Quarter of motor industry at risk
More than a quarter of small and medium businesses in the SA motor industry could close if the Covid-19 lockdown is extended beyond the end of April, and cost up to 24,000 industry jobs, says Mike Mabasa, CEO of the National Association of Automobile Manufacturers of SA.
More than a quarter of small and medium enterprises (SMEs) in the SA motor industry could close if the lockdown is extended beyond the end of April at a cost up to 24,000 industry jobs, says Mike Mabasa, CEO of the National Association of Automobile Manufacturers of SA.
Many of the casualties could be small suppliers of sub-components and services, because they lack the scale and cash flow to sustain them through a prolonged period of inactivity.
Mabasa said average cash reserves across the industry were sufficient for only one month and many companies were likely to limit employee payments at the end of April.
He said 21%-30% of SMEs “are likely to close” because of the effects of the pandemic.
If the lockdown continued to early May, he said 11%-20% of the pre-crisis workforce would lose their jobs. If it went to end-May, this would rise to 21%-30%. Vehicle and components manufacturers employ about 120,000 people.
Renai Moothilal, director of the National Association of Automotive Component and Allied Manufacturers (Naacam), said the projected volume of automotive product demand was so heavily reduced that it would be difficult to see how employment numbers in the whole value chain could be maintained at pre-crisis levels.
Domestic new-vehicle sales in March fell 29.7% from a year earlier, and exports 21.5%.
April’s declines will be much more dramatic, with no clarity on how long it will take markets to recover.
Mabasa’s forecast is included in his responses to an economywide government survey of the SA manufacturing industry. His views relate specifically to the motor industry, which accounts for 29.7% of SA manufacturing output. Including after-sales and retail, the sector contributes 6.8% to national GDP.
A separate Naacam survey paints a similarly stark picture.
While Moothilal said that smaller suppliers were most at risk, big companies were also under threat.
He is particularly concerned that export competitors in other countries with less stringent lockdown conditions will substitute their goods for non-delivered SA exports.
Mabasa expects to see no closures among vehicle manufacturers, even if the lockdown continues until the end of May or beyond. There is no such security in the components sector.
Companies supplying parts direct to vehicle assembly lines are known as tier-one suppliers.
Most are subsidiaries of multinationals and so have the financial backing to survive temporary lockdowns. But even they were not immune, said Moothilal, “I won’t be surprised if we see some downscaling or even closure at this level.”
Nearly two-thirds of vehicles built in SA are exported, so the global collapse in vehicle sales will slash demand for both vehicles and their components. Many suppliers also export to overseas assembly plants.
“Where local tier ones have invested and employed both capital and labour based on expected volumes, if these don’t materialise, there is no reason why we can’t see tier-one casualties,” Moothilal said.
SA’s thriving catalytic converter industry, which exports millions of units every year, is particularly dependent on overseas demand.
The greater risk, though is at tiers two, three and below that supply the sub-parts and services required to produce major components. This is very worrying for government, which has identified these tiers as a priority in the long-term development of the motor industry.
Nearly all these companies are SA-owned and overwhelmingly white. Under its SA automotive master plan, the government wants at least 20% of tier two and three companies to be black-owned by 2035. Vehicle manufacturers have pledged an initial R6bn to a transformation fund. Many existing small companies, however, may not survive the economic effects of the Covid-19 pandemic and be able to take advantage of the fund.
The master plan, which comes into effect in 2021, aims to double industry employment in vehicle and components manufacture to 240,000, grow annual vehicle production from about 600,000 to 1.4-million and increase local content in SAmade vehicles by 50%.
Given the short-term and possible long-term effects of the Covid-19 pandemic, all these targets will become even more difficult to achieve.
Moothilal said the components industry must start preparing now for a post-Covid manufacturing environment.
“The sector needs to start mapping out how manufacturing can return under riskadjusted conditions, knowing that infection risk does not stop on April 30,” he said.
“It may be useful to have a subset of component companies starting to manufacture under controlled conditions in the weeks before lockdown ends. This can be used to give guidelines or a blueprint to those who will return to a changed environment in May.”