Car Conference 2011 Adapting for success in a changing automotive market Presented by: Stewart Jennings

The greatest danger in times of turbulence is not the turbulence; it is to act with yesterdays logic. – Peter Drucker, 1980

Supplier Statistics Revenue last year was valued at over R65 billion, 10% up on 2009, but well below 2008 levels The employment of suppliers is just over 65,000, down from a peak of 82,000 at the beginning of 2008 Despite this decline, supplier employment is more than double that of the OEMs, and it is in our sector where the greatest job opportunities lie. More than half the locally-owned suppliers and sub-suppliers are SMMEs. Component sector employment in 2011 has increased by 5% (not all permanent jobs) but the overall manufacturing sector has lost jobs in Q2 alone. This statistic alone indicates the success of the MIDP.

Export destinations EUR21 billion Africa R3,3 billion USA R3 billion BrazilR940 million JapanR420 million AustraliaR300 million S. Korea, China and India each over R200 million.

The component sector makeup 35% of production is sold to local vehicle assemblers (OEMs), 45% is exported, mainly to overseas OEMs, and 20% is for local spare parts. Total component exports were R34 billion in APDP, its effect on exports is currently important and being analyzed. It needs to be tweaked to cater for the need to encourage exports. Economies of scale is the most important determinant of component manufacturing efficiencies.

The growth of imports Imported Cars now make up 70% of the market (from 31% in 2003), the highest in the world (with Australia) of any car-producing country outside of economic blocs. SA import duties of 25% are lower than almost all developing countries, and the same as China, which produces 25 times the vehicles SA produces, and the same as the USA duty on pickups (they produce 5 million), Furthermore we are the only country where duties can be fully rebated by credits. Most spare parts for these cars are also imported

The decline of local content Local Content in vehicles has declined in recent years: The MIDP structure allow OEMs to use export credits to import components duty-free Older-generation vehicles with high local content have been replaced by more sophisticated ones OEMs are using more multinational suppliers, many of whom assemble components from imported sub-components thus eroding local sub-supplier capabilities Our cost competitiveness has deteriorated NB: often figures quoted do not reflect real local content The industry trade deficit (including vehicles) is R25 billion

Global Competitiveness Decisions on vehicle and component production are made globally, mainly on price. Our competitiveness is being eroded by increases beyond our control – notably electricity (including punitive peak charges), wages, logistics, a strong and volatile currency. Our ports are the most expensive in the world. Artisan shortages force premium pay (7 X Thailand). Port and rail inefficiencies cause congestions and costly safety stock requirements. Strong Rand has eroded our competitiveness and cost jobs.

Change in Number of Employees per sector for Q Thousands (total gain of jobs) Source : Stanlib

Change in Number of Employees per sector for past year Thousands (total gain of jobs to Q2 2011) Source : Stanlib

South Africas permanent employment ( ) 2011

Trends in R/$ changes vs changes in employment As appreciation of the currency takes root, employment falls

Automotive sectors contribution to Manufacturing

Summary The automotive suppliers, along with many other manufacturers, are facing their toughest period, exacerbated by the global nature of the sector. The lower export incentives from 2013 will challenge the ability of suppliers to compete internationally. It is important for authorities to address the barriers to competitiveness, infrastructure investment, provide temporary relief where appropriate and facilitate improved productivity and skills development. Need to have a more competitive and stable currency. The industry will focus on improving competitiveness.

Factors that have changed our industry in the last 3 years The great recession and its influence on the currency. Its legacy is a strong Rand rather than a reduction in volume, resulting in margin squeeze and its dire consequences. Labour militancy which has focused on the redistribution of wealth. Inappropriate economic policy for a developing economy and the policy makers have been caught like a rabbit in the headlights. Electricity cost increases which have excessively outstripped inflation (140% over 4 years). Very high percentage of imported vehicles ±70% which has led directly to reducing much needed volume for local manufacturers. In addition, imported spare parts for these vehicles has taken away volume from local component manufacturers - the only negative consequence of the MIDP exacerbated by the strong Rand.

Factors that have changed our industry in the last 3 years Cheap unfettered Chinese imports have ballooned, particularly in the aftermarket. Model range available: January 1994 – 192 model from 17 brands August 2011 – 1309 models from 60brands While the local OEMs have rationalized, imports have exploded. Skills shortages remain at all levels in the manufacturing sector, and indeed all sectors of the economy. Quality standards and specifications have increased cost. Costs have escalated and pricing reduced due to globalization, the recession and the Rand. The result is MARGIN SQUEEZE. Transition between the MIDP and APDP – a new dynamic.

So what do we do about it? Some will say go away, leave the sector to China and others. We need to be activists on a number of fronts: Cost escalation on administered prices Need a new labour bargaining structure – business will have to take the lead Need to tweak the APDP to offset the relative advantages in the MIDP for exporters Promote skilled immigration Actively sign up for the preferential procurement pledge, to encourage the private sector to support the DTI / economic development department campaign Seek international partners on technology and skills transfer Tackle the unfair explosion of imports from countries which provide unfair incentives – we need to revive our industry Work in unison with government on all the issues. The MIDP has been a shining example of where alignment can bring us, and we must actively change what is not working for survival before we thrive Job growth and its resultant multiplier must be at the core of all SA strategies and objectives

Benefits of the Motor Industry in SA The MIDP has been an outstanding success, compare its contribution to manufacturing generally. Decent jobs have been created. Investment has been significant last 3 years – component fixed investment has been R8 billion - in difficult times. Support of the 7 OEMs has been admirable for an industry which produces less than 1% of the worlds production. Quality standards have forced SA component manufacturers into high quality parts and ensured we can meet export requirements. Training and development in our industry and the multiplier effect in the economy has been very significant. The motor industry has grown, while general manufacturing has shrunk.

The greatest danger in times of turbulence is not the turbulence; it is to act with yesterdays logic. – Peter Drucker, 1980