Will SA meet chal­lenge of shifts in global car mar­ket?

The Star Early Edition - - OPINION & ANALYSIS - Justin Barnes is the chair­per­son of B&M An­a­lysts, justin@bm­an­a­lysts.com. Anthony Black is Pro­fes­sor of Eco­nom­ics at the Univer­sity of Cape Town, Anthony.black@uct.ac.za Justin Barnes and Anthony Black

THE AUTOMOTIVE global value chain (GVC) is un­der­go­ing pro­found change that could fun­da­men­tally dis­rupt the pro­duc­tion of and mar­ket for ve­hi­cles. A num­ber of in­ter­na­tional ex­perts have com­mented on these changes, at­tempt­ing to un­der­stand their con­se­quences for the multi­na­tional or­gan­i­sa­tions and economies that dom­i­nate global pro­duc­tion and con­sump­tion.

How are these changes likely to play out in the more pe­riph­eral parts of the automotive GVC, such as South Africa, over the next two decades?

The South African automotive in­dus­try, which pro­duced 600 000 ve­hi­cles last year, is a mar­ginal player, con­tribut­ing 0.65 per­cent of global ve­hi­cle out­put. Its con­tri­bu­tion has hardly in­creased over the past decade.

Ve­hi­cle pro­duc­tion in South Africa is highly frag­mented, mak­ing it dif­fi­cult for the automotive com­po­nents in­dus­try to se­cure the economies of scale re­quired to com­pete, re­sult­ing in the lo­cal con­tent level of South African ve­hi­cles de­clin­ing to 38 per­cent in 2015, from 47 per­cent in 2012.

De­spite the chal­lenges it faces, the automotive in­dus­try re­mains a core fo­cus of the gov­ern­ment’s in­dus­tri­al­i­sa­tion strat­egy.

It is one of the few sec­tors that has grown over the past decade, and it con­trib­utes mean­ing­fully to to­tal man­u­fac­tur­ing out­put.

The sec­tor’s com­par­a­tive re­silience, estab­lished foun­da­tions, con­tri­bu­tion to di­rect em­ploy­ment (about 112 000 jobs) and ex­ports, and recog­nised tech­nol­ogy mul­ti­pli­ers have po­si­tioned it as a core, strate­gic do­mes­tic in­dus­trial sec­tor.

It is this po­si­tion that has en­sured the gov­ern­ment’s tar­geted sup­port – ini­tially in the form of the Mo­tor In­dus­try De­vel­op­ment Pro­gramme (MIDP) from 1995, fol­lowed by the Automotive Pro­duc­tion De­vel­op­ment Pro­gramme (APDP), in­tro­duced in 2013.

De­spite sub­stan­tial gov­ern­ment sup­port, nei­ther the MIDP nor the APDP has sub­stan­tially shifted the in­dus­try’s po­si­tion as a sec­ond-tier global player.

An im­por­tant de­fi­ciency in re­spect of the in­dus­try’s po­si­tion re­lates to its poor re­cent per­for­mance in the do­mes­tic mar­ket, the ex­tent of im­ports into the do­mes­tic mar­ket and de­te­ri­o­rat­ing con­di­tions in the re­gional mar­ket.

Do­mes­tic ve­hi­cle sales have con­tracted 23 per­cent since the record achieved in 2006, with im­ports com­pris­ing 56 per­cent of the mar­ket last year. The lo­cal mar­ket is far from hav­ing suf­fi­cient de­mand to at­tract lo­cal as­sem­bly ex­clu­sively to sup­ply the do­mes­tic mar­ket.

A mod­ern as­sem­bly plant re­quires about 80 000 units of a plat­form to jus­tify pro­duc­tion, whereas the top-sell­ing model in South Africa in 2015 (VW Polo/Vivo) achieved sales of 54 142 units.

There is also limited de­mand for South African ve­hi­cles in sub-Sa­ha­ran Africa. The short-term prog­no­sis for the re­gional mar­ket is muted, be­cause con­sumers pre­fer to buy cheap pre-owned im­ported ve­hi­cles.

The lo­cal in­dus­try is there­fore in a dif­fi­cult strate­gic po­si­tion, with pro­duc­tion tied to ex­ports to dis­tant de­vel­oped economies, such as the EU and the US, which to­gether ac­count for 63 per­cent of to­tal automotive ex­ports. These ex­ports are sup­ported by the African Growth and Op­por­tu­nity Act, the EU-South African Eco­nomic Part­ner­ship Agree­ment and in­cen­tives such as the APDP that com­pen­sate for in­dus­try cost dis­ad­van­tages rel­a­tive to com­peti­tors.

South African pro­duc­tion is there­fore driven less by lo­cal or re­gional mar­ket fac­tors, which un­der­pin the com­pet­i­tive ad­van­tage se­cured by al­most all the coun­try’s more suc­cess­ful com­peti­tor economies.

Not­with­stand­ing the com­pet­i­tive pres­sures, South Africa’s base ve­hi­cle own­er­ship pro­file sug­gests ma­jor growth op­por­tu­ni­ties to 2035, pro­vided there is eco­nomic growth and the in­dus­try’s base com­pet­i­tive­ness im­proves.

Re­search by the writ­ers of this ar­ti­cle re­veals that the lo­cal in­dus­try has the po­ten­tial to in­crease its pro­duc­tion to 1 per­cent of global out­put (po­ten­tially 1.4 mil­lion units of pro­duc­tion an­nu­ally by 2035) and in­crease its lo­cal con­tent in do­mes­tic ve­hi­cles to 60 per­cent. This would dou­ble to­tal em­ploy­ment in the automotive value chain to 224 000 jobs, even af­ter fac­tor­ing in ma­jor pro­duc­tiv­ity im­prove­ments, and sub­stan­tially in­crease the in­dus­try’s con­tri­bu­tion to the econ­omy.

