Colin-on-Cars – Auto industry taking strain

South Africa’s important built-up vehicle export programme is under threat from two major fronts. This is one of the strong messages that came out of Messe Frankfurt SA’s recent Hypermobility virtual conference and was mentioned by several speakers.

Hypermobility was fully supported by the National Association of Automobile Manufacturers of South Africa (NAAMSA), the Retail Motor Industry organisation (RMI) and the South African Motor Body Repairers Association (SAMBRA).

The first speaker to highlight the threat to South Africa’s vehicle exports was Neale Hill, the Managing Director of the Ford Motor Company of Southern and Sub-Saharan Africa and Vice President of NAAMSA.

Hill said the immediate threat was the second wave of the virus which had resulted in further lockdowns in several European countries, adding last year’s record vehicle exports of 387 125 units to 151 countries in the world accounted for 64% of South Africa’s vehicle production of 632 000 units and 74% of these exports went to European countries.

Ford’s Struandale engine plant

This is where the first problem lies for SA vehicle exporters. Not only have these countries been hit by the pandemic, but the United Kingdom also faces the tough challenges of Brexit, which will see the UK leave the European Union at the end of December, while there are ongoing shifts in global trade patterns as well as a move towards regionalisation.

Hill said the latest estimate for the future of SA’s vehicle exports was a drop of almost 40% in 2021, compared to 2019, with forecasts for a full recovery to 2019 levels varying between two and five years.

This is a sad picture when one considers that automotive exports from SA in 2019 were at a new high and 10,2% above the 2018 figure. The automotive industry was the fifth largest exporting sector in the South African economy last year, contributing 6,4% to the nation’s Gross Domestic Product (GDP).

So far there have been no announcements of specific stimulus packages for the local automotive industry. In fact, Hill said an international survey had shown only six countries had, so far, provided specific help to their motor industries to alleviate some of the effects of COVID-19.

The second threat to the local manufacturing industry is the swing to electric vehicles and upcoming bans on the sale of cars and vans with internal combustion engines (ICE) in many European countries.

Volkswagen Uitenhage

The United Kingdom, a major destination for SA vehicle exports, has just seen the ban on the sale of cars and vans with ICE brought forward by five years from 2035 to 2030. The ban on petrol-electric hybrids will remain at 2035. This kind of decision could have a big impact on the SA automotive industry if it is unable to replace ICE vehicles with electric vehicles for the export markets.

Mike Mabasa, the CEO of NAAMSA, speaking at Hypermobility on the subject of the NAAMSA roadmap for the future, said the organisation’s major thrust going forward was to ensure the production of EVs came to South Africa so local manufacturers could continue to service their export customers.

Mabasa explained that without EVs the value of SA’s automotive exports would drop from a figure such as 2019’s R201,7-billion to only R40,3-billion, and the contribution to GDP would fall from 6,9% to 4,6%, while employment would shrink from 110 000 jobs at the OEMs to only 55 000.

The NAAMSA CEO stressed a healthy and growing domestic EV market would be required to make local EV manufacture viable for the OEMs. To this end NAAMSA is making a proposal to the government that import duty on vehicles with engines larger than 1 000 cm3 be increased to a starting point of 18%, while import duty on EVs after the three-year no duty period be set at 18% instead of the current 25%.

In addition, there is a plea to government to exclude the cost of EV battery packs from ad valorem duty while the OEMs are also looking for further financial support from the various assistance programmes such as the Automotive Investment Scheme (AIS), Volume Assembly Localisation allowance (VAI) and Production Incentive (PI).

The outlook for the South African economy is bleak and a post COVID-19 recovery will take as long as five years and by that time the local economy will be 8% smaller than it was pre-pandemic according to Jeff Gable, the head of Fixed Income Currency (FIC) research at ABSA.

Gable said the global economic downturn, which from a predicted 3,3% growth in 2020 to a decline of 4,4% was the biggest fall since the Great Depression of the 1930’s. He added Sub-Saharan Africa was also in dire straits, with a switch from 3,5% economic growth for the region to a decline of 3% and the rate of recovery is not easy to predict, making medium- and long-term planning very difficult.

The ABSA executive said the South African economy was not in a good situation even before it was hit by the global pandemic, with the economy growing by barely 0,5% in 2019.

