Automobiles : African testing ground (Africa Report n°34 – October 2011)

South Africa may dominate car assembly and production, but North Africa is coming up fast as the continent becomes a battleground for the low-cost segment.

For several years now, Ford has sent its up-and-coming executives to run Ford South Africa. Though the managers often go on to take positions with the company in the Pacific Rim, Ford must see in South Africa a testing blend of potential and problems, ideal for taxing the problem-solving abilities of its top cadres.

The auto sector, heavily concentrated in the Eastern Cape, reflects the country’s macro-level situation: it provides a great toehold for targeting fast-emerging middle-class demand in places like Nigeria and beyond; it is starting to feel the pull of cheap Chinese and Indian car manufacturers; and it has a relatively high cost of business compared to more established production locations.

Despite the regular complaints of company executives – labor unions demanding 10% wage increases, the cost of electricity set to go up dramatically – car makers are still increasing their capital investment in South Africa, which should reach R4.5bn ($642m) this year, after R4bn in 2010, according to the National Association of Automobile Manufacturers of South Africa (NAAMSA). Germany’s BMW and Mercedes are producing their 3 Series and C-Class, respectively, in South Africa, and Volkswagen’s Polo Vivo model is already under production. In December 2010, Daimler announced a $290m investment, bringing capacity at its high-tech plant up from 45,000 to 65,000 units, mainly for export to Asia.

For some, it is the potential of the African market that keeps them there. « There is no short-or even medium-term economic logic, it’s more of a strategic position, » according to Tony Twine of Econometrix. « Nobody wants to be left out of Africa, and especially sub-Saharan Africa, in case it turns into the next China, » argues Twine. But the labour and power price rises – which arrived after a new incentive scheme had triggered investment decisions from the majors – still pose a problem . « Car makers are looking seriously at automation, » says NAAMSA director Nico Vermeulen. « Currently, South Africa sits somewhere in the middle between full automation and heavily labor-intensive manufacturing.

Turbo-charged incentives. The South African government has played its part in attracting investment, first with the 1995 Motor Industry Development Programme, which provided export incentives, and now with the Automotive Production and Development Programme (APDP), set to boost local content. The government says that companies have made R13bn of new investment since the APDP was announced in 2008 – R9bn in vehicle manufacturing and R4bn for the makers of car parts – with the backdating of incentives to July 2008 a key draw for companies. Auto sector companies can receive a cash grant of 20% of the value of their investment, with a further 10% possible if they meet quality-control standards. Between them, South African component and car manufacturers export to 130 different countries. The sector already employs more than 28,000 people.

Coming into force from January 2013, the APDP gives support to car makers based on the value-addition sourced locally. Ultimately, though this is not stated publicly by the government, the aim is to create domestic parts manufacturers that can create the economies of scale necessary to integrate into international supply chains.

« Though this might not be possible with a 50,000-a-year order of parts from Volkswagen, if they can find an order for another 100,000, they will be global players, » says Twine.

Companies such as Metair Investments, which manufacture a wide range of car parts from batteries to cooling fans and torsion bars, are poised to do well out of the scheme. Having made cuts following the 2008 downturn, which hit South Africa’s car industry hard, it announced revenues of more than R2bn in the first half of 2010.

Other component manufacturers, however, complain about the impact of a strong rand. The sub-sector is also more dependent on electricity and so more vulnerable to price hikes. The effect of the Fukushima power plant meltdown in Japan could have positive knock-on effects for South Africa, with companies seeking to diversify supply lines.

Despite the boost in investment, all the main brands are also now looking over their shoulders at the arrival of cheaper Indian and Chinese manufacturers. In a symbolic moment, Tata Motors South Africa launched operations at the old Fiat factory at Rosslyn in July, creating a R100m assembly plant. Though, for now it will be producing only 3,650 vehicles a year – the Tata LPT 813 and Tata LPT 1518 – it is certainly a sign of intent from the Indian conglomerate, which has plans for a South African expansion and is already embedded in the telecom and steel sectors.

The call of the middle. The huge market represented by Nigeria is also a great pull. The African Development Bank estimates Africa’s new middle classes of about 300 million people will be spending $2.2trn per year by 2030, and a sizeable percentage of that will happen in Nigeria. Car makers such as South Korea’s Hyundai are targeting the market with inexpensive cargo trucks and commercial passenger vehicles. In June this year it entered the market with local partner Globe Motors Holdings Nigeria.

