African logistics

Africa awakes

The region currently plays a small part in global automotive supply and demand, but more investment and changing economics might help it to realise its huge potential

BMW Group plant, Rosslyn

Africa’s vehicle production and distribution sector still trails much of the rest of the world, but the signs are that this is beginning to change. South Africa is still the only significant producer and distributor of vehicles and parts on the continent, but other countries are now laying the groundwork to follow in its footsteps. Nigeria and Kenya, in particular, are dipping their toes into the industry, though they have a long way to go to catch up with their southern rival.

South Africa is home to the plants of seven of the world’s major OEMs – BMW, Volkswagen, Chrysler, Ford, Nissan, Toyota and Fiat. It is also home to smaller niche plants that build or assemble light commercial vehicles, in particular buses and trucks.

The country’s domestic industry suffered a blow last year when General Motors disinvested from South Africa and stopped manufacturing and selling its Chevrolet line there. At the time, GM said the move was based on a strategic review of its business worldwide and was not influenced by local economic or political considerations.

GM’s Struandale plant in Port Elizabeth on the Indian Ocean was sold to Isuzu Motors South Africa. Isuzu will consolidate its local truck business and repurpose the Struandale plant to build its own brand of pickups and trucks that have historically sold well in the country.

“This is the first commercial and light commercial vehicle manufacturing operation outside of Japan in which we have acquired 100% ownership,” said Masanori Katayama, Isuzu representative director, at the re-opening of the plant in February this year.

 


“The automotive sector remains a priority for the South African manufacturing sector… [but] while the production of local OEMS is crucial, the largest economic spin-offs will be realised in the supply chain.” – Renai Moothilal, NAACAM


 

At the moment, South Africa is struggling with a sluggish GDP growth rate of under 4% and unemployment in excess of 26%. It remains a relative minnow on the automotive scene, too – ranking around 22nd globally. Still, the industry is important to the local economy, comprising 30% of local manufacturing output.

As such, the government views the industry as strategic and will undoubtedly continue to support it through the Automotive Production and Development Programme (APDP). A policy tweak to the programme is expected soon, resulting in a heightened focus on localisation in the sector. The current average is 40%, though it is likely that the government will push for this to rise to 60% by 2035.

Last year, vehicle exports of about 600,000 units earned the country around 170 billion rand ($13.4 billion), according to figures from the National Association of Automotive Component and Allied Manufacturers (NAACAM). This is about 7% of its GDP, underscoring just how valuable the sector is to the country.

Renai Moothilal, executive director of NAACAM, says government support remains crucial to the sector’s health. “The automotive sector remains a priority for the South African manufacturing sector, contributing significantly to the country’s GDP and export basket,” he says. “While the production of local OEMs is crucial, the largest economic spin-offs will be realised in the supply chain.”

The country has around 200 specialist engineering firms supplying parts to the industry, most of which are small, family-owned enterprises.

NAACAM’s latest data shows that exports remain in good shape. Around 338,000 left- and right-hand-drive vehicles were exported to 149 countries in 2017. A wide range of components were also sold abroad.

Uncertainty over exports to UK
The UK remained South Africa’s top destination for vehicle exports last year, as in 2016, importing 98,400 Mercedes-Benz, Volkswagen, BMW, Toyota and Ford vehicles, including passenger cars and light commercial vehicles.

Lingering anxiety remains over how the UK’s exit from the EU next year could affect its position as a destination for South African exports. Any change to trade patterns could disrupt plant operations, says Ryan Bax, industry analyst at Frost and Sullivan in Cape Town.

“The UK is South Africa’s largest vehicle export market and remains strategic to the OEMs involved. Changing these flows would add considerable cost to the manufacturers involved,” he says.

For now, however, exports continue as usual and BMW recently started producing the first X3 vehicles at its Rosslyn plant in Pretoria, sending the first 100 to Europe in May in a move that Tim Abbott, CEO of BMW Group South Africa and Sub-Saharan Africa, describes as “a big moment for us”.

BMW has spent the equivalent of $465m over three years tooling up the new factory, he explains. “It’s really exciting to know that BMW Group Plant Rosslyn has joined the enormous success story of BMW’s X models globally and [it]goes to show the power of combining good industrial policy and foreign investment,” he comments.

