Go­ing spare

Parts man­u­fac­tur­ers claim auto strikes aren’t help­ing

Finweek English Edition - - INSIGHT - SVET­LANA DONEVA svet­lanad@fin­media24.com

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.

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