Parts manufacturers claim auto strikes aren’t helping
THE PAST WEEK saw two encouraging sets of annual results from South Africa’s Metair Investments and Control Instruments. Both deal in the production of vehicle parts and both have made admirable leaps in recovery following the severe recession in the world’s automotive industry. The bad news is that the industry in which they operate is fast losing ground when it comes to global competitiveness. A quick walk through the exhibition stands at the recent AutoMechanika trade show in Johannesburg is evidence of how much market share Asian auto parts makers are gaining.
The simple solution is obvious: increase efficiency. The application to reality is almost impossible, due to the delicate position held by those employers in SA’s highly politicised labour markets.
Control Instruments benefited from outstanding growth in the aftermarket segment, which provides replacement parts for vehicles. It’s booming due to SA’s ageing fleet. Earnings before interest, tax and depreciation (EBITDA) almost doubled to R53,2m in the year to December 2010. However, Control Instruments’ Pi Shurlock division, which supplies parts to vehicle manufacturers Ford, Volkswagen and BMW in SA and also exports to Europe and the United States, isn’t performing as strongly. EBITDA dropped 48% to R7,9m over the same period.
The story is similar at Metair. The group’s aftermarket segment reported a 20% increase in revenue for its past financial year. The division supplying vehicle manufacturers experienced a 12% increase in revenue for the same period, although it should be noted Metair’s management has worked hard to spring clean the business. Steps taken include closing loss-making operations, consolidating others and focusing on cost and efficiency management.
The biggest problem the industry currently faces is the rapid decline in competitiveness in the global market place. The main problem is the high cost of labour in SA, with a strong US dollar/rand exchange rate and escalating electricity prices aggravating an already fragile situation.
Finweek spoke to Herbert Diess, BMW Group board member in SA responsible for buying, who expressed concern about the local component industry’s deteriorating cost-effectiveness, saying parts from Eastern Europe and Asia are more appealing due to their lower price and comparable quality. Another big issue is the manner in which SA’s Government manages strikes. “The auto industry strikes in SA last year actually interrupted production at our German plant,” says Diess. “That isn’t acceptable.”
Control Instruments MD Richard Friedman says the South African industry is being measured on its reliability – and “labour isn’t helping”. Friedman says SA’s automotive component market’s exports have also declined due to losses in competitiveness.
Roger Pitot, executive director at the National Association of Automotive Component and Allied Manufacturers, agrees cost levels in SA are “unfortunate” and beyond the industry’s control. “It’s irresponsible of unions to ask for increases above inflation,” says Pitot. “What unions don’t realise is that as wages increase there’s a strong incentive to automate – and that’s not good for the country in terms of employment.”
Pitot says component manufacturers are taking measures to increase their competitiveness but, unfortunately, that includes laying off employees. Other manufacturers are diversifying their product offerings into non-automotive sectors.
For example, Metair is diversifying into the non-automotive sector, although that still makes up a tiny part of the group revenue – 9,4% in 2010.
SA’s Automotive Production and Development Plan (APDP), which comes into play in the next two years, was expected to make some inroads towards correcting the situation, but industry players have begun expressing doubts about its success, in terms of the component industry, months before it’s even implemented due to the fact that it offers little incentives for parts manufacturers.
“Most of the incentives are aimed at the car makers – and they aren’t passing anything along to the parts manufacturers,” says Friedman.
Pitot says the problem with the APDP is that it was based on discussions with the industry held in 2007/2008 – before the financial crisis and subsequent recession in the automotive sector globally. “Since then, automotive makers worldwide have reviewed their supply chains and the situation has changed.” The APDP will replace SA’s current industrial programme, the Motor Industry Development Plan.