Prior year reports have centred around black swan type occurrences faced by the sector since the turn of the decade. While many of these events have been overcome with remarkable resilience by the South African automotive value chain, there continues to be economic headwinds confronted by businesses and individuals alike.
Over the past year, consumers have faced a 10-year high inflation rate and rising interest rates. With this, growth in the economy has remained minimal, reflecting a 0.4% GDP increase in the first quarter of 2023 and forecasts predicting GPD growth to stay under 2% in the coming two years. The country’s ongoing energy crisis largely drives this lacklustre growth, with loadshedding being a daily reality over the past six months, impacting economic activity and the South African investment outlook. The tightening monetary policy implemented by the SA Reserve Bank has not aided investment ability in the sector, especially if one considers the unplanned capital expenditure needed to implement contingency plans for electricity generation. That SA based vehicle manufacturers invested R7,1 billion in 2022, while the component sector accompanied with investments of R4,5 billion goes a long way to highlight the value this sector brings to SA at a time when the rest of the manufacturing economy is receding. It remains imperative for our country’s leadership to fast-track solutions to the loadshedding crisis and address the existing inefficiencies and bottlenecks in critical infrastructure, including port and rail, to support the value chain in a predictable and sustainable way.
To punctuate the view above, by the end of 2022, there was continued growth in domestic vehicle production, with year-end vehicle production numbers reflecting an 11.3% increase. This is despite the regular supply chain disruptions experienced. The component manufacturing sector defied expectations, reaching record-high exports of R70.3 bn and achieving the second-highest total sector CAPEX to date. This is indicative of the role component manufacturers play in supporting SA’s trade and capital account balances.
Whilst it may be tempting to view the above through rose tinted glasses, we understand things may look different by the end of 2023. There have been announced plant closures and job losses at tier one supplier level, with the emissions control (catalytic converter) subsector being hardest hit. This can be explained by the deteriorating operating competitiveness in SA combined with global plants excess capacity. Once these plants close, the odds of that level of production returning is slim.
The state of the economy featured in the MIBCO Chapter 3 wage negotiations that took place in the latter half of 2022. A three-year inflation linked agreement and the Peace Clause continuing in its existing structure were secured with no industrial action. NAACAM’s leadership in this was crucial. It is hoped the agreement will provide much-needed operational stability over the next three years.
On the policy front, NAACAM continues to advocate for component stimulation. The much-anticipated New Energy Vehicle (NEV) final policy is yet to be concluded. While waiting for its finalisation, NAACAM continues to engage with all relevant parties to ensure component production is prioritised in any NEV policy to ensure we can move towards higher levels of localisation as envisaged by the South African Automotive Masterplan 2035. This publication has an opinion piece by Renai Moothilal in this regard. In a further development, outgoing Metair CEO and NAACAM Vice President Riaz Haffejee has recently been appointed as a special government advisor on NEV policy. It is heartening to see the OEM cohort already starting to transition into the NEV environment, and at the time of writing there have been announcements and production of both traditional and plug-in hybrids, with the most recent being a R4.2bn expansion by BMW plant Rosslyn for G45 model production including those of the plug-in type.
A key lobbying activity in the first half of 2023 has been looking to secure South Africa’s continued participation in AGOA. From a total automotive export value of less than R1.2bn to the US in 2000 before AGOA, to approximately R24bn last year, it is obvious that remaining party to this preferential trade agreement is key to sector sustainability. To this end, NAACAM has activated a strategy to engage both South African and US partners and educate on the importance of AGOA for both the local and US automotive industries whilst encouraging a long-term extension of AGOA, with South Africa’s continued participation therein. Noting the SAAM35 commitments, the transformation objective is another policy related activity that NAACAM supports its members in.
The NAACAM team continues to provide a range of value-added services to assist members’ growth within the sector. In 2023 NAACAM has kicked off its joint skills development project with long standing member Metair, through the provision of a R30 million discretionary grant from the merSETA, to support the training of 145 students in various engineering disciplines. Members are encouraged to contact the NAACAM office to investigate other similar projects that could be done in partnership with your own company. The first half of the year saw the initiation of NAACAM’s project with Transnet and the National Empowerment Fund to boost localisation and domestic manufacturing capabilities. The programme is expected to contribute to greater local manufacturing in the allied transport sector.
Supplier upgrading and localisation support continue to be offered through the joint stakeholder ASCCI platform. NAACAM continues to fund and serve as facilitator to this multi stakeholder platform. This has made provision for a further 44 supplier capability projects to be implemented. On the localisation front, off the back of the ASCCI Access to Technology research paper, three more studies have been commissioned in 2023 to understand the localisation and investment opportunities within the battery, thermal management and fuel cell markets associated with NEVs. This complemented past research on E-motors and transmissions, power electronics, and high voltage electrical distribution systems.
Public relations and related activities have increased over the past six months to amplify awareness of the contribution made by automotive components in South Africa as well as the range of activities delivered out of the NAACAM offices. This remains a pillar of the Association’s policy and advocacy strategy. The third iteration of the NAACAM Show is happening from 30 to 31 August at the Sun Bet Arena in Times Square, Menlyn with the Tshwane Economic Development Agency as the headline partner. The Show looks to provide insights into trends disrupting and reshaping the automotive sector and offers a platform to visually showcase the strengths and capabilities of the component manufacturing value chain to key stakeholders, amplifying NAACAM’s year-round advocacy activities.
