With sales and exports hit hard, South Africa’s seven OEMs are scrambling to revamp their production to become more efficient, and pushing for the country’s rail and port operator to smarten up. If that doesn’t happen, carmakers may go elsewhere

In October, South Africa held its second South African Automotive Week (SAAW), a biannual, five-day event bringing industry together with local and national government bodies in Port Elizabeth for a trade fair and conference. It was a critical moment. Not only has the South African car industry been severely impacted by the recession, with exports down close to 45% from 2008, and the local market off by as much as 40% from its peak in 2006, but carmakers have struggled with chronically low productivity, an underdeveloped local supply chain and high logistics costs.

The supply chain is a particular problem in South Africa, where the industry appears to have developed more as a colonial satellite to its European, American and Japanese OEMs, rather than gaining more independence. Despite a historic motor industry with seven OEMs assembling cars, localisation rates are only 35%. There was a sense during the SAAW, and parallel interviews, that while the industry has high export potential, it must work fast to become more efficient or risk seeing its major players pull out. At the same time, it needs to lower logistics costs given the high amount of global imports and exports it handles.

A lot going on at the bottom of the world

Port Elizabeth is way down the bottom of the continent, on South Africa’s Eastern Cape, home to 1.3m inhabitants and a hard wind off the Indian Ocean. While I was there, the wind churned up stiff white peaks in the sea, blowing so rough that it delayed a containership in the bay for several days, holding up deliveries to local industry and causing General Motors to shut down early on Friday that week.

A panorama of the region reveals some of the contradicting strengths and weaknesses of the South African industry. GM and Volkswagen have assembly plants here, while Ford produces engines. The local port offers a convenient infrastructure for exporting and importing vehicles, with rail links across the Eastern Cape and north to Johannesburg.

Only days before the SAAW began, the Port of Ngqura, adjacent to Port Elizabeth, also began operations. Part of the government-owned Coega Industrial Development Zone (IDZ), Ngqura has South Africa’s deepest draught and is intended to become the country’s first global hub port, with a focus on containers. According to Gustav Meyer, of the government-owned Coega Development Corporation, which runs the IDZ, Ngqura’s container specialisation allows Port Elizabeth to focus more on finished vehicles.

Also part of the local landscape and the Coega IDZ project is the Nelson Mandela Bay Logistics Park near VW’s plant in Uitenhage, where five European suppliers have set up assembly operations in the past year alone, and a second zone close to the new port where GM is developing a $30m Pan-African logistics centre for spare parts, set to begin operations in July 2010. Space is here for other manufacturing or logistics areas.

About 140km away is East London, home to a Mercedes plant and another port and supplier park also looking for a manufacturer, possibly a contract carmaker. There have been rumours of investments in either this or the Coega space by Indian or Chinese OEMs, but as yet no concrete developments.

All for the price of a port

Despite the density of manufacturing and new infrastructure, including the ongoing construction of roads and buildings stimulated by the 2010 World Cup in the country, there are concerns about the costs and efficiency of these projects that strike at the heart of South Africa’s logistics problems. Port fees in South Africa, for example, are among the highest in the world, according to Dave Powels, president of the National Association of Automobile Manufacturers of South Africa (NAAMSA), and also managing director of VW South Africa.

According to NAAMSA, cargo fees for a 40ft container based on 2008 figures are $820 in South Africa compared to $470 in Argentina, $306 in India and $80 in China (see chart, p44). Port productivity is also toward the bottom, with Cape Town averaging fewer than 20 moves per hour, while Port Elizabeth and Durban are only mildly better. Germany’s Bremerhaven is nearly 60, and Japan’s Yokohama about 100.

There is a reasonable rail infrastructure but high prices and decaying rolling stock make it less attractive to carmakers. “Logistics is a big issue in South Africa, especially with rail costs so uncompetitive,” Dr Johan van Zyl, CEO of Toyota Motors South Africa, tells Automotive Logistics. “And there is very old rolling stock that needs updating.”

Behind both the port and rail operations is Transnet, a name synonymous with budget stress for carmakers. Transnet operates South Africa’s ports, railways and oil pipelines. It was incorporated in 1990 from state-held companies, however the state remains the main shareholder. According to Roger Pitot, executive director of National Association of Automotive Component and Allied Manufacturers (NAACAM), Transnet is a “privatised monopoly”, and it hurts the industry’s competitive standing in the global marketplace.

