SA’s auto industry will be in a fight for its survival post-pandemic

South Africa’s automotive industry has proposed a host of liquidity relief measures to President Cyril Ramaphosa to alleviate the industry’s serious cash flow challenges and ensure its survival post Covid-19.

The proposals will also safeguard the livelihoods of more than 500,000 employees across the automotive industry value chain during the lockdown, said a report on the economic impact of Covid-19 on the industry, released by the National Association of Automobile Manufacturers of South Africa (Naamsa) on Thursday.

The report warns that the Covid-19 lockdown could lead to job losses of between 21% and 30% in South Africa’s automotive industry, which supports more than 1 million people in the formal sector.

“The real effect will be known with time lags,” the report said.

It added that the domestic automotive sector’s significance is premised on its contribution to export earnings, employment and GDP growth.

The report said the sector created 468,000 formal jobs in the automotive industry in 2019, while a further 588,273 jobs were created through industry linkages with other industries in the value chain.

The estimated impact of the Covid-19 pandemic has led to South Africa’s vehicle original equipment manufacturers (OEMs) slashing their initial projections for total domestic sales for this year by 23% (120,500 units), total domestic production by 26.5% (167,900 units) and total export sales by 28.4% (111,400 units).

These figures reflect the difference between the projections by the OEMs for domestic sales, domestic production and export sales in a review of business conditions in the vehicle manufacturing sector for the first quarter (Q1) of 2020, also released by Naamsa this week, compared with Q4 2019.

Massive drop in sales forecast

Forecast total domestic sales for this year – at 405,000 units – is 24.5% lower than the 536,611 units sold in 2019, and will be the lowest level of domestic sales since 1995.

Total domestic production is projected to slump to 466,500 units, its lowest level since 2004 and 26% lower than the 631,983 vehicles produced in South Africa last year.

Vehicle export sales are also projected to take a hammering and slump to 280,500 units – the lowest level since 2014 and 27.5% lower than the 387,125 vehicles exported last year.

However, Thursday’s Naamsa report said: “Taking into consideration the supply chain disruptions, possible global lockdown extension in South Africa and abroad … the South African automotive market might take a [volume] knock as high as 40%.”

The report added that despite the automotive sector being granted permission to operate at 50% employment at Level 4 lockdown, subject to strict health protocols, the sector’s production level is still expected to decline “by at least 12% year on year”.

Naamsa CEO Mike Mabasa confirmed this week that only three of the seven OEMs in the country – Toyota, Volkswagen and Mercedes-Benz – are already back in production, albeit at a much reduced scale.

Mabasa said BMW, Nissan, Isuzu and Ford are hoping to commence production again from the beginning of June.

Part of the R40 billion investment over five years committed by South Africa’s automotive industry at the 2018 Presidential Investment Summit might also be at risk because of Covid-19.

Mabasa said some of the investment pledged at the summit had already been committed and deployed, but for the remainder of the five-year period, many of the OEMs were obviously “comparing notes” with their overseas principals.

“I hope that in June they will be able to give us a sense of whether those commitments will still stand or [if] they are likely to revise them,” he said.

Relief proposals

The liquidity relief proposals made by the industry to Ramaphosa include:

• An amendment to the volume assembly allowance rate to be applied to actual production volumes to the four quarters of 2020.
• An extension to the expiry date of product rebate credit certificates (PRCCs) for a minimum of 12 months, the period allowed for the submission of new PRCC claims to be extended by six months, and the accommodating of electronic submissions of PRCC claims with immediate effect.
• A 60-day extension to lodge new Automotive Incentive Scheme (AIS) claims, and the start of production date of AIS applications already granted to be extended by six months for both suppliers and OEMs, to prevent the denial of approved applications.
• An extension to submit quarterly duty account submissions to customs.
• The postponement of the start date of Phase 2 of the Automotive Production and Development Plan (APDP) from January 2021 to July 2021.
• A delay, postponement or extension for the payment of various duties and taxes, including APDP completely knocked down (CKD) duty, CO₂ tax, ad valorem duty on domestic production, waste tyre tax, company employee taxes and levies, corporate taxes, withholding taxes and value-added tax.

Economist Mike Schüssler said this week that car sales worldwide before the Covid-19 crisis were about 14% lower than a year ago and down 20% in the past two years.

Schüssler said worldwide there is an overproduction of cars, which is a massive problem.

He believes the Covid-19 crisis will lead to people holding on to their cars for longer.

And, with governments in the developing world increasingly concerned about air pollution, many have stopped giving subsidies to vehicle manufacturers or have added taxes to cars.

“That means there is a lot more production around the world looking for markets, which is going to impact us for years to come on the export side,” he said.

Schüssler added that South Africa is a tax-incentivised vehicle-producing country and the economic response to the virus will result in the government reining in incentives.

“There might be an [auto] agreement but they will revise it in a year or two,” he said.

Schüssler said investment by the automotive industry in South Africa will probably bounce back in the second half of this year but he believes that from next year there will be as much investment in vehicle production facilities as before.

Econometrix chief economist Azar Jammine said Naamsa’s projections for domestic vehicle sales, domestic production and export sales were “very much in the ballpark” although there were those who would argue that some of Naamsa’s projections were too optimistic.

“I’m not entirely convinced that is the case but they are the ‘best case’ scenario,” he said.

Customer pockets hit

Jammine added that people had been badly hurt by the lockdown and incomes had been depleted among the lower- to middle-income class as well as some of the wealthier sections of the market.

This would result in people who were planning to buy a new car holding back from doing so to restore their own personal balance sheets.

Jammine said under normal circumstances with lower automotive market projections, OEMs would just postpone planned investments in the belief that they did not have to produce as much as they anticipated.

But Jammine said the rand had weakened and any capital investment woud be more expensive than it would have been earlier this year.

“That too means that they will need more money to make the same investment, and will delay them in making that investment,” he said.

Jammine said the Covid-19 crisis had also highlighted all sorts of potential changes to the way in which the world is likely to behave in the future.

“If people start working much more from home rather than at an office, that reduces the potential demand for the usage of vehicles to travel to and from the office or to travel to meetings and that sort of thing.

“You could have had a permanent stepwise change in the demand for vehicles that you may not previously have been contemplating,” he said.

“The lockdown has also highlighted to people the attractions of a better physical environment, such as cleaner air and fewer traffic jams. That in itself could also inspire changes in the type of vehicles that might be used and you could see a faster move towards electric and other types of vehicles.”

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