An inefficient supply chain, high logistics and port handling costs could cause carmakers in South Africa to lose future production volumes to global competitors in Asia, South America and even the EU, according to executives at last week’s South African Automotive Week in Port Elizabeth.
Total costs for South Africa’s automotive industry are about 20% higher than Western Europe, according to the National Association of Automobile Manufacturers of South Africa (NAAMSA); compared to China, South Africa is around 40% costlier. While wages in South Africa are higher than countries like China, India or Mexico, labour appears to be less of an issue compared to low localisation levels, poor productivity and logistics cost.
Dave Powels, president of NAAMSA and managing director of Volkswagen South Africa (pictured), said the problem is South Africa’s relatively low vehicle and component production. Carmakers here have traditionally spread volumes thin across four or five vehicle platforms, making it difficult for parts suppliers to justify localising in the country. Total production in South Africa for all passenger and commercial vehicles was close to 563,000 across seven OEMs, expected to drop to 385,000 this year, according to NAAMSA.
The industry relies heavily on imported parts, particularly powertrain components such as engines and transmissions. Toyota sources engines from Japan and gearboxes from India, while GM sources kits for its Corsa pickup from Brazil and for Isuzu trucks from Japan. VW, BMW and Mercedes import powertrains mostly from Germany, while Ford is the exception with an engine plant in Port Elizabeth. The industry sources only 35% of content locally, which Powels said must rise above 70% to make manufacturing more viable.
“The supply chain’s inefficiencies have been a big part of the disadvantages in cost compared to Western Europe or China,” said Powels. “The tier one suppliers may be here, but we need the tier twos and tier threes to produce more to increase the manufacturing depth and decrease logistics costs.”
With government and development officials in the room, including the Department of Trade and Industry (DTI), Powels and others made clear that change needed to happen fast from both policy and industry perspectives. He warned that if South Africa did not make its supply chain and production more competitive within the next two years, the industry might not survive another decade. He called for support from both the DTI and the Automotive Production and Development Programme, a government initiative to be phased in by 2013 that will offer incentives for higher volume production. It will replace the Motor Industry Development Plan, which has focused more on encouraging exports.
Early signs are reasonably positive, as OEMs have continued to invest in South African plants, and have made moves to rationalise production to one or two platforms. VW and BMW are both at one, while Toyota, the largest exporter in the country, just two.
Manufacturers also expressed frustration with Transnet, which operates South Africa’s ports, railways and pipelines. Transnet was incorporated in 1990 from state-held companies, however the state remains the main shareholder, although Transnet is expected to generate its own revenue to invest in infrastructure. According to Roger Pilot, executive director of National Association of Automotive Component and Allied Manufacturers, Transnet is a “privatised monopoly”, and it hurts the industry’s competitive standing in the global marketplace.
Transnet is currently investing heavily in projects, but OEMs complained that enormous port fees acted as a tax to finance other aspects of infrastructure and industries. VW’s Powel revealed that port charges in South Africa for a 40ft container based on 2008 figures were $820 compared to $470 in Argentina, $306 in India and $80 in China. Port productivity is also on the bottom end of global productivity, with Cape Town averaging fewer than 20 moves per hour, while Port Elizabeth and Durban are only mildly better. Germany’s Bremerhaven is close to 60, while Japan’s Yokohama is near 100.
The port costs, on top of a volatile and rising Rand, hurt South Africa where it counts, as the industry depends not only on importing parts but also on exporting finished vehicles. Exports were a record 284,000 last year, and although have dropped between 35-45% for 2009 they still account for a majority of production. But future programmes are being put at risk. Sean Bricknell, logistics manager for GM South Africa, said that the key challenge for the industry is being cost competitive versus sister plants elsewhere in the world. “Inbound and outbound logistics costs are significant drivers because of the great distances between our sources and export customers,” he told Automotive Logistics.
Trade agreements pose another conundrum. Manufacturers such as VW and Toyota make good use of a free trade agreement with Europe, while others such as BMW benefit from one with the US. However, there are concerns that future agreements with low cost countries in southeast Asia or Latin America could put South Africa at a further cost disadvantage, particularly in crucial efforts to localise more parts.
On the other hand, South Africa could suffer from the lack of free trade agreements with other parts of Africa, including 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,” said Dr Johan van Zyl, CEO of Toyota Motors South Africa. “But we have few free trade agreements in North and West Africa, while the EU is already negotiating an agreement [with North Africa]. If we don’t act, we will lose this market.”
Van Zyl echoed Powels, warning there is no inherent reason for the automotive industry to be in South Africa if it does not develop the necessary supply chain. “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.