Dark clouds gather over one of South Africa’s largest employers

South Africa’s car manufacturing sector risks losing significant market share unless it shifts to building electric vehicles (EVs) to satisfy changing demand.

This is particularly important as, starting 2035, the European Union will ban the import and sale of new cars with internal combustion engines (ICEs).

Although 2035 seems far away, there is already a big shift towards electric vehicles from those who use petrol.

This shift places traditional car manufacturers at a crossroads. They are caught between the need to innovate in the era of electric vehicles (EVs) and the need to protect their existing products and profitability.

Coronation analyst Lisa Haakman said many South Africans are considering switching to EVs despite concerns about limited charging stations and ongoing power crises.

“On the plus side, we know it’s the right thing to do for the planet, and we may also have some surplus capacity from the newly installed solar panels on our roofs,” she said. 

“But on the negative side, with the lack of charging stations and being in a country with a power crisis, we are wondering how we will do the long-distance drives for our annual holidays.” 

“And, to be honest, we don’t know where to start looking, as the car brands we know and are familiar with are not the market leaders in the EV race.”

She said this is a classic case of the ‘Innovator’s Dilemma’—the situation where a new technology comes along, and incumbent businesses are too slow to react. 

Initially, the new market is too small to warrant their attention and can easily be ignored. 

Diverting resources from an already profitable business can significantly lower profits, making it an inherently poor decision. 

Cannibalising a successful venture with a less profitable one is challenging, which is why many corporate executives tend to procrastinate.

“However, this delay can be disastrous. Before companies realise it, the world has moved on – like owning a record store in the age of music streaming,” she said.

“Many of today’s auto companies risk ending up obsolete, much like Musica, Kodak, Nokia, and Blackberry.”

This is a significant threat to South Africa, as the automotive sector significantly contributes to the country’s economy and employment. It directly employs approximately 110,000 people in manufacturing and assembly plants. 

Additionally, the sector supports around 500,000 jobs when considering the broader automotive value chain, including suppliers, dealerships, and service providers.

Haakman said that, as EVs have surged in popularity, Chinese companies have emerged as leaders in the field. 

Traditional car manufacturers are being disrupted by this shift, struggling to adapt from combustion engines to EVs.

China’s dominance in EV production stems from their government’s early investments and subsidies that jumpstarted the industry. 

This strategic foresight allows them to control a significant portion of the EV supply chain, including battery production – the largest single component in an electric vehicle.

“This is where China is truly dominant,” Haakman said. 

China produces 68% of the world’s batteries and between 80% and 95% of the components needed to manufacture them, including the cathode, the anode, the electrolyte, and the separator. 

Producing the batteries “in-house” gives China a cost advantage over other countries. They also largely focus on lithium-ion batteries, which are around 15% cheaper to produce than nickel batteries. 

While Elon Musk’s Tesla has undeniably revolutionised the entire EV industry, BYD, a Chinese automaker, has emerged as the biggest threat to Tesla’s reign in the EV market. 

Unlike traditional car companies, BYD focuses solely on electric and hybrid vehicles and even manufactures its own batteries. This vertical integration grants them a significant cost advantage over competitors.

Haakman said many Western countries, concerned about China’s grip on the EV market, have implemented measures to shield their domestic car industries. 

These measures include subsidies for non-Chinese EVs and import tariffs on Chinese-made cars.

South Africa has also implemented similar policies. Last year, Trade Minister Ebrahim Patel presented a government policy paper on electric vehicles that outlined the government’s framework for the shift away from gasoline-powered cars. 

According to this policy, South Africa intends to build electric vehicles using some of the $8.8 billion of climate funding provided by some of the world’s richest nations.

However, this policy has received criticism, with some saying it will be rendered useless or harmful without effective implementation. 

In addition, many have pointed out that the country’s energy and logistics crises put South Africa at a competitive disadvantage for EV manufacturing.

Haakman said the traditional car companies’ sluggish shift to EVs creates a vulnerability that could be fatal in the long run. 

Their hesitancy to invest in EVs might leave them without a competitive offering in this rapidly growing market. 

As a result, many of the car brands we know today could face extinction in the electric vehicle era, threatening jobs in the country.