2010). Business Day. Local parts lobby alarms car manufacturers (March 29, 2011). Business Day. Late changes to motor industry plan ‘unlikely’ (March 31, 2011). Business Day. New record for SA vehicle exports (April 5, 2011). Business Day. Post-tsunami vehicle investment ‘a boon for SA’ (April 26, 2011).

Business Report. Tyre and rubber workers to strike (August 29, 2010). Business Report. Toyota SA saddled with huge backlog (September 17, 2010). Business Report. Car firms cry foul on cheap imports (October 15, 2010). Business Report. Regaining credibility to take long time: Ford SA (November 2, 2010). Business Report. Tax hike on luxury cars annoys Naamsa (February 25, 2011). Business Report. Mahindra plans SA bakkie build (March 8, 2011). Business Report. Car dealers are important employers (March 11, 2011). Business Report. Locally made cars ‘key to industry survival’ (March 18, 2011). Business Report. Local content in vehicles could be increased to 50% (April 4, 2011). Business Report. Contract to lift exports by BMW SA (April 15, 2011). Business Report. Automotive industry confident of growth (April 20, 2011). Business Report. Mercedes-Benz SA chief warns of high wages (April 28, 2011).

Department of Trade and Industry. Industrial Policy Action Plan 2011/12 – 13/14 (February 2011).

Engineering News. Ford expects looming Transnet strike to impact on operations (May 4, 2010). Engineering News. BMW cancels some shifts as Transnet strike drags on, looks at Maputo as alternative (May 25, 2010). Engineering News. Catalytic converter industry and DTI at incentives impasse (August 5, 2010). Engineering News. Motor manufacturers concerned over strike (August 12, 2010). Engineering News. BMW, VW plants down as component strike enters second day (September 2, 2010). Engineering News. VWSA forecasts a big rise in 2010 exports (September 3, 2010). Engineering News. SA vehicle production grinds to a halt – again (September 10, 2010). Engineering News. GMSA, Isuzu in talks to grow local production (September 28, 2010). Engineering News. GMSA to produce, export new Spark hatchback (September 30, 2010). Engineering News. DTI receives 10 applications for R2,7bn automotive incentive (October 14, 2010). Engineering News. Mazda says new BT-50 to be made in SA (October 25, 2010). Engineering News. New bakkie to be made in Silverton for SA and export markets (October 29, 2010). Engineering News. Rental demand lifts passenger car sales in October (November 12, 2010). Engineering News. VW targets 80% local content, but warns that it won’t be easy (November 15, 2010). Engineering News. GMSA opens R250m E Cape parts distribution centre (November 26, 2010). Engineering News. SA partnership unaffected by Ford’s plan to reduce Mazda stake (December 3, 2010). Engineering News. No longer ‘Government Motors’ as GM returns to NYSE (December 3, 2010). Engineering News. New Geely to make big play for small car market next year (December 3, 2010). Engineering News. R15bn in auto pledges SA’s 2010 industrial-policy ‘highlight’, focus shifts to public procurement (December 15, 2010). Engineering News. Toyota and Volkswagen take gold in 2010 auto market (January 11, 2011). Engineering News. Govt in talks with Toyota on local minibus production (January 14, 2011). Engineering News. SA plant secures new C-Class contract and R2bn investment (January 14, 2011).

