GHITESH DEVA: SA must switch on to burgeoning EV industry

For the most part automobiles have been powered by the trusted internal combustion engine (ICE) since mass production began in the early 1900s. ICE technology has evolved, with suppliers and original equipment manufacturers (OEMs) investing extensively to improve engine performance while reducing emissions.

However, stringent global emission regulations, coupled with increased activism by environmentally-conscious consumers, have necessitated that the industry seek alternative technologies to propel vehicles. It is now certain that the availability of ICE-powered vehicles will diminish in the near future — many countries have already announced that the sale of ICE vehicles will be banned. The UK and Europe in particular, have already announced the prohibition of ICE-powered vehicle sales from as soon as 2025. Others will surely follow. As OEMs experiment with options, electric vehicles (EVs) are likely to become the powertrain of choice.

According to the Organisation Internationale des Constructeurs d'Automobiles, during 2019 (the period before the Covid-19 disruption) 23% of vehicles manufactured were sold to Europe, 23% to North America and 48% to Asia. The remaining 6% were distributed between South America and Africa, with Africa accounting for only 1%. It’s no surprise then that developments in Asia, Europe and North America will have a huge impact on the specification of products that OEMs research, develop and ultimately manufacture.

In this highly competitive sector the achievement of economies of scale is imperative. OEMs will be discerning in deciding what technologies to invest in, meaning if volume-driver markets ban ICE the business case to continue building and supporting ICE-powered vehicles is eroded, even if there are small markets (such as Africa) where ICE may still be permitted. It must be highlighted that some experts don’t believe EVs will be adopted as quickly as policy regulators and other stakeholders believe for a variety of reasons, including lack of infrastructure, pricing and the adaptability of customers to change.

The automotive sector is one of SA’s largest contributors to employment and GDP, offering employment to about 100,000 people. The country exports about 60% of production to foreign markets. Therefore, consumer and regulatory developments in these export markets have a big effect on the local industry. No EVs are assembled in SA, but some hybrid vehicles are built locally and an opportunity to grow this into a niche exists as markets transition into EV supply. Local component manufacturers also benefit from the export of ICE-related components for assembly and distribution in global markets.

Opportunity knocks

If the local industry does not transition to the production of components and assembly of EVs it will not only lose the opportunity to reap the rewards of participating in this emerging technology, but the sector is at risk of diminishing. At least 100,000 jobs may be at risk in an already struggling economy.

The EV Green Paper produced by the department of trade, industry & competition in May 2021 recognises that a coherent strategy is required to shift to the production of EVs. It is not merely the OEMs that have the challenge of leading this — a holistic and collaborative execution plan is required.  

The ability to achieve scale is a crucial factor to support a business case for OEMs and component manufacturers in deciding whether to invest in an economic zone. Input costs are another important aspect, given the competitive landscape in both the sector and the geographies.

Just like an engine, a battery is a critical element of an automobile. In most cases, engines in SA-assembled cars are imported. However, batteries are volumetrically larger and heavier than engines. This means the logistical costs of landing imported battery assemblies are higher, making it financially unviable. There are a limited number of battery manufacturing plants and these are concentrated in Asia, aggravating the challenge of getting batteries to SA at a palatable cost.

To better participate in the assembly of EVs investment in a local plant may be considered to produce battery cells. The challenge is that none of the OEMs individually builds sufficient units to validate a commercial case for the construction of a battery plant. A possible solution could be for a separate economic hub to be created where manufacturers jointly invest in such a plant. That would work to the extent that component sharing is possible between OEMs.

Enhanced incentives

Similarly, existing global battery component manufacturers could be encouraged to invest in a plant in SA. The Automotive Production & Development Programme, Phase 2 (APDP2) incentives would need to be enhanced, in addition to the consideration of other support for a commercial case for such an investment.

Notwithstanding the achievement of building a battery plant locally, the viability of the local industry is also contingent on the terms and conditions of bilateral trade agreements with target countries that would allow us  to land SA-built EVs at competitive prices.

Increased incentives for the technology investments that are required would also be welcome as new EV platforms become prevalent — especially in the component subsector. The biggest obstacle to localisation is that in matters such as retooling and testing, as SA-based manufacturers often look to divert production out of existing global component hubs. These incentives could be in the form of a higher Automotive Incentive Scheme or even supplementary tax incentives for new EV-specific components. The added investment the fiscus may need to make in this regard would be rewarded by a multitude of economic benefits, including job creation, technology transfer and business opportunities that result from greater domestic component production.

In tandem, the local consumption of EVs, specifically driven by the largest consumers of vehicles (government, rental market and corporate fleets), could serve as a catalyst to drive up local demand and consumption, thereby  facilitating scale and improving the business case for local investment. This would require financial incentives for local consumers, traditionally driven by taxation allowances, as well as a robust and reliable infrastructure to charge and maintain EVs.

The current allowances see a higher import tax levied for EVs compared with their ICE counterparts. Additional incentives, such as reduced licence costs, subsidised tolls, parking and charging infrastructure, as well as dedicated supplier parks and preferential utility provision, could further drive up local demand and scale.

Proactive preparation

Most Tier One component suppliers in SA are globally owned and have the internal and global technical knowledge or partnerships to supply whatever commodity or component subsystem is required, irrespective of the OEM platform. There are also locally headquartered suppliers that have track records of producing high-quality components at specifications suitable for OEM assembly.

Key determinants of component supply into the new electric vehicle space will include proactive work in the skills and technology preparation areas. The National Association of Automotive Component & Allied Manufacturers (Naacam) has been at the forefront of this, with programmes such as High Gear and the Yakh’iFuture platform.

Component companies should also make use of the skills development funding available through an agency such as the Manufacturing, Engineering & Related Services Sector Education & Training Authority, to ensure their workforce is skilled up to levels required by global technology changes.

EV is a turning point in mobility and our local sector’s ability to remain relevant will be determined by embracing the opportunity to make the necessary shifts to capitalise and grow our contribution to global markets.

Deva is partner and automotive sector leader at Mazars SA. Naacam executive director Renai Moothilal contributed to this article.