International motor firms invest in South Africa for local, regional and global markets

Manufacturing is often seen as a gateway to inclusive growth and with the potential to create jobs, deepen and broaden local value chains, advance technology and cultivate local skills. As such, numerous countries in Africa have solidified manufacturing as the cornerstone of their industrial policies. The automotive industry has set itself apart as a key driver of industrialization and manufacturing and many developing economy governments have given incentives to their domestic automotive manufacturing. For some countries, such as South Africa, the automotive industry has become a key economic growth driver. The industry boasts to be the largest in the African continent producing units that are not only used in South Africa but also exports to other countries in the continent and Europe. Our review in this issue focuses on how the industry has impacted the country’s economy, its experience during the pandemic, and what the future holds for the sector which is one of South Africa’s most important socio-economic growth drive.

A century-old industry

Automotives first came to South Africa in 1896 when a Benz Velo was imported and was demonstrated on January 4 of 1897 in Pretoria in front of President Paul Kruger. Manufacturing however started decades later, in 1923 to be specific, after a visit by Henry Ford in 1922 led to the first assembly plant being set up in Port Ford.  General Motors joined soon afterwards producing Ceves Buicks Oldsmobiles and Pontiac’s and in the mid-1960s, Ford and GM still controlled over 60% of the local car marked with Ford’s and Chevrolets dominating until the mid-1950s when the German and British small cars began to make inroads into the country.

In the early 1960s, the Volkswagen (VW) launched in South Africa by managers from Ford PE who went on to develop VW- USA for the German company. By the late 1960s Toyota, Datsun and Mercedes were all developing factories in South Africa, and British makers were being pushed out. In the late seventies, Sigma Motors had planned to merge with British Leyland, known as Leykor locally – when this merger failed, Leyland had to scramble to create an all-new dealer network in only a month. Leyland’s South African presence never recovered.

Two of the great things about the automobile industry in the 1960s was that the Apartheid government asked Ford and GM to advise on policy to develop the local automobile component manufacturing industry. Ford and GM engineers asked to include black people in development to address chronic poverty but this was refused.

In 2004, South Africa was responsible for the manufacture of 84% of all vehicles produced in Africa, 7 million of which are on the South African roads.

However, Ford, GM and VW, the three largest manufacturers at the time with over 75% market share, accelerated local component development so rapidly that by 1968 they had destroyed Job Reservation policy in the auto industry allowing black people to work in factories previously reserved for whites. After the fuel crisis of the ‘70s, the large American cars which had been very popular dropped in sales drastically. By the end of the 1970s, the Mazda 323 and the Volkswagen Golf were the biggest sellers and American-designed cars were no longer regularly available.

For a while, the demand for big saloons had been met by assembling the somewhat more compact Australian Fords and Holdens, but these were discontinued in favour of more compact European designs. 1976 showed the worst sales numbers since 1972. Chrysler SA went belly up soon thereafter, merging with Illings (Mazda) to form Sigma. Chrysler had been very successful in the late sixties, with the Valiant range being the most sold passenger car in 1966, 1967, and 1968, but began a serious slide after that. The acquisition of Mitsubishi gave Chrysler a stay of execution but the severe economic climate of the latter half of the 1970s proved too much.

The many industry upheavals of the 20th century only led to sector reorganization where new and agile players pushed out players who were unable to adopt to the changing economic environment. Overall, the sector was experiencing robust growth. By 2003, the industry catered to 303,000 employees in South Africa in 2003, and in 2004 the country exported fully assembled motor vehicles to 53 countries including many developed countries such as Japan, the United States, the United Kingdom, Australia and Germany. South Africa had grown in profile during these years with many of the manufacturers now making the country their main production base.

In 2004, South Africa was responsible for the manufacture of 84% of all vehicles produced in Africa, 7 million of which are on the South African roads. Also in 2004, the industry made a 6.7% contribution to the GDP of South Africa and 29% of all South African manufacturers made up the country’s automotive industry. 2004 also saw 110,000 vehicles exported from South Africa of which 100,000 were passenger vehicles.

