Ugo Frigerio: President 2024
Greetings NAACAM Member, at a time when South Africa enters a historical political journey through the formation of a Government of National Unity. Our call to the newly formed GNU is clear – SA and the domestic automotive sector needs to be put of a path of stronger economic growth and wider economic opportunity. In particular, NAACAM remains on hand to support all sector development initiatives to come under the guidance of newly appointed Minister of Trade Industry and Competition, Parks Tau and his senior team.
SA GDP growth was meagre during 2023, amounting to just 0.6%. In addition, consumers remain under significant pressure, with the Repo Rate remaining at its 14-year high of 8.25% and the average inflation level for 2023 hitting 6%. Looking ahead, this pressure on consumers isn’t likely to decrease any time soon with economists typically expecting interest rates to start reducing in the latter quarter of 2024. More broadly, IMF forecasts 2024 SA GDP growth to close around 0.9% and possibly increase to 1.2% in 2025.
This pressure on consumers and the economy has placed strain on new vehicle sales, with sales figures for the first half of 2024 totalling 246 336 units, 7% behind sales for the first 6 months of 2023. The configuration of these sales is also changing dramatically, with the proportion of sales of vehicles produced in high volume Asian markets rising rapidly in comparison to sales of domestically produced vehicles. This changing dynamic will inevitably require the sector to adapt or risk losing production volumes linked to the domestic market.
On the production side, two OEMs have already fallen behind original forecasts for 2024, with one announcing large-scale retrenchments. Despite this, there may be room for some cautious optimism. Loadshedding and port delays are easing, along with a stabilising inflation outlook. From an automotive industry perspective, 2023 total SA vehicle production increased by 14% from 2022 levels to 633 332 units. Capital investment, particularly from component manufacturers, also remained high at R4.2 billion and we expect CAPEX to continue to perform well as we see the start of production of the BMW G45 taking place later this year and VWSA and Stellantis both announcing they will be locally producing new models within the next two years. The recent launch of the African Continental Free Trade Area (AfCFTA) offers an opportunity for the expansion of domestic exports into the region as well continental industrialisation.
In the NAACAM context, significant strides have been made, particularly on the policy front. The highly anticipated New Energy Vehicle (NEV) White Paper was released at the end of 2023. NAACAM is pleased to see the importance of component manufacturing and many of its direct proposals and submissions made to dtic and National Treasury well represented within the White Paper. Critically investment and R&D within the component sector has been prioritised along with other general reforms which seek to boost overall sector competitiveness. As a direct policy outcome to NAACAM positioning, component manufacturers producing NEV components can claim a 35% cash grant through the automotive investment scheme (AIS), as opposed to the standard 25%.
Transformation has remained a priority. Amendments made to the BBBEE requirements within APDP2 now allow for component manufacturers to either achieve compliance through the generic BBBEE scorecard or via participation in the APDP 2 Transformation Fund, administered by AITF. The Transformation Fund is now open, with several component companies having already joined.
The past year was punctuated with ad hoc topics requiring NAACAM focus. Examples of this are the advocacy for the extension of the African Growth and Opportunity Act (AGOA), and AMSA’s continued production of long steel products. In the latter case, NAACAM research indicated that 7 component suppliers and 3000 jobs were at risk of closure and OEM line stoppage. In both the case of AMSA and AGOA, NAACAM submissions were prioritised by key stakeholders and senior government representatives. AMSA has now committed to ongoing production, whilst a final positive AGOA decision for SA is expected.
NAACAM’s value added services portfolio continues to be delivered, through various multi-year initiatives. In partnership with the International Finance Corporation (IFC) the Localisation Optimisation Opportunity Platform (LOOP), an innovative web[1]based platform was launched. This should make it easy for OEMs and Tier 1 suppliers to link up their procurement opportunities with lower tier and emerging suppliers and vice versa. Over 75 companies have joined the platform and localisation linkages have started taking place. Additionally, bolstering localisation within Transnet’s supply chain and general manufacturing sector capabilities, NAACAM and Transnet have partnered on a supplier upgrading project. The project will see 10 businesses go through an in-depth supplier upgrading programme. In terms of ASCCI supplier upgrading projects, NAACAM continues to serve as the facilitator of ASCCI, for the business plan period to 2025.
Last year I referenced the kick-off of NAACAM’s joint skills project with manufacturing member, Metair, through the implementation of a merSETA discretionary grant. This project remains on track with 145 bursary students successfully completing the programme. NAACAM has also partnered with the International Labour Organisation (ILO) on the Decent Work in SA Programme which will support 6 suppliers with skills assessments and subsequent shopfloor skills upgrades.
A reflection on the previous year cannot fail to reflect on the third delivery of The NAACAM Show, driven by TEDA, which took place in Tshwane in August 2023. The event exceeded organiser expectations. The exhibition space was fully subscribed, creating an impressive display of the breadth and depth of SA’s component manufacturing capability. The conference, which had a packed agenda covering topics from the NEV transition to bolstering participation from Black owned industrialists in the supply chain, and fostering regional integration was equally fully attended. All key stakeholders from global experts, government leaders, industry partners were united in a view that SA’s component sector was a manufacturing sector to treasure and nurture.
