While local manufacturers report double-digit sales growth, component suppliers are shedding workers and unions are asking if government subsidies are being used effectively.
South Africa might be teetering on the brink of a recession, but its motor industry continues to enjoy near-boom-like growth. Edgar Lourencon, president and managing director of General Motors (GM) in Africa, which is run out of East London in the Eastern Cape, says his company has recorded 11-12% growth in South African sales so far in 2012.
“That is lower than over the last three years but, considering everything, it is a very good number,” Lourencon says. “In Africa as a whole, it is even better. We have seen 50% growth this year, albeit from a very low base.”
GM sells around 6,000 vehicles per month in South Africa and about 900 per month in the rest of Africa. Lourencon warns that South African sales growth levels above 10% might not be sustainable.
GM’s story is not exceptional. In early August, the National Association of Automobile Manufacturers (NAAMSA) said vehicle sales in July were up 18% year-on-year to 54,067 units, with exports rising 11.6% in the same month.
NAAMSA said it expected an over-all growth rate for 2012 of 10%, predicting that interest rate cuts would support sales. After a slight drop in capital expenditure by the industry in 2011 to R3.9bn ($1.1bn), capital expenditure investment in 2012 is estimated at R5bn.
In late August, Nissan South Africa announced plans to invest R1bn to expand its production plant at Rosslyn, near Pretoria, which it estimated would create 800 direct jobs and 4,000 more in the supply chain. It plans to double production to 100,000 units a year after 2016.
The sector feeds a mix of domestic and export demand. Of the 532,545 units produced in South Africa in 2011, 69% were sold in South Africa, according to NAAMSA. Exports, valued at R43.7bn in 2011, went primarily to the US, UK and Japan. Within Africa, the main markets were Algeria, Nigeria, Zimbabwe, Cameroon and Zambia.
Lourencon says South Africa remains a good place to do business, but that its competitive edge is under threat. “The cost of utilities, and especially electricity, used to be a comparative advantage. Now, it is becoming a disadvantage. Labour is available, but cost and skills are not at a level where we can go beyond what we have now,” he says. “If utility and labour costs go up, we will become less competitive … already labour here is two to three times more expensive than in other African countries.”
According to Mziyanda Twani, an education officer for the National Union of Metalworkers of South Africa (NUMSA), this is the argument employers always use. “We can’t be scared of investors’ threats. We have heard them be- fore. The main issue is that we don’t want an Egypt or Tunisia here. It is a worry for 90% of a country to be in poverty. There must be a way,” he says.
In 2013, there will be national-level negotiations between companies and unions for three-year wage agreements in the tyre, auto and motor industries. Twani says that NUMSA is looking for “a significant settlement” and will push hard to achieve one. The union is aware, however, that the automotive sector in the Eastern Cape has shed a quarter of its workforce –10,000 jobs – since 2008, when the global economic downturn sent the industry into crisis.
“We are extremely worried as a union. The Eastern Cape is heavily reliant on this sector. The collapse of this sector would mean the collapse of the economy of the Eastern Cape,” says Twani.
The government’s main new initiative for the sector is the Automotive Production and Development Programme (APDP), which is scheduled to run from 2013 to 2020. One component, a scheme that allows 20% of a new investment’s value to be returned to investors over a three-year period, is already operational. From 2013 the APDP will set import tariffs at 25% for built up vehicles – except for those from the European Union, which will be subject to a 19% tax – and 20% for components. Another major feature is that vehicle manufacturers producing more than 50,000 vehicles per year will be able to import 20% of their components duty free, which will drop to 18% over three years.
This is good news for large man- ufacturers, but less so for the components industry, which has expressed concerns about its ability to cope with the likely new competition and about the impact of reduced export incentives in the APDP.
Vehicle manufacturers strongly defend the government’s intervention in their favour. A spokesman for Volkswagen, which manufactures cars in Port Elizabeth, said: “Most countries have support pro- grammes to support investment, and South Africa is no different. Volkswagen has been producing cars here since 1951, and we believe we have a suitable business model that makes sense in South Africa.”
Why No Jobs?
Lourencon said government support has been central to GM’s investment plans. “We are investing R1bn over three years in new product programmes … Without the MIDP Motor Industry Development Programme and APDP we would never have done it. The APDP is fundamental to keeping us here.” Nissan also said the expansion of its Rosslyn plant was also made possible by the APDP.
Unions, however, argue that taxpayers’ money should not be given to employers who do not create jobs. Despite the sector’s heavy job losses, vehicle and component manufacturers continue to complain that South African labour laws make it too difficult for them to shed employees.
Around 300 companies work in the components industry, which exports just under half of its output. Catalytic converters are the big sellers, with sales of R19.6bn in 2011. A spokesperson for tyre manufacturer Continental, which has a large plant in Port Elizabeth, said difficulties caused by “inflexible” labour laws are compounded by a range of others, including high port charges, inadequate infra- structure, excessive bureaucracy and high taxes, particularly at the municipal level.
New vehicles in South Africa are generally less expensive than those in other African countries but cost far more than in Europe or Asia. Automotive manufacturers are adamant, however, that if the Competition Commission comes looking, it will not find price fixing.
Lourencon says GM absorbed 20% input price rises last year but increased car prices by just 2-3%. “I have no concerns about any possible investigations into our sector,” he says.
By; Gregory Mthembu-Salter