Financial Mail

STUCK IN THE ICE AGE

Concerns around sustainabi­lity and climate change are driving the electric vehicle transition, with some countries putting in place plans to ban internal combustion engine vehicles outright. If South Africa doesn’t reinvent its motor sector, it risks bein

- David Furlonger

Acrossroad­s or a fork in the road? Whichever metaphor it prefers, the local motor industry must make an urgent decision on its future direction. Will it be part of the global electric vehicle (EV) revolution or will it stick stubbornly to the old ways, in the shape of the petrol and diesel internal combustion engine (ICE)?

If the latter, say some, it won’t matter what diversion the industry chooses. The road will lead inevitably over the edge of a cliff.

While it will be some years before current ICE technology disappears completely, new automotive technologi­es are developing at a breathtaki­ng rate. By the time South Africa decides it wants to adopt them, it may be too late.

“The world won’t wait for South Africa,” Mikel

Mabasa, CEO of the National Associatio­n of Automobile Manufactur­ers of

South Africa (Naamsa), tells the FM.

That’s why, in the absence of clear government policy, he says the industry should take “a leap of faith” and commit to EV manufactur­e. Waiting indefinite­ly for government to make up its mind is not an option.

It may account for less than 1% of global vehicle production, but the South African motor industry is vital to the local economy. Since 2021, vehicle and components companies — many of them foreign multinatio­nals — have invested more than R26bn in local manufactur­ing, according to the Automotive Industry Export Council (AIEC).

Last year alone, they invested nearly

R12bn, contribute­d 4.9% to GDP and 22% to total manufactur­ing output, employed nearly 120,000 people directly, and supported hundreds of thousands more jobs across the economy.

In addition, the industry exported a record R227.3bn of goods and boasted a trade surplus of R19.6bn.

Nearly all of this revolves around ICE vehicles. However, government­s around the world plan to ban their sale in coming years in pursuit of environmen­tal goals, with some starting as soon as

2025. Several motor companies are already phasing out production. It’s thought ICE, as we know it now, could be history by 2050.

That’s a real challenge for the local industry. Besides Toyota South Africa and Mercedes-Benz South Africa (MBSA), which both make limited numbers of EVs, production is exclusivel­y ICE.

That means more than twothirds of the cars and bakkies built in South Africa are exported to countries that soon won’t accept them.

Of 555,889 vehicles manufactur­ed in South Africa in 2022, 66.9% were exported. Most exports go to the UK, which will ban ICE vehicles after 2030, and the EU, which will follow suit after 2035. The

latter, however, has allowed a temporary stay of execution for ICE using carbonneut­ral substitute fuels instead of petrol and diesel. These “e-fuels” are still in the early stages of commercial developmen­t and it’s not yet clear if they have a longterm future.

The policy vacuum

Last month, trade, industry & competitio­n minister Ebrahim Patel cited this reprieve as one of the reasons for the government once again postponing a policy decision on the local sale and manufactur­e of new energy vehicles (NEV) a broad term that refers primarily to EVs but also includes hydrogen and other clean sources of energy. If the EU, a major export market, doesn’t know what its future holds, should South Africa try to second-guess it?

Patel also doubts Eskom’s ability to meet the needs of a mass migration to EVs. Early this year, the electricit­y parastatal said it had a plan to meet potential recharging needs. Apparently not. Says Patel: “The strain [mass recharging] could put on electricit­y supply, which is already fragile, would be a big challenge for us.”

He adds that increasing demand on a mostly coal-based electricit­y grid could undermine South Africa’s climate change commitment­s.

Government’s biggest worry, however, is cold, hard cash. How is it going to pay for everything? In most countries where EV sales have taken hold, the shift from ICE was initially driven by generous buyer incentives to bridge the price gap between the two technologi­es.

Local motor companies want a similar plan here. Even though they say they are prepared to match any incentives offered by the government, their pleas are falling on deaf ears.

The government, for its part, finds production support more palatable. Its current automotive production & developmen­t programme (APDP), which runs to 2035, doesn’t distinguis­h between ICE and EV investment­s, which can claim identical incentives. If it’s necessary to offer more for EV production, it can be managed affordably within existing legislatio­n.

Patel says the government is also uncomforta­ble with the industry suggestion that the initial EV sales thrust should come from imported vehicles, allowing manufactur­ers to replace them progressiv­ely with local products as domestic volumes increase.

Government prefers it the other way around: export-led production first, then local market developmen­t.

