Founder: Turnaround Talk
At one point in time, South Africa has a vibrant motor industry with a range of vehicles on offer locally and an active manufacturing industry with a number of vehicles being built or assembled in South Africa.
This changed over the years as the manufacturing of Chinese components made it cheaper to import parts than panel beat cars that have been in accidents. Legislation in South Africa also played a negative role with Chevrolet making a key decision to pull out of the country.
The South African automotive industry played an important role in driving the country’s economy. This was already declining prior to Covid-19. The Pandemic has a telling impact in that it put the global automotive industry under pressure. Order of new cars not only take longer to fulfil because of the global chip shortage, but there are longer lead times on deliveries because of the global supply chain crisis.
Deloitte released a report in 2020 which discusses the impact of the crisis on South Africa and the way forward for executives within the automotive sector to overcome the impacts of this crisis.
The importance of the South African automotive sector
The report points out that the automotive cluster is an important industrial sector in South Africa. The broader automotive sector accounted for 6.8% of gross domestic product (GDP) in 2018.
Considering that the overall figure for manufacturing value added as a share of GDP stood at 11.76% in 2018, the auto industry accounts for a significant chunk of South Africa’s entire manufacturing capacity. Automotive manufacturing furthermore employs 110 000 directly and indirectly, with the broader automotive sector accounting for 457 000 jobs.
The report adds that it is the only manufacturing sector that has shown notable progress, supported by proactive industrial policy from the Government.
The continuity of the South African automotive sector is thus critical to the future industrial and economic landscape of the country.
Photo By: Lenny Kuhne on Unsplash
The global picture
In line with strict government-led social and economic shutdowns, most original equipment manufacturers (OEMs) are shuttering their manufacturing plants across Europe, North America and South Africa. As a result of these shutdowns, Moody’s has predicted that global demand for passenger vehicles will shrink by approximately 14% in 2020.
The Deloitte report points out that, based on Moody’s forecast, this would translate into a reduction of over 13.5 million passenger vehicles not being manufactured in 2020. These figures may even be on the conservative side, depending on when and to what extent consumers are willing to spend, as well as when industries are able to restart.
The report adds that in line with this dramatic forecast slump, Moody’s has downgraded a number of the global auto OEMs including BMW (to A2), Ford (Ba2), Toyota (Aa3), Honda (A2), and Nissan (Baa3). The ratings agency has also put under review other leading auto firms such as Daimler, JLR, PSA Group, Renault, VW, Volvo and McLaren Holdings. VW Group has revealed that it is already burning through €2bn per week following its plant closures and the collapse in demand.
These dire forecasts are unprecedented. In comparison, following the post-Lehman Brothers financial shock from September 2008, the automotive demand declined roughly 8% over a two-year period.
Governments step in
The report points out that, considering the scale of industrial destruction, the situation globally requires immediate support and enablement from governments. It is imperative that wages are protected and that consumers are given as much support as possible in order to minimise a long-term and protracted decline in demand. Some market commentators are already warning of a “lost decade” for the auto industry.
But the real challenge lies in maintaining demand after factories are able to re-open, and this rests with the consumer.
The report points out that the British Government will provide funding of up to 80% of employees’ monthly salaries up to a maximum of £2 500. For employees of auto dealerships, the Government will reimburse up to 80% of salaries if their jobs are “at risk”.
In the United States, no dedicated auto sector support measures are in place, but the auto OEMs and suppliers will likely benefit from industry-wide liquidity boosting measures aimed to shore-up consumer spending.
The Deloitte report points out that, in France, the Minister of Finance Bruno Le Maire stated last week that “[…] sectors like the aeronautical sector and automobile sector need support today. It won’t systemically be nationalisation; it could be recapitalisation.” President Emmanuel Macron further said “We won’t let industrial champions disappear in smoke because there is a crisis unprecedented since 1929.”
Government support in South Africa
The South African Government is contemplating establishing a “National Disaster Benefit” fund that could potentially draw from the R30bn capitalised Unemployment Insurance Fund (UIF). The Industrial Development Corporation (IDC) will make available R3bn for wider industrial funding for South African companies but there is doubt that these monies will make their way into the OEMs in light of their foreign ownership.
The report points out that the newly created Automotive Industry Transformation Fund (AITF) – currently capitalised to the tune of R6bn – with a mandate to support black participation in the automotive supply chain could serve as a support mechanism for the industry over the medium term.
