The Industrial Development Corp (IDC) wants to establish a vehicle assembly plant for cars, minibuses and pick-ups (bakkies) to be shared by at least five foreign motor companies not currently manufacturing in SA.
The decision is an acknowledgment by the government, the IDC’s sole shareholder, that the existing motor industry cannot on its own meet the ambitious aims of the eight-month-old SA automotive master plan.
This month the IDC issued a tender document inviting bidders to offer "advisory services for the development of a multimodel OEM project". "OEM" stands for "original equipment manufacturer" — a motor company that undertakes the entire vehicle manufacturing process on site, from thousands of individual components.
This process is known as CKD, or "completely knocked down". Some companies, mainly truck-makers, use SKD — semi-knocked down — which involves the local reassembly of imported vehicle kits, usually with a few local components thrown in.
The IDC wants a CKD plant able to build at least 50,000 vehicles a year. That is the minimum number required for the plant to earn the master plan’s manufacturing incentives.
New companies with limited initial demand wouldn’t countenance the cost of a new plant of their own — it costs billions of rands simply to update an existing one. So the option of moving into a ready-made joint venture, complete with incentives, and requiring them to provide only 10,000 vehicles, is tempting.
Stellantis, the Europe-based group whose brands include Peugeot, Citröen, Fiat, Alfa Romeo, Opel, Jeep and Chrysler, may already be interested. Leslie Ramsoomar, MD of its SA subsidiary, says the company has been talking to local OEMs about using spare manufacturing capacity in their plants to build some of its vehicles.
As it is, there are seven CKD mass manufacturers in SA — BMW, Ford, Isuzu, Mercedes-Benz, Nissan, Toyota and Volkswagen. Of those, only Isuzu and Nissan currently build fewer than the 50,000 vehicles required for master plan incentives.
Peugeot’s Landtrek pick-up, launched as an import late last year, is an obvious candidate for contract manufacturing in bakkie-mad SA. "Our initial interest would be in the pick-up, but not necessarily limited to that," says Ramsoomar. "Though we’ve talked about local assembly in general terms, we’ve never got down to the details of what we’d like assembled here."
Peugeot, Citröen, Opel and Fiat vehicles have been built in SA before.
Ramsoomar says the IDC’s proposed contract assembly plant is good news. "We are very interested in SA assembly but we have to find the right set of circumstances. It certainly doesn’t make sense for us to put in a greenfields plant of our own."
Some Asian brands previously expressed interest in sharing a plant. Whoever wins the IDC contract will have to see if these verbal expressions of interest can be made concrete. With the IDC, it will have to "scan the global market environment to confirm whether there is sufficient demand for such contract manufacturing".
If there is, it must come up with a list of at least five OEM partners. Then it must help the IDC create a plan that will "resonate" with these companies; develop a "go-to-market" strategy timetable; and co-ordinate activities between interested OEMs and the assembly plant project team.
Johan Cloete, co-founder and vice-chair of Gauteng-based Automotive Investment Holdings (AIH), says: "There are complexities with multibrand [production] because if you look at the supply chain, you have to deal with a multiplicity of components."
Still, he adds, it’s "an interesting concept".
According to the tender document, the plant should be able to build either electric vehicles (EVs) or ones with conventional internal combustion engines (ICE), using diesel or petrol.
The department of trade, industry & competition, for its part, is anxious to encourage the local sale and manufacture of EVs. A policy white paper, which should have been published at the end of 2021, is now expected in the second half of this year.
EV direction can’t come soon enough: nearly two-thirds of locally made vehicles are exported, most to countries that plan to ban the sale of new ICE vehicles from 2030.
A number of companies have identified SA as a place they would like to base themselves
— Mikel Mabasa
Companies have until February 28 to submit their bids for the plant. But Gauteng-based AIH is unlikely to be among them, despite having set up and managed several vehicle-manufacturing projects in SA, Europe, Asia and East Africa for clients including BMW and Mercedes-Benz.
Though Cloete says AIH has been talking to the IDC "for some time" about a contract assembly plant, "I don’t think we will be managing this one", even if the company "might be able to add some value to the project".
Multibrand assembly plants require specialist organisational skills. It’s one thing to get a single OEM up and running, quite another to organise and co-ordinate five or more. Paint shops and body shops can manage multiple products, but the project might require multiple assembly lines. And the IDC wants a minimum annual production run of 5,000 for every model.
Magna International, a Canada-based multinational, is considered a global leader in multibrand assembly plants.
"Even if Magna doesn’t run this, we could do with sharing its experience," the MD of an SA OEM tells the FM.
