08 November 2023 – The 40th forum of the African Growth and Opportunity Act (AGOA), which offers duty-free access to the United States economy for 20 African countries, has concluded and appears that concerns about South Africa potentially losing its benefits due to the ‘Lady R’ diplomatic spat and its support for Hamas and Iran have abated. South Africa is advocating for an early 2024 renewal of AGOA in the U.S. Congress, as the current agreement is set to expire in September 2025. In an interview with Biznews, Renai Moothilal, the CEO of the National Association of Automotive Component and Allied Manufacturers (NAACAM) said while it is challenging to predict the outcome until a formal announcement by the U.S. Congress, a strong case has been made for the continuation of AGOA.
Moothilal said the automotive industry plays a significant role in the South African economy contributing to 5% of GDP and employing 110,000 people primarily in component manufacturing. AGOA, he said, is vital for the industry’s competitiveness and ability to maintain volume. Moothilal pointed out that South Africa exports a substantial number of vehicles and components to the U.S., which accounted for R24 billion in exports last year. He explained that South Africa contributes less than 1% to global auto production and it can’t afford to lose any markets, making AGOA crucial for the sector’s growth. Commenting on the global shift to electric vehicles (EVs) he said that component manufacturers are already adapting to technology changes and are prepared for the shift to EVS.
Excerpts from the Interview
No certainty about AGOA, but pointing towards a positive
So, I think it’s pointing towards the positive. We can’t say for certain until we see what the US Congress finally adopts, but we believe that a very strong case has been made for the renewal and continued extension of AGOA, but also the importance of that continued participation. Not only to South Africa, but I think to the wider African continent and the U.S. themselves. So, it’s looking positive, but ultimately we’ll rest when the formal announcement is made.
I think there’s a lot at stake, and AGOA is not something that we’ve tested over a short period. It’s been running for more than two decades now. The volume of growth that we’ve seen and how South Africa and the wider African continent have been able to support leverage on the US market, and the cross-benefit to the US as well makes me kind of confident that it will be extended.
R24 billion US auto exports to US in 2022 is key to competitiveness and volume
As you can imagine automotive manufacturing in South Africa is probably one of our core industrial sectors from a manufacturing perspective. You’ve got more than 110,000 direct employees in the combination between vehicle assembly and component manufacturing, with the bulk of those jobs sitting in component manufacturing. So, from a local manufacturing perspective, auto production is key. The sector is contributing probably somewhere around 5% of the country’s GDP on an annual basis.
Having said that, within a global context, and if you compare to comparative economies like Thailand, Mexico, or Turkey, I do think we’ve still got some work to do to be an even greater player. South Africa has been producing vehicles for about 100 years now, and of course, components have been associated with that as well. Having said that, we still have less than 1% of global auto production.
Why am I sketching all of this out? Trade agreements like AGOA and preferential access into the US which is still the biggest consumer market globally are absolutely key for maintaining volume and also maintaining the level of competitiveness of assembly in South Africa. So, we benefit, for example, from the free trade access into the EU and the UK, and preferential access into AGOA. The US market has for a long time been absolutely key.
Last year alone, I think R24 billion worth of vehicle exports came out of South Africa into the US, of which R15 billion was vehicle manufacturing or vehicles being exported, and about R9 billion was direct component exports. If you consider that vehicles are the sum of components, I guarantee you that all R24 million of them have an interest in my constituency.
So, ongoing participation in something like AGOA is obviously key for this domestic sub-African vehicle production and components ecosystem. I sense that we cannot, being less than 1% of total vehicle production, afford to lose any levels of market entry. So, it’s an absolutely key one, and it’s a message that we’ve constantly been saying throughout the year.
AGOA is important not only for SA but whole of Southern Africa – e.g. Mercedes C-Class
I do think our message was heard, and to some extent, it was also really heartening to contextualise it within the context that it is not only to the benefit to South African auto component production but also in a regional context and the development of regional value chains. We have already seen a proliferation of auto component production and companies moving into some of the regional economies.
Let’s use the example of a Mercedes C-Class that’s being exported into the U.S. market. Some components are an agglomeration of processing from Botswana, Mozambique, from Lesotho, where raw materials are converted into auto glass, converted into wire harnesses, come into South Africa, then further processed and then supplied to the vehicle assembly plant in East London, then finds its way into the US. So, we’ve already seen through the AGOA trade relationship benefits outside of South Africa and into the wider African context. That’s actually what AGOA wants to promote. You don’t want to see one particular country dominating that kind of preferential trade agreement and we’re starting to see the progress in that regard.
So, I think the point was really well made. There are obviously opportunities for greater regional integration but I think some issues can be addressed outside of the AGOA forum, for example. Component manufacturers were well represented together with OEMs at the forum last week. I think the message was very strongly passed across.
