The withdrawal from SA by an iconic global company is a serious matter. General Motors (GM) has been in SA for nearly a century, although it did temporarily disinvest in 1986 due to political pressures at the height of the international campaign against apartheid.
This latest move has been interpreted in some media reports as a vote of no confidence in the South African economy although the company insists it is a matter of global strategic positioning.
So what is really happening?
The decision can be evaluated at three levels — the position of the company in SA, the current situation and future prospects of the Southern African vehicle industry, and the global context for GM.
GM SA produces Chevrolet and Isuzu products from its two assembly plants in Port Elizabeth. The fact is that the company has not been very successful in SA for a number of years. In 2016, it only produced 33,602 cars and commercial vehicles, less than 6% of SA’s total output. Modern, world-scale plants produce in the region of 150,000 vehicles per year, usually of just one model.
SA’s largest producers — Toyota, Volkswagen (VW), Ford and Mercedes — are all producing models in excess of 80,000 per year, with much of this being for export.
The critical problem for GM SA is that it has failed to secure a major export contract from its parent company, which would have allowed it to achieve the volumes and economies of scale required in an intensely competitive environment. High volumes are also essential to make the localisation of parts economic. Local content in SA-assembled vehicles is presently only 38%, which is well below the levels required to support sustainable competitive advantage relative to competing industries in countries such as Thailand and Turkey.
A second factor is that SA’s position in the global vehicle industry is marginal at best. In 2016, the country only accounted for 0.65% of global vehicle output although its share in light commercial vehicles was more significant (at 1.3%).
The domestic market is limited and has been going backwards in an environment of very low growth. Total domestic sales of 547,000 vehicles in 2016 represent a 23% decline from the records achieved back in 2006.
Added to this, SA is a long way from major markets. This means that the industry cannot adopt the strategy of Mexico in relation to the North American Free Trade Area (Nafta) or Turkey, Slovakia and Morocco in relation to the EU.
The African market, for which SA is well placed in terms of geographical location and market access, does have promise. But weak economic growth over the last few years due to the commodity slump has led to a decline in new vehicle sales across the continent and dented perceptions of its short-to medium-term growth prospects. In any event, this regional market is served mainly by imported used vehicles from developed economies and total new vehicle sales remain very limited.
SA is a successful exporter, with 58% of locally produced vehicles exported. But this does not mean that the domestic market is not important. Automotive exports are assisted by government policy that allows firms to claim duty rebates based on their local production. Essentially, the more firms produce for domestic and export markets, the more they can import vehicles and parts on a duty rebated basis. A growing domestic and regional market are clearly essential to maintain the expansion of multinational investment.
In response to these pressures, the South African government has commissioned the development of the South African Automotive Masterplan to 2035. Drawing heavily on international experience, the masterplan sets ambitious objectives. These include growing South African vehicle production to 1% of global output (projected to reach 140-million units annually by 2035) as well as raising local content in domestically assembled vehicles.
If this could be achieved, even allowing for significant productivity improvements, employment gains would be significant. Apart from supportive policies, this will require much higher domestic growth coupled with appropriate interventions to build infrastructure, improve skills and generally create a better investment environment.
At a global level, GM has battled in major markets and essentially only makes money in North America and China. The company is, therefore, redefining its global operations. In the aftermath of the global financial crisis, it sold off or closed noncore assets in a bid to generate cash, and is in the process of selling off its European operations (Opel and Vauxhall) to PSA, the owners of Peugeot and Citroën.
What is surprising is that not only will GM branded vehicles no longer be sold in SA but the company will also no longer be selling its products in India, a major growth market. Speculation is rife in respect of this latter decision. Does it represent the permanent contraction of GM at a global level or a reorientation of its business model towards higher growth, better return market opportunities, as suggested by its global CEO? Or does it signal a reshuffling of its collaboration with SAIC Motor, China’s largest vehicle producer with whom GM has a highly successful joint venture.
Interestingly, SAIC has recently purchased GM’s Halol assembly plant in India and this represents the first foray by a Chinese car maker into production within the country. Is GM’s global repositioning an indication of a future global realignment with SAIC? These questions reveal the extent to which developments within major global value chains affect the positioning of individual firms within the South African automotive industry.
It is also important to note that GM used to have a small shareholding in Isuzu. As part of its global realignment, GM sold off this share, leaving the GM plant in Port Elizabeth manufacturing Isuzu vehicles under a licensing agreement. The silver lining in GM’s withdrawal from SA is that Isuzu has purchased the assembly plant and is looking to expand production of light commercial vehicles. This opens the opportunity for the local operation to secure a major export contract within a new global family.
The benefits for the South African industry could be significant, particularly given that the country is already a centre for the production of light commercial vehicles. Leading South African component suppliers are cautiously positive about the announcement and hold the view that Isuzu would not be buying the plant to simply continue assembling 30,000 vehicles a year. The hope is that output will expand significantly.
Regionally, GM’s small Kenyan assembly operation, which produces Isuzu commercial vehicles, has also been sold to Isuzu suggesting that the Japanese company is developing an African production strategy.
While developments at GM SA appear to be primarily driven by its parent company’s global strategy, with the outcome potentially having longer term benefits for SA, it does sound a warning. SA is falling behind its global competitors in terms of domestic market expansion and vehicle output growth. It is moving further to the periphery of the global automotive industry, making it more vulnerable to the global machinations of multinational corporations.
If the ambitious targets of the industry’s masterplan are to be achieved, all stakeholders will have to co-operate to a much greater degree than has been the case to date.
It is critical that the country undertakes the structural reforms necessary to stimulate market growth and improve productivity levels. Collaboration with our African neighbours on the development of a regional automotive industry is also essential. In combination, these reforms should ensure that the highly unfortunate job losses at GM SA are not repeated elsewhere, and that SA’s leading manufacturing sector contributes more meaningfully to the industrialisation of the domestic economy.
• Barnes is executive chairperson of B&M Analysts and Black is professor of economics at the University of Cape Town. Both have been involved as advisors on automotive industry policy to the Department of Trade and Industry
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