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Local content key to safeguarding components industry amid powertrain revolution

steel-fabrication-4 The global automotive industry is facing the rapid development of new powertrain technologies, such as electric and hydrogen vehicles, eager to displace the internal combustion engine (ICE), which has powered the industry for more than a century. The local automotive manufacturing industry is acutely aware of the changes taking place on the global stage.

Volkswagen Group South Africa (VWSA) produces ICE engines at its Uitenhage plant, in the Eastern Cape. Production capacity at the engine plant is 175 000 units a year.

VWSA MD and chairperson Thomas Schaefer said earlier this year that VWSA was “fighting” to bring a new engine variant to the plant. He noted, however, that the global automotive industry was faced with uncertainty regarding the future direction of engine development, owing to the rapid global emergence of electric and electrified drivetrains.

He said much of VWSA’s discussions with government, which supports the local automotive industry through its Automotive Production and Development Programme (APDP), centred on identifying production that could withstand the current revolution in drive- trains, otherwise “we could say goodbye to our [components] suppliers” by 2025.

One of South Africa’s biggest components manufacturers, JSE-listed Metair, is readying itself for the evolution by, for example, focusing on the manufacture of components not linked to the vehicle’s drivetrain. Cars still require lights, brakes and wiring harnesses, for example, said Metair MD Theo Loock last year.

Metair has also since announced its intention to move into the production of lithium-ion batteries for the automotive industry, the power source for electric vehicles.

“Our electric vehicle adaptibility is high. The plan is to EV-proof the business,” said Loock.

Trade data shows that component exports from South Africa in 2016 were, as usual, dominated by catalytic converters, which are used to clean up the dirty emissions from ICEs.

The ICE is big business for South Africa.

Data published in the Automotive Export Manual 2017 shows that catalytic converter exports made up 41.3% of all component exports from South Africa by value, earning R21.9-billion in 2016.

ICE parts were South Africa’s second-biggest component export product in 2016, at R3.9-billion, with tyres third, at R2.5-billion.

ICEs were the fourth-biggest export product in 2016, at R2.1-billion.

“I wouldn’t say that the local components manufacturing industry is vulnerable to changes in the global market,” says National Association of Automotive and Allied Manufacturers (Naacam) executive director Renai Moothilal, “but, yes, we are not currently participating in producing alternative powertrain technologies in South Africa.

“There is definitely space to increase the production of ICE, hybrid and electric vehicles in South Africa. Naacam would like to see OEMs (original-equipment manufacturers, or vehicle manufacturers) increase their production of alter- native drivetrain vehicles in South Africa, but only if they use locally sourced components.”

Moothilal says the local production of a growing number of alternative power- train components is largely dependent on OEMs securing contracts to build such vehicles in South Africa, thereby placing a demand on the local components sector to deliver the required components.

However, the demand for alternative powertrain vehicles in the South African market is still almost non- existent, with consumers not yet warming to the idea of electric vehicles. This is partially due to the high cost of these vehicles, and the lack of charging infrastructure to support their roll-out.

A number of local vehicle manufacturing plants, such as BMW, Mercedes-Benz and Ford, however, have export contracts to numerous markets abroad, where the demand for these new- generation vehicles is escalating.

It is a question of responding to dual markets – the more traditional South African market and the more advanced global market. Disregarding either of these markets could spell a significant loss in local production volumes.

For the local components sector, the key to global competitiveness is increased local parts content, whether it be the production of ICE or alternative drivetrain components, emphasises Moothilal.

“The target is 60% local content on vehicles built in South Africa, up from the current roughly 38%. This is a key objective and not simply a wish. Sixty per cent creates the scale we need to be competitive, regardless of the technology.”

This 60% target is likely to be enshrined in government’s new incentive regime, the Automotive Masterplan, set to replace the APDP in 2021.

The Masterplan is set to run to 2035, with the 60% target to be reached by this date.

“If we can reach this target, there will still be components manufacturers in South Africa in 2040,” says Moothilal. “All the global benchmarks indicate that 60% local content is where a country’s automotive sector becomes dynamic and successful.”

He says the masterplan gives equal importance to higher-volume production and localisation, whereas the APDP favours volume production.

“Simply put, we need to produce more vehicles with higher local content.”

The finer details of the masterplan are close to finalisation, says Moothilal. An announcement of the policy is expected by the end of March.

Moothilal says the masterplan recognises the need to introduce high-value- add technologies in South Africa.

“We are hopeful of seeing a targeted policy stimulus for high-value-add production in South Africa within the masterplan.”

Moothilal emphasises, however, that the ICE will not disappear anytime soon.

“As Naacam, we don’t want to lose what we currently have in the ICE space. We are looking to optimise our existing expertise, but also have a framework to support new technology in South Africa. We have, for example, the capability to produce lithium-ion batteries in South Africa. We would like to see these new technologies supported in the masterplan.”

Moothilal says older technologies such as catalytic converters should still, and correctly so, be supported by the masterplan.

“This is the biggest export components subsector in South Africa and we can’t just lose this capability. The sector still needs to be supported. We can use the expertise here to eventually support fuel cell vehicles, for example.”

Moothilal adds that Naacam would like locally built vehicles to capture a growing percentage of new-vehicle sales in South Africa, as this would greatly assists the local automotive sector.

The strong gains made by the rand in recent weeks, however, increasingly opens the door for growing new-vehicle imports.

Which companies and/or sectors would be on Moothilal’s wish list to invest in South Africa’s components sector?

“I would like to see an increase in powertrain and related components investments in South Africa. That would be the first prize,” he says.

“The second sector where we would like to see new investment from abroad would be the electronics sector, in high-end telematics, for example.”

Are new multinational components companies, however, eager to invest in South Africa, considering government’s increased demands for increased black economic empowerment in the automotive sector?

Moothilal says the components sector faces a similar challenge to the OEMs sector – ownership by multinationals that are seldom in a position to give up ownership to black companies.

South Africa’s OEMs seem to have responded to the challenge by proposing the establishment of a venture fund to support the development of black-owned service and components suppliers in the automotive supply chain.

This programme could potentially create a number of new black suppliers, says Moothilal.

Multinational Tier 1 components suppliers could potentially use a similar fund solution if this concept is approved.

Naacam has also proposed measures to its members that can be taken to increase empowerment compliance and black supplier development, says Moothilal.

He acknowledges that there is “significant pressure” on the local automotive industry to improve its empowerment credentials.


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