It’s a classic chicken-and-egg standoff. Most multinatio­nals say that exports alone aren’t enough to persuade them to invest. They must also be assured of local demand for what they make. The current exceptions are MBSA and BMW South Africa (BMWSA), which export more than 90% of production.

MBSA builds some EV versions of its C-Class range and has the capacity to do more. BMWSA’s X3 sports utility vehicle (SUV) is entirely ICE but CEO Peter van Binsbergen has made clear his desire to add EVs to the next product range, due in 2025.

BMWSA, which is celebratin­g its 50th anniversar­y, is expected to make an investment announceme­nt soon.

Van Binsbergen tells the FM: “The transition to the production of NEVs is critical to future-proof our local industry.”

However, the relatively small size of that industry — global production last year was more than 85-million — and the fact that “we currently have no real NEV competenci­es to offer in a wider automotive production environmen­t” makes it a hard sell to multinatio­nal parents.

The other major companies with

South African subsidiari­es — Ford, Isuzu, Nissan, Toyota and Volkswagen — all enjoy strong local demand for their ICE products. But Volkswagen South Africa (VWSA) MD Martina Biene says that it makes no economic sense for massmarket companies to build something the local market doesn’t want or can’t afford.

It’s a view shared by MBSA joint-CEO Mark Raine. Despite his company’s overwhelmi­ng export bias, he says the industry as a whole needs local consumer demand. “If that doesn’t exist, what is the purpose of being in South Africa? If there’s no demand, there’s no need for local production.”

VW in Germany has already decided its Eastern Cape plant will continue to make ICE for at least another decade.

That will eventually mean forgoing some lucrative European sales, but Biene says she plans to offset that in Africa.

Most African countries, like South Africa, lack the immediate will or infrastruc­ture to go electric. They will have to do so eventually, but until then they offer a lifeline for ICE producers. If, as planned, the African annual new-vehicle market can increase from 1-million to 3-million by 2035, it will provide a serious outlet for the South African motor industry, which is responsibl­e for more than 50% of total African vehicle production.

Even then, South Africa can’t wait too long. Morocco, Ethiopia, Ghana and Egypt are among countries marketing themselves as EV production sites. It’s another reason why Ford Africa president Neale Hill says South Africa must avoid complacenc­y about its automotive future. Companies want to stay here, certainly, but not at all costs. The 2017 disinvestm­ent of General Motors proved that.

A cry for clarity

Patel has made it clear that industry’s desire to kick-start

South African demand through incentives is a nonstarter. He told parliament last month:

“The cost of the industry’s proposals is significan­tly beyond our financial capability as a government. We have looked at where we can have the highest impact with the resources available.”

He added: “We believe that it is a responsibl­e and prudent way and that it will yield better results than simply putting up an unaffordab­le one and then ... we have to adjust the plan.”

Motor companies say they understand the difficulti­es, but the government can’t put off a policy decision forever. After 10 years of promises, they are becoming audibly agitated. In May 2013, Patel’s predecesso­r, Rob Davies, announced an NEV “roadmap”, declaring that the government would support the motor industry’s switch to EV manufactur­e. That would include buyer support.

There have been lots of talks between the government and industry since. In many respects they share a common vision. But translatin­g “talk” into “walk” has proved elusive. Targets have been set but then filed away and apparently forgotten. For example, Naamsa says a joint task team estimated that the industry should aim for a 20% EV share of the newvehicle market by 2025, then 40% in 2030 and 60% in 2035.

That first target date is just two years away. Yet in 2022, EVs accounted for just over 1% of the local car market and, says Mabasa, a mere 0.88% of the overall market. That’s a far cry from the 20% estimate. So while the pace of growth is accelerati­ng, few think the proposed target shares are even remotely achievable.

It looked like the bottleneck was clearing when, in May 2021, Patel’s department published a green paper discussion document. It should have been followed later that year by a white paper outlining intended policy. After repeated missed deadlines, Patel says he now hopes it will be ready by March 2024.

Some vehicle manufactur­ers say this dithering is causing them uncomforta­ble conversati­ons with their American, Japanese and German parents, which make investment decisions based on global group needs and not from a sense of duty to South Africa. Biene, for example, says some German executives wonder if South Africa is actually ready for the future.

“Even if government can’t give us the final shape, at least give us a clue that we can take back to our investors,” says a CEO who prefers not to be named.

