Getting Africa On The Road

The world’s automotive manufacturers have been having a hard time of it with the mature markets of the Western world heavily impacted by the financial crisis and a lack of consumer confidence. But there is one bright spot on the horizon for them – Africa – with growing markets and affordable manufacturing bases.

While many African countries do not keep accurate automotive sales figures, results from South Africa suggest that the industry is enjoying a strong recovery from the global economic crisis. According to figures from the National Association of Automobile Manufacturers of South Africa (Naamsa), unit sales in South Africa in March rose to 56,110 in comparison with the same month last year, which recorded 53,558.

The country’s automotive manufacturing sector saw a fall in demand from key overseas markets. The volume of exports stood at 23,956 units in March 2012, 20.2% lower than in March 2011. Industry watchers believe that the new Ford Global Compact Vehicle Export Programme, as well as BMW’s ramp-up of the production of the new 3-Series RHD sedan model at Rosslyn, will bolster the year’s total output to record modest single-figure growth. That is still some way short of the 588,000 units produced in South Africa in 2006, the high-water mark for the industry in the country.

Naamsa also warns that increases in energy and transport costs could impact the domestic market negatively while the European debt crisis casts a shadow over demand from that region. Nevertheless, increasing demand from the rest of Africa is anticipated.

Increased investment

It certainly appears that the African continent’s only substantial centre of automotive manufacturing, South Africa, is set for expansion. According to Naamsa, local vehicle manufacturers are planning to invest R5bn in capital expenditure in 2012 in South Africa. This is 28% more than the R3.9bn that was invested in the country in 2011. Of the planned R5bn in investment the majority will go to product, production facilities and export investment (R4.69bn), with about R200m for support infrastructure and R176m for land and buildings. The trade body believes that the government’s new Automotive Production and Development Programme, coming into force next year, has encouraged much of the new investment. At the end of last year, the automotive manufacturing industry employed 28,147 people, a slight decline owing to fewer part-time workers, but the government hopes that this figure can be doubled over the next decade with the anticipated growth in component manufacturing.

Japanese automotive manufacturers in South Africa and elsewhere in the world could benefit from expected changes in supply chain management. At present, many source components from suppliers in Japan but production was severely affected by the destruction wrought by the country’s earthquake and subsequent tsunami. Most Japanese firms are therefore keen to set up parallel production plants elsewhere in the world. The South African Department of Trade and Industry is keen to attract Japanese component manufacturers to set up operations in South Africa, as automotive producers seek to diversify their supply base.

The deputy director general of the industrial development division of the Department of Trade and Industry, Nimrod Zalk, revealed: “With all sensitivity to what’s happened, the huge tragedy in Japan will make companies think about their risk management. The reality is the process is already happening, the process of moving parts of the value chain out of Japan, more so in some industries than others.”

However, investment is not limited to South Africa. In late April 2011, Indian firm Mahindra & Mahindra announced that it planned to set up tractor factories in Ethiopia, Kenya, Morocco, South Africa, Tunisia and Zambia in order to target the African market. Pravin Shah, the chief executive of international operations in the automotive and farm equipment sectors, said: “Africa is an opportunistic market. We are following the bottom of the pyramid products strategy where we will leverage our product portfolio, which includes three-wheelers, LCVs, Bolero, to grow further into the African market.” Mahindra & Mahindra, which is now the world’s biggest tractor manufacturer, already operates production lines in Chad, Gambia, Ghana, Mali and Nigeria.

Manufacturers based outside the continent are also beginning to target African customers for the first time. India’s Tata Motors, which also owns the prestige Jaguar and Land Rover companies in the UK, is to begin selling its Nano model in Africa and announced a decision to build a plant in South Africa in July 2011. But Tata’s has ambitions go beyond South Africa. The MD of Tata Motors, Prakash Telang, says: “The countries which are similar to India offer good potential for the Nano to grow…In Africa, many markets are left-hand drive, so we’re developing that now.”

At present, the North American, European and Japanese cars that dominate the global market are particularly expensive in Africa. Tata hopes to replicate the success that it has enjoyed in its domestic market by selling lower-cost cars that could be within the finances of a far greater proportion of the African population. The Nano currently retails at just over $3,000 in India.

New models

Nissan SA hopes that the fourth generation of its Micra, launched last year, will make more of an impact in the South African market than previous versions of the globally popular vehicle. The company has long successfully marketed its sports utility vehicles (SUVs) in Africa but anticipates that the new Micra will have more success in the continent’s biggest market given the growing trend towards more fuel efficient vehicles.

There is also speculation that Nissan plans an assault on the “taxi” market by building a mini van in South Africa to compete head on with the Toyota Hiace that currently dominates this particular segment.

Gilles Normand, the Japanese company’s vice president for the Middle East, India and Africa, commented: “Now is the time to focus on Africa. Africa has 10% of the world’s population but less than 2% of vehicle sales. It is one of the last frontiers.”

However, as with many automotive manufacturers in South Africa, Nissan SA will also focus on marketing its vehicles worldwide as the local subsidiary begins to assemble a greater variety of Nissan’s international passenger models.

However, not all cars produced in South Africa are designed for general international distribution. When Chrysler South Africa launched a new edition of its Dodge Caliber, it was specifically for the domestic market. Guy Franken, the group head of marketing and corporate affairs at the company, said:

“Chrysler has identified with a specific market niche – a group of drivers that have a passion for performance hatchbacks. To address this need, we have delivered the racy Dodge Caliber Mopar Edition which we believe will go a long way to satisfy the ‘boy racer’ in all of us.”

More niche models are also beginning to be produced in South Africa, including the Perana Z-One sports car, which Zagato has opted to manufacture in South Africa.

With consolidation still the name of the game in the global automotive industry, there seems little chance that a major African manufacturer will emerge in this highly competitive sector. Yet the trend towards cost-cutting and ever greater efficiency means that South Africa and some other parts of the continent could become major assembly and component manufacturing hubs.

Such factories would be primarily designed to supply overseas markets but could also provide some diversification in African supplies. With low wage costs and improving shipping services, such investment would certainly inject much needed diversification into the continental economy. It is now up to governments and investors alike to demonstrate that they have the ambition to make the most of such opportunities.