The post-lockdown restart of the global motor industry was likened in the US last week to a "slow-moving steam engine slowly leaving the station". If that analogy can be applied to SA, one might justifiably ask where the train is going.
Local motor companies and their suppliers are trying to minimise the devastation of weeks of lost production, lost sales and lost revenue caused by the Covid-19 pandemic. Despite being allowed to resume limited operations at the beginning of May, some companies are returning to work only this week. Ford Southern Africa and Nissan SA were due to reopen their Tshwane vehicle plants on Monday.
Others are well ahead. Volkswagen SA’s Uitenhage vehicle assembly plant near Port Elizabeth was one of the first to resume production and MD Thomas Schaefer hopes that it will be back near full capacity in coming days.
Like BMW SA, Mercedes-Benz SA and Toyota SA, which are all accelerating operations, Volkswagen SA (VWSA) has initially prioritised exports, which last year accounted for 64% of the SA motor industry’s total vehicle production. With most major overseas economies opening faster than SA’s, exports are likely to remain the industry’s lifeblood in 2020 — particularly as local sales are expected to be painfully weak.
The National Association of Automobile Manufacturers of SA (Naamsa), in its latest business review, predicts the full-year market will fall by nearly 25% from last year’s 536,611, to 405,000.
That is among the more optimistic forecasts. Toyota SA CEO Andrew Kirby puts the likely drop at more than 30%, down to 370,000.
Isuzu SA MD Michael Sacke takes a similar view. As head of a company that relies more than most on the domestic market, that’s a sobering thought. With the move this week to level 3 of the government’s risk-adjusted strategy, export-focused companies, some of which require three daily shifts to meet demand, look forward to quickly approaching pre-Covid production volumes. For Sacke, the target is 80% by year-end, on a single shift.
Toyota SA was building 500-600 vehicles daily before lockdown. The plan was to reach 75% of that by the beginning of this week as part of a "careful and considered" return to normal working.
Kirby says: "For the next two to three months, we will be in a stabilisation phase as we refine our [Covid-19] countermeasures while slowly ramping up production."
He expects the Prospecton assembly plant in Durban, which built 141,000 vehicles in 2019, to roll out 99,400 this year.
VWSA hopes for 140,000, down from 162,000.
Despite the initial industry emphasis on exports, these will also suffer. Naamsa expects a decline of 27% from last year’s record 387,125, then a recovery of 22% in 2021. Overall, local vehicle production this year is predicted to fall nearly 26% from 631,983, before clawing back 20%.
The restart is not a question of companies simply resuming where they left off. Factories have been reconfigured and production lines redesigned to enable social distancing and the host of other Covid health requirements. Motor companies, their suppliers and dealers are all learning to operate differently.
Kirby expects many of these changes to become part of a "new normal" working culture. "History has shown us that when a global or national crisis [hits] a country, there is always a quantum or step-change in the market and in the business environment," he says.
"Business will never be the same again. Manufacturing will change, remote working will change, digitisation will accelerate and customers’ buying patterns will never be the same again. This is a tremendous opportunity for us to change the way we do business and make the changes that are needed."
All this learning comes at a cost. Schaefer reckons his company has lost production of 16,000-17,000 vehicles, with its accompanying revenue, because of the local lockdown.
That pales into insignificance alongside losses suffered by the international automotive industry.
Economic analysis company GlobalData reckons the cumulative market capitalisation of vehicle manufacturers and their suppliers fell by $564bn in the first quarter of 2020.
In addition, it estimates vehicle companies have lost $139bn in revenue because of the collapse in sales. In Europe and North America alone, 4.1-million units weren’t built.
Analyst David Leggett says some automotive companies will struggle to weather the storm. "A decline of this magnitude will create structural change in the industry all along the automotive value chain," he says.
Fiat-Chrysler and French group PSA, which owns Peugeot and Citroën, were already planning to merge early in 2021.
Leggett says more deals could be accelerated by the Covid fallout.
Contrarily, in SA Covid threatens to disrupt structural change already happening. Naamsa confirmed last week that it has asked for a postponement of the next stage of government-led automotive policy. It wants the January launch of the SA automotive masterplan to be postponed for six months, to July.
