Although economists are less upbeat about emerging markets than they might have been in the recent past, global analysts are forecasting a rise in the proportion of cars produced in the Brics from 38% in 2015 to 45% in 2020, according to the Automotive Future Now Report 2016.
But a projected GDP growth rate of 1.5% and recent political and economic uncertainties may jeopardise South Africa’s position to share in that piece of the pie.
As the largest manufacturing sector in the country, accounting for 30.2% of manufacturing output, the automotive industry contributes 7.2% to GDP, according to the department of trade and industry, and supports hundreds of thousands of jobs.
Yet political and economic instability, a volatile currency and a history of labour disruption are endangering the country’s ability to attract capital.
These factors won’t make it any easier for car manufacturers to make decisions about continued investment into the country.
In 1995 capital investment by original equipment manufacturers (OEMs) amounted to a mere R847m. But aided by government incentives via its Automotive Production Development Programme (APDP) and official goal to produce 1.2m vehicles annually by 2020, investment in the last five years from the automotive sector amounted to R26.4bn, reports the National Association of Automobile Manufacturers of SA (Naamsa).
This substantial capital expenditure, predominantly by the seven major vehicle manufacturers, includes R5bn from Mercedes-Benz, R3.6bn from Ford and R1bn from General Motors.
A valuable industry
For the BMW Group, which recently invested a massive R6bn for production of the BMW X3 at its Rosslyn plant north of Pretoria, stability is key.
“We need to have stable production conditions for the X3. And political stability would also mean the rand would stabilise. That would help us, help the local economy and local suppliers,” says Dr Klaus Draeger, member of the board of management BMW AG: Purchasing and Supplier Network.
BMW’s Rosslyn plant generates more than 1% of the country’s total exports. Between 1975 and 2015, more than 1m vehicles have rolled off this production line. The German carmaker also supports more than 42 000 local jobs.
SA exports over 50% of its vehicle production. And with new vehicle sales continuing to dip, there is an increasing dependency on vehicle exports to support local manufacturing infrastructure and investment.
In 1995 vehicle exports totalled a mere 15 764. Today the figure is 333 802, projected to rise to 376 000 for 2016, reports Naamsa.
According to the department of trade and industry, in 1995, the value of exports for vehicles and components amounted to only R4.2bn. But by 2014 that figure had climbed to R115.7bn, accounting for 12.7% of SA’s total export value.
A leading exporter of premium vehicles, BMW SA’s production for export increased by over 70% in 2014 with 87.5% of the 3 Series vehicles built at Rosslyn destined for export.
Last year, BMW exports totalled 80% of local production – a number that equates to around 63 000 units.
Export volumes of the X3 will be similar to that of the 3 Series, Dr Ian Robertson, member of the board of management BMW AG: Sales and Marketing, tells finweek, but because the price point of the X3 is higher than that of the 3 Series, the value contribution will rise by around €3?000 to €4 000 per unit.
A long-term view
Predictably, a stable environment and stability within the automotive labour force are factors that BMW and other major players in the local vehicle industry would be keen to see bedded down.
The industry was rocked by prolonged strikes during 2013 and 2014, curbing export earnings and negatively impacting the industry’s trade deficit.
Any OEM considering the whole package of investment takes a long-term view, thus constancy over that long term is paramount.
“We always have to see the whole cycle of 10 years,” Draeger tells finweek. “R&D [research and development] of three years and production of seven years.”
And while it is that latter full seven-year phase that forms the payback for the capital investment, three years before the roll-out a decision for the successor of production is taken, says Draeger.
It is this critical future production decision by car manufacturers that could perhaps scupper ongoing vehicle production in SA if the stability that OEMs like BMW are keen to see realised does not come about.
Australia is a prime example of how disinvestment by car manufacturers leads to the demise of an automotive industry. Given the contribution by the local car industry to the economy, this is surely something that the country’s leaders would be keen to avoid.
Investment is, after all, stimulated by healthy and stable local conditions and potential for sustainable growth and gain.
Glenda Williams was a guest of BMW SA at the 86th Geneva International Motor Show.
This article originally appeared in the 24 March 2016 edition of finweek. Buy and download the magazine here.