Developing a Masterplan for the South African automotive industry in the conxtext of disruptive GVC drivers: Lessons for second tier automtotive economies

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The South African automotive industry is beset with numerous competitiveness challenges. The industry remains a marginal player globally, with comparatively small vehicle assembly plants, and an underdeveloped automotive components industry relative to leading developed and developing economy competitors. This is despite the automotive industry remaining central to the South African economy. The South African automotive industry is at best a second-tier player within global automotive value chains, although this perspective varies considerably between manufacturers. The medium and heavy commercial vehicle sector comprises mainly semi knocked down (SKD) assembly operations, with pockets of significant value addition in bus assembly and the related yellow metals assembly industry. This has placed substantial pressure on the automotive components industry, which has struggled to secure economies of scale because of volume limitations amongst domestic vehicle producers, a highly fragmented domestic parts and accessories market, and increasing international competition.
A major deficiency in respect of South Africa’s present automotive industry position relates directly to its poor recent domestic market performance, the extent of imports into the domestic market, and deteriorating regional market conditions. The optimism relating to Sub-Saharan African market growth, which was evident a few years ago, has abated, with the short-term prognosis for the regional market muted at best. Coupled with negative market conditions, the South African automotive industry is placed in a difficult strategic position, with recent vehicle production growth tied to exports into distant developed economies. These exports are supported by the African Growth and Opportunity Act (AGOA) and the EU-SA Free Trade Agreement, as well as national incentives (via the Automotive Production Development Programme - APDP) that compensate for the industry’s substantial cost disadvantages. Local production is not being driven by local or regional market factors, which underpin the competitive advantage being secured by almost all the country’s competitor economies.
While the automotive industry has certainly not gone backwards since the advent of the APDP in 2013, evidence suggests an insufficiently dynamic operating environment. Aggregate vehicle production has increased, but production for the local and regional market has declined. While the value of local content has increased on the back of more vehicles being assembled in South Africa, local content levels have declined to below 40%; and there have been declines in aggregate industry employment. Growing local content and increasing employment are key policy objectives. The most positive finding is the substantial improvement in the automotive industry’s vehicle trade position since the advent of the APDP, with the country experiencing a trade surplus in 2015. However, even here the key driver of this change appears to be declining domestic market demand and the exporting of South African assembled vehicles with declining local content levels. These developments do not suggest a fundamental change in either the South African automotive industry’s base competitiveness or its strategic position. The APDP may provide substantial support to the South African automotive industry, but the industry has not performed as well as a range of comparator economies.
In response to these pressures, the South African government commissioned the development of a ‘South African Automotive Masterplan to 2035’, with the two authors appointed to lead the process on behalf of the national government and industry stakeholders. The Masterplan highlighted numerous future challenges and opportunities for the South African automotive industry in respect of emerging GVC drivers: developed economy vehicle fleet fuel economy requirements, the associated movement to high technology, smaller displacement internal combustion engines, the rapid evolution of alternative engine technologies, green manufacturing requirements, new materials, infotainment and vehicle connectivity development, vehicle safety advances, the disruptive potential of autonomous vehicles, etc. These are all critical issues shaping the future of the South African automotive industry; and yet many of these GVC drivers do not feature prominently in the domestic or regional market. How does a development plan for the South African industry respond to these GVC requirements? What are the policy implications and likely impact on the South African automotive industry? And does South Africa offer lessons for other second tier automotive industries?