Postponement alone may not be enough. It may be necessary to reconsider parts of the plan.
The motor industry environment has changed drastically since the masterplan framework was announced in November 2018. Because of Covid-19, many of the local and global economic assumptions that dictated its shape are no longer relevant. Most tellingly, jobs and production baseline figures on which growth forecasts are based are from 2018. While it is too early to say what the pandemic’s impact on jobs will be, short-and medium-term production targets are being rewritten.
The masterplan is based on a souped-up version of the automotive production & development programme (APDP), which has operated since 2013. The new model will run to 2035.
Amendments to the APDP are designed to grow and diversify the industry.
If they work, the number of full-time jobs at vehicle and components companies will double from (pre-Covid) 120,000 to 240,000, annual vehicle production will more than double from 600,000 to 1.4-million, and the average local-content value in SA-made vehicles will grow from 40% to 60%.
Together, it is intended that they will make space for the mass creation of black-owned components suppliers where almost none exists today.
The masterplan originally required multinational vehicle manufacturers to cede shares in their SA subsidiaries to black partners. Faced with a blanket refusal, the government has accepted a trade-off by which the industry’s seven main manufacturers of cars and bakkies will establish a R6bn transformation fund to establish black suppliers. Some of the money could also help black dealers and repair shops.
Foreign-owned truck companies and components companies are negotiating to add to the fund, in exchange for similar protection from local ownership.
With less than seven months to its intended launch, the masterplan should be dominating boardroom planning. Instead, Covid-19 has relegated it to the background. As Naamsa CEO Mike Mabasa puts it, the current preoccupation is with "securing the (immediate) survival of the industry".
That includes seeking changes to the current APDP. The lockdown and shrunken market will cause some companies to fall short of minimum production volumes required to earn duty credits.
In addition, because investment rebates and other credits are paid out according to performances in previous quarters, some companies could receive almost nothing later this year. Hence, Naamsa’s request that incentives be based on volumes in the second half of 2019.
Schaefer says the APDP can work only if the entire automotive sector is functioning properly. "At the moment, it’s completely skew."
Sacke says a delay in implementing the masterplan is "appropriate, given the impact of Covid-19 on the industry and the economy as a whole".
The pandemic, however, isn’t solely to blame. The broad structure and intention of the updated APDP — the "what" and "why" — have been known for some time. But not the "how".
For example, companies are still waiting for the department of trade, industry & competition to explain the formula for measuring and recording amended incentives.
Nissan Africa MD Shinkichi Izumi says it’s too late to introduce and test new systems: "Companies’ resources are focused on Covid-19, meaning all business-related planning has been disrupted." In the case of Nissan SA, he says it could be another month before the assembly plant is up and running properly. Other distractions are not needed.
As Mabasa notes, it’s too late for companies, particularly small suppliers, to change internal systems in time.
The state has been slow elsewhere.
Under the masterplan, it has to improve the pitiful performance of the railways and ports, which have proved a long-term obstacle to automotive imports and exports. SA’s ports, in particular, are notorious internationally for their inefficiency and high costs.
If recent performances are anything to go by — the ports and railways have been castigated for their lack of support in the build-up to the Covid-19 crisis — little has changed.
Not everyone is convinced that these obstacles are cause enough to postpone the masterplan — particularly the R6bn transformation fund. Sisa Mbangxa, chair of the African Panel Beaters & Motor Mechanics Association, says the industry is looking for excuses not to fulfil its commitments.
Mbangxa, whose association is among those lobbying the Competition Commission to open up the vehicle service and repair market to independent black newcomers and whose members are among those who could benefit from the transformation fund, says genuine transformation is not on motor companies’ agenda. Rather, "it is being forced down their throats by government".
The charge is fiercely denied by the vehicle and components companies, who say they are committed to maximum black participation, vital for the industry’s long-term survival. If the industry hopes to meet its masterplan goals and also increase its share of global vehicle production from 0.7% to over 1%, they say it can’t do so in its current form.
With the easing of lockdown, the SA motor industry train may indeed be leaving the station, but it has no clear idea of the stops along the way, of when it will reach its destination, or even what that destination is. The "new normal" is an unnerving place.
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