Auto industry can play key role in economic transformation
04 February 2019 | Web Article Number: ME201913432
By Dave Coffey
TRANSFORMATION of the South African economy is both a moral and an economic imperative. Meaningfully addressing the triple challenge of poverty, inequality, and unemployment requires significant interventions delivered in a co-ordinated and mutually reinforcing manner by the government, business and civil society.
A step change in thinking and action is required for the deep transformation of the economy into a dynamic environment where sustainable and inclusive growth is achieved.
One action led by the existing business community is the development of new, productive, competitive and transformed suppliers while transforming themselves.
Given the significant role of manufacturing in driving both gross domestic production growth and employment creation, it stands that any efforts to restructure the economy must include this important sector. Manufacturing value addition is linked to higher levels of equality and there is a strong positive correlation between high levels of manufacturing value addition and a lower Gini-coefficient [a gauge of economic inequality].
The manufacturing sector locally accounts for 13% of gross domestic product (GDP), compared to a global average of 18%. Our automotive manufacturing sub-sector makes up around 34% of all manufacturing activity; the sector as a whole contributes in the region of 7% to GDP. The significant economic role played by the automotive manufacturing sub-sector means that it has a key role to play in our socio-economic transformation. Its importance locally must be placed in context – South Africa produces less than 1% of the global automotive output.
Automotive manufacturing is viewed globally as an “industrial jewel” given that Original Equipment Manufacturers (OEMs) anchor complex, value-adding supply chains that reach deep into other sectors.
With high labour absorption, productivity, skills development, technology, trade and innovation intensity it is a priority sector for developed and developing countries. Given our scale in global terms and the ability of OEMs to place production in competing markets, the support of the sector locally by the government is required.
This imperative has not gone unnoticed: the automotive sector is considered a priority sector by the government, with sector-specific policy support and incentives currently provided in the form of the Automotive Production and Development Plan (APDP) and the associated Automotive Incentive Scheme (AIS). The long-standing policy support for the automotive sector has provided investor confidence and worked towards stimulating production in a relatively low local demand environment.
The recently adopted South African Automotive Master plan (SAAM) will guide the sector to 2035, providing a unified roadmap and inform the new incentive framework. Its targets include expanded vehicle production, doubling employment, an increase in local content to 60% , and an increase in the contribution of black-owned suppliers’ automotive Gross Value Added within the economy to 25% of the Tier 2 and Tier 3 total.
The SAAM acknowledges the weaknesses in the sector, specifically the lack of depth in the supply chain, and will encourage OEMs to focus on rebuilding it by incentivising a higher level of local content within their end products. SAAM also heralds a new incentive framework with higher B-BBEE scorecard requirements to access its benefits; all indications are that the new incentive framework will be linked to much higher levels of compliance than is presently the case now; a level 4 scorecard has often been mentioned.
This creates a confluence of socio-economic interests supported by not only the incentive structure of the SAAM but a host of other legislation and programmes. A unique opportunity is created to significantly transform the sector profile while growing its socio-economic impact.
To contribute to Tier 1 and OEM B-BBEE scorecards through procurement there is a strong rationale for new lower-tier entrants to black-owned manufacturers. Further, by needing to comply with increased B-BBEE scorecard requirements, existing firms will be required to increase their efforts and spend across the scorecard categories. The skills development, socio-economic development and enterprise and supplier development categories of the scorecard specifically provide opportunity to develop existing and new suppliers.
There are several industry-led initiatives aimed to facilitate support for existing companies on this transformation and black supplier development journey. Incubator structures, private advisory services and cluster initiatives such as ECAIF (East Cape Automotive Industry Forum) and DAC (Durban Automotive Cluster) provide valuable structures to support these objectives.
The National Association of Automotive Component and Allied Manufacturers (NAACAM) Show is another. This biennial event is positioned to showcase the depth and capability of South Africa’s automotive value chain, whilst providing a platform for industry to advance its immediate objectives.
A distinct focus on accelerating transformation and black supplier development can be seen throughout the event's conceptual design.
As 2019 gets underway, there are favourable growth and investment signs within the sector. The SAAM has just been adopted and the alignment between the government and the business sector is positive.
A key blockage appears to be deeper levels of engagement and creative thinking on how to achieve faster and greater levels of transformation through the entire automotive value chain. As the component manufacturer body representative, NAACAM is committed to playing its role in taking this agenda forward.
- Dave Coffey is the managing director of Shatterprufe and vice-president of the National Association of Automotive Component and Allied Manufacturers (Naacam)