Wheels of fortune: how Morocco plans to overtake SA motor industry
SA may be about to surrender its status as the home of Africa’s biggest motor industry. New investments in Morocco are forecast to push up the North African country’s automotive production.
South African motor companies built 601,178 vehicles in 2017, compared with Morocco’s 376,826. Morocco, however, has set an annual production target of 1-million vehicles within 10 years while SA is targeting 1.2-million by 2035.
Biggest is not necessarily best, but the challenge to SA’s long-standing supremacy on the continent underlines the need for industry and the government to protect the competitiveness of the motor industry when designing a successor to the 2013-20 Automotive Production and Development Programme (APDP). Discussions on a new programme, expected to run to 2035, are understood to be advanced and Trade and Industry Minister Rob Davies has said he hopes to present a draft policy to Cabinet by year end.
Two recent reports highlight the progress made under the APDP and the scale of the challenges ahead.
The 2018 Automotive Export Manual, published by the Automotive Industry Export Council, shows that exports of South African-made vehicles and components grew exponentially in recent years.
Between 2013 and 2016, their value grew from R102.7bn to R171.7bn. Though the figure retreated slightly in 2017 to R164.9bn, that was partly the result of a stronger rand in the second half of the year. Exports to the EU rose 8% in euros but fell marginally in rand.
A few days before the manual was published, the National Association of Automotive Component and Allied Manufacturers (Naacam) released a report showing that the quality, cost management and overall efficiency of the local automotive supply sector is improving.
Vehicle manufacturers often blame components suppliers when the industry falls short on international competitiveness. However, Naacam’s benchmarking report, produced by B&M Analysts, shows that suppliers are actually making good progress. Fixed costs are under control, variable costs (as a percentage of sales) are receding, and sales and employment are both on the rise. So are profits and productivity.
Naacam director Renai Moothilal says suppliers are matching themselves against global best practices.
Local industry urged to adopt the ‘Cape to Cairo’ approach to ensure sustainability
The result, says B&M MD Doug Comrie, is that customers – mainly local vehicle manufacturers but also export clients – overwhelmingly intend to increase purchases from SA.
That’s music to Davies’s ears. The average local content (including components, labour, energy and other value-adding elements) in vehicles produced in SA is below 40%. He wants it to reach at least 60%.
That will have a big effect on the motor industry’s trade balance. As the Export Manual shows, the over reliance on imported components drags down overall performance. In 2017, exports of "original equipment" components used to build new vehicles were worth R50.3bn. But R94.8bn of imports created a R44.5bn deficit.
Trade in new vehicles did better: R114.6bn exports and R59.8bn imports.
Put the two together and you have an overall trade surplus of R10.3bn. But that’s just original equipment. The motor industry also imported R53.8bn of after-market spares — some for motor companies and their dealers, and some for independent distributors. Throw that into the pot and the final industry trade balance is a R43.5bn deficit. The components gap becomes an eye-watering R98.3bn.
Components suppliers share Davies’s desire to grow their sector. They, and motor companies, also understand his insistence on more black participation. Multinational motor companies have rejected the government’s suggestions that they cede stakes in their South African subsidiaries to black shareholders and instead have offered to create a multibillion-rand fund to support the development of black components suppliers. The plan is for an initial R3.5bn "pot" that will be regularly replenished. It is estimated this would cost R1bn annually. The government has accepted the idea in principle.
Motor companies exported 338,000 vehicles in 2017, more than half of the industry’s production. National Association of Automobile Manufacturers of SA executive manager Norman Lamprecht expects exports to hit 366,000 in 2018.
South African-made vehicles were shipped to 149 countries in 2017. The biggest single destination was the UK, which took 98,358.
Although SA is the 22nd-largest producer of vehicles, last year it produced only 0.6% of the global total of 97.3-million cars and commercial vehicles.
The post-APDP dream is to double last year’s 601,178 production to at least 1.2-million by 2035, for a 1% share of the overall market. Exports will dominate that growth. The domestic market is showing signs of relief after a prolonged period of stagnation but no one is predicting a surge in the foreseeable future.
Kriben Reddy, head of the Transunion Auto consultancy, says a sustained swing from new cars towards used ones has started to reverse.
New-vehicle price inflation has slowed and — combined with a bewildering variety of discounts and special deals by manufacturers — is bringing buyers back into showrooms.
But economic uncertainty, limited disposable income, a higher rate of value-added tax, rising fuel prices and inflexible credit rules – most finance applications are rejected – mean the market’s not about to turn on its head, he says.
So exports will continue to underpin the industry. Africa is the logical target market. Lamprecht says the local industry should adopt a "Cape to Cairo" approach. Nissan SA MD Mike Whitfield, however, speaks for most companies when he says the emphasis should be on sub-Saharan Africa.
But most new vehicle markets have collapsed in recent years. An attempt, involving SA, to create a motor industry in Nigeria is in limbo.
The situation is made worse by regional and national protectionism against imports.
There has been talk for some time of trade agreements but nothing concrete has come out of them yet.
According to the International Organisation of Motor Vehicle Manufacturers, vehicle production across Africa grew 3.9% last year, to 1.1-million units. SA accounted for 56.4%. Future automotive policy would like to protect that, but Morocco may have other plans.
At first, the kingdom was considered a cheap production base for French manufacturers. Target markets were the former French colonies of North Africa. But with Spain only a few kilometres away, it became a base for European exports, too.
Some Moroccan politicians are talking about turning the country into a production base for the whole of Africa.
Renault, the original investor, has been joined by Peugeot- Citroen, while manufacturers from other countries are starting to take an interest.
Renault’s Tangier car plant is planned to have an eventual annual production capacity of 400,000 vehicles — nearly twice as many as SA’s largest.
Investment incentives include a five-year corporate tax exemption for automotive companies setting up in Morocco, and a 25-year exemption if most production is exported. Other benefits include VAT exemptions, land purchase subsidies and rebates of up to 30% on investment costs.
The APDP also offers import-duty rebates and cash grants. None of this means SA must lose out. If African economies eventually meet forecasts and world automotive sales grow as predicted, there is room for two significant African motor industry bases (three, even, if Nigeria wakes up).
There’s no reason to doubt that SA’s policy makers will produce a competitive post-APDP strategy and lay the foundations for sustainable growth.