Local content key to SA motor industry
The most dynamic manufacturing sector in the country is gearing up for greater things
THE SOUTH African automotive manufacturing sector is the most dynamic manufacturing sector in the country and a major driver of its economic development.
This is due in part to a supportive car industrial policy framework that has been sustained over the last three decades, beginning with the Motor Industry Development Programme (MIDP) in the mid-1990s and followed by the current Automotive Production and Development Programme (APDP) from 2013 to the end of 2020.
These policies have supported the local market’s integration into global car value chains, creating an industry that currently produces approximately 600 000 new vehicles annually, provides employment for around
112 000 people, and contributes an estimated 7.7 percent of the country’s gross domestic product (GDP).
The incentive framework of the APDP has had a major role to play in ensuring long-term commitment from the seven Original Equipment Manufacturers (OEMS) that operate here.
A key element of the existing framework is the VAA (Volume Assembly Allowance) which, while driving the sector, has had the unintended consequence of incentivising increased vehicle value at the factory gate over the level of local content within vehicles.
The government, labour, OEMS and component suppliers came together to set the future direction of the automotive industry.
The output, the recentlyannounced SA Automotive
Masterplan (Saam) heralds the start of a new journey under a revised incentive framework that will take the industry through to 2035. It has at its core the central objective of increasing local value addition – from 37.4 percent currently to 60 percent.
To demonstrate the importance of the local value addition level, at 37.4 percent local value addition a crude calculation is that South
Africa in fact “fully produces” the equivalent of 224 000 vehicles. At 60 percent local value addition and meeting the Saam volume target of
1.4 million vehicles, South Africa would “fully produce” the equivalent of 840 000 vehicles or have 3.75 more automotive output than at present.
Increasing of local value addition is key not only to the sustainability of the local automotive industry but to the multitude of benefits the sector delivers being felt more widely across the economy.
At present the OEMS create and capture the most value from the sector while in comparator economies there are many more local suppliers undertaking a greater level of value addition.
A true pyramid structure is in place in these comparator economies while South Africa currently has a relatively shallow base of lower tier manufacturers.
The revised incentive framework of the Saam goes some way to promoting local value addition by replacing the VAA with the Volume Assembly Localisation Allowance Addition (Vala). Vala acknowledges the level of local content within a vehicle and incentivises the OEM accordingly. In short, to maintain or improve the benefit felt under the current APDP incentive framework OEMS need to increase local content levels significantly, while there is a transition period from 2021 to 2026.
Increased local content cannot simply be incentivised, however, and will require a strategic and co-ordinated approach from the component manufacturing sector, OEMS, labour and the government.
It will also require innovative thinking and bold initiatives to localise the high value componentry such as the drivetrain and telematics, which collectively account for about 50 percent of the value in a modern vehicle. Drivetrain is in a relative state of flux with the lifespan if the internal combustion engine and its successor and speed of transition to it unknown. Telematics is booming and also advancing rapidly. Both are highly technical, capital intensive systems and naturally difficult for a multinational OEM to justify an investment in South Africa.
A specific incentive is mooted for these crucial sub-sectors and creative solutions have been found in other markets. Force Motors, for instance, headquartered in Pune India makes engines for both BMW and Mercedes, a global first. While supplying only the Indian market in low volumes, the investment case was made and rivals brought together to collaborate on this key system.
Given the significant challenges in these crucial sub-sectors, localising as much else as is possible is a priority.
For any localisation to be achieved, supplier competitiveness against global peers is a non-negotiable. The work conducted by the Automotive Supply Chain Competitiveness Initiative, a partnership between the OEMS, represented by the
National Association of Automobile Manufacturers of South Africa, and the National Union of Metalworkers of South Africa in driving supplier competitiveness is key. A project with 75 suppliers over the last three years significantly reduced waste and improved processes to support their competitiveness. Another round of projects is under way in sub-sectors viewed as having high localisation potential – seating, interior trim and drive-train systems.
Our localisation ambitions cannot be seen in isolation and can only be achieved in an enabling environment.
A weak domestic economic climate and an unstable electrical supply are just two causes for concern as they drive business confidence lower and slow investment.
Potentially protectionist policies in our traditional vehicle export markets threatens vehicle exports which account for around 58 percent of new vehicle sales each year.
However, the vision of the Saam is ambitious and realising its objectives will be a boon for local and regional economic development.