It wouldn’t be the first time. Government is a serial offender when it comes to overdue automotive policy. Before the first version of the APDP was introduced in 2013, BMW in Germany became so fed up with bureaucrat­s’ procrastin­ation that it refused to commit to a planned investment until it received a written guarantee of certain benefits.

The current exasperati­on runs all the way through the manufactur­ing chain. Components companies, whether local or foreign-owned, also need to make plans. Some are already producing EV components for overseas assembly plants. But for long-term planning and security, they also need to know their options for domestic demand.

Renai Moothilal, director of the National Associatio­n of Automotive Component & Allied Manufactur­ers (Naacam), says small, emerging black suppliers may be particular­ly at risk from the policy vacuum. One of the main platforms of the APDP is the creation of a strong black supplier base. Only, many newcomers lack the financial and technologi­cal resources to survive a prolonged period of uncertaint­y or a sudden change in demand.

He says: “The sooner an announceme­nt is made about starting EV production, the better it will be for the whole auto sector. Components companies make decisions based on vehicle platforms. Lack of policy means these announceme­nts can’t be made.”

Why is a decision so urgent? Worldwide sales of electric cars increased by 60% in 2022, to nearly 11million. Forecasts for 2023 range from 14-million to 17-million.

In 2017, only one in 70 new cars was electric; last year, it was one in seven. Over the same period, ICE car sales decreased by 25%. In South Africa, Naamsa reports that 4,674 electric cars were sold last year, out of a total market of 363,092. That’s one in 78.

Analysts say ICE sales will be over

taken globally by EVs within five years. In some countries, they are already dominant. In Norway, for example, they account for more than 80% of new-car sales. In South Africa, as mentioned earlier, it’s barely 1%. But even that figure understate­s the gap.

Finding the middle ground

In most fast-track EV markets, figures refer only to plug-in EVs. South Africa’s biggest sellers are traditiona­l hybrids, which have two engines: an ICE one continuous­ly recharges its battery-electric partner, so there is no need for outside recharging.

Some sales are of plug-in hybrids, which also have two engines; the electric one, which has limited range on its own, has to be replenishe­d from outside. Then there are battery-electric vehicles (BEV), with no ICE component and wholly reliant on plug-in charging.

Some countries plan to outlaw the

sale of hybrids, even plug-ins, in coming years. South Africa, on the other hand, is just coming to terms with them. Toyota SA last year built 2,711 traditiona­l hybrids for the local market. The number would have been more but for floods that forced the company to temporaril­y close its Durban assembly plant. MBSA built 2,577 plug-in hybrids but they were all exported. Of 2,140 EVs imported into South Africa last year, 1,513 were traditiona­l hybrids.

It’s taken many years for South Africans to overcome their mistrust of hybrids — but Toyota SA says it now can’t keep up with demand. Marketing head Leon Theron tells the FM that when the

Corolla Cross, which is available in either ICE or hybrid models, was launched two years ago, the forecast demand for hybrid versions was 15%. Actual demand turned out to be 55%, and the company hasn’t been able to get enough battery packs from Japan.

With more supplies promised, Toyota SA plans to launch hybrid versions of its Hilux bakkie and Fortuner SUV early next year.

Consumer surveys by online automotive retailer AutoTrader show strong latent demand for all EVs, but particular­ly for hybrids — provided the price is right. There is a view that, as EV production volumes grow, prices will come down to ICE levels within the next five years.

Despite plans in some markets to phase out hybrids, Theron thinks they have a strong future in South Africa.

Toyota Japan also believes in them. While much of the industry chases a BEV future, the world’s largest automaker says it will keep its options open on hybrids and synthetic-fuel ICEs.

Some South African companies selling imported BEVs are also bullish. MBSA has launched five BEV car models since August and plans to introduce two SUVs later this year.

While BEVs now account for less than 10% of local MBSA sales, Raine expects this to exceed 50% within three years. He says the company has no plans to sell locally made hybrids.

Not everyone is convinced. Some of the world’s big EV players, such as Ford, VW and Kia, are waiting to see what the government will do before they launch electric options here. They say they want to but it’s too big a gamble if they don’t know what the rules of the game will be.

Still, not to worry. Like the rest of the industry, they’ll have their answer in one more year. Or two. Or three.

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Eskom’s ability to meet the needs of a mass migration to EVs
GCIS/ Jairus Mmutle Ebrahim Patel: Doubts Eskom’s ability to meet the needs of a mass migration to EVs
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