As ever with Nigeria, the logistical challenges add a hefty price tag. Nissan South Africa executive Jim Dando has railed against the cost of exporting into the country from South Africa, saying that the shipping cost from Japan to Europe is $800, while the South Africa-Nigeria trip costs $1,400.

North Africa, the other pole for car manufacturing on the continent, is also feeling the low-cost pull of Eastern makers. Chinese company Geely has set up distribution points in Morocco through Premium Auto. One of the largest Chinese car makers, selling 130,000 units in 2010, Geely is looking at setting up automated assembly plants in Egypt.

This ups the stakes for European carmakers such as Renault, which also sees the Maghreb as a key market for low-cost products. The Logan is already in production in Morocco and the company hopes to build 400,000 cars per year by 2015. « The choice of site can be explained by the coming together of two visions: the first, Morocco’s plan to make the auto sector a key part of its economy because it helps structure its industrial fabric; and also that of Renault, which wanted to create a second manufacturing platform for our low-cost vehicles to take the pressure off our Pitesti plant [in Romania] « says Jacques Chauvet, Euromed director for Renault.

Johnny (should) be good . East Africa, not traditionally a car industry stronghold outside Kenya, has also seen Asian manufacturers arrive in force. Ethiopia’s Johnny General Auto Car Maintenance & Assembly is building a 67m birr ($4m; assembly factory in Gelan Town to construct FAW vehicles. The same plant will build Fiat cars from knockdown kits. Though the numbers are now tiny – barely more than 200 new cars a year – demand in Ethiopia’s fast – growing economy is rising quickly.

China’s Foton setup an assembly plant costing several billion KSh in Nairobi, which has just started production, adding an edge to local competition. In early 2011, the Kenyan Monopolies and Prices Commission was ordered to investigate General Motors East Africa, KVM and the Association of Vehicle Assemblers, to investigate price fixing.

The fight for the emerging African consumer is just beginning. Established manufacturers in the relentlessly cost-cutting world of automobiles are all too aware of the challenge. “All the traditional car makers are worried about this, » says Twine. « Everyone is looking over their shoulders at India and China. »

Nicholas Norbrook

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Interview : Edgar Lourencon, President, General Motor Africa “Revving up the regions”

GM Africa’s president since 2009 has big ideas for expanding distribution continent-wide.

Africa Report : Why did General Motors change its organisation in Africa?

Edgar Lourencon : In 2010 our sales on the continent grew by 15% compared to 2009, rising to 160,000 vehicles or roughly 13% of the African market. Those are excellent results, but they are mainly due to our good positioning in South Africa and Egypt, which represent 70% of our sales. To progress, we had to look for growth elsewhere on the continent, and for that a different kind of organization was necessary.

AR : Meaning?

EL : Up to now we have had a global approach, led from South Africa. Only Egypt, where we have industrial units, had a separate strategy. If we wanted to take advantage of African development – something we firmly believe in – we could no longer function in this way. In 2004, GM sold only 3,000 vehicles in North and West Africa. Today we are selling more than 40,000. It’s a great advance, but it still doesn’t match our ambitions. We are working on strategies adapted to each sub-region, even to each country, with a regional office in Cairo for North Africa, another for sub-Saharan Africa based in Port Elizabeth, and a smaller office in Nairobi for East Africa. AIso, along with the Asian and South American subsidiaries we are now attached to GM International in Shanghai, and no longer to the US head office. This should bring a smoother supply chain and better sharing of experience.

AR : Which African markets will you target in particular?

EL : The North African market is extremely promising. We hope to have a stronger presence in Algeria, the largest North African market. In sub-Saharan Africa our five priority targets, in order, are Nigeria, Angola, Kenya, Ghana and Senegal. In Southern Africa, we also want to invest more in the Zimbabwean market, taking advantage of commercial agreements within the Southern African Development Community.

AR : Are you going to manufacture more cars on the continent?

EL : We already produce eight models in South Africa, but they are essentially right-hand-drive vehicles for East and Southern Africa. The decision to build the Chevrolet Spark in Port Elizabeth should help us cross the export benchmark of 50,000 vehicles [current production is 26,000]. In addition, with our Japanese partner Isuzu we decided to develop a new version of the KB pick-up for the continent that will be built in our South African plants.

AR : What are the end of year priorities?

EL : The building of a solid distribution network in our target countries. But we are not kidding ourselves, that will take more than a year.

lnterview by Christophe Le Bec

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