25 South Africa’s automotive industry 2011 Engineering News. Nissan mulls 2012 SA debut for electric Leaf, but hurdles remain (January 14, 2011). Engineering News. Toyota SA to build R363m parts centre in Ekurhuleni (January 17, 2011). Engineering News. Truck sales recovered in 2010, but still fell well short of 2007 peak (January 28, 2011). Engineering News. Ford and Gauteng launch R100m initiative to develop black-owned suppliers (February 1, 2011). Engineering News. 2010 was a year of auto recovery rather than expansion, erport argues (February 4, 2011). Engineering News. Growing competition in automotive manufacturing industry (February 18, 2011). Engineering News. Pretorius reflects on the automotive industry as his 38-year career draws to a close (February 25, 2011). Engineering News. Local Volkswagen plant exports top 100 000 units (March 1, 2011). Engineering News. Building of R500m Uitenhage press shop gets going (March 4, 2011). Engineering News. GM creates platform for ramp-up for SA output to 50 000-unit mark (March 11, 2011). Engineering News. Korean group aims to be top-selling South African car brand (February 11, 2011). Engineering News. Clean-fuel pressure should be placed on South African oil companies (March 12, 2011). Engineering News. Toyota, Nissan SA await clarity on impact of Japanese earthquake (March 14, 2011). Engineering News. Mercedes-Benz SA, DTI in major component push for new C-Class model (March 15, 2011). Engineering News. Steel ‘rationing’ set to disrupt auto component production (March 18, 2011). Engineering News. Nissan aiming for twofold increase in production capacity at Rosslyn plant to 100 000 units a year by 2015 (March 25, 2011). Engineering News. BMW exports to Japan halted as earthquake disrupts supply chains (March 31, 2011). Engineering News. BMW SA to export 5 000 more units in 2011, pushes ahead with CKD plan (March 31, 2011). Engineering News. Q1 new vehicle sales up 22,2%, but may slow as year progresses (April 4, 2011). Engineering News. SA’s auto component battle intensifies as rand and Asia strengthen (April 15, 2011). Engineering News. Ambitious AMH aims to double turnover, lure more new buyers to the market (April 18, 2011).

KPMG. Global automotive executive survey (2011).

National Association of Automobile Manufacturers of South Africa (Naamsa). Quarterly review of business conditions: 4th quarter 2009 (March 1, 2010). National Association of Automobile Manufacturers of South Africa (Naamsa). Quarterly review of business conditions: 1st quarter 2010 (April 19, 2010). National Association of Automobile Manufacturers of South Africa (Naamsa). Media release on the impending Transnet/ Portnet industrial action (May 5, 2010). National Association of Automobile Manufacturers of South Africa (Naamsa). Quarterly review of business conditions: 2nd quarter 2010 (August 2, 2010). National Association of Automobile Manufacturers of South Africa (Naamsa). Media release on the impending carbon dioxide vehicle emissions tax regime (August 5, 2010). National Association of Automobile Manufacturers of South Africa (Naamsa). Quarterly review of business conditions: 3rd quarter 2010 (November 15, 2010). National Association of Automobile Manufacturers of South Africa (Naamsa). Media release on the 2011/12 budget (February 23, 2011). National Association of Automobile Manufacturers of South Africa (Naamsa). Industry vehicle sales, production, export and import data (March 9, 2011). National Association of Automobile Manufacturers of South Africa (Naamsa). Quarterly review of business conditions: 4th quarter 2010 (March 11, 2011).

www.bmw.co.za www.businessday.co.za www.engineeringnews.co.za www.ford.co.za www.gmsa.com www.mercedes-benz.co.za www.naacam.co.za www.naamsa.co.za www.nissan.co.za www.oica.net www.toyota.co.za www.vw.co.za

South Africa’s automotive industry 2011 26 South Africa’s automotive industry 2011 The material contained in this report was compiled by the Research Unit of Creamer Media (Pty) Ltd, based in Johannesburg, South Africa. The information contained in this report has been compiled from sources believed to be reliable, but no warranty is made as to the accuracy of such information. This document is designed to be used as a source of information for subscribers to Creamer Media’s Research Channel Online and Creamer Media’s MiningWeekly.com Research and is not to be reproduced or published for any other purpose. In particular, the report may not be republished on any other websites, or Intranet sites, or be distributed by email outside of the subscribing company. The reports draw on information published in Engineering News and Mining Weekly, as well as from a range of other sources, and should provide an invaluable and easy-to-read snapshot of key industrial sectors.

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