Sean Bricknell, GM’s logistics manager in South Africa, believes the problem is the South African government has decided Transnet must improve transport infrastructure following a long period of neglect. That would be positive except that the government expects Transnet to fund the investment itself. “In my opinion, the government is shirking its responsibility [to invest in infrastructure],” he tells Automotive Logistics in an interview at GMSA’s Port Elizabeth plant. “Elsewhere in the world, municipalities are responsible for infrastructure. The cargo dues – supposedly used to fund infrastructure development – are a tax charged to the port users and are what make our ports uncompetitive. It’s an impossible task to expect Transnet to run a world-class operation at competitive rates whilst at the same time having to invest billions into neglected infrastructure.”

Bricknell points out that Transnet has made some encouraging administrative improvements recently, including a new group commercial department that handles negotiations, rather than having a person in each of the company’s various departments. But high costs and low efficiencies start any negotiation on the wrong foot.

According to Matthew Quin, product manager for Chep South Africa, inventory-carrying cost in the country has doubled within the past four years, while transport costs have risen 50%. “South Africa is actually 39% higher than the world average on these logistics cost drivers,” Quin said at the conference during SAAW.

Price rises of 30% a year by South Africa’s energy provider, Eskom, have put suppliers under pressure, according to Gavin Maile, an analyst at KPMG. “Raw material and electricity costs are higher in South Africa than elsewhere, with a greater knock on effect in the supply chain,” he told delegates.

The problems will not disappear in the new port developments without reform. Coega’s Gustav Meyer admits that despite good logistics systems, the pricing and fees from Transnet make his port less competitive. “Therefore we are working on improving the port’s efficiency,” he says.

Too many imports

But in the meantime port delays are becoming more common at a time when OEMs are in need of critical timing. With inventory levels cut down to the bone to free up cash, most OEMs are carrying fewer buffer stocks both for inbound material as well as for finished vehicles, meaning shipping delays carry a greater risk of stopping a plant.

Bricknell blames many delays on Transnet’s inefficiency, on port congestion in South Africa and on problems in South American ports, from which GM receives kits for its Corsa pickup. During our interview, a vessel scheduled to arrive from Brazil had suddenly decided to make up for time delayed in Brazil and on the previous calls along the South African coast by skipping Port Elizabeth to go to straight to Durban. It meant Bricknell had to move GM material back from Durban.

Bricknell’s challenges from Brazil reveal more fundamental problems that the South African industry must overcome in its supply chain. The supply base relies too heavily on imported parts, exposing it to logistics cost as well as the volatility of the South African rand, which has fluctuated by as much as 40% versus the dollar. On the other hand, with a global supply chain inevitable to some extent, South Africa is missing the right logistics efficiency at home to stay competitive.

Among the imports are valuable components such as engines and transmissions. Toyota sources engines from Japan and gearboxes from India; besides Brazil, GM sources kits from Japan and Thailand for the Isuzu pick-up trucks it assembles. VW, BMW and Mercedes import powertrain parts mostly from Germany, while Ford is the exception with its Port Elizabeth engine plant. There is a strong base for catalytic converter production in South Africa, but VW’s Powels believes local content must rise above 70% to make manufacturing more viable.

NAAMSA figures also suggest that South Africa produces just 20 cars per employee each year, a rate Powels says must improve to 30 per employee. The result is that despite lower labour costs, total costs for South Africa’s automotive industry are about 20% higher than Western Europe, according to NAAMSA, and a staggering 40% costlier than China.

Improve supply chain, build in volume, or die

At the conference, Powels warned that if South Africa does not begin to change within the next two years, the industry could fade away, losing production to Asia, South America and even the EU. “If we do not make these improvements now, we will lose the industry,” he said. “We need to act in the next 1-2 years, if we want to survive 7-10 years.”

While those dramatic words were no doubt selected carefully for the audience of local and central governmental officials, including the Department of Trade and Industry (DTI) from which the automotive sector would like to see more support, manufacturers are in wide agreement on the sector’s needs. South Africa’s seven carmakers have traditionally spread volumes thin across four or five vehicle platforms, making it difficult for part suppliers to justify localising in the country.

To increase volumes, Powels tells Automotive Logistics that OEMs need fewer platforms. VW is moving from as many as five down to two (including the new Polo). In November, VWSA signed a deal to double its exports in 2010 to about 55,000 Polos, including being the sole provider of right-hand drive versions globally. Powels estimates that local content will reach close to 70% by the end of the year.

Early signs suggest that other OEMs are following suit, with BMW also going to one platform, and Toyota, the largest exporter in the country, two. The theory is that producing with fewer platforms will increase the purchasing and logistic economies of scale, bringing down cost and increasing efficiency. The higher volumes per platform should also encourage more suppliers to localise, particularly at the tier two and three level that is missing currently.

To be a free market or not to be, that is the question

The industry hopes for support in this area from the Automotive Production and Development Programme (APDP), a government initiative expected to offer incentives for higher volume production. The scheme will replace the current Motor Industry Development Plan (MIDP) by 2013.

