Auto components manufacturing in SA is in danger of collapse, say executives. Imports accounted for two-thirds of new cars sold in SA last year, and exports of key components fell by up to 50%. SA imported parts worth nearly R20bn more than the value of those it exported.
Without urgent government action, including a reversal of declining import duties, and linking the rand to the US dollar, the sector will continue the slide in which it has already shed 25% of jobs in 18 months, warns Stewart Jennings, president of the National Association of Automotive Components & Allied Manufacturers (Naacam).
Jennings, group CEO of PG Glass, acknowledges that government's proposed new automotive production and development programme (APDP) will provide overdue support to the components sector. But by the time it comes into play in 2013, much of the damage will already have been done, he says.
Jennings says employment at auto components companies has fallen from 82 000 to 62 000 since mid-2008. He forecasts a further 10% drop in 2010. Naacam director Roger Pitot says the list of collapsed companies is growing. "There is not a single components company making money at the moment."
Even the new automotive incentive scheme (AIS), which offers investment rebates to vehicle and components manufacturers, is no guarantee of salvation. Shy of investing in anything automotive, banks have not passed on reductions in interest rates, says Jennings. "Prime has come down a long way since 2008 but all that means is that, instead of quoting us prime plus 2%, banks are now offering prime plus 7%." Government's Industrial Development Corp has assisted some companies, though Jennings says its rates are "no giveaway".
One positive trend is increased demand from the domestic parts after-market. Motorists are keeping vehicles longer, so they require replacement parts. Damage caused by SA's expanding pothole network is also proving a boon.
Jennings acknowledges that SA vehicle manufacturers are trying to increase local content. But much of the additional business is going to local subsidiaries of multinational groups with links to the SA motor companies' parents in Japan, Europe and the US.
Because all seven SA car manufacturers are wholly foreign-owned, investment and sourcing decisions are approved overseas, where group interests come before those of the SA subsidiary. "SA suppliers without overseas parents never get close to overseas procurement departments," says Jennings. "Increasingly we find that SA companies that supplied parts to old SA vehicle models are dropped when new ones come along." He adds: "It's no wonder some SA suppliers are shifting their production focus away from automotive towards mining and other industries."
Jennings says the lack of a coherent overall policy threatens all manufacturing, not just automotive components. Trade & industry minister Rob Davies and others mean well, but without structural reforms, programmes like the APDP will always be limited in their effect. They won't create the hundreds of thousands of jobs SA so urgently needs.
"China, by devaluing its currency by 12%, helped lift itself out of recession," says Jennings. In the short term, he says, SA should weaken the rand. Longer term, it should peg the currency's value to the US dollar. The two measures would not only make SA exports more competitive but also limit the volatility that deters investment.
"In January alone, the rand has fluctuated 8% against the dollar," says Pitot. At the time of the interview, the rand's value had strengthened in one year from R10,80 to R7,50. "Export deals signed only a few months ago have since been rendered worthless," says Jennings.
He adds that the 65% market share of imported cars highlights the danger of a strong rand and reduced tariff barriers. From over 100% in the mid-1990s, duties on built-up cars have dropped to 27% today and are due to bottom out at 25% in 2012. However, there is no agreement on how to control the currency (see Cover Story, January 29).
Jennings recognises the need to limit protection, but says the process has gone too far. The imported 65% leaves only 35% to local components producers. Average local content of below 50% means the SA industry is providing no more than 17,5% of components for cars sold in SA.
Vehicle exports, into which local components are also fitted, may be rising. But the industry is well short of the 700 000 SA production Jennings says is needed by suppliers for cost-effective manufacture. At 379 000, last year's production was barely half that. In 2010, the industry predicts 418 500.
The current 27% duty is largely academic because, in almost all cases, duty rebates earned on vehicle and components exports bring it down to zero. The APDP will offer incentives for production volumes and added value but manufacturers will continue to feel no direct impact from import duties. "Once they balance the books to a zero-duty level, there is no incentive to use more local components," says Jennings.
Local motor companies may deem an imported part cheaper than the local alternative, but that is often because it is rebated. Jennings wants the department of trade & industry (DTI) to adjust the APDP so motor companies pay duties first, then claim back incentives. "The end result is the same but you focus their minds on the fact that there is a duty."
He is also worried by unfair competition. One of the local industry's main competitors is China, where government subsidises the automotive glass industry by up to 50%. "Glass is landed here at ridiculous prices," says Jennings. "We can't compete." He adds that soaring Eskom electricity tariffs have added a further R27m to the SA glass industry's costs over the past year.
Nimrod Zalk, the DTI's chief director for industrial policy, acknowledges the sector's strains but suggests the worst is over and that employment will start to pick up in 2011. He won't be drawn on the idea of rand stabilisation - "we cannot pre-empt the outcome of the macro-economic debate on this question" - but admits the DTI is concerned about the high proportion of imported vehicles sold in SA. However, he insists: "There is no artificial way to cap the level of imports."
Neither will there be tampering with the APDP - for now, at least. "The architecture of the APDP has been extensively consulted with all parts of the industry and there will be no fundamental changes. At an appropriate point we will assess its functioning and make adjustments if necessary."
He adds that government welcomes any form of foreign components investment in SA. "We would prefer to see deeper technology transfer, for instance through joint ventures between local and foreign component suppliers."
