Downgrade may put brakes on car makers

Multinational vehicle and components companies may be investing in the South African motor industry at unprecedented levels, but will their largesse survive the fallout from South Africa's credit downgrade to junk status and government's apparent abandonment of sound economic principles?

The local new-vehicle market has gone from feast to famine in just a few weeks.

In mid-March, analysts were predicting a quicker-than-expected recovery from three years of declining domestic new-vehicle sales. Now, with the country's downgrade and President Jacob Zuma appointing a cabinet that fills few with confidence, the mood has changed. There are warnings of further market decline that could extend into 2018 and beyond.

Craig Parker, African automotive head at the Frost & Sullivan business consultancy, says downgrade-induced rand weakness, rising interest rates, reduced returns and general pessimism about South Africa's economic sustainability are likely to undermine the confidence of foreign investors.

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While describing his views as a "worst-case scenario", he says the industry cannot afford to ignore the potential for disruption caused by South Africa's junk status. Multinational motor groups, expected to invest a record R8.2-billion in local manufacturing operations in 2017, say they are ignoring nothing.

Ian Nicholls, president of the General Motors Sub-Saharan Africa operations, says: "We are deeply concerned about the current instability in the political environment as it has far-reaching negative repercussions on the economy, including a major negative impact on consumer confidence and business confidence and therefore on the automotive industry."

However, BMW SA MD Tim Abbott says the current imbroglio is "just a moment in time" and that foreign investors will not be panicked by short-term events.

The production life cycle of most car models is about seven years; for bakkies it's closer to 10. BMW SA this week showed off progress with the R6-billion investment at its Rosslyn, Pretoria, assembly plant, to build the X3 vehicle from 2018. At present it makes the 3-Series sedan. The X3 investment, with vehicle production due to start in 2018, will tie BMW SA and its German parent to South Africa until at least 2025.

Other companies are also committed to manufacturing plans stretching well into the next decade.

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Abbott says: "Economic circumstances in countries go up and down. That's life." Although the domestic market is down, exports of South African-made vehicles are likely to set new records in 2017, he points out.

Jacques Brent, Dubai-based head of Ford Motor Co's Middle East and Africa region, says South Africa faces two major manufacturing challenges: investors' assessment of local demand, and the market's competitiveness as a sourcing locality. Though a weaker rand might make South African automotive exporters more globally competitive, the fact that, on average, 62% of the value of South African-made vehicles is imported, would also increase the cost of local assembly.

Brent says that as long as automotive support policy and local market demand remain stable, "South Africa can remain a contender when it comes to investment choices, albeit less attractive than it was".

Policy stability has been a big carrot for multinationals, first through the Motor Industry Development Programme and now through the Automotive Production and Development Programme (APDP), which will expire at the end of 2020.

Discussions on a successor are well advanced, but although there is likely to be continuity, foreign investors have raised some red flags.

The local industry's established manufacturers are all 100% owned by foreign parents. So are many of their components suppliers. Government's desire that multinationals cede 10% stakes in their South African subsidiaries to black ownership has met stiff resistance. "They can take that off the table right now," says Abbott.

"It's not going to happen."

However, the Department of Trade and Industry (DTI) considers this an important step towards companies achieving level 4 broad-based black economic empowerment status.

Abbott says the department's proposed empowerment code, as it stands, is unworkable. However, Trade and Industry Minister Rob Davies says companies that do not comply risk limited access to APDP incentives. As these include payback of up to 30% of production-related investments, that's a big penalty.

A slightly less contentious DTI proposal is for companies to pay a share of profits into a central fund for black supplier development. Davies wants the current 38% local content average in South African-made vehicles to rise to at least 60%, and most of that growth to come from new black companies.

That's an idea much closer to the heart of established vehicle and components companies, who are searching for suitable black candidates.

However, Volkswagen SA MD Thomas Schaefer says that while transformation must happen, the DTI must not try to ride roughshod over global policies of groups that have invested in South Africa. Since the APDP was announced, multinational motor companies have spent or committed nearly R50-billion to their South African operations.

Schaefer says: "The DTI and the industry share many common goals. However, government must be careful not to impose something that will reduce vehicle manufacturers' confidence in policy and force them to leave."