In 2007 and the next years, the automotive industry grew again, producing over 500,000 vehicles annually reaching peak of 616,000 in 2015. While amounting to a small fraction and 22nd place of the global vehicle production of near 100 million, this made great contributions locally, being supremely first in Africa and making up 7.5% of the country’s GDP and about 10% of South Africa’s manufacturing exports. In 2010 the National Association of Automobile Manufacturers of South Africa (NAAMSA) reported that new vehicle sales exceeded their initial expectations of 7%, with large local growth allowing it to reach 24%, providing a big boost after the 2008/09 recession. This was evident in 2010 with 271,000 vehicles being exported, more than double what was seen in previous years.

An Important economic growth driver

After close to century of operations in Africa, South Africa’s automotive industry has grown to become the largest in the African continent and a key economic driver for the country. For decades, the automotive industry has been fundamental to South Africa’s economy. It contributed 6.8% (4.3% manufacturing and 2.5% retail) to GDP in 2018. Moreover, in 2018 the industry employed around 110,000 people (across vehicle and component manufacturing) producing over half a million vehicles according to Deloitte. In addition, the segment is a key foreign exchange earner as its products are exports to several other parts of the world, especially Europe. Automotive exports are valued at nearly R180 billion (US$12.5 billion) and comprised 14.3% of South African exports. Export sales recorded a second consecutive month of solid growth in January 2021 and at 22,771 units reflected an increase of 6,468 units, or 39,7%, compared to the 16,303 vehicles exported in January 2020.

However, during the year 2019, it witnessed a slight downfall in sales figures. During the year 2019, 355,378 units were sold as compared to 365,242 units in the year 2018, which is a fall of around 2.7%. Similarly, the commercial vehicle segment in the country witnessed a downfall of around 3.07% and registered sales of 181,233 units of commercial vehicle sales in the year 2019.  In 2020, according to the National Association of Automobile Manufacturers of South Africa, vehicle sales in the country declined by 29.1%, which is because of the pandemic COVID-19. New vehicle sales are expected to continue declining as constrained household finances (even with low-interest rates) and high unemployment depress buyer power. The used vehicle market is also increasingly becoming a threat as it offers cheaper vehicle options for consumers whose incomes are already constrained. Yet, with the aforementioned trends and developments, it is expected that the market studied will experience growth during the forecast period.

South Africa’s top-selling cars of 2020

With 31,263 units sold in 2020, the Toyota Hilux remains the dominant player in the local market, with a gap of more than 10 000 units to the 2nd-placed Volkswagen Polo Vivo (19 750 units). The presence of no fewer than 8 compact cars in the Top 20 makes it clear that affordability is key to sustained sales volumes. Whereas in previous years one would see the likes of the BMW 3 Series and Mercedes-Benz C-Class in the Top 20, that’s no longer the case.

The most expensive volume-selling vehicle is now South Africa’s top-selling SUV, the Toyota Fortuner (9,635 units). It’s also worth noting the presence of the Haval H2 compact family car in the Top 20. With 4,465 units sold, the Chinese model’s not far off the numbers posted by the Hyundai Venue and Volkswagen T-Cross.

Battle of the compact cars

Volkswagen South Africa has the compact car market buttoned up, with the Polo Vivo coming out tops (19,750 units), followed by the Polo compact hatch on 16,335 units. Furthermore, the 9th best-selling compact car was the Polo Sedan (4,282 units). If there is a threat to its dominance this year, it’s likely to come from Toyota’s rising Star(let), which racked up 3,352 sales in the 4 months that it’s been available on the new-vehicle market. With 361 units moved in the month-and-a-half that it’s been in local showrooms, Toyota’s smaller Agya budget car has not quite set off fireworks yet but watch this space. 

