By Roger Houghton
The troubled South African motor industry continues to receive mixed messages from a variety of sources. Some of it is good news, but most of it is depressing.
The best news is the decision by BMW to make a further, large investment in its plant and the tooling and equipment related to the assembly of the next generation 3-Series. The amount of the investment is R2,2 million, which will have a spinoff of increasing the facility’s maximum annual capacity from 60 000 to 87 000 units.
In addition, the company will facilitate an 18-month MERSETA-accredited training programme for 1 100 of its workers, which will give them a National Qualification Level One certificate.
The BMW group has a long history of producing vehicles in SA, with a local company (Praetor Industries, in Rosslyn) undertaking this task from 1968. Then, in 1975, BMW took over production and established its first plant outside Germany.
The investment announcement followed the signing of a Letter of Commitment between the Department of Trade and Industry (DTI) and BMW that the former will honour the investment under the new support scheme for the motor industry – the Automotive Production and Development Programme (APDP). BMW SA’s managing director, Bodo Donauer, stressed that it was important for the DTI to urgently resolve remaining open issues with regard to the ADDP.
This once again highlights the government’s tardiness in finalising and implementing much of its legislation affecting the motor industry. Previous examples are the long-running Taxi Recapitalisation Programme, the Bus Rapid Transport (BRT) system and the APDP, which should have been announced in October 2006, but is still not complete.
Another positive signal for the motormen was the fact that local business confidence climbed to a 10-month high in September, indicating that the SA economy may be recovering from its first recession in 17 years. The Chamber of Commerce and Industry said the Business Confidence Index had increased to 85,5 points, which was the highest level since November 2008 and compared favourably with 83 points in August. (The index is compiled from 13 economic indicators as well as financial gauges).
We have also heard Wesbank saying that credit availability was likely to improve as it seems the market has bottomed out, with a marginal improvement in the second quarter of the year. (The Wesbank Vehicle Sales Confidence Indicator which measures current and future activity in the automotive market, with input from 250 people in the retail sector, rose from 4,2 to 4,3).
Wesbank’s chief sales and marketing executive, Chris de Kock, added that the bank’s credit approval rate had also improvised marginally, moving up to the current 28 per cent from a low of 24 per cent at the peak of the financial crisis. Repossessions were also 20 per cent off their peak, running now at 1 650 a month from 2 250 a month in September last year.
Yet another positive indicator was TransUnion’s vehicle price index for the third quarter, which revealed that new vehicle price inflation declined to 11 per cent from 11,3 per cent in the second quarter, while used car price deflation improved marginally to minus 0,6 per cent from minus 0,7 per cent in the same period.
The chief executive of TransUnion Auto in SA, Mike von Höne, said that while new price inflation remained high at 11 per cent, compared to 5,8 per cent a year previously, the underlying trend was stable. He said the ratio of new to used cars sold had eased from a high of one new car for every 2,5 used cars sold to one new for two used. Von Höne added that TransUnion looked forward to a moderate sales recovery through the course of 2010, which will gain momentum in the second half of the year.
Unfortunately there was plenty of bad news to offset these positive sentiments.
These included headlines such as:
– Last roll of the dice for SA motor industry
– Motor industry on Death Row
– High cost, uncertainty and inefficiency most change, says Naamsa chief.
– Merc chief warns of slump; local car manufacturers “might be forced to leave the country”
– Ford production to drop by 50 per cent
– The motor industry: Crash course in survival
– Motor policy: Business can’t wait
– Motor industry: No news is bad news
– Claim of upturn based on rental sales
The toughest talker was the president of the National Association of Automobile Manufacturers of SA (Naamsa) and managing director of Volkswagen SA, David Powels. He told the SA Automotive Week conference in Port Elizabeth that the future of the automotive industry was at risk unless steps were taken within the next 18 months to address several major challenges.
He warned the industry and other stakeholders against euphoria because of major investment in the automotive sector in recent years.
“This might be the last roll of the dice unless we fix these things (the challenges). If we do not improve our competitiveness within the next seven to 10 years I’m not sure there will be another roll of the dice,” said Powels. He added that the honeymoon period for SA was wearing off as global companies faced overcapacity and had to consider how much volume to allocate to SA and to review their investments.
These included port charges, which were 10 times higher than those in China, while SA was the only country in the world to charge cargo dues at its ports. The latter were also far behind global standards in terms of efficiency. Powels said the industry was seriously considering Maputo, in Mozambique, as an import and export port.
Another area which Powels said needed urgent attention was to make local component suppliers more competitive, because currently locally assembled vehicles used only an average of 35 per cent SA-made components. This needed to move up to 70 per cent, which was a level that would not be reached economically in terms of the latest APDP. The Naamsa chief explained that the cost competitiveness of local suppliers was 20 per cent worse than those in Western Europe and 30-40 per cent more expensive than India and China.
Powels concluded by saying that SA had not responded as aggressively to the global economic crisis as other countries and with sales now down by up to 47 per cent it was the most affected market in the world.
This sentiment was echoed earlier – and not for the first time – by the president and CEO of Mercedes-Benz SA, Hansgeorg Niefer, who said that local motor manufacturers might close down their operations in SA if global demand for vehicles did not improve. This was because the slump in demand had increased production overcapacity and competition between countries for manufacturing contracts.
This was highlighted recently when it was announced that Mercedes-Benz was looking to use its plant in Alabama, in the US, as one of three sources for the next generation C-Class. The other two countries were Germany and China. There was no mention in the article of the highly-rated East London plant, which is one of the current sources of this popular model.
Ford’s outgoing president and CEO, Hal Feder, says his company has taken drastic steps as the market collapsed. Hourly and salaried staff at its Silverton assembly plant and Port Elizabeth engine manufacturing facility have been slashed, with 1 300 people losing their jobs. “We have taken out R720 million in inventory costs since the beginning of the year, from components to finished goods”.
This has resulted in a 50 per cent drop in production (28 000 units will be produced at Ford’s Silverton plant this year compared with 55 000 last year), while its exports will fall 60 per cent.
Feder added that FMCSA’s R1,5 bn investment programme to produce a new pick-up at the rate of 90 000 units a year and the Puma diesel engine were “under review”, but currently still on track. New project engine production is scheduled to start next year and vehicle manufacturing in 2011.
