Localisation

The low levels of local content in the automotive value chain undermine sustainable competitiveness of the sector principally through the exposure to cost-raising factors such as exchange rate volatility, duties and tariffs, and logistical costs. In order to address local content and cost competitiveness, the DAC analyses automotive industries in countries that have successfully increased local content, examines opportunities for firms to capitalise on the Automotive Production Development Programme (APDP), and increases dialogue between local automotive manufacturers.

Purchasing Skills Development

The purchasing function at firms wields the most influence over suppliers and is the department that interacts most with suppliers. It therefore stands to reason that these departments should play the dominant role in supplier development at firms. The procurement and supply chain related interface functions at firms are developed via:

  • Procurement Forum: This quarterly forum provides a platform for identifying and engaging with the various operational supply chain management challenges.
  • Best Practice Workshops: These workshops add significant value in terms of awareness and adoption of best practices. Eight workshops are held annually with an average of approximately forty delegates from industry attending each workshop.
  • Formal Education: A specialised automotive course in purchasing and related fields has been developed and is presented jointly by the DAC and the Durban University of Technology. Other automotive specific courses will be developed and presented as this programme expands.

Joint Supplier Auditing and Development

In response to the challenge of increased localisation and cost competitiveness in the local automotive industry, the DAC launched the Joint Supplier Auditing and Development Programme in June 2007 with two groups of Tier 1 suppliers. Each group consists of four 1st Tier suppliers and a selection of their respective 2nd Tier suppliers. A third group was subsequently included in the Programme. A total number of 12 first tier and 106 second tier suppliers are currently participating in the Programme.

Through this Programme the participating 1st Tier firms are optimising the use of their resources. While a Tier 1 firm runs only one training session every 12 months, its strategic suppliers benefit from four such sessions during the corresponding period.

Relevant areas for development are identified and discussed by each of the groups of 1st Tier firms at various meetings convened for this purpose. Qualified speakers on the selected topics are identified as well as host firms for the training sessions. The material to be presented is then reviewed by the relevant group of first tiers two weeks prior to the training taking place. The training is then conducted at no cost to the second tier suppliers at the identified host firm’s facilities. Training sessions have been conducted on manufacturing related topics such as lean manufacturing, kanban, 5S, problem solving, FMEA, APQP, PPAP, G8D and Recession Surviving Skills.

After completion of the training session, participants are expected to implement the learning in their work environment e.g. kanban. Each participant is also handed a ‘Supplier Development Project Charter’ to complete on behalf of their companies, and this charter is to be presented to the participants at the next training session. The project charter acts as a management tool during the process of implementation and will provide the first tier suppliers (customer) with feedback on the practical application and benefit of the training received.

  • Group 1:  Tier 1 participants are Federal Mogul Friction Products, Feltex Fehrer, Ramsay Engineering, and Smiths Manufacturing.
  • Group 2:  Tier 1 participants are Aunde SA, GUD Filters, Hesto Harnesses, and Kaymac Structural Foam.
  • Group 3:  Tier 1 participants are BEHR SA, PFK Electronics, Federal Mogul Powertrain Systems, and Pi Shurlok.

Tier 2 Localisation and Cost Reduction Support:

This initiative attempts to find ways to ensure the sustainability of the training and support that is currently provided to 1st and 2nd Tier suppliers in the automotive component industry. This is to be achieved by securing the required technical support to the identified suppliers to increase localisation and cost competitiveness. 

The DAC is exploring opportunities to forge partnerships with various organisations that could provide the level of technical support required. 

Special Projects:

  • Drivers of Thailand’s Relative Cost Competitiveness:

A comparative study of the cost competitiveness of automotive production in Thailand relative to KwaZulu-Natal revealed a competitive advantage for KZN firms in respect of factory rentals and shipping costs. However, Thai automotive producers have a distinct competitive advantage in almost every other facet of their operations- from market demand considerations, to the operational effectiveness of their plants, to management and labour costs, to rail infrastructure costs. While both economies provide substantial incentives to their automotive industries, the level of benefit appears higher in South Africa.

Importantly, the study considered only cost differentials that could be quantified, and controlled for all indefinable factors-such as market demand considerations. While this summary analysis is therefore not definitive, the evidence generated is nonetheless compelling:

  • Thailand has a major "trade access" advantage, given that it can manufacture (holding COS equal) one passenger vehicle and one LCV with a 19.6% selling price advantage, relative to manufacturing in KZN.
  • Data on pair-matched South African and Thai/Indian firms indicated that the latter group commanded a 4.6% advantage in terms of operational waste in manufacturing processes.
  • Input cost differentials secure a 13.5%  cost advantage for Thailand, specifically in relation to labour and managment. Electricity costs are similar, while water is much cheaper in Thailand. However, KZN offers cheaper factory rentals.
  • While MIDP benefits compensate for some cost competitiveness differentials between KZN and Thai firms, this is only equivalent to 3% of sales.
  • Taking into account these factors, the competitivenes gap between KZN and Thai firms can be calculated at a staggering 34.7%. Excluding trade access and Thailand's Greenfield investment support, the gap reduces to as little as 9.66%, largely due to MIDP benefits.

Thailand has achieved its competitive advantage based on the scale economies it has created through its tax regime, stimulating demand for particular products (LCVs), thereby encouraging high local content. Valuable lessons can be drawn in this regard in terms of the South African government's intent on securing production of 1.2 million vehicles by 2020. However, Thailand takes a far more protectionist stance on its automotive industry, with implications for trade access calculations facing OEMs. In addition, skills shortages in the SA industry are driving labour costs to comparatively uncompetitive levels, indicating the need for enhanced skills development programmes in the provincial automotive industry. Nonetheless, the opportunity exists for KZN firms to substantially reduce the operational cost gap with Thai manufacturers; of  particular importance, given that the support provided by the MIDP is insufficient to fully compensate for the deficiencies in the industry's overall competitiveness.

KZN therefore cannot afford to lose the few cost advantage it has. Should factory rentals and shipping costs increase in line with recent electricity hikes, KZN could quickly lose in all areas of competitiveness to Thailand- bar preferential access into the South African market.