Two old favourites that have fallen off the chart are the Ford Fiesta (1 095) and Honda Jazz (458). And just compare the Baleno’s total of 581 with that of the Toyota Starlet – it’s a virtually identical product to the Suzuki, which has been on the market for several years now. That must be a bitter pill to swallow for Suzuki.

A Benz Velo

Government role in industry development

It’s safe to say that South Africa’s automotive would not have grown to the behemoth that it is today with robust support from the government.  Regulations for local content requirements first appeared in the 1960s and were quite strict and led to a limited number of cars being available to South African motorists. Beginning in the late 1960s, engines had to be built locally for the car to be considered a local product. The South African government has however changed strategy and has been updating its policies to provide necessary support to automotive manufacturers. In a Department of Trade and Industry Budget Vote Address delivered in July 2014, the then Trade Minister Rob Davies said that “given that automotive and component manufacturing comprises 30% of our industrial sector, with strong linkages to other manufacturing sub-sectors, the impact of such investment on our domestic economy is significant.” 

One of the most successful government policies for the sector was the Motor Industry Development Programme (MIDP)—was introduced in 1995. The program had the objective of increasing South Africa automotive industry’s international competitiveness and encouragement of growth in vehicle and component manufacturing. Reforms introduced under the program were a success leading to the sector exhibiting significant growth – it almost doubled in size since 1994. Its successor, the Automotive Production and Development Programme (APDP), came into effect in 2013 to simultaneously stimulate the expansion of local production to 1.2 million vehicles a year by 2020 and significantly increase the local content. The intention is to achieve this through investments, unlike the MIDP which relied mainly on exports.

According to the National Association of Automotive Component and Allied Manufacturers (NAACAM), the program has four pillars: Import Duty, Vehicle Assembly Allowance (VAA) BP, Production Incentive (PI) and Automotive Investment Scheme (AIS) The fourth pillar is not a new initiative but a revised incentive. The Automotive Investment Scheme (AIS) was first introduced in 2010/2011, and, since then, incentives in the public sector have amounted to R6.3 billion (US$436 million) and supported investments worth R23 billion (US$1.59 billion) by original equipment manufacturers in the automotive sector.

APDP has been succeeded by South Africa’s latest automotive policy, the South African Automotive Masterplan (SAAM) which was set for launching in January 2021 but was postpoened to July 2021. The new policy aims to rectify this by broadening and deepening local value chains and embedding industry into the domestic economy. Meaningful localisation, at its core, forms part of value beyond compliance as it supports innovation and productivity, and aligns economic performance with social progress, thus driving inclusive growth.

Apart from attracting investments in the sector, the government has also been keen in pushing quality standards in the industry. Since around 7% of South Africa’s economic output is attributed to the automotive industry, it is understandable that the government and companies within South Africa have been trying to encourage greater quality and greater productivity.

The government has been using stricter controls as a way to improve quality. This seems to be working as large improvements in quality have been achieved, and the industry as a whole is more investable to foreign countries. The goal is to achieve production quality equal to that of manufacturers with the highest standards in the automotive industry. With the quality of cars reaching comparable levels to those manufactured in western Europe, exports are increasing. Production has been down, but quality has gone up and is yielding more profit.

 Existing players expand as new entrants set base

Several major OEMs from all over the world are investing in the country, for instance, in April 2019, Ford announced that Ford Motor Company of Southern Africa (FMCSA) is expanding its vehicle export operations by adopting a multi-port strategy with the first shipment of 1,000 locally assembled Ford Rangers from Port Elizabeth to markets in Europe.