The lo­cal in­dus­try has the po­ten­tial to in­crease its pro­duc­tion to 1 per­cent of global out­put and raise its lo­cal con­tent in do­mes­tic ve­hi­cles to 60 per­cent.

Eight key changes

But what of the GVC driv­ers? The chal­lenges fac­ing the in­dus­try and the de­vel­op­ment of ap­pro­pri­ate gov­ern­ment pol­icy are com­pounded by the emer­gence of ma­jor tech­no­log­i­cal and so­cio-eco­nomic changes that are set to trans­form the global automotive in­dus­try. We have iden­ti­fied eight:

Fuel econ­omy re­quire­ments in de­vel­oped coun­tries and the as­so­ci­ated move­ment to smaller-dis­place­ment in­ter­nal com­bus­tion en­gines, which are in­creas­ingly likely to per­me­ate the mar­kets of de­vel­oped and de­vel­op­ing economies. This is al­ready hap­pen­ing in South Africa and could in­crease dra­mat­i­cally as highly fuel ef­fi­cient, sub-1 000cc en­gine tech­nolo­gies de­velop. Our abil­ity to sell ve­hi­cles with larger en­gines to de­vel­oped economies such as the EU may be threat­ened.

The rapid evo­lu­tion of al­ter­na­tive en­gine tech­nolo­gies, such as bat­tery-elec­tric ve­hi­cles and hy­dro­gen-fuel-cell-based ve­hi­cles, will likely re­sult in these new tech­nolo­gies sub­stan­tially in­creas­ing their mar­ket share over the next cy­cle of model changes, which take place every six to eight years. How will the EU and US mar­kets look in 15 years? How rapidly will de­vel­op­ing-econ­omy mar­kets con­vert to al­ter­na­tive en­ergy ve­hi­cles? How will the South African mar­ket be di­rectly af­fected?

Rapidly ad­vanc­ing green man­u­fac­tur­ing re­quire­ments shap­ing the ve­hi­cles and com­po­nents that are pro­duced, as well as the ma­te­ri­als and man­u­fac­tur­ing pro­cesses that are used. Will these re­quire­ments open or close op­por­tu­ni­ties in South Africa? What green pro­duc­tion ca­pa­bil­i­ties will South Africa man­u­fac­tur­ers have to master to en­sure con­tin­ued sup­ply into the “green­ing” mar­kets of de­vel­oped economies?

The de­vel­op­ment of new ma­te­ri­als that have the po­ten­tial to dis­place stan­dard automotive ma­te­ri­als, such as steel and plas­tics. As ve­hi­cles be­come lighter, and func­tion­ally more ad­vanced, what new ma­te­ri­als will dom­i­nate? What role will nano-tech­nol­ogy play in re­spect of the automotive ma­te­ri­als used?

In­fo­tain­ment and ve­hi­cle con­nec­tiv­ity de­vel­op­ments that are fun­da­men­tally al­ter­ing the na­ture of the “driv­ing cabin” and ve­hi­cle func­tion­al­ity. How will this change the na­ture and cost pro­file of ve­hi­cle pro­duc­tion?

Pas­sive and ac­tive ve­hi­cle safety ad­vances that are shift­ing both the tech­nol­ogy pro­file and the cost pro­file of ve­hi­cles. As ad­di­tional safety fea­tures are de­vel­oped, what are the con­se­quences for ve­hi­cle pro­duc­tion? How will South Africa man­u­fac­tur­ers ad­just to these emerg­ing re­quire­ments, par­tic­u­larly if the safety re­quire­ments in the EU and US di­verge dra­mat­i­cally from those in South Africa (and other de­vel­op­ing economies)?

The dis­rup­tive po­ten­tial of au­tonomous ve­hi­cles and the con­se­quences for driv­ing den­si­ties within the ex­ist­ing road in­fra­struc­ture. How will South African man­u­fac­tur­ing be im­pacted by the emer­gence of au­tonomous ve­hi­cles? How will pro­duc­tion be im­pacted? How will ve­hi­cle use change?

The emer­gence of mo­bil­ity ser­vices and the po­ten­tial dis­place­ment of pri­vate ve­hi­cle own­er­ship. What hap­pens to lo­cal pro­duc­tion if ma­jor de­vel­oped economies evolve into mass mo­bil­ity mar­kets ser­viced by au­tonomous ve­hi­cles con­trolled by mo­bil­ity ser­vice providers, as op­posed to pri­vate ve­hi­cle own­er­ship? What hap­pens if the mar­kets ser­viced by South African pro­duc­tion evolve in this di­rec­tion?

These eight emerg­ing GVC driv­ers could fun­da­men­tally re­shape the South Africa automotive in­dus­try, but many of them do not yet fea­ture in the do­mes­tic or re­gional mar­ket.

We are ei­ther in the very early stages of ma­jor struc­tural change within the automotive in­dus­try or the po­ten­tial im­pact of the GVC driv­ers we have un­packed are over­stated. We think the for­mer is more likely, al­though the ex­act na­ture of the changes to which these GVC driv­ers will give rise is un­clear.

More re­search is re­quired to un­der­stand what the fu­ture holds.


A Volk­swa­gen pro­duc­tion line in Port El­iz­a­beth. The automotive global value chain is un­der­go­ing pro­found change that could fun­da­men­tally dis­rupt the global pro­duc­tion of and the mar­ket for ve­hi­cles.

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