“The South African automotive manufacturing sector is the most dynamic manufacturing sector in the country and a major driver of economic development for the country,” says Renai Moothilal, the Executive Director of the National Association of Automotive Component and Allied Manufacturers in an opinion piece.
This is due in part to a supportive auto industrial policy framework that has been sustained over the last three decades, beginning with the Motor Industry Development Programme (MIDP) in the mid-nineties and followed by the current Automotive Production and Development Programme (APDP) from 2013 to the end of 2020.
These policies have supported the local market’s integration into global auto value chains, creating an industry that currently produces approximately 600 000 new vehicles annually, provides employment for around 112 000 people, and contributes an estimated 7.7% to the country’s Gross Domestic Product (GDP).
The incentive framework of the APDP has had a major role to play in ensuring long-term commitment from the seven Original Equipment Manufacturers (OEMs) that operate here. A key element of the existing framework is the VAA (Volume Assembly Allowance) which, while driving the sector, has had the unintended consequence of incentivising increased vehicle value at the factory gate over the level of local content within vehicles.
The government, labour, OEMs and component suppliers came together to set the future direction of the automotive industry. The output, the recently announced SA Automotive Masterplan (SAAM) heralds the start of a new journey under a revised incentive framework that will take the industry through to 2035. It has at its core the central objective of increasing local value addition, from 37.4% currently to 60%.
To demonstrate the importance of the local value addition level, at 37.4% local value addition a crude calculation is that South Africa in fact ‘fully produces’ the equivalent of 224 000 vehicles. At 60% local value addition and meeting the SAAM volume target of 1.4 million vehicles South Africa would ‘fully produce’ the equivalent of 840 000 vehicles or have 3.75 more automotive output than at present.
Increasing of local value addition is key not only to the sustainability of the local automotive industry but to the multitude of benefits the sector delivers being felt more widely across the economy. At present the OEMs create and capture the most value from the sector while in comparator economies there are many more local suppliers undertaking a greater level of value addition. A true pyramid structure is in place in these comparator economies while South Africa currently has a relatively shallow base of lower tier manufacturers.
The revised incentive framework of the SAAM goes some way in promoting local value addition by replacing the VAA with the Volume Assembly Localisation Allowance Addition (VALA). VALA acknowledges the level of local content within a vehicle and incentivises the OEM accordingly. In short, to maintain or improve the benefit felt under the current APDP incentive framework OEMs need to increase local content levels significantly, while there is a transition period from 2021 to 2026.
Increased local content cannot simply be incentivised however and will require a strategic and coordinated approach from the component manufacturing sector, OEMs, labour and the government.
It will also require innovative thinking and bold initiatives to localise the high value componentry such as the drivetrain and telematics, which collectively account for about 50% of the value in a modern vehicle. Drivetrain is in a relative state of flux with the lifespan if the Internal Combustion Engine and its successor and speed of transition to it unknown.
Telematics is booming and also advancing rapidly. Both are highly technical, capital intensive systems and naturally difficult for a multi-national OEM to justify an investment in South Africa.
A specific incentive is mooted for these crucial sub-sectors and creative solutions have been found in other markets. Force Motors, for instance, headquartered in Pune India makes engines for both BMW and Mercedes, a global first. While supplying only the Indian market in low volumes the investment case was made and rivals brought together to collaborate on this key system.
Given the significant challenges in these crucial sub-sectors, localising as much else as is possible is a priority – think pressed parts, plastic parts, fabrics – all sub-sectors we have expertise in. For any localisation to be achieved supplier competitiveness against global peers is a non-negotiable. The work conducted by the Automotive Supply Chain Competitiveness Initiative (ASCCI), a partnership between the OEMs, represented by the National Association of Automobile Manufacturers of South Africa, Naacam and the National Union of Metalworkers of South Africa (Numsa) in driving supplier competitiveness is key. The project with 75 suppliers over the last three years significantly reduced waste and improved processes to support their competitiveness. Another round of projects is underway in sub-sectors viewed as having high localisation potential – seating, interior trim and drivetrain systems.
Our localisation ambitions cannot be seen in isolation and can only be achieved in an enabling environment.
A weak domestic economic climate and an unstable electrical supply are just two causes for concern as they drive business confidence lower and slow investment. Potentially
protectionist policies in our traditional vehicle export markets threaten vehicle exports which account for around 58% of new vehicle sales each year.
The vision of the SAAM is ambitious and realising its objectives will be a boon for local and regional economic development. It is positive that in spite of the domestic and foreign economic headwinds, the seven OEMs have made investment commitments of R40 billion over the next five years. Investment at this scale is significant and will promote local value addition, with almost R25 billion expected to be invested in locally sourced components.