File Photo: IOL
JOHANNESBURG – The manufacture of vehicles is one of the most advanced forms of manufacturing within the global economy.

There are many structural features of the automotive manufacturing process that cause it to locate in relatively few economies. These same structural features also mean that there is a high level of trade between producer countries in both built-up vehicles and componentry.

The South African automotive sector only really entered the global value chain after the motor industry development plan in 1995.

However, it has made good progress and now exports about half of the vehicles produced. As a deliberate objective, the range of models produced reduced and the wide variety of vehicles available is achieved through imports.

However, unlike in the pre-1995 era, there is a reasonable degree of balance between imports and exports. Such a balance of payments stability is the usual macro-economic objective of automotive policy programmes.

For South Africa to deepen its local content capacity we need to produce more vehicles. This objective presents South Africa with a strategic possibility that will benefit it and other industrialising economies in Africa. The level of vehicle production in Africa is low compared to existing demand.

For instance, sub-Saharan Africa consumed about 1.6million vehicles in 2016. Of the total vehicle demand, 791000 units were new vehicle sales and 838000 pre-owned imports.

Contrasting demand to supply, only 664000 vehicles were produced in sub-Saharan Africa in 2016 (of which the majority, 547000 units, were produced here).

The current vehicle fleet in most of Africa is suboptimal. The vast majority are second-hand, and vehicle standards and homologation have little impact on the quality of the vehicle fleet. The balance of payments effect is adverse and safety, fuel efficiency and emissions levels are all suboptimal.

However, the advanced nature of auto manufacturer also requires advanced infrastructure. Many African economies don’t have such infrastructure. However, this is not a show-stopper as the structural features of the auto industry allow a progression of different forms of assembly over time, allowing careful planning to provide the necessary infrastructure in phases.

Auto manufacture occurs in economies where specific policy programmes have been developed. This is, therefore, an opportunity for South Africa to work with African partner economies to develop an efficient African manufacturing and intra-sectoral trading system. The best way of understanding this is to put the counterfactual proposition.

If South Africa were to see the rest of Africa only as a buyer of the country’s vehicles ­- the prospect of a Continental Free Trade Agreement suggests that this might be an enticing prospect - it would be making a costly strategic mistake.

In the first place, we would be competing with much larger exporting countries across the world, which are unlikely to let us dominate such a market. But, more fundamentally, this is not a sustainable situation for the larger African economies.

For Africa’s larger industrialising economies, the absence of auto manufacturing means all vehicle needs would have to be imported. This has two fundamentally adverse effects.

The first is that it destabilises the balance of payments and, secondly, they lose the key industrialisation advantages that the auto sector provides. In fact, they would be attempting to grow with an inefficient transport sector.

It is by no means a coincidence that the global auto industry’s development is characterised by various forms of the partnership arrangement between producer countries.

As pointed out at the beginning of this discussion, there are structural features of the auto-manufacturing process - related in the main to economies of scale - that are conducive to a global manufacturing system characterised by high levels of intra- sectoral trade.

In Africa, at present, there is favourable conjunction of events that need to be seized as a strategic opportunity.

Firstly, economies such as Nigeria, Ghana, Kenya and Ethiopia are seeking to implement auto programmes.

Secondly, South Africa, working with its global OEM (original equipment manufacturer) partners are firm of the view that an African auto partnership of some form is in the best interests of the African economies. Auto policies are complex and multifaceted industrial policies and need great attention to detail and accommodation to the structural realities of this global industry. However, the ingredients are there for Africa to take a very meaningful step towards its industrialisation.

Alec Erwin is a director of Ubu Investment Holdings and member of the Naacam Show stakeholder reference group.

BUSINESS REPORT