Europe to the rescue of South African vehicle manufacturers

Exports have become the lifeblood of South African vehicle manufacturers. Despite precarious domestic demand, assembly plants are working at close to capacity, according to a FM report.

A spike in demand for South African-built vehicles in Europe and Asia has mitigated the fallout from plunging local sales and a collapse in markets across Africa.

Exports to Europe have more than doubled since 2012, propelling the local industry to near-record production in 2016. With Asian demand growing more than 80% over the same period, exports themselves set records last year and are expected to do even better in 2017.

They will need to. Despite a growing sense that the South African market for new vehicles is bottoming out, more than three years of falling sales have knocked a big hole in local demand. Between 2013 and 2016, the new-car market dropped from 450 296 to 361 404 and the overall new-vehicle market from 649 216 to 547 174.

Cars are expected to do fractionally worse in 2017 but a recovery in commercial vehicles could drag the combined number above last year’s level.

It could have been a lot worse. Initial industry response to South Africa’s credit downgrading and President Jacob Zuma’s firing of finance minister Pravin Gordhan and his cabinet reshuffle was one of misery.

Having started the year predicting a recovery of 2%-3%, analysts went into gloom mode. Suddenly the decline was going to continue through 2017 and possibly 2018.

The National Association of Automobile Manufacturers of SA (NAAMSA) even declared it was temporarily giving up the numbers-guessing game, because the economic situation was so unclear.

By the end of April, however, the market was just over 1% weaker than a year earlier. Luxury cars, down 17%, have taken the biggest knock, as consumers opt for cheaper vehicles.

In its latest quarterly review, NAAMSA now thinks the 2017 market could rebound slightly, to 548 500. Toyota SA CEO Andrew Kirby suggests it could go as high as 565 000.

“Key market drivers are interest rates and price increases,” he says. “As long as there is a relatively stable environment in these areas, there is a real possibility of growth.”

His company is particularly anxious that this should be the case. It has suffered most from the disintegration of SA exports into the rest of Africa.

It still contributes more than two-thirds of SA volumes there but in much lower numbers. According to the 2017 Automotive Export Manual, since 2014 Toyota SA has slipped from being SA’s biggest global vehicle exporter, to fifth.

The companies that have overtaken it – Mercedes-Benz SA, Volkswagen SA, BMW SA and Ford Southern Africa – are much less reliant on Africa.

The good news, says NAAMSA president and Nissan SA MD Mike Whitfield, is that African markets should start to recover from 2018.

It can’t happen soon enough. In 2016, South African vehicle exports to the rest of the continent tumbled 49% from a year earlier – from 42 234 to 21 564. That’s a drop of almost 75% from the 80 293 recorded in 2012.

Attempts to create pan-African free-trade areas are moving slowly. Some north African countries, which have been strong South African customers, are creating barriers to try to give their own fledgling industries a leg up. In sub-Saharan Africa, falling oil and commodities prices have stripped governments and corporations of revenue. Ordinary consumers mainly buy dumped, used Asian vehicles, which are allowed unfettered access into most markets.

Plans to turn Nigeria, Africa’s biggest economy, into a major vehicle producer in its own right are on hold because hardly anyone there is buying new vehicles. Ford Southern Africa and Nissan SA, which are supposed to be sending thousands of vehicle kits for reassembly in Nigeria, are instead twiddling their thumbs.

Volkswagen SA is trying to break the logjam by creating satellite production sites to reassemble cars.

Its first targets are Kenya and Rwanda, where governments seem willing to curb dumping of used vehicles. Individually, the markets may not be big but they offer decent numbers when combined.

“In Africa, you never go from A to B in a straight line,” says VWSA MD Thomas Schaefer.

But the good news is that while exports to Africa have been shrinking, other regions have come to the rescue.

The export manual shows shipments of new vehicles to Europe grew between 2012 and 2016, from 87 621 to 195 764. Asian markets have also been receptive, increasing orders from 26 443 to 47 616.

Australia has also taken up some of the slack. North America is down from its peak of a few years ago but remains South Africa’s second-biggest regional market, at 52 430.

The UK was by far the biggest export market in 2016. The 110 356 vehicles shipped there was more than twice the number of the US market, which took 47 267. In all, South Africa exported vehicles to 140 countries.

The end result was a record of 344 859 exports last year. NAAMSA expects this to reach 351 600 vehicles in 2017.

These figures are almost exclusively cars and bakkies. South Africa exported only 1 104 trucks and buses – a figure that has remained fairly steady in recent years. Local truck makers say they hope to start making real inroads in the next five years.

Vehicle manufacturers boasted a R61.9 billion trade surplus in 2016, based on R118 billion of exports and R56.2 billion of imports. New-car imports hit their peak in 2013, when 338 592 entered the country. By last year, this was down to 264 286.

The overall motor industry trade balance, however, remained in deficit in 2016, at R32.9 billion. This is because South African vehicle manufacturers continue to buy most of their components from overseas.

So even though local producers are growing exports, their value is swamped by imports. Last year the industry exported R53 billion of components but imported R147.8 billion.

The overall deficit has almost halved in three years from R63.8 billion in 2013 to last year’s R32.9 billion.

Combined, vehicle and components companies exported a record R171.1 billion of goods in 2016. Most in the industry expect a new peak in 2017.