Like an athlete settling into the starting blocks at the Beijing Olympic Games, General Motors SA (GMSA) is preparing for the race of its life. However, unlike athletes at the games themselves, it won't know, until the gun goes off, exactly which race it has entered.
The starter is trade & industry minister Mandisi Mpahlwa. Any day now, he is expected to announce details of the next stage of the government-administered motor industry development programme (MIDP), which is due to run from 2012 to 2020. Until then, only he knows if the race will be a sprint, a stamina-sapping endurance race, or even a steeplechase littered with hurdles.
WHAT IT MEANS
 R3bn invested since GM returned to SA
Product decisions depend on exports
|
What is certain is that success will have to be earned the hard way. Since the current MIDP was launched in 1995, GMSA and its SA rivals have been engaged in what can best be described as local qualifying heats, to get into shape for the tougher international competition to come.
Over the past few years, the local motor industry has worked hard to get fit. It's leaner, better-trained, more efficient and quality-conscious. Since buying back control of its former subsidiary in 2004, Detroit-based General Motors (GM) has invested more than R2,6bn to bring its Port Elizabeth operation in line with others around the world. Implementation of GM's global manufacturing system is turning local production into a mirror image of that in other countries.
Reward for improvements came early, with the awarding of the export contract to build the H3 version of the Hummer sports utility vehicle (SUV). The six-year deal, which began in 2006, is due to win GMSA up to R18bn in export earnings.
Another R500m is being invested this year to further upgrade facilities. But even as this money is spent, GMSA president Steve Koch acknowledges that the real challenge for the company has barely begun. The purpose of the past four years has been to get GMSA into shape and potentially competitive. Now it must prove it can win.
Like other local companies, it has some considerable hurdles to overcome. SA's position at the southern tip of Africa, half a world away from source plants and major export markets, puts it at a logistical and cost disadvantage. SA's sometimes shaky, often overpriced, transport infrastructure doesn't help. Nor do rising labour costs and skills shortages.
By world standards, production volumes out of SA assembly plants remain generally small. This has a double impact. First, unit costs are high; second, it discourages the creation of a solid local base of components manufacturers. Though there has been considerable investment in SA by multinational supplier companies, most components used in locally built vehicles are imported.
If, as requested, the new MIDP includes incentives for components companies, that would encourage more local
Quote: "Our vision is to be globally competitive. That means becoming the most efficient operation in terms of quality and cost"
Quote: - STEVE KOCH
investment. So would the expected incentive switch for vehicle manufacturers - from export values to production volumes. Guaranteed bigger numbers would be irresistible to more suppliers. The manufacturing head of another SA motor company which has radically increased production numbers in the past two years, says: "Before, we had to beg some suppliers just to talk to us about local production. Now they are knocking on our door and wanting to know how quickly they can set up shop."
All this means big decisions for GMSA. One will have to be made soon on which vehicles it will build in the future. With the exception of Hummer, vehicle assembly has been moved out of the more modern Struandale assembly plant, which is being prepared for the next generation of products. For now, the centre of GMSA's manufacturing activities is once again its 82-year-old Kempston Road headquarters.
There has been talk for some time about whether Kempston Road should continue to build vehicles, or whether all assembly should be shifted to Struandale. No firm decision has been made. Koch says: "Our vision is to be globally competitive. That means becoming the most efficient operation in terms of quality and cost. It makes sense to rationalise our operations where possible to drive efficiency and flexibility. There are many ways to accomplish this objective, and we are evaluating a number of scenarios. We must execute the strategy which best promotes a lean, flexible and efficient manufacturing environment for the future, while minimising cost."
For now, Kempston Road remains the ideal home for the company's burgeoning engineering division, and for medium and heavy truck assembly. These are assembled from fully imported kits so there is no need for the intensive technology and production lines required for GMSA's light vehicles.
GMSA is expected to adopt a two-platform light-vehicle assembly strategy. The likeliest vehicles at this stage are the Isuzu KB pick-up and smaller Opel Corsa pick-up. Not only does the decision depend on the future shape of the MIDP, but also on the winning of long-term export contracts.
Domestic demand alone will not take any GMSA product to the annual 40 000 or 50 000 minimum production threshold likely to be required by the MIDP. Exports are vital. The Hummer export programme probably won't be extended after it expires in 2012. Volumes are too small and, in any case, GM in the US says it is re-assessing the future of the Hummer brand in view of the global shift towards fuel-efficient smaller vehicles in response to runaway oil prices.
Koch says: "Hummer is a great product and accounts for over half the niche in which it competes. But it would be unrealistic if GM did not re-examine its product portfolio in a time of rapid market change like the one we are experiencing. From a GMSA perspective, it makes little difference as we examine our future production portfolio. We retain our commitment to customers and dealers and suppliers and will certainly support Hummer in SA for many years to come."
Africa is the logical target market for future export products. Since last year, GMSA has been the headquarters for all GM's African operations. GMSA has the size and sophistication to complement GM's other African assembly operations to maximise its regional presence. It has the skills and capacity to meet many of GM's Africa needs. Though it still has work to do on bringing down production costs and overheads, Koch is confident GMSA will play an even larger role on the continent in the future.
Africa is not the only possible destination, however. Under the free-trade agreement between Africa and the European Union, vehicle exports from SA land duty-free in Europe as long as they contain at least 60% local content. That might be a carrot for Isuzu, which sells few vehicles there.
But these issues, which are looked at individually later in this report, are for the future. The more immediate challenge for SA vehicle manufacturers, importers and dealers is to counter and survive the current collapse in sales of cars and commercial vehicles.
Some analysts point out that, despite a fall of over 20% in sales of new cars, 2008 remains one of the best years ever for the SA industry. In cold numbers, perhaps. But many of those sales are highly discounted to fleets and rental companies. Motor companies and dealers are offering all manner of deals, including free fuel, to shift stock. Unfortunately, most consumers can't afford to bite. Two years of interest-rate rises, record debt levels and a threatened economic downturn are not the ingredients for a sales boom.
The weaker rand is also hurting an industry still reliant on imported vehicles and components.
Despite this, Koch has reasons to be cheerful. Industry sales may be down but GMSA market share is up. The Chevrolet brand, absent from SA for some years, has rebounded with a vengeance. Opel and Isuzu are doing well. Cadillac and Saab show promise, though neither is intended to be a high-volume seller. And Hummer is, well, Hummer.
Looking beyond SA, Koch - who also carries the title president and MD of GM African operations - can afford to be optimistic. GM sales across the continent are up by more than 38% so far this year. Sales in some markets have more than doubled.
Maureen Kempston Darkes, president of GM's Laam (Latin America, Africa and Middle East) region, says that though the SA market is disappointing, some backsliding was inevitable after the previous prolonged period of growth.
"It doesn't change our view that we made the right decision to reinvest in SA. Our investment was for the long term. We are very bullish about the future for Africa."