AGOA also benefits the US: Reduced duty components and manufacturing jobs supported
I think we need to understand that, yes, vehicles are exported fully-assembled into the US, but there were R9 billion worth of components being exported directly to the US . Let me give you an example. Right now, within the NAACAM structures there is a very large-scale, what we call Tier 2 manufacturer who is producing wheel hubs that find themselves eventually assembled in the US into the highest volume pickup assembly that they’ve got in the US. Included in there is an electric vehicle variant. There are manufacturing jobs in the US being supported by the fact that there are South African components finding their way into that space. So, there are already direct manufacturing jobs being supported in the US by having South African integration into the value chain.
Then we spoke about the US being a large consumer market. They are benefiting from the fact that they get reduced-duty components of the quality produced in South Africa at reduced prices as consumers in the US. So, a combination of the fact that you’ve got manufacturing jobs being supported, they’ve got access to cheaper components produced at a reliable location like South Africa, which means it is an advantage, and they wouldn’t want to be losing that kind of supply chain.
I think supply chains have become an even more integral discussion point in a post-COVID environment, and South Africa has consistently portrayed itself as a reliable supply chain partner and I think we’ve seen globally the kind of challenges with other larger supplier destinations.
SA auto component suppliers are already responding to the demand for EVs
It’s a slightly more nuanced discussion, especially from a components perspective, in that component companies and how they supply vehicle assemblers or OEMs have been responding to technology changes every time a vehicle changes. A model runs typically for about seven years, and what would happen probably two, or three years before that is that the assembler or the OEM at a global head office level will start sourcing. They’ll start putting out the Request for Quotation (RFQs) for suppliers to respond and be part of that on a global basis. Things like investment in technology and skills will happen before the OEM actually starts assembling that particular technology.
So, whether it’s internal combustion, whether it’s hybrid, whether it’s an electric vehicle, I sense that the South African supplier base is already ready to respond. Right now, there is no pure electric vehicle assembly in South Africa, but we’ve got component manufacturers. I gave you one example; I know of quite a few others. There’s a beneficiary of raw materials who is exporting plates for the battery packs to a US assembler. So it’s kind of already happening. Component manufacturers are playing in this space.
From a South African context, what we want to see is that as markets change, if, for example, there’s a particular reason why the US starts heavily scaling up its EV consumption, what we would like to see is that the South African OEMs using a platform like AGOA would then be producing EVs for supply to the US, and then the South African component manufacturers are then part of that kind of continuous build process.
SA Auto component sector: Leading utiliser of AGOA with 86,000 jobs
The auto sector going into the US, both from a volume and a value perspective, has one of the higher rates of utilisation of the AGOA agreement. So, it is a material discussion point and it will be heavily affected.
It’s difficult to pinpoint the exact number of component jobs linked only to production in the US because as you can imagine, companies are supplying different markets all the time, but what I can give you is there are more than 80,000 employees in South Africa, leave the neighbouring countries who are part of that value chain. Just in South Africa alone, I think it’s about 86,000 or so direct component manufacturing jobs.
I think the benchmark that can easily be used is if you look at vehicle assemblers or the OEM plants, globally you’re looking at anywhere between three and four jobs in the components value chain for every one job at an OEM assembly level and I think that ratio will increase over time as we’ve increasingly seen that OEM plants are getting even more and more automated. The real job-heavy part of the sector sits in the components base. So, if you take us out of AGOA, will it be a complete catastrophe, and will all 80,000 jobs be impacted? I don’t think so, But there will be a spiralling effect.
South Africa’s AGOA exit could trigger domino effect in other markets
Once you start losing one market, the competitiveness or the scale or the volume, the fact that you have that market as part of your makeup, and it is then extracted, you put more and more pressure on trying to either replace or find other cost-saving measures. It becomes a vicious cycle, and losing the US market, in my opinion, would be a forewarning of greater pain in the Southern African auto manufacturing base.
You could make the argument that if, for example, you lose a major market, the US is a major market and a trade partner, you introduce competitiveness pressures on the domestic guys, which then could in turn impact how they supply into other markets. Yes, there are opportunities to find new markets, the kind of BRICS arrangement and things like that but if you look at our traditional performance, it has been the US and the EU that have been the big consumers of South African auto products, both from a vehicle perspective and direct component exports.
There are value chain benefits that come from being able to supply into the US market, having big investors from the US here in South Africa, not only from an OEM brand perspective, there’s a large number of US-headquartered companies from the US who are producing here in South Africa as multinational investors, including supplying into the EU. My concern would be if you lose that market entry and then buyers in the EU are looking at South Africa and you don’t have the qualification or the linkage to large buyers in the US, then again, that becomes a discussion.
Issues around the withdrawal of AGOA will create risk premium issues even for the EU market. It’s a combination of many factors. Can we conclusively say you lose EU customers if you lose the US? No, we can’t, but I do think it will contribute.
Seeking greater access to Chinese Markets, but yet to materialise
To date, what we’ve seen is that we are more of an importer from a trade balance perspective. China is stronger on the import side of that trade relationship. We would like to increase access to the Chinese market, but that hasn’t happened yet. Source: BizNews – Linda van Tilburg