In simplified terms, the MIDP provides credits by value of goods exported from South Africa, which can be used against the duty of goods imported. In some ways the MIDP artificially stimulated exports, as manufacturers sought to gain those valuable credits. But since the credits came off the duty of imports, it also prevented a wider localisation of the supply base. Toyota’s van Zyl echoes Powels by warning there was no inherent reason for the automotive industry to be in South Africa if it was just going to import parts and export most vehicles. “If the industry and supply chain are not competitive, we have no reason to import parts here from other parts of the world to build cars,” he said at the conference.

The APDP, on the other hand, will offer incentives to OEMs that produce more than 50,000 units per year. Such OEMs would be able to import 20% of their components duty free, reducing to 18% over three years. The APDP will also include a tradable duty credit of 55% on the value-added element of a component, along with other support to be finalised.

Such government help along with trade agreements pose another conundrum. Carmakers such as VW and Toyota make good use of a free trade agreement with Europe, while others like BMW benefit from one with the US. However, there are concerns that future agreements with south-east Asia or Latin America could put South Africa at a further cost disadvantage.

On the other hand, South Africa could suffer from a lack of free trade agreements elsewhere in Africa, including with North African countries, the fastest growing region on the continent. “There is much potential particularly in the light commercial vehicle market in Africa, which should be our market,” van Zyl told delegates. “But we have few free trade agreements in North and West Africa, while the EU is already negotiating them. If we don’t act, we will lose this market.”

South African collaboration is strong

While South Africa faces its supply chain problems, OEMs here work more closely together than their global counterparts, particularly for logistics. There is a supply chain and logistics sub-committee of NAAMSA, chaired by Ford’s head of logistics, with GM’s Bricknell as the vice-chairman. He says the group is an important way for OEMs in the country to confront logistics challenges, particularly in facing up to Transnet “as an industry”, rather than individually.

But OEMS have also worked together to join volumes for inbound and outbound. GM and VW, for example, use the same service provider, UTi, to handle and share the movement of domestic inbound material. UTi works under separate contracts, but at the same rates, while sharing consolidation centres and milkrun capacity between the OEMs. “UTi is using half the number of trucks required before the agreement, when we had separate supply chains,” said Bricknell. “This has taken out a huge amount of cost, and helped make the LSP more profitable.”

GM and VW have also put together finished vehicle volume by rail. “GM didn’t have enough volume to fill a train, nor did VW, so we negotiated with Transnet to share it,” he said.

Bricknell hopes to extend that rail collaboration to other OEMs. Currently, the trains that move GM and VW cars to Johannesburg return empty. However, Ford and BMW move vehicles from Pretoria, near Johannesburg, to Durban for export, a port that is often congested, according to Bricknell.

“We’re working together through the NAAMSA Supply Chain sub-committee and with Transnet to put a solution in place where the Gauteng-based OEMs [Ford, BMW and Nissan] could use the backleg of our train to export from Port Elizabeth, which is not usually congested,” he says. “Then, perhaps we can get a reduction in our rates too. Unfortunately, progress with Transnet has been slow.”

From a purchasing and manufacturing point of view, OEMs also hope that higher volumes and supplier parks could go some way toward encouraging suppliers and OEMs to work more closely together. Toyota’s van Zyl said at the conference that only 17% of the components it uses are shared by other OEMs, a proportion that he would like to see increased to improve supply and logistics costs.

A way between the global and the local

But the industry must develop more locally for this to happen. At just 1% of the global motor industry, there has been a relatively low amount of R&D invested here. And while a spate of multi-billion rand investment announced by numerous OEMs suggests the viability of the industry, Powels warned that it could be a final “spin of the dice” before OEMs pull out.

But with the consolidation of platforms, there is a chance for the country to better concentrate its skills. This responsibility could extend to logistics as well, as Bricknell reveals. GMSA currently manages its supply chain out of Europe ex-works with UTi with a good deal of success. Together with UTi, it recently won the Platinum Award at the annual Logistics Achiever Awards in South Africa for the system.

Bricknell said that GMSA is investigating how to set up something similar for material coming from Brazil, which is currently consolidated as knock-down kits (CKD) in Brazil.

“But I believe GM should be producing cars rather than performing logistics and packaging,” he said. “I would like to be able to source material directly from those Brazilian suppliers, and then use a 3PL and control it ex-works, as we do so effectively in Europe.”

Such control, dependent on good supply-chain partners, could be a small but important example of how OEMs here should work to regain a competitive edge. Such logistics systems are especially important since, barring government intervention, global parts will continue to flow into the country. South Africa’s success, as elsewhere, will depend upon how well it can manage between a simultaneously global and local supply chain.