SA auto industry rides MIDP wave
8 October 2003
South Africa's automotive industry has become an increasingly important contributor to the country's gross domestic product, mainly through strong growth in the motor vehicle and component exporting sector.
The industry is ranked 19th in the world in terms of vehicle production. It is responsible for approximately 80% of Africa's vehicle output and produces 0.7% of the world's vehicles.
According to the National Association of Automotive Manufacturers of SA (Naamsa), exports of components amounted to about R22.5-billion in 2002, while exports of motor vehicles amounted to about R18-billion in the same year. The association expects South Africa's vehicle exports to rise by 21.6% in 2003.
So bright is the outlook that Standard Bank has projected that South Africa can expect foreign earnings from auto industry exports to equal earnings from gold exports for the first time in 2004.
Motor Industry Development
Programme
The catalyst for this unprecedented growth is the government's Motor Industry Development Programme (MIDP), introduced in 1995 and recently extended until 2007 by the department of trade and industry.
The programme is aimed at making the South African automotive sector internationally competitive through phased global integration, increasing the volume and scale of local production, expanding exports, and modernising and upgrading the industry.
The effective reduction of related import tariffs, as part of the integration strategy, had an initial negative impact on local markets, but has since evened out.
The MIDP has boosted exports by enabling auto manufacturers to include total export values as part of the their local content total. They are then allowed to import the same value of goods duty-free into South Africa. This has allowed them to concentrate on manufacturing vehicles or components for export, and to import others into South
Africa.
This system, according to the department of trade and industry (DTI), has led to a "rapid expansion of exports, especially of components". For example, if a local manufacturer exports vehicles worth R10-billion, of which 50% were locally produced, it can then import vehicles duty-free to the value of R5-billion.
Previous strategies aimed at developing the local industry placed high tariffs on imports. "Although this policy was effective in leading to the establishment of a significant assembly industry supported by a diversified component sector, most producers were not internationally competitive, and most domestically assembled vehicles were sold at a premium compared to world prices", the DTI says.
"The protected environment led to a proliferation of vehicle models being produced in South Africa, and the resulting low volumes per model have been a significant cost-raising factor. Exports were also minimal."
However, the MIDP has lead to a sharp
turnaround in sentiment.
Competitive advantages
Despite the relatively small size and production abilities of the local industry, South Africa is well situated to provide competitive advantages to international concerns.
The local industry has a world beating cost ability on short or low-volume runs, competitive tooling costs and a high degree of manufacturing flexibility. It also has good access to southern hemisphere and African markets, and offers right-hand drive (RHD) production facilities (SA is a right-hand driving country). Volkswagen SA produces all RHD Golfs for the UK, while BMW SA exports 70% of its output.
The South African industry boasts several unique technologies, such as differential locks for off-road vehicles, aluminium welding technology for radiators, and the ability to design components such as air cleaners and air conditioners that are able to cope with the higher temperatures and dust levels in
Africa.
The country's first-world production facilities are coupled with access to raw materials and cheap electricity, as well as stable transport and telecommunications infrastructure. The DTI has partially funded the Centre for Scientific and Industrial Research's Automotive Industry Development Centre to develop technology locally.
New investment opportunities are being created for the industry by the introduction of free trade agreements with the European Union and within the South African Development Community; potential agreements with Mercosur, China, Japan, the US and India; an economic agreement with Thailand; as well as the African Growth Opportunity Act (Agoa).
Gauteng Automotive Cluster
The Gauteng Automotive Cluster, a Blue IQ project, is an aggregation of automotive assemblers, component manufacturers and material suppliers in the same location that are together responsible for some 40% of South Africa's automotive
production.
The project has two important components that will enhance the global competitiveness of the country's automotive industry - the Automotive Industry Development Centre (AIDC) and the Automotive Supplier Park in Rosslyn, north of Pretoria.
Auto component manufacturers
There are more than 220 automotive component manufacturers in South Africa, and another 150 which supply the industry on a non-exclusive basis. Production is concentrated, with only 14 firms providing over 50% of total employment in the sub-sector and contributing even more to the total output.
Pressure on prices, and the increased trend for suppliers to operate globally, has led to several mergers between component and original equipment manufacturers. These initiatives have
produced the intended results, and cars as well as components are now being exported from South Africa into the global network.
Key exports include stitched leather car seat covers, catalytic converters, tyres, silencers/exhaust pipes, and road wheels and parts. Export growth rates have been high - over 40% per annum over the past 10 years - and are expected to remain high.
Germany is the largest destination for South African component exports, with other major markets including Britain, the US, Belgium, Spain (Europe as a whole accounts for about 74% of component exports) and Zimbabwe.
SouthAfrica.info reporter
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