Vision 2020 is it a fantasy or a reality?

11 Oct 2009

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The first morning of the SAAW conference saw four top auto industry players coming together to discuss Vision 2020 – is it a fantasy or a reality? The campaign, which aims to drive economic growth and investment in South Africa was originally formulated in 2006. The recent economic crisis has forced industry role players to take another look at the vision which aims at an economic growth rate of between 5% and 8%, an annual job growth rate of 3,5%, which constitutes about 13 000 jobs a year, and a 60% reduction of households living under the poverty line. One of the key sectors being targeted for growth includes the automotive manufacturing sector which has set a target of manufacturing and selling one million vehicles per year by 2020.

The four panellists for the SAAW conference discussion were Mr Brand Pretorius, CEO, Mc Carthy Holdings, Mr Dave Powels, President, NAAMSA and MD of VWSA, Mr Johan van Zyl, President and CEO, Toyota Motors SA and Mr Stewart Jennings, President, NAACAM and CEO of the PG Group.

All panellists agree that Vision 2020 fulfils the need for a common vision between government the automotive industry. It was noted, however that there is still a lot of work to be done to achieve this vision. It also depends on collaboration between all stakeholders including government, labour unions, shareholders, employees, customers and communities. Creating jobs and sustainable economic policies were also highlighted as key to the project’s success.

Highlights:

• According to Brand Pretorius, CEO, McCarthy Holdings, “the 2020 vision should not be imposed, it should be developed by the industry through an inclusive process and all stakeholders must participate in this vision.” Pretorius also noted that the success of the project will be measured in terms of sustainable growth in domestic sales and exports, quality earnings for shareholders, international competitiveness (cost and quality), customer satisfaction and contributions towards social upliftment. “We are at a defining moment of our industry. The world we used to know doesn’t exist any more. The future is not an extension of the past, we have to do things differently and capitalize on this moment through a unified and clear vision and collaboration through stakeholders,” says Pretorius.


• Johan van Zyl, President and CEO, Toyota Motors SA said that the Motor Industry Development Programme (MIDP) roadmap to vision 2020 should be made very clear to all industry players and should comply with the World Trade Organisation. He noted that it was necessary for government to help provide appropriate levels of support and industry protection to achieve the Vision 2020 targets. He also noted the importance of clear economic policies. “There is no reason for the South African auto industry to exist,” says van Zyl. “There are many stronger markets out there, and to be sustainable, we need to create more local content and local value. This can only be done if our economic policies are aligned.”
  Van Zyl noted that the stronger rand is impacting negatively on the vehicle market. “The strong Rand and high local inflation translates into huge industry losses.” He noted that it is extremely important for South African manufacturers to target the greater African market and create more free trade agreements with them. “I predict that with the latest SADC agreements, there will be small vehicle plants going up in places like Kenya, Egypt and Nigeria. We need to create free trade agreements with the rest of Africa as soon as possible.”
  Van Zyl also emphasised the importance of targeting skills shortages in South Africa. “We cannot give up on training and development. People should be our number one priority, and it is people that make us competitive.”


• Stewart Jennings, President of NAACAM and CEO of the PG Group focussed on the stresses in the components sector. “The automotive industry is in and a microcosm of the employment and manufacturing challenge facing SA,” he said. “The forces facing the manufacturing industry are structural and we need a macro economic solution to change the status quo.”
  According to Jennings, the South African components manufacturing industry is affected by several things including the strong Rand, labour pressure, financiers, price increases in electricity, export costs and rates, and import tariffs. “Interest rates are excessive and industry players have to confront these issues because we cannot continue to absorb these costs,” says Jennings.
  The role of government was highlighted, and Jennings emphasised an immediate short term need for a 2% lower interest rate to provide stimulus and cost relief for the industry. “We also need a realisation by unions of the crisis and the absolute need to improve productivity and quality of output otherwise unemployment will continue.”
  Like van Zyl, Jennings emphasised the need to look at job creation. “All of us must be passionate to buy SA otherwise, not only will we have a disappointing economy, but social insurrection will intensify and the alleviation of poverty will not happen.”


