Important South African industry crumbling in front of everyone’s eyes

South Africa’s automotive manufacturing industry is facing a near-perfect storm of tariffs, declining export demand, and increased local competition. 

This has been coupled with energy insecurity, rising electricity prices, and a wider collapse of South African industry that supplies carmakers. 

As a result, the industry, one of the few successful examples of South African industrial policy, is under significant threat and may soon add to the country’s track record of deindustrialisation over the past two decades. 

There is some light at the end of the tunnel, with a vast improvement in Transnet’s performance, making it easier to get products to market and stabilising energy supply.

However, unless urgent action is taken, the headwinds the industry faces could outweight these positive developments. 

This is feedback from BDO South Africa Automotive Sector Leader Siyabonga Mthembu, who recently outlined the myriad of challenges the industry faces. 

Mthembu said the South African automotive sector is at a crossroads, with the decisions made today likely to determine the industry’s chances of survival in the coming years. 

He explained that the headwinds the industry faces threaten the viability of South Africa’s Automotive Industry Master Plan 2035 and increase the risk of de-industrialisation. 

The Master Plan has several objectives, among them an ambitious target to increase South Africa’s market share to 1% in terms of global vehicle production and increase local content to 60%. Currently, South Africa is nowhere close to achieving these targets, Mthembu said.  

Policy and regulatory uncertainty and infrastructure challenges, particularly related to ports, which are still ranked as among the worst performing, and rail efficiency, are the most significant headwinds the industry currently faces. 

“Of concern is that, as a country, we’ve not yet effectively addressed the basics that are critical to ensuring a conducive investment climate for the automotive manufacturing sector,” Mthembu said. 

“As if this wasn’t enough, the sector now faces an onslaught from imports of Chinese and Indian vehicle models.”

Chinese manufacturers are expanding their presence in South Africa with aggressive pricing strategies and offering the latest technologies, which will further disrupt the market.

While this is good for the price-conscious consumer, established brands will face an uphill battle to protect their market share, Mthembu said. This requires them to adapt and offer more innovative features and competitive pricing to retain market share.

The collapse of local manufacturing

These headwinds have resulted in a chorus of calls from local manufacturers for the government to do something about imported vehicles and change policy to make it easier to operate in South Africa. 

The country’s Completely Knocked Down (CKD) unit mix has deteriorated by more than 11% since 2018, from 60% to 54% in 2023, due to more vehicles being imported rather than produced locally. 

Chinese companies enjoy significant subsidisation from their government, coupled with South Africa’s free trade of rebates and CKD options, which encourages de-industrialisation, Mthembu said.

Localisation levels have reduced by 10% since 2021, from 42% to 38% in 2023, with Tier 2 and lower suppliers significantly underdeveloped.

While there has been a lot of focus on the impact on the sector of the 30% tariff imposed on South Africa’s exports by the United States, the country has scored its own goals, especially when it relates to regulatory and policy uncertainty.

It has become cheaper to import components from mass-producing countries such as China than to produce them locally. 

Some local vehicle manufacturers had initially tried to source components locally, but recently, they have increased imports from China.

Domestic beneficiation of vehicle components has also been dealt a major blow following the planned closure of ArcelorMittal. This will have a snowball effect in the downstream value chain, and could result in further job losses. 

It’s not all doom and gloom, however. When it comes to infrastructure and logistics, South Africa is beginning to see initiatives by Transnet to bring in the private sector to run the country’s railway lines. 

This will improve efficiency in transporting vehicles, particularly between the Eastern Cape and Gauteng. However, the country still lacks sufficient port infrastructure to improve efficiency in transporting vehicles.

On the policy front, the government should impose measures to protect the automotive sector from imports, while making it easier for existing and new investors to operate profitably. 

These are critical interventions needed if South Africa is to compete with countries such as Morocco, which is taking advantage of its geographical proximity to European markets, Mthembu said.