Small wonder
Assembly newcomers don’t have to spend big to enter the SA market
Could SA attract more foreign motor companies to invest in SA by encouraging small-scale startups, rather than full-scale manufacturing plants?
Automotive Investment Holdings (AIH), an independent SA consultancy, already runs low-volume assembly plants for three Asian brands, and vice-chairman Johan Cloete believes there is potential for more companies to dip their toes into SA without crippling financial consequences.
AIH is advising Chinese manufacturer BAIC which, with the local Industrial Development Corp as a 35% partner, has said it plans to invest R11bn in an Eastern Cape assembly plant with annual capacity to build 100,000 passenger vehicles and bakkies.
At the other end of the scale, Indian manufacturer Mahindra this year opened a Durban plant with initial capacity for 2,500 bakkies but with the potential to grow to 4,000. Total investment in the plant, which is equipped and operated by AIH, is R10m, of which Mahindra’s share is R1m.
The difference between the two operations is that BAIC’S will eventually provide full manufacture, with its own paintshop and bodyshop, as well as tooling and local components suppliers. Mahindra’s is a reassembly operation. Vehicles arrive from India in kit form and are bolted together in Durban. Instead of thousands of parts, there are about 300. Instead of thousands of employees, there are 26.
AIH runs similar operations in Gauteng, where two plants build commercial vehicles for BAIC affiliate BAW and Korean brand Hyundai.
They may be small but Cloete says: “This is how most companies start. First you import, then, when you have a brand presence and sales volumes grow, you look at local assembly.” First step is usually kit reassembly, also known as disassembled knocked-down manufacture, or DKD. Then comes semi knocked down (SKD), which is also kit-based but may include some local parts. And then there is completely knocked down (CKD), which is full manufacture.
Mahindra is already talking of inserting Sa-made oil, batteries, tyres and wheel rims — what plant operations director Henry Grimbeek calls “low-hanging fruit” — into its vehicles. All can easily replace the imported versions. It reckons it can take local content, measured as a percentage of the total cost of manufacture, up to 40%. That’s very optimistic, given that some local mass manufacturers can’t get there. Grimbeek says a more realistic target is 10% by the end of 2019.
Arvind Mathew, head of international operations for the global Mahindra & Mahindra group, says the company’s long-term aim in SA is to become a full-scale manufacturer, supplying the whole of Subsaharan Africa. But would he want to invest in a full-scale plant like BAIC’S?
Mathew would prefer a shared plant, building vehicles for several manufacturers. The East London industrial development zone (IDZ) has been trying for years to get one going. Austria-based contract manufacturer Magna Steyr was called in by AIH to advise but the project remains on hold. Peugeot and Hyundai are among companies that have expressed interest but so far there have been no takers. Mathew says Mahindra would be reluctant to move out of Durban. A Scandinavian contract manufacturer, Valmet, has also been named as a potential partner.
Cloete says in order to access current SA investment incentives, a shared plant would need to build at least 50,000 vehicles annually — a minimum threshold that could increase under future policy.
He wonders if policy should make allowances for newcomers. Government’s stated ambition is for the motor industry to build at least 1.2-million vehicles annually by 2035 — twice its current number and well beyond full industry capacity of about 800,000.
“Do we get the extra numbers by hoping for four or five more BAICS or by encouraging others to start slowly and grow?” he asks.
He estimates a basic shared plant — with a common paintshop but individual bodyshops and assembly lines for each brand — would cost about R3.5bn. Government would pay that on behalf of the IDZ, which would lease facilities and services to participating motor companies.
AIH, which helped BMW SA with assembly logistics planning for its new X3 and is supplying a similar service to Mercedes-benz SA for its next C-class, also advises on possible reassembly sites outside SA. Among them is a proposed venture in Walvis Bay. The Namibian government argues that the port is more convenient than Port Elizabeth or Durban for container ships bringing vehicle parts or kits from Europe and North America, so why not reassemble there and transport completed vehicles to customers in SA and other countries in the regional customs union? French manufacturer Peugeot has shown interest but nothing more. Cloete says Walvis Bay’s distance from major markets like Gauteng, Cape Town and Durban could be a disincentive.