• Dave Powels, President, NAAMSA and MD of VWSA noted that since the establishment of Vision 2020, the automotive industry has become a lot tougher. “We can still achieve the vision but need to modify the speed of reaction. The world and the environment has changed and we need to change the speed at which we react to it.”
  “Vision 2020 is not an illusion, it’s a reality. We need to look at successful examples from other places in the world to give us the confidence to do it. We have to do it quickly. This is a job for the next 18 to 20 months!”

Q&A:

Q: What is the automotive industry’s trump card that that is going to outsmart the likes of India and China?
Dr Johan van Zyl: They have huge volume benefits compared to us. We need to make sure we select the correct markets and products to target. We also need to look at skills and productivity. We don’t want to have to cut salaries to improve productivity, it must be done through better skills training. We can do what other auto industries all over the world can do.
Mr Stewart Jennings: I agree, the key is to bring in skills. There is a desperate need for skills in the industry and we need to develop a policy of importing skills and create joint partnerships with overseas suppliers. This is not in competition with South African suppliers, it is extremely important to increase our skills and technology and therefore increase our supply. The cars we’re producing in SA are more sophisticated than those of China and India. We therefore require assistance. We will only be able to compete in overseas markets if we have joint ventures with overseas technology partners.
Mr Brand Pretorius: Yes, we definitely need the support of the overseas parent companies. We need to lobby them and convince them that we’re a good market to invest in.
Dr Johan van Zyl: If we don’t have confidence in our own future, it’s difficult to convince parent companies to have confidence. International companies like certainty and on-time delivery. These are small but very important things. Results create confidence.

Q: Vision 2020 will give impetus to increasing localization of component manufacturing. Is the target of 70% achievable, given the current challenges facing the components industry?
Mr Stewart Jennings: If we look at Thailand as an example, I think it is achievable. Thailand achieved success through setting targets. For the SA industry, OEMs and DTI’s need to sit together and work out a programme to become competitive. Our biggest challenge is economies to scale. We need volume and we need assistance for us to get there.

Q: Banks hold one of the keys to recovery. Are they doing enough and moving fast enough?
Dr Johan van Zyl: Banks are still recovering from the crisis. Rates of lending differ from bank to bank, but we would like to see banks taking another look at their customers again. The right people must get funding, and must not get punished when the wrong people get funding. Some bank rejection rates are still very high, but others will pick up the business. They also needed some time to recover from the economic crisis.
Mr Brand Pretorius: Banks are definitely inhibiting sales to a significant degree. We used to get 55%-60% of our applications for credit through. In September this year, it was just over 20% for the Mc Carthy Group. But, I do agree with Johan, things are looking up. There was some irresponsible lending previously and the situation is still busy normalising. The financial world has a liquidity crisis and the availability of capital is improving gradually.

Q: Traditionally, in an industry, when supply exceeds demand, prices drop. Why is the opposite true in SA?
Mr Stewart Jennings: Cost pressure. Because of volume, if you don’t put your prices up, you will go out of business.
Mr Brand Pretorius: In 2008, the cost of imported components and vehicles from Japan went up by more than 40% only because of the weakness of the Rand. Despite the Rand recovery, there is still a deficit. It is a very competitive industry. We need volume and throughput. When we put prices up in difficult times, we need to do it.
Dr Johan van Zyl: I think Brand is correct. Those are the facts. Our cost pressures don’t go away, they remain. Vehicle prices are driven by market forces. If we don’t push prices during volume drops, we will go out of business quickly.

Q: It is argued that delivering the next significant increment of value to automotive consumers, while remaining profitable will require dramatic increases in productivity across the value chain. Can this be achieved, given the high cost of labour in SA?
Mr Stewart Jennings: Employers have to take the lead here. Just as we have to take the lead in talking to government, we have to engage with labour. Service is a challenge to SA. We’re not known for our service. We need to work with our people and unions to improve productivity, quality and service. It is up to us to drive this.
Dr Johan van Zyl: We need a national effort to fight inflation. We need to get inflation down.

Q: Why do OEMs insist upon price reductions from their suppliers in an environment of lower production values?
Dr Johan van Zyl:  Most of the manufacturers work on a formula based on cost drivers and exchange rates. If exchange rates strengthen, then OEMs are entitled to claim back.
Mr Stewart Jennings: It is a challenge. The OEMs have longwinded bureaucratic processes. We need a much quicker response to price increases. With all the administered price increases at the moment, the auto industry cannot just absorb it. My appeal to OEMs is to process price increases quickly.

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