SA Automotive Week in Nelson Mandela Bay last week turned the spotlight on one of the most critical issues facing the country’s automotive industry — the crucial distinction between semi knocked-down and completely knocked-down manufacturing.
These may be technical terms, but they make a massive difference in understanding the kind of industrial investment that South Africa needs to focus on attracting in order to retain its manufacturing base and depth of value chains that support substantial, and sustainable, job creation.
The issue is critical to the economic stability of the Eastern Cape, an economy anchored on automotive manufacturing, with the metros of Nelson Mandela Bay and East London home to almost half of the country’s auto component manufacturers, and together accounting for 45% of SA’s vehicle production, over 50% of vehicle exports, and 40% of auto manufacturing employment.
Simply put, the seven global original equipment manufacturers of passenger and commercial vehicles with plants in SA perform completely knocked-down manufacturing, building the vehicle “from the ground up”. Most of the parts — from chassis, axles, metal exteriors, wheels, brakes, clutches, body panels and batteries and to seats, dashboards, steering wheels, lights and windows — are manufactured and supplied by about 500 local component manufacturers, providing almost 40% local content in locally built vehicles.
The original equipment manufacturers, component manufacturers and the component aftermarket, through both domestic sales and exports, together account for R171-billion in manufacturing value added to the South African economy. This is the country’s largest manufacturing sub-sector, contributing 21.9% of domestic manufacturing output and 5.3% of GDP.
The automotive sector is a major employment contributor, sustaining about 115,000 direct jobs in vehicle and component manufacturing. Indirect employment through the value chain including suppliers of services and consumables to the manufacturers, transport and logistics, dealerships, service and fitment centres, aftermarket parts and accessories, wholesalers and retailers is estimated at more than 500,000, and up to a million jobs.
The significance of local component manufacturing is reflected in the fact that, of the 115,000 direct jobs in auto manufacturing as a whole, 80,000 (70%) of those are in the components sector — a sector that would not exist without the original equipment manufacturers and completely knocked-down manufacturing.
Semi knocked-down assembly — the importing of vehicle bodies and all their components in “kit” form for local assembly — makes minimal contribution to these numbers. No components are manufactured locally and employment numbers in assembly are low, albeit there is some impact in terms of local businesses supplying goods and services to the facility, and employment and economic contribution in the establishment of local dealer and service centre networks.
Economic impact
The differences between completely knocked-down manufacturing and semi knocked-down manufacturing assembly in terms of investment size and economic impact are stark, as outlined by Toyota SA chief executive Andrew Kirby in a presentation at SA Automotive Week.
- Investments in semi knocked-down assembly facilities range around R100-million to R170-million. For completely knocked-down manufacturing, an investment in a new plant requires between R3-billion and R11-billion. The bulk of semi knocked-down investment is abroad, in the brand’s home country, while completely knocked-down manufacturing investment takes place mostly locally.
- Employment in a completely knocked-down manufacturing plant runs from a minimum of 1,000 up to 5,000 people, or more. In a semi knocked-down assembler, jobs required are as little as 30, up to about 300.
- Every one person employed in a completely knocked-down manufacturing plant has a multiplier effect of eight people employed in the value chain. For the equivalent product, semi knocked-down assembly has an employment multiplier effect of x1.
- Completely knocked-down manufacturing is surrounded by an ecosystem of up to 250 local component suppliers to each plant, with associated employment. Semi knocked-down assembly has zero local component suppliers.
Additionally, completely knocked-down manufacturing supports localisation of supply chains, for efficiency of just-in-time supply and harnessing incentives under government policy such as the SA Automotive Masterplan.
Semi knocked-down assemblers have no interest in localising supply chains. Some of these types of manufacturers are heavily subsidised by their governments in order to create employment and industrial activity in their own countries, and have excess capacity far beyond what is needed in their local markets.
There is also a large distinction in terms of employment — semi knocked-down manufacturing offers basic assembly roles of low complexity while completely knocked-down manufacturing requires high-level engineering skills.
Additionally, completely knocked-down manufacturing brings technology transfer and skills development as multinationals build localised supply chains.
It also cannot be emphasised enough how critically important it is that only completely knocked-down manufacturing that supports high local content levels is allowed in the country, and not the type of semi knocked-down manufacturing that utilises imported components as this would quickly destroy the overall ecosystem and the thousands of jobs linked to it.
