Trouble brewing for South Africa’s R220 billion industry

South Africa’s automotive industry is facing a structural decline that may see thousands of jobs lost and exports worth billions disappear. 

The local automotive industry is one of the most important contributors to South Africa’s economy, generating over R2.7 trillion worth of exports since 1994. 

The industry contributes approximately R220 billion to the fiscus per annum or just under 5% of the country’s gross domestic product.

South Africa is home to seven legacy Original Equipment Manufacturers (OEMs) – Toyota, BMW, Mercedes-Benz, Nissan, Ford, Isuzu, and VW. These industry stalwarts have maintained a significant presence in the country for decades.

More recently, brands like BAIC and Mahindra have established local manufacturing facilities. Foton and Stellantis are also poised to further bolster the industry with their planned factories.

However, Krutham managing director Peter Attard Montalto warned that a diplomatic fallout with the US may ignite the industry’s structural decline, as it has not received adequate government support. 

Montalto explained that this is one effect of the country’s poor foreign policy decisions, which antagonise the US and other Western trading partners. 

He said in a research note that much of South Africa’s foreign policy stance skews far away from what is in citizens’ – and especially jobseekers’ – pragmatic self-interest. 

There are deep strains of anti-Westernism inside parts of the ANC and the Department of International Relations and Co-operation, and there is no environment for trust.

Strangely, Montalto said the markets have been remarkably calm through all of this, with the rand holding its own and the JSE hovering around all-time highs.

This can be explained by the limited costs of losing access to the African Growth and Opportunity Act (AGOA), which enables some tariff-free exports to the US. 

However, the longer-term effects are set to be much more severe and damaging, extending beyond financial markets. 

On a broader level, Montalto said the loss of AGOA would catalyse the structural decline of South Africa’s automotive sector. 

Given the policy environment’s inability to shift to the new realities of hybrid or fully electric vehicle manufacturing and compete with imports from China and India, the loss of AGOA could tip the industry over the edge. 

Saving grace

The local automotive industry’s saving grace is that even if it misses out on the shift to hybrid or electric vehicles, the African market for combustion engines will support existing manufacturing capacity. 

BDO South Africa partner and automotive and manufacturing specialist Siyabonga Mthembu said exports to other African countries are set to soar in the coming years. 

With a new vehicle market currently around 1.3 million units annually, expectations are that this figure could rise to between 3 and 5 million by 2035. 

The African Continental Free Trade Agreement (AfCFTA) is a significant enabler in this regard, particularly for South Africa’s automotive sector. 

For South Africa to capitalise on this opportunity, it must address shortcomings in the areas of skills development, infrastructure, and government collaboration. 

“Without targeted action in these areas, we risk missing out on the tremendous potential that Africa holds for automotive growth and industrialisation,” Mthembu said.

South Africa’s automotive sector is globally competitive, largely thanks to the skill level of the country’s workforce.

However, the skills required to operate and maintain today’s advanced, automated production lines are vastly different from those needed a decade ago. 

To address this, Mthembu said the country needs to reinvigorate technical training in schools and prioritise vocational education to consistently upskill its workforce. 

There has been a shift toward academic degrees at the expense of artisanal and technical skills, which are the backbone of any manufacturing economy. 

Another major hurdle preventing South Africa from capitalising on growing demand for its vehicle exports is its poor infrastructure, particularly rail and ports. 

At present, much of Africa’s demand for affordable vehicles is met by imports from more advanced economies. Mthembu said South Africa has the chance to disrupt this pattern and meet continental demand for cheap vehicles.

Another factor that might support continued manufacturing in South Africa is the slowdown in global demand for electric vehicles. 

While global electric vehicle sales rose by 25% in 2024, driven by demand from China, this includes sales of plug-in hybrids, which have grown in popularity as an alternative to fully electric vehicles. 

In some major markets, such as the European Union, the sales of fully electric vehicles declined in 2024 as consumers prefer hybrids.

The shift to manufacturing hybrid powertrains is much easier and cheaper than converting an existing assembly line to fully electric vehicles.