How are these changes likely to play out in the more peripheral parts of the automotive GVC, such as South Africa, over the next two decades?
The South African automotive industry, which produced 600 000 vehicles last year, is a marginal player, contributing 0.65percent of global vehicle output. Its contribution has hardly increased over the past decade.
Vehicle production in South Africa is highly fragmented, making it difficult for the automotive components industry to secure the economies of scale required to compete, resulting in the local content level of South African vehicles declining to 38 percent in 2015, from 47 percent in 2012.
Despite the challenges it faces, the automotive industry remains a core focus of the government’s industrialisation strategy.
It is one of the few sectors that has grown over the past decade, and it contributes meaningfully to total manufacturing output.
The sector’s comparative resilience, established foundations, contribution to direct employment (about 112 000 jobs) and exports, and recognised technology multipliers have positioned it as a core, strategic domestic industrial sector.
It is this position that has ensured the government’s targeted support - initially in the form of the Motor Industry Development Programme (MIDP) from 1995, followed by the Automotive Production Development Programme (APDP), introduced in 2013.
Despite substantial government support, neither the MIDP nor the APDP has substantially shifted the industry’s position as a second-tier global player.
An important deficiency in respect of the industry’s position relates to its poor recent performance in the domestic market, the extent of imports into the domestic market and deteriorating conditions in the regional market.
Domestic vehicle sales have contracted 23 percent since the record achieved in 2006, with imports comprising 56 percent of the market last year. The local market is far from having sufficient demand to attract local assembly exclusively to supply the domestic market.
A modern assembly plant requires about 80 000 units of a platform to justify production, whereas the top-selling model in South Africa in 2015 (VW Polo Vivo) achieved sales of 54 142 units.
Difficult strategic position
There is also limited demand for South African vehicles in sub-Saharan Africa. The short-term prognosis for the regional market is muted, because consumers prefer to buy cheap pre-owned imported vehicles.
The local industry is therefore in a difficult strategic position, with production tied to exports to distant developed economies, such as the EU and the US, which together account for 63 percent of total automotive exports. These exports are supported by the African Growth and Opportunity Act, the EU-South African Economic Partnership Agreement and incentives such as the APDP that compensate for industry cost disadvantages relative to competitors.
South African production is therefore driven less by local or regional market factors, which underpin the competitive advantage secured by almost all the country’s more successful competitor economies.
Notwithstanding the competitive pressures, South Africa’s base vehicle ownership profile suggests major growth opportunities to 2035, provided there is economic growth and the industry’s base competitiveness improves.
Research by the writers of this article reveals that the local industry has the potential to increase its production to 1 percent of global output (potentially 1.4 million units of production annually by 2035) and increase its local content in domestic vehicles to 60 percent. This would double total employment in the automotive value chain to 224 000 jobs, even after factoring in major productivity improvements, and substantially increase the industry’s contribution to the economy.
Seven key changes ahead
But what of the GVC drivers? The challenges facing the industry and the development of appropriate government policy are compounded by the emergence of major technological and socio-economic changes that are set to transform the global automotive industry. We have identified eight:
The rapid evolution of alternative engine technologies, such as battery-electric vehicles and hydrogen-fuel-cell-based vehicles, will likely result in these new technologies substantially increasing their market share over the next cycle of model changes, which take place every six to eight years. How will the EU and US markets look in 15 years? How rapidly will developing-economy markets convert to alternative energy vehicles? How will the South African market be directly affected?
Rapidly advancing green manufacturing requirements shaping the vehicles and components that are produced, as well as the materials and manufacturing processes that are used. Will these requirements open or close opportunities in South Africa? What green production capabilities will South Africa manufacturers have to master to ensure continued supply into the “greening” markets of developed economies?
The development of new materials that have the potential to displace standard automotive materials, such as steel and plastics. As vehicles become lighter, and functionally more advanced, what new materials will dominate? What role will nano-technology play in respect of the automotive materials used?
Infotainment and vehicle connectivity developments that are fundamentally altering the nature of the “driving cabin” and vehicle functionality. How will this change the nature and cost profile of vehicle production?
Passive and active vehicle safety advances that are shifting both the technology profile and the cost profile of vehicles. As additional safety features are developed, what are the consequences for vehicle production? How will South Africa manufacturers adjust to these emerging requirements, particularly if the safety requirements in the EU and US diverge dramatically from those in South Africa (and other developing economies)?
The disruptive potential of autonomous vehicles and the consequences for driving densities within the existing road infrastructure. How will South African manufacturing be impacted by the emergence of autonomous vehicles? How will production be impacted? How will vehicle use change?
The emergence of mobility services and the potential displacement of private vehicle ownership. What happens to local production if major developed economies evolve into mass mobility markets serviced by autonomous vehicles controlled by mobility service providers, as opposed to private vehicle ownership? What happens if the markets serviced by South African production evolve in this direction?
These seven emerging GVC drivers could fundamentally reshape the South Africa automotive industry, but many of them do not yet feature in the domestic or regional market.
We are either in the very early stages of major structural change within the automotive industry or the potential impact of the GVC drivers we have unpacked are overstated. We think the former is more likely, although the exact nature of the changes to which these GVC drivers will give rise is unclear.
More research is required to understand what the future holds.
* Justin Barnes is the chairperson of B&M Analysts, [email protected]
* Anthony Black is Professor of Economics at the University of Cape Town, [email protected]