As for the specifications, the IDC says bidders must be experienced in "providing advisory services to multinational OEMs in relation to business development services … global trade rules and tariffs [and] free-trade agreements applicable to the automotive sector".
They also need intimate knowledge of the automotive production & development programme (APDP), the incentive policy at the heart of the automotive master plan.
The APDP, introduced in 2013, was relaunched in revised form last year, as part of the master plan.
Under the old format, manufacturing incentives were based on production volumes. Now they rely on the value of local content in vehicles. This reflects the government’s desire to increase the size and scope of SA’s components supply industry.
From barely 40% today, the master plan hopes to increase average industry local content to at least 60% by 2035. The same deadline applies for doubling aggregate employment at vehicle and components manufacturers, from 120,000 to 240,000, and increasing annual vehicle production to 1.4-million.
Given the Covid market havoc of the past two years, Toyota SA CEO Andrew Kirby says the 2035 target date may have to be pushed out between five and 10 years.
Figures from Naamsa/the Automotive Business Council, which represents vehicle manufacturers and importers, show that local production fell from 632,000 in 2019, the year the targets were set, to 446,000 in 2020. They went up to 499,000 last year. Even if, as predicted, they regain pre-Covid levels in 2023 (depending on demand locally and abroad) that will be four years of growth lost.
And even then, it’s unrealistic to expect seven OEMs and a handful of low-volume truck producers to more than double national production on their own — hence the need for projects like this to increase capacity, according to the IDC.
Renai Moothilal, director of the National Association of Automotive Component & Allied Manufacturers, says that while annual production runs of 10,000 for individual newcomers won’t do much for local suppliers at first, they could translate into significant volumes later. "It’s a stepping stone," he says. "Once new OEMs are in the market, successful ones will want to expand their presence. That’s good for everyone."
The assembly plant will offer a relatively low cost, low-risk gateway into SA for motor companies wanting to manufacture here
— What it means:
Naamsa CEO Mikel Mabasa welcomes the move as "an example of the state doing something for the master plan". Under previous automotive policies, the government left everything to the industry. This time, it has committed to improving transport infrastructure, mainly ports and railways, to facilitate industry growth.
So far, some of its efforts have been underwhelming. Ford, which last year announced a R16bn investment in its SA operations, has been frustrated by the slow delivery of promised rail support.
The IDC, too, has a chequered history. From 2012, it invested heavily in the Gauteng operations of Beijing Automobile Works, a Chinese minibus manufacturer that failed dismally to meet any of its bold promises to transform the local taxi sector.
It is also a 35% shareholder in the SA subsidiary of another Chinese company, BAIC, which is supposed to be building vehicles at Coega, near Gqeberha in the Eastern Cape.
Amid great fanfare from officials of the Chinese and SA governments, the first sod of the new assembly plant was turned in 2016, with promises of 50,000 annual CKD vehicle production by 2022 and 100,000 by 2027.
To date, says Cloete, whose company has advised BAIC, very little has happened within the enormous white building beside the N2 highway. Some SKD kit assembly has taken place "but CKD is still a long way off". The company has had run-ins with the government over labour and raw materials, and most of its Chinese staff returned to China at the start of the pandemic.
"They are starting to trickle back now. We hope that as they do, BAIC will be able to start moving towards vehicle production," says Mabasa.
Some analysts suggest that, given its plentiful space and lack of progress on its own behalf, BAIC could host the IDC’s multibrand plant.
The idea of an SA contract assembly plant is not new: East London’s industrial development zone has been punting itself as a site for years. But that’s no guarantee the IDC will place its plant there.
"I don’t think it has East London in mind," says Cloete.
As far as Mabasa is concerned, "any site requires access to the rest of the automotive value chain. It needs major highways and proper rail infrastructure".
Wherever the plant goes — if, indeed the IDC goes ahead with it after the advisory process is complete — Mabasa welcomes the initiative. With SA spearheading efforts to develop a pan-African motor industry and grow the continent’s annual new-vehicle sales from 1-million to 5-million over the next few years, many motor companies are showing renewed interest.
"Depending on the plant strategy and where it is sited, I don’t think there will be a shortage of takers," he says. "A number of companies have identified SA as a place they would like to base themselves. With its infrastructure, it is an attractive base from which to take advantage of Africa’s developing free-trade progress."
*The IDC was invited to contribute to this article. Joy Balepile, head of the automotive and transport equipment strategic business unit, confirmed receipt of questions last week but had not replied at the time the FM went to press
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