A new kind of journey for the automotive industry

Rapid technological changes, evolving consumer preferences and behaviours, and game-changing technologies such as autonomous vehicles are converging to make the future of transportation and mobility both exciting and challenging for the industry.

At an automotive industry event hosted by RMB, industry experts trained a spotlight on the changing nature of the sector.

RMB CEO James Formby highlighted a peculiarity in South Africa: that much emphasis is placed on the mining industry which makes up 7.3% of GDP yet the automotive sector, which is a close 6.8% of GDP and also a major contributor to exports and foreign direct investment, tends to not get as much attention.

Have we reached “peak auto” and what does that mean for the automotive sector in South Africa and the rest of the world? Deloitte & Touche Automotive Industry Sector Leader Dr Martyn Davies asked.

Globally, favourable regulations, government subsidies and tax breaks have led to a surge in electric vehicle (EV) production and sales, with over 2 million EVs sold globally in 2018.

Even though Scandinavian countries remained world leaders in terms of market share, in 2018 China is largest EV market by sales volume.

The growing popularity of EVs has turned attention to vulnerabilities in the metals supply chain, in particular those for cobalt and lithium, and building an ethical supply chain and managing supply disruptions are concerns for automotive OEMs.

Government corruption, political instability and conflict in countries such as the (DRC and legal obstacles in Chile are threats to the supply of cobalt and lithium and could lead to higher EV prices, which are still competing to reach cost parity with internal combustion engine (ICE) vehicles.

Other factors likely to affect the industry are the price of oil, potential curbs on fracking in the US, and the fallout from a US-China trade war.

The future of the industry rests on several pillars: the rapid development of electric vehicles; greater awareness of emissions; and consumers more readily using ride hailing services such as Uber. Unlike in the past, the status associated with owning a car is no longer a given, especially among younger consumers.

RMB Chief Economist Ettienne le Roux suggested that South Africa’s automotive sector is at an inflection point as the premium segment of the market had shrunk dramatically.

The changing trends were highlighted by WesBank CEO Chris De Kock who emphasised that South Africa had to get used to a market that is becoming substantially smaller than what we have been accustomed to, with sales hovering closer to the 450 000 mark p.a, down from the 550 000 level. There has already been a shift away from premium vehicles to “value” or more affordable brands.

The contraction in the local retail sector to some extent reflects global trends. Global passenger vehicle sales contracted in 2018 due to saturated markets and automotive supply and demand problems and the decline is expected to persist in 2019. The decline in car sales reduced global GDP by as much as 0.2%, according to Fitch Ratings. However, strong demand from construction, oil, agricultural and vocational applications supported growth in commercial vehicle sales in 2018.

As the local economy stagnates, it is expected that vehicle sales, one of the leading indicators of consumer spending, will continue to come under pressure, Mr De Kock emphasised at the discussion.

Dealerships are reporting depressed sales and a steady decline is expected until 2025.

The reasons are multipronged: highly indebted consumers are opting for longer payment terms with contract periods now averaging 72 months. Furthermore, vehicle owners are choosing to not change cars as often as they did in the past.   At the same time, regulators have been scrutinising the financial services industry, with Treating Customers Fairly rules likely to affect the provision of financing.

Intense competition offers some insight: the number of dealers has declined from 3484 in 2014 to 3007 this year; there are 65 OEMs servicing the industry (down from 70 in 2014); average annual sales per dealer had declined from 144 to 137; and average annual sales per OEM are around 8266 (8754 in 2014).  Profits are more and more being driven from vehicle finance income and to a lesser extent from a mix of used vehicles, services and parts making up for the  decline in new vehicle profit contributions. In summary OEMs and dealerships, who are invest heavily in infrastructure, are grappling with over supply against low demand. 

However, two factors may present opportunities for South Africa-based OEMs: the continued decline in public transport services and expansion into the rest of the continent. With 47% of the share of sales, South Africa dominates the new vehicle market in Africa with only Egypt (15%), Morocco (14%), Algeria (8%), and Tunisia (4%) being noteworthy players.

There are other bright spots in sub-Saharan Africa. High-growth countries such as Ethiopia, Ghana and Rwanda are making efforts to establish the kind of manufacturing capacity that would enable skills development and investment by OEMs. The Rwandan government in partnership with VW has established its version of a ride-hailing service that guarantees a market for the manufacturer while shutting out established services such as Uber. The capital city Kigali is also embracing EVs with a planned 2020 rollout of a fleet of Golf E taxis.

South Africa’s automotive industry is well established and has contributed to supply chains that feed into the global industry while contributing to the development of the local skills base.

In this regard, the government’s incentive programme, the Automotive Production and Development Programme has been key to the industry’s success.

In countries with established manufacturing sectors, there was a correlation to low inequality levels, said Dr Davies. However, South Africa’s automotive sector, like other businesses have to contend with the structural decline in the overall macro economy, he said.

Simon Woodward, RMB Sector Director: Auto, Logistics and Services highlighted the fact that in South Africa, the automotive industry had been a crucial contributor to high-quality jobs and to sustaining the economy of the Eastern Cape, KwaZulu-Natal and Gauteng. 

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