Reserve Bank interest cuts have given consumers approximately R50-billion in spending power, but there will be far less money in circulation at the end of this year, due to the ongoing loss of jobs, very few bonuses being given, as well as low wage increases if any at all and the reality that it seems the public service wage bill is to be reining in by Treasury.

Gable added that although the prime lending rate was at its lowest level since the 1960’s, but the rates for longer term loans are much higher and this is placing huge strain on the government, with lower tax collection and huge debts that need to be serviced. A growing share of taxes collected is going to paying interest on loans, which is impacting on government spending in most sectors of the economy.

He said the lack of business confidence was of great concern, as there had only been two quarters in the last 10 years when the indicator had been in favourable territory and that was in 2011 and 2015. Consumer confidence is also very weak, and that extends to the high-income earners too, with little appetite to buy durables, which includes motor vehicles.

Gable concluded by saying that the economic environment, both globally and locally, would remain uncertain and volatile until thoroughly tested and proven vaccines are rolled out globally. The recovery that follows will be led by the private sector as the world’s governments all have depleted finances.

However, there was some good news on the financial front, arising from the establishment of the African Continental Free Trade Area (FTA) Secretariat, and Secretary General, Wamkele Mene, stressed how imperative it is for an integrated African market to be established saying Africa had been, basically, an exporter of raw material and an importer of most manufactured goods.

Speaking from Ghana, Mene said in 2019 seven of the 10 fastest growing economies in the world were in Africa, but this is no longer the case and the outlook for Africa post-COVID-19 is bleak.

“Most African countries have poor infrastructures with small markets and a shallow industrial base. This must change. We must accelerate beneficiation programmes for our raw materials to add value. Here we must look to government/private partnerships as well as the private sector to lead the changes,” he said.

Isuzu South Africa

He explained the use of American dollars for most trade in Africa was time-consuming and expensive, so a priority for cross-border trade is going to be electronic payments and settlements, facilitated by the African Export-Import Bank (Afreximbank). The aim is to have digital cross-border trading operational by the beginning of 2021. In addition, digital platforms will be integrated into systems used to find markets for products made in Africa by linking seller and buyer.

“What we will need is strict adherence to customs governance, particularly regarding the rule of origin. We must ensure the system is not used to facilitate the passage of products from a third country through the customs posts as we know that preventing customs fraud will be a big challenge. Our objective is to increase inter-Africa by 81% by 2035,” Mene concluded.

Autobody repair workshops are continuing to experience tough times as they try and recover from the hard COVID-19 lockdowns, while the future looks bleak too.

“The recovery is slow but fortunately there have been only limited business failures so far,” said Richard Green, the Director of the SA Motor Body Repair Association (SAMBRA), which represents about 75% of the autobody repair shops in the country.

Green said the slow recovery is partially due to the fact there are less incidents involving vehicles because there are far fewer of them on the road as people drive far fewer kilometres than pre-pandemic, while and the shortage of personal finance means that some owners take the damaged vehicles to ‘backyard workshops’ rather than getting the repair done at an accredited repairer.

“Only about 30% of the registered vehicles on South Africa’s roads are comprehensively insured and they provide a substantial volume of work that goes to accredited body shops, but these people are also driving less on less congested roads,” explained Green.

“What we urgently need to make our business viable and sustainable is an increase in the labour rate, particularly as we now have to deal with some of the insurers buying replacement parts themselves. This means that the panel shops do not get a share of the parts spend, which makes finances even more difficult to balance. Some of the insurers have even tried to run their own repair shops, but all these ventures have proved dismal failures.”

“We, at SAMBRA, are very aware of the need for transformation in our industry and believe the best way forward to encourage growth in the ownership of body shops by previously disadvantaged groups is to have more collaboration between the industry and the various business partners.

“One aspect of the industry where we are expecting progress is in the certification of assessors – a qualification sorely needed.

“However, on the other side of the coin we are extremely disappointed at the way in which insurance companies are writing off ‘uneconomical to repair’ vehicles at 50% of their value instead of the previous 75%.

“Not only does this take major repair work away from authorised repairers, but these vehicles are then auctioned off and later find their way back onto the road, often through fraudulent dealings. They are often unroadworthy and not repaired to manufacturers’ standards before being sold to unsuspecting customers.

This situation requires urgent attention from the relevant authorities.

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