The announcement was followed by another in February 2021  where Ford revealed that it will invest US$ 20.13 billion together with its supplier in South Africa to produce new Ford rangers and light trucks at Ford’s assembly plant in Silverton, Pretoria. US$ 686 million of the investment will provide a major upgrade to Silverton’s assembly plant, increasing the plant’s installed capacity from approximately 168,000 units to 200,000 units annually, driving significant improvements in production efficiency and vehicle quality. US$365 million of the  investment will be channelled to tools at major supply plant while an investment of US$296 million by 12 auto parts suppliers will be dedicated to expand capacity for manufacturing parts for new Rangers and Volkswagen Amarok products and launching operations adjacent to the Silverton plant.

Nissan has also announced that it is investing a ZAR 3 billion (US$206.3 million) in its facility in Rosslyn, Pretoria, to produce the next generation Nissan Navara pickup. Following greater investments by its peers Ford and Nissan, Toyota Motor Corporation announced in May 2020, the launch of the Corolla sedan in South Africa. This car comes with 1.8L and 2L engine with a CVT transmission.  Toyota South Africa Motors (TSAM) has also announced that they will invest approximately R3 billion (US$206.3 million) in South Africa to produce the new Corolla Cross Sport Utility Vehicle (SUV) at Prospecton’s manufacturing plant in Durban.  Volkswagen AG started local production of Gold GTI, T-Cross, T-Roc, and Amarok in South Africa.

With a good run in 2020, the National Association of Automobile Manufacturers of South Africa (Naamsa) anticipates another very good year of capital investment commitment by South Africa’s Original Equipment Manufacturers (OEM) in 2021. Naamsa CEO Mikel Mabasa said that many car OEMs, including Chinese heavy-duty commercial vehicle manufacturers, expect to make sure they are considering a capital investment project in South Africa this year.

Mabasa’s comments indicated that total capital spending by major automakers reached a record high of R9 billion (US$619 million) in 2020 after Naamsa released a quarterly review of the business situation in the new car manufacturing industry.  “The ongoing high level of capital investment is due to investment projects by manufacturers in automotive production and development programs. [APDP], usually spread over multiple years and are associated with higher levels of production for the export market, “he said.

Mabasa speculated on how 2021 will evolve in terms of capital investment by automotive OEMs, and how this year’s total industry investment will be compared to the record investment year of 2020.

Also, at a national speech debate in parliament, Minister of International Relations and Cooperation Dr. Naledi Pandor said that Isuzu, Tata Motors, Mahindra Motherson Sumi and Toyota have expanded their investment in South Africa.

“The fact that South Africa is still in recession and all these automakers are forced to make very serious investments in South Africa confirms a new investment climate from the auto industry this year,” he said.

Growth Projections

After a disastrous 2020 that saw South African vehicle sales plummet by 29 percent to just 380,206 units as the Covid-19 pandemic ravaged the economy, the industry is poised for growth in 2021 and 2022.

In its latest quarterly review of the South African motor industry, Naamsa has predicted that the overall new vehicle market will grow by 15 percent to 438,000 units in 2021, and then by another 5.7 percent to total 463,000 units in 2022. Although this is encouraging, it will however take years for the market to recover to pre-Covid levels when vehicle sales averaged around 540 000 units a year.

Bakkies and other light commercial vehicles will be leading the comeback charge, with LCV sales projected to grow by 16.3 percent in 2021 and 6.2 percent in 2021. Passenger car sales, on the other hand, are expected to grow by 15.5 percent this year and 5.2 percent next year.

According to Naamsa, motor company bosses generally agree that the automotive industry is poised for much improved business conditions over the next six months.

“CEOs across all vehicle manufacturing segments as well as the CEOs of the independent vehicle importers are by and large positive about a robust recovery in the domestic as well as global new vehicle market over the next six months in line with the economic rebound in South Africa and international markets, from the very low base in 2020,” Naamsa said.

“Considering the close correlation between new vehicle sales and the country’s GDP growth rate projected to be more than 3% in 2021, a healthy rebound in the new vehicle market performance is anticipated, from the very low base in 2020,” the industry body added.

This feature appeared in the December 2021 edition of CEO Business Africa magazine. You can access the full digital magazine HERE

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