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Picture: SUPPLIED
Picture: SUPPLIED

Mercedes-Benz SA recently announced plans to retrench 700 workers at its East London manufacturing plant in response to falling global demand for the C-Class sedan range, which caters to the upper end of society.

Ninety percent of Mercedes cars manufactured in SA are exported to Europe, Asia and America. The company is now looking at moving from three shifts to two shifts, which will result in production cuts of about 30,000 vehicles a year to 60,000. 

In November 2023, Mercedes announced an investment of R100m for the expansion of the existing solar PV facility for the East London manufacturing plant. It is planning to install 12.6MW of rooftop solar in addition to the existing 2MW solar facility. 

Globally, Mercedes has cited bottlenecks in its supply chain as a reason for the challenges it is facing, along with model changes in China that meant its top-end cars were in limited supply. Its global sales of electric vehicles (EVs) declined partially because of the end of subsidies in countries such as Germany.

There has also been a significant decline in research & development (R&D) spending on the transformation of Mercedes vehicles (excluding vans) towards a sustainable business strategy. In addition, new financing and leasing contracts declined in the first quarter of 2024 as people sought alternatives.

Global car manufacturers are in a state of flux. They are saddled with numerous costs: fixed costs (R&D, facilities) and variable costs (materials, labour, marketing). Raw materials and parts are the biggest variable cost, typically about 57% of the total price. In SA this has been made even more complex by high electricity costs, load-shedding and supply chain challenges in getting the cars to the ports for export.

Economics tells us that domestic production of goods and services is initially driven by domestic demand. This is followed by global demand for the product, often facilitated through subsidies, as is the case of the growth in EVs in China. 

One of the biggest drivers of R&D in the automotive sector is the impending carbon border adjustment mechanism (CBAM) proposed by the EU, and other transport decarbonisation policies deployed elsewhere. This has seen car manufacturers in SA procuring green energy and even making this a requirement for their original equipment manufacturers. This requirement has driven up manufacturing costs, and in the case of Germany and the UK has resulted in de-industrialisation. 

Mercedes-Benz SA sells luxury cars that are well over the R1m mark in a country where the median monthly salary is R5,400. It is selling cars where central banks globally have imposed the highest repo rates. It has invested in energy independence due to load-shedding and the impending CBAM, but SA has excess capacity. Manufacturers also face the very real risk that the countries they are exporting to may not want EVs produced in SA, or they could impose tariffs and remove tax credits. 

As we enter new economic terrain it is becoming evident that a lot of countries are opting for protectionism of their industries, and may even do so under the banner of decarbonisation. There are trade wars over critical minerals and green products such as lithium batteries, and the biggest casualty will be African economies and their people. 

The implementation of the CBAM, the rapid advancement of EVs and the escalating trade tensions between major global powers present a complex and multifaceted challenge for automotive companies, particularly in SA. As manufacturers grapple with the need to decarbonise their operations while remaining competitive in a volatile market, the potential for significant retrenchments and economic disruption looms large.

The long-term viability of the automotive industry in Africa will depend on its ability to adapt to these evolving circumstances, including by investing in sustainable technologies, diversifying supply chains and fostering partnerships that can help mitigate the risks associated with geopolitical instability. 

• Mashele, an energy economist, is a member of the board of the National Transmission Company of SA.

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