Workers assemble a Mercedes-Benz AG automobile on the assembly line at the new Daimler AG automobile plant outside Moscow, Russia. File photo: BLOOMBERG/ILYA ARKHIPOV
Workers assemble a Mercedes-Benz AG automobile on the assembly line at the new Daimler AG automobile plant outside Moscow, Russia. File photo: BLOOMBERG/ILYA ARKHIPOV

The UK is one of SA’s most important automotive markets, accounting for more than half of the vehicle units exported to Europe and about a third of global exports. In addition, Gibraltar, also a UK territory, received 586 vehicle units from SA in 2017, which almost doubled to 1,106 units in 2018. Overall, SA exported R6.6bn worth of vehicles to the UK in 2018.

However, the trade relationship between the SA and UK automotive industries is not just about the import and export of vehicles. Underlying vehicle exports are intricate cross-border supply chains, which involve linkages with component manufacturing. These are a vital cog that drives the industry. It is important to appreciate the fact that vehicle exports are supported by networks of component manufacturers that are an essential source of jobs and income growth.

SA exported R2.2bn worth of original equipment components to the UK last year, almost 70% being catalytic converters. The second-largest component export is automotive glass, which was estimated at R113m, followed by tyres (R62m) and road wheels and parts (R55m).

Two-way trade — the combination of SA’s exports to the UK and its imports from the UK — totalled R9.8bn in 2018. SA imported R3.5bn, R1.9bn of which was original equipment components. The components imported from the UK by SA are used to manufacture vehicles, most of which are in turn exported to other territories the world over, including the EU. In fact, the UK is the seventh-largest supplier of SA’s original equipment components, after Germany, Thailand, Japan, China, Brazil and the US.

SA’s exports are at risk of being affected by the UK’s departure from the EU. As the prospect of a “no deal” Brexit looms, the expectation is that SA and its SA Customs Union (Sacu) counterparts will need to strike a trade arrangement with the UK to ensure short-term stability.

If the UK leaves the EU without a deal on the one hand, and fails to conclude a trade arrangement with Sacu on the other, SA may face tariff increases on 70 automotive product lines, according to the commodity codes published by the UK. Out of these 70 tariff lines, four accounted for 84%-86% of exports over the 2016/2017 period. In 2018 the same four tariff lines accounted for 99.8% of R6.6bn in SA vehicle exports to the UK.

Urgent measures will be necessary to cushion the automotive industry from the short-term shock that a “no-deal” Brexit presents

These four tariff lines include various petrol and diesel engine vehicles, which not only affect major original equipment manufacture exporters in SA, but also a host of component manufacturers that support the production and export of these vehicles.

A no-deal scenario would see SA vehicle exports to the UK facing an increase in tariffs from 0% to 10% from April 13 onwards. A failure to implement some sort of Sacu reciprocity would negatively affect SA’s competitiveness in the UK market, negatively, and would in all likelihood lead to declining exports in the immediate term.

The impact of the tariff escalation will not only affect direct exports of vehicles from SA to the UK. Components sourced from other countries to manufacture and export vehicles to the EU will not fulfil local content and rules of origin requirements. This means vehicles manufactured in SA that use components sourced from the UK would not qualify for preferential market access into Europe once the UK moves out of the EU.

Stability is key in the short term, but all may not be doom and gloom in the longer run. In the event that this situation plays out, it may present an opportunity for reinvestment into SA’s component manufacturing industry, especially for multinational companies that seek to replace content currently sourced in the UK with SA content to optimise the agreement with the EU.

In that sense, Brexit could be the proverbial double-sided sword, which is likely to negatively affect exports in the immediate term but could attract investment from original equipment manufacturers (OEMs) and component manufacturers in the longer term.

Meanwhile, some urgent measures will be necessary to cushion the industry from the short-term shock that a cliff-edge “no-deal” Brexit presents, as this could have potentially negative implications for the domestic automotive industry’s development path as aligned to the SA Automotive Masterplan 2035, with repercussions on jobs and GDP.

It is vital that the government prioritises trade stability in the short term, and finds a way to fully analyse the costs and benefits of permanent trade agreements with both blocs in the future, once the full Brexit process has settled.

• Moothilal is executive director of the National Association of Automotive Component and Allied Manufacturers.