The health and durability of the components firms is tied to the OEMs which need to restart production as soon as possible. If OEMs can restart, the supply chain will be able to recover quickly, depending, of course, on the health and wellbeing of its workforce. The experience of the automotive components sector and its robustness was evident in Japan after the Fukushima disaster in 2011. Honda, for example, was one Japanese OEM able to restart domestic production about on month following the disaster.
Photo By: Haidan on Unsplash
The report adds that current announced measures in South Africa may, however, not be sufficient to provide support for the wider automotive ecosystem in the economy. In the coming weeks it will become clearer as to how much deeper the Government will have to dig into its pockets to support a pillar industry of the economy.
With suppressed demand ahead, lost production will not recover. The three-week forced closure in South Africa will in effect be longer due to reduced inventories. The challenge is that it will prove difficult for auto companies to pay full salaries beyond the official three-week shutdown if production is not restarted soon.
The report points out that, in light of depressed production volumes, the Automotive Investment Scheme (AIS) – an incentive that both OEMs and component manufacturers enjoy under the APDP – will have to be renegotiated between industry and the Department of Trade, Industry and Competition (DTIC).
The AIS requires OEMs to achieve a minimum of 50 000 units produced per annum within three years, with component supply manufacturers also benefitting from this link to the production value chain.
Respond, recover, thrive
The automotive industry is already grappling with rapid change and disruption: congested cities with inadequate infrastructure deterring car purchasing; technological shifts toward embracing new battery elective vehicle (BEV) power; and the rise of new competitors moving into the mobility industry. And now it faces an unprecedented economic crisis that is rapidly unfolding.
The global auto industry may face significant disruption and wide-sweeping restructuring. As per conversations with CEOs, the two major priorities at the moment are their people’s well-being and raising cash for their business. OEMs will be forced to adjust to a suppressed market by right-sizing their cost base. “Undoubtedly, there will be a different automotive sector coming out of this,” says Whitfield.
But the example of China’s emerging consumer and industrial recovery holds out hope. 80% of global car production involves “Made in China” parts. The Chinese economy is now cautiously reopening and economic activity reviving.
As of 2020, the Deloitte report points out that, of VW’s 33 plants in China, only two remain closed, albeit at reduced utilisation. Car sales in China dropped by 80% in February 26 (the greatest contraction on record) but are expected to pick up with VW expected sales to reach 1 million in March 2020. Figures to be released in the coming days will reveal the extent of China’s economic normalisation. China now offers hope and lessons28 for other countries grappling with the COVID-19 scourge. A recent study by authors affiliated to the US Federal Reserve Board, the Federal Reserve Bank of New York, and MIT Sloan School of Management suggests that there is not a tradeoff between suppressing the virus and economic activity. Instead, the act of suppressing the virus ultimately leads to improved economic activity. This is consistent with what we are now seeing in China.
If Governments can take drastic action to “flatten the curve” of infection rates at an early stage, this results in a quicker suppression of the outbreak. The abovementioned study evaluated the 1918-20 influenza pandemic and found that swift action 10 days prior to the onset of the pandemic increased manufacturing employment by roughly 5% in the post-pandemic period. Implementing restrictions beyond this for an additional 50 days increased manufacturing employment by 6.5% after the pandemic subsided.
This is clearly a case of wilful short-term pain to avoid longer-term structural damage to the industry. The outcome may still be uncertain, but the South African automotive industry must be protected at all costs.
What should the response of auto executives be?
The Deloitte report points out that Covid-19 is having a major impact on the whole business ecosystem. In the short term, businesses will need to respond to the immediate challenges of the COVID-19 lockdown where speed will be more important than elegance. Stabilising the business will be critical. This will include identifying organisational vulnerabilities and securing business continuity and financing.
In time, the world will start emerging from the constraints of Covid-19 and the next challenge will revolve around recovery plans including ramping up the return of employees, managing claims and contract dispute resolution, collaborating with customers and suppliers to synchronise operations and reviewing orders versus commitments and inventory.
The report adds that many businesses will have identified the value of a digital future and new ways of working. This future promises improved efficiencies, cost out and quicker response times. Thriving in the next normal will be for those businesses who see these convulsive changes as opportunities not to be missed.