BMW’s X models now make up more than 30% of BMW’s global volume and Rosslyn is expected to produce around 76,000 units a year.

 South Africa leads the way on  infrastructure

Of all the countries on the continent, it is South Africa which has the best infrastructure for moving cars and components. 

The World Bank’s most recent Logistics Performance Index ranked the country at number 20 out of 160, putting it in the same league as most industrialised nations. The roads in the country, in particular, are excellent – which is one reason that BMW, for example, transports export vehicles to the country’s ports by truck. 

South Africa’s good quality roads are, however, somewhat offset by the country’s creaking railway system. A focus on commodities has led to a deterioration of general service by rail and a wholesale shift to road. As a result, road transport accounts for around 86% of total freight volumes moved in the country. 

Mike Schussler, CEO of economic advisory service Economists.co.za, suggests that this has raised competition among trucking companies, to the advantage of shippers.

“Competition leads to lower prices,” he notes. “Over the past ten years, road freight has increased its unit prices by 30%, while rail has increased its unit prices by 107%. More than 5,000 road freight firms now operate in the country.” 

Elsewhere, Ford has just announced that after a $226m upgrade of its plant in Struandale, the site has been awarded the latest Ranger pickup line. The Ranger Raptor will be in production from 2019.

Meanwhile, the other Pretoria-based OEM, Nissan, is still considering further upgrades to its own plant. The Japanese OEM is considering adding another model to its line-up of the NP200 half-tonne pickup and NP300 one-tonner. Both are exported extensively across the rest of the African continent.

One newcomer to South Africa is Beijing Automobile International Corporation (BAIC), China’s fifth largest OEM. BAIC is building an $864m plant at Coega, an industrial development zone outside Port Elizabeth, where it will initially focus on the D20 hatchback/sedan and the X25 SUV. In time, the Chinese bra nd will seek to sell its SUVs into wider Africa, where rapid urbanisation combined with poor infrastructure is pushing demand for such robust vehicles.

“This is clearly looking at the wider African market, not just South Africa,” says Bax of Frost and Sullivan. “With a growing middle class, there is a need for vehicles that can handle bad roads but also provide comfort and styling.”

Africa does hold promise for local manufacturers and South Africa’s frequently cited label as a ‘gateway’ to the continent may well hold some truth in this case.

Car usage comes to only 42 private vehicles per thousand people, according to a joint study by the National Association of Automobile Manufacturers of South Africa and the Automotive Industry Export Council. This is exceptionally low, compared with the global average of 180 vehicles per thousand.

The past five years have not been kind to the pan-African economy however, dependent as it is on raw commodity exports. New vehicle sales in Africa have fallen from a peak of 1.72m units in 2014 to 1.2m last year, the joint study says.

 

Challenging South Africa’s dominance
South Africa no longer has the manufacturing field to itself on the continent. Morocco, for example, produced 341,802 units in 2017, for the first time surpassing South Africa’s passenger car production total of 331,311 units, the study shows.

Other countries also want to enter the lucrative automotive market. They include Africa’s largest, Nigeria, which has a fledgling car assembly programme that produces around 45,000 vehicles a year, according to the country’s National Automotive Council (NAC). In time, it could grow to half a million vehicles a year, according to projections by PwC.

Ford Ranger South Africa

At least 49 licences to assemble vehicles have now been granted there, although only about half are so far active. One of the latest applicants is the Dangote Group, a Nigerian conglomerate that is heavily involved in construction and cement making. Dangote has partnered with China National Heavy Duty Truck Group Company (Sinotruk), to produce up to 10,000 vehicles a year.

‘The policy has two objectives; to bring back motor assembly and to grow local component manufacturing,” says Aminu Jalal, director general of the NAC. “So far we have succeeded with the first objective to bring back motor assembly.”

This, he says, will allow Africa’s most populous country to develop the skills and technical expertise to graduate to full manufacturing. In time, component making should also develop in the country as vehicle assembly advances.

Coping with poor infrastructure
Logistics in Africa remains a tough obstacle for anyone hoping to do business across the continent.