In essence, the local economic contribution of semi knocked-down investments is minimal, compared with the depth of the value chain around completely knocked-down manufacturing, and its vast ripple impact into other sectors of the economy.
As Kirby puts it: “Semi knocked-down is cheap, but shallow. Completely knocked-down is costly, but transformative. Where a completely knocked-down model already exists in South Africa, and for every new semi knocked-down job that is created, the completely knocked-down manufacturer loses eight jobs, resulting in a net loss of seven jobs for the country.”
An unintended consequence of current industrial policy is that semi knocked-down investment and imports of fully built-up vehicles have become a more attractive option, with lower market entry requirements.
Additionally, while consumer demand for new vehicles is growing, the rising market share represents more affordable imported vehicles from India and China — now accounting for 64% of local vehicle sales. This is effectively displacing the ability of local original equipment manufacturers to maintain volumes in the domestic market and achieve the required economies of scale to be sustainable.
Loopholes
Completely knocked-down manufacturers require a mix of both domestic demand and exports to make their business cases work.
The decline of SA’s tyre manufacturing industry, largely due to the influx of cheap imports, with importers exploiting loopholes in the anti-dumping regulations, is a loud warning bell that industrial policy is not working in favour of local manufacturing and job retention.
It must be emphasised that imports bring no investments and no skills development, compared with local manufacturers that invest billions, create jobs and develop technology and skills.
At the same time as Goodyear SA shut down, losing over 900 direct jobs and more in the supply chain, Egypt and Kenya secured new tyre plant investments valued at R18-billion and R15-billion respectively.
Morocco has announced a R100-billion Chinese investment in an EV battery “gigafactory”, and Egypt recently secured investment in a wiring harness plant creating 10,000 jobs.
Speaking on these figures at SA Auto Week, Ford Africa president Neale Hill raised the concern that SA’s industrial policy was falling behind: “Africa’s progressive automotive and industrial policy measures and proactive governments are outpacing SA, while the rest of the world is running even faster.”
Unions and industrialists are on the same page on this issue, with Numsa secretary general Irvin Jim one of the most vocal critics of the government’s inability to curb cheap imports and to compel Indian and Chinese brands to manufacture locally. Speaking at SA Auto Week, Jim said the automotive sector was “bleeding jobs — not because workers are lazy or unskilled, but because government policy has been distorted in favour of traders and importers”.
Trade and Industry Minister Parks Tau said the government was working with China and India on commitments to transition their local semi knocked-down operations to completely knocked-down manufacturing, and talks were ongoing to ensure foreign brands used local labour more effectively.
However, what was needed now was less talk and more urgent action.
If we want to retain automotive manufacturing as the heart of South Africa’s industrial base, we need to decide the terms for new players coming into the market — and those terms need to be weighted in South Africa’s interest.
Given the ecosystem of component suppliers that surrounds completely knocked-down manufacturing and the multiplier effects on employment and supply chains, rippling into supporting a vast array of local economic activity, the strengthening of local suppliers should be put at the centre of policy.
Failing municipal services, crumbling infrastructure, logistics inefficiencies, declining safety and security — all of these are critical issues that are inflating the costs of doing business, eroding competitiveness and threatening the sustainability of local manufacturing.
Business steps in
Business has stepped in to help address these issues where we can, by deploying expertise and resources into collaborative partnerships with the government on interventions focused on unblocking barriers to economic growth, investment and job creation. At the national level, the CEO-led Business For South Africa partnership with the government is delivering progress on turnaround initiatives in electricity and energy, logistics and transport, and crime and corruption.
A local-level example is the Nelson Mandela Bay Business Chamber’s geographic clusters where businesses are collaborating to effect infrastructure repairs, maintenance and security improvements, along with task teams supporting the municipality with technical expertise to resolve shortcomings in the electricity grid and water and sanitation infrastructure.
However, the arena of industrial policy and incentives lies firmly in the hands of the government — and that is the area where business most relies on the government to act. We can lobby and advocate for change, but final decisions are in the hands of the government, and they are urgently needed.
While all investment is welcome, South Africa’s high unemployment amid advancing deindustrialisation demands that we push for investments with maximum economic impact.
It is vital that the government acts urgently to move new and prospective investors from vague commitments to “transition to completely knocked-down manufacturing”, to implementing policy that demands this.
Industrial policy must urgently be reshaped to protect local manufacturing and steer incoming investments on terms that are in the best interests of South Africa.
Business and organised labour are united on this. Now we need the government to join us, and turn talk into action — swiftly and decisively. DM