To conclude, a note of appreciation goes out to all NAACAM executive and regional committee leaders for your dedicated support of the Association. I equally offer a warm welcome to new members and gratitude to our loyal and long-standing manufacturing and associate member base. It is your participation and engagement in NAACAM that is at the heart of efforts to grow our industry. Please get in touch with the NAACAM team if any support is required.
Electrification and SA’s Automotive Component Industry: Sparking New Opportunity
The dawn of global “new energy vehicle” (NEV) mass production has seen automotive manufacturing countries position themselves as suitable locations to host greater volumes of electric vehicle and related platforms. South Africa is no different.
At present, there is no announced standalone policy around South Africa’s industrialisation of NEVs. Yet industry stakeholders, including the Department of Trade, Industry and Competition, the vehicle assemblers or Original Equipment Manufacturers (OEMs), and automotive component manufacturers, as well as labour, and other interested public sector partners, have been engaged over recent years in trying to work through what changes or additions may be needed to the well-established Automotive Production and Development Programme to assist the local automotive manufacturing sector transition into the NEV production environment. The local assembly base has already begun to transition with three of the South African OEMs having or soon to start production of both mild as well as plug-in hybrid electric vehicles.
This think piece highlights a possible trajectory for the South African automotive component sector the vehicle electrification era, outlining options for greater levels of domestic value chain capture.
South African vehicle manufacturing has long had its localisation levels determined by a combination of incentive positions and global purchasing dynamics. To the extent that there has been for some time an almost anaemic country localisation average level of less than 40%. The South African Automotive Masterplan 2035 has an objective of 60% localisation.
Most South African vehicle assembly platforms in the last two decades have been done without significant power/drivetrain units such engines and transmission systems. So, the country’s supplier base is well set up, to continue producing the range of non-EV specific components, albeit at different specifications. There are live examples of such being exported into already “in production” global NEV platforms.
First tier component manufacturers in South Africa, a mixture of multinational and domestically owned companies, are well used to a business model of responding to changing production specifications. This will not be different with NEVs. Supplying into the high volume, multinational owned, assembly plants in South Africa, as well a significant independent exporter history, means the local component base is aligned to global quality standards and capability. The attendant technology and skills development that comes with a vehicle model change will happen irrespective of the source of power generation. Such is the dynamic of how this global value chain works. What is needed is to identify ways of growing the typical base of components the country has traditionally supplied, especially into those of NEV specific nature.
Electric vehicle battery production represents an opportunity for more localised “high value” components. The Southern African region has significant mineral resources, including lithium, manganese, cobalt, and nickel, which are essential for battery manufacturing. Well-co-ordinated inter African regional trade and materials beneficiation policies, coupled with logistics enhancements are most likely the big-ticket drivers to develop a business case for EV battery manufacturing, and should this be successful, provides a reason for OEMs in South Africa to be awarded high volume battery electric vehicle assemblies. This would be a case of regional integration and progressing competitiveness of the Southern African automotive value chain from the bottom up, starting at raw material level.
Another set of NEV specific systems that South Africa has a chance to transition into include electric motors and transmissions, power electronics, high voltage wiring harnesses, redesigned thermal and cooling management systems and charging related components and infrastructure. It is expected that these localisation opportunities are feasible due to domestic availability of raw materials; the profile of component firms based in South Africa, mainly those with global head offices and international technology partners; and existing manufacturing infrastructure and process capabilities required for their production.
A significant difference between internal combustion engine vehicles and NEVs is the reduction and exclusion of fuel and emissions systems. The emissions control sector, especially catalytic converter production, has been a mainstay of South African automotive component production. In the two years post-Covid 19, component exports out of South Africa were the best performing of all automotive products. However, that will not continue, and the South African catalytic converter sector is already seeing volume losses in 2023 and into the intermediate future. To the extent that plants have begun to close or scale down production. Global overcapacity and a reduction in South Africa’s operating cost competitiveness is driving this. The most immediate example is the announced closure of one of the country’s largest catalyst coating facilities in Gauteng, with more than 400 jobs being lost at one go. There is obviously concern at the likely long-term pain to be felt in catalytic convertor production.
A possible silver lining may emerge in the hydrogen linked economy, should some of the production of technologies around fuel cell EVs be realised. Notwithstanding the advantage of South Africa’s resource rich platinum group mining capacity, this needs the dedicated focus of South African policy makers, knowing that the component companies who process the catalysts used in fuel cell EVs are the same as those found in traditional catalytic convertor production. Support measures should be implemented to ensure these companies remain in South Africa and have competitiveness enhancing policies and programmes to allow the country to transition into a hub of this emerging hydrogen economy opportunity.
A nuanced understanding of South Africa’s existing automotive industrial policy (APDP), and its historical iterations, will recognise its constrained ability to support expanded NEV localisation of the type highlighted earlier. Whilst working to maintain the base of vehicle assembly in South Africa it has been tepid in growing localisation.
Insanity is colloquially defined as doing the same thing over again and expecting a different result. Any new wave of policy that wants to unlock high rates of localisation, and the associated employment, skills, technology, and new business opportunities, needs stronger focus on the components and materials base in South Africa. The priority should be greater incentivisation of component related technology investment; competitive manufacturing value propositions in the various automotive hubs and special economic zones for NEV component production; and dedicated efforts to attract global technology partners and licence holders in NEV specific component systems. This will see the country competitively develop its business case to produce NEVs. Decades of differently named, but essentially the same top-down, vehicle assembly dominant incentive model where vehicle and component import duties have easily been rebated at the expense of greater local procurement, has not realised the required local content ambitions. This will not change in the NEV era if the policy emphasis is not wired differently.
* (This article was first published in a Bank of China report commissioned for the 2023 BRICS Conference