NAACAM looks forward to showcasing the strength of its membership again at the next iteration in 2025. Thank you to the NAACAM national executive and regional committee representatives for the critical role they play in guiding the association. I extend a warm welcome to new members and equally, appreciation to the long-standing members. Your presence and participation in NAACAM activities is central not only to the strength of the Association but also the development of the sector. Members are encouraged to contact NAACAM if any support is required.
Automotive Policy Environment
The close-out of the 6th South African government administration has given pause for thought on sector progress over the past term and priorities for the incoming administration. With the Department of Trade, Industry and Competition (dtic) having new leadership, under Minister Parks Tau, supported by Deputy Ministers Zuko Godlimpi and Andrew Whitfield, it is critical that a stable automotive industrial policy continues to underpin operating models in South Africa. Yet there may be areas of enhancement needed to unlock new opportunities and find a way of resolving sector challenges.
The past 5 years have been a mixed bag for the sector. On one hand, despite strong economic headwinds the automotive sector has reaffirmed why it is considered the foundation of South Africa’s manufacturing base and a critical economic sector. In 2023, the auto sector produced over 600 000 units, contributing 5.3% to the national GDP, 3.2% of which was generated from manufacturing vehicles and components. This represents 21.9% of the country’s manufacturing output. While South Africa faced rising unemployment, the component sector reported a 3% growth in employment over the past 5 years. Along with this, the sector reached record component export levels in 2022, amounting to R70.3bn. This represents 30% growth between 2019 and 2022. Similarly, record levels
of CAPEX, equalling R20.3bn, were invested between 2019 and 2023. The sector has made significant progress in growing the participation of Black-owned companies in the supply chain. Between 2019 and 2023, the number of NAACAM members achieving a BBBEE level 4 or better has grown from 37% to 55%. When looking ahead, there is also optimism, with two OEMs announcing the launch of new platforms in the next two years.
This kind of performance and continued confidence in the sector is impressive when considering the challenges faced over the period, which go well beyond the poor economic growth in South Africa.
Between 2019 and 2023, the following events took place: COVID-19, ongoing logistics and freight challenges, loadshedding, semi-conductor and other part shortages, multiple geopolitical conflicts, flooding and civil unrest. The impact of these events has been profound. On average, actual production levels are 11% below forecast, with some OEMs losing over 20% of planned production.
In an industry where business cases and returns on investment are fundamentally tied to the scale economies of high volume yet low margin, this level of lost production has placed a strain on businesses, with cash flow challenges and short time becoming a common occurrence.
While much of the sectors’ performance, despite challenging circumstances, comes down to supplier resilience, the APDP2 has played its part in supporting the stability and competitiveness of South African automotive manufacturing, and is equally vital in incentivising future investment. The dtic’s ongoing commitment to this programme is of paramount importance to maintain investor confidence and sector growth.
That being said, there are policy tweaks that may warrant attention. A lens needs to be placed on unlocking localisation opportunities. Although the move from volume assembly allowance (VAA) to
volume assembly localisation allowance (VALA) under APDP2 represented a boost for the domestic component sector, with OEMs needing to exclude imported content from their assembly incentives,
localisation levels in South Africa have remained sticky between 38% – 40%. If one follows the modelling under the South African Automotive Masterplan, which aims to achieve 60% local content by 2035, the sector should already be close to 46% of the average vehicle local content. In 2023, the difference between the achieved local content of 39.5% and the targeted 46% equalled approximately
an R30bn shortfall additional production forgone. The new administration should carefully consider possible policy revisions within the APDP2 mid-term review that promote bottom-up competitiveness, starting with materials and components. This, coupled with more general approaches to improve the investment climate, will be critical in driving increased localisation.
Along with improved levels of localisation, the component export market represents one of the most significant opportunities for the next administration but, equally, one of the biggest risks. Currently, the component export market is highly concentrated in terms of products exported and markets supplied. Of the R66.9bn components exported in 2023, more than 50% were a combination of catalytic converters and engine parts. Both technologies have shown slowed global demand. On the destination side, 3 out of every 4 vehicles exported and over 44% of direct component exports
are destined for the European Union and the United Kingdom.
Both markets are moving quickly towards NEVs and introducing increasingly stringent environmental regulations such as the Carbon Border Adjustment Mechanism (CBAM). It’s imperative, therefore, that strategies be implemented to diversify the components exported and markets supplied to mitigate risks. This should be done while still seeking to maximise gains from the existing component export profile and making strides towards the decarbonisation of the sector in line with global trends. On the product side, research conducted by ASCCI has highlighted high localisation
potential NEV components, including developments in the exciting green hydrogen space. Developing an export business case for these components should be explored. On the market side, the launch of the African Continental Free Trade Area (AfCFTA) represents a significant opportunity for both expanded exports into the Continent and regional industrialisation, which can enable the development of regional value chains.
In conclusion, as the 7th administration takes office, all efforts must be made to build on successes and learn from the challenges of the past 5 year to ensure the growth of the component sector. Policy stability and continuity are essential for sustaining investor confidence, while unlocking localisation and export opportunities will assist the industry in achieving the goals of SAAM35. Getting this right is essential to ensure the component sector can continue to positively drive South Africa’s economic growth and job creation in the years to come whilst positioning the country as a hub of productive vehicle assembly in global terms.
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