SA vehicle component manufacturers bullish but lack the ability to scale up
South African vehicle components manufacturers are making significant gains in quality, productivity and cost competitiveness but still struggling to close the gap on emerging-market competitors, according to a report published on Tuesday.
It finds that while there are plenty of domestic reasons for the components supply industry to be bullish — employment is rising, sales revenue is up in real terms, and vehicle manufacturers plan to increase orders — improving global competitiveness is often matched by that of other countries’ industries.
The South African Automotive Supplier Industry Benchmark Report, by B&M Analysts, compares SA directly with other up-and-coming industries in India, Mexico and Hungary.
More than 60% of the value of parts built into SA-produced vehicles is imported. Suppliers say the low volumes they are called on to produce — SA accounts for less than 1% of global vehicle production — make it impossible for them to be cost-competitive with overseas suppliers that count production volumes in millions, rather than thousands.
However, the report, commissioned by the National Association of Automotive Component and Allied Manufacturers (Naacam), says SA made big strides in cost containment between 2015 and 2017. Variable production costs, as a percentage of revenue, fell significantly. Combined with a drop in fixed costs, this lowered break-even points and increased operating profits. Even so, profit levels were less than half those of the other countries.
It’s a similar story with productivity, which improved by nearly 10% in the past two years but is still far behind that of competitors.
When it comes to worker commitment, however, SA is streets ahead. The 3% absenteeism rate is less than half that of the other countries. South African training budgets, as a percentage of remuneration, are also out in front.
Product quality is on the rise. Fault-related component returns by customers has fallen by more than 60% since 2015.
The overall improved performance is reflected in the attitude of vehicle manufacturers, who say they plan to not only commit to long-term relationships with existing suppliers but also to increase their total level of local sourcing.
This is not altogether voluntary. In the next phase of the government’s automotive policy, Trade and Industry Minister Rob Davies wants motor companies to increase local content in their vehicles from the current level of below 40% to at least 60%. He also wants more black participation in the South African supply industry.
Naacam director Renai Moothilal said on Monday: "There is a big opportunity here for black industrialisation, but there can be no corner-cutting. We are part of a global industry and anyone taking part must meet global standards."
B&M MD Douglas Comrie said the local supply industry was "making real progress" but some weaknesses required attention. One was lack of capital investment. In SA, this is equivalent to 3.6% of annual sales, compared to 6.7% elsewhere.
Not only was more investment needed to enable localisation growth but it could also support local research and development, which appeared to be a low priority among suppliers, he said. Motor companies had identified lack of SA-specific local product development as a growth obstacle.
The report says: "While complex and challenging, especially considering the structure of research and development networks, suppliers need to ensure an understanding of customer development needs and the resources needed to support them."