“Africa has countries with access to the sea, and others that are landlocked,” noted Jean Claude Masangu Mulongo, former Central Bank governor in the Democratic Republic of Congo (DRC). Speaking on the sidelines of the Katanga Business Meeting (KBM) in Lubumbashi recently, Mulongo said that African ports were underdeveloped compared with their global counterparts.

“The most important ports on the continent do not even rank in the top 50 global ports,” Mulongo observed.

Rail infrastructure is also lacking, especially country-to-country connections, as national rail lines are not generally linked up to those of neighbouring networks. Even when they are, different rail gauges mean that goods have to be transferred to other rail cars before continuing on their journey.

“Even where infrastructure projects, such as rail, are contemplated, they are usually focused on moving raw commodities, not goods such as vehicles or components,” Mulongo said. “So it’s still very much a case of imported vehicles being discharged at a port, then driven inland to their intended market.”

Fortunately, growing competition between various ports is driving a modernisation push. According to a study by PwC, this will lead to an emergence of major hubs that will dominate trade in the most important regions of south, east and west Africa.

DurbanPorts that are the gateway to large hinterlands will benefit most. Durban in South Africa, Abidjan in Ivory Coast and Mombasa in Kenya are most likely to emerge as the major hubs in their respective regions, PwC predicts.

Such port expansion is inevitable, says the analyst. African trade has increased by about 300% over the past 30 years, but without investment this rate will slow. Meanwhile, the prices of many commodities, Africa’s primary exports, have begun to recover from the dive that occurred five years ago. As a result, exporters now have more money for investment, plus an incentive to make their logistics infrastructure more efficient.

“Ports are a vital part of the supply chain in Africa,” says Andrew Shaw, PwC Africa transport and logistics leader. “Many ports have a far-reaching hinterland, often spanning a number of countries, which makes them a natural focus for regional development.”

Tackling the trade imbalance
African imports mostly consist of containerised cargo, while exports are mostly bulk freight. Even cars are generally imported in containers. Nigeria, for instance, brings in nearly half a million used vehicles a year, mostly shipped in 20-foot-equivalent units.

The trade imbalance between imports and exports means that many containers return empty, however, taking up valuable port capacity and resulting in higher logistics costs for inbound traffic to offset the cost of empty return legs.

Increasing Africa’s exports of manufactured, semi-processed or agricultural goods would significantly improve the imbalance in containerised trade, PwC notes.

There are indications that countries on the continent are beginning to see port development as crucial to economic development, especially in West Africa, where economies have embarked on new economic development drives.

“New or expanded port access and capabilities are increasingly recognised as key tenets of these programmes. This is exemplified by the number of active port development and expansion projects in Nigeria and Ghana,” says Shaw.

Realising vast potential
For now, Africa as a whole may be a footnote in the global automotive trade, but with more than a billion people and 54 countries, the continent has vast potential to grow into a desirable market for the automotive industry. A gradual rollback of conflict and a growing middle class are both expected to help spur demand for all sorts of goods and services across the continent, including private transport.

Eric Monga, current head of the Central Bank of the DRC, notes that as conflict winds down, people obviously become less concerned with basic survival and start to develop interest in tertiary needs. Speaking at the Katanga Business Meeting in Lubumbashi in May, Monga suggested that basic needs were no longer a concern across much of Africa.

“Demand has moved from food and shelter to construction of permanent homes and owning transport. Economies, too, are moving from primary resource extraction to service industries such as car repair and fashion,” said Monga.

It may trail other automotive markets at present, but Africa seems to be a market which is slowly awakening. As Monga points out: “Africa’s needs are falling in line with the rest of the world.”

 

E-commerce boosts Africa’s aftermarket parts flow

One intriguing development in the African automotive components sector is the emergence of online buying. Nigeria-based Jumia is an e-commerce platform that sources household products from Europe and China but is also now pursuing automotive parts. 

Jumia reported revenue of more than €500m ($583m) last year and operates in 20 countries on the continent. 

“Obtaining parts for cars is one of the biggest problems motorists face across Africa,” says Sami Louali, head of strategy, investor relations and corporate development at Jumia Group. “Online is often the only way to source a particular component, to compare prices and to place an order.” 

Jumia uses a network of established logistics operators for informal delivery services – up to 30 in each country it operates in. 

Louali notes that preferred suppliers are usually Chinese, mostly because they sell generic spares cheaper than branded items.