Nw dac august 2013

The Challenge of Localisation

Nigel Ward

Senior Vice President

Toyota SA Motors

Vision 2020

Manufacture 1.2 million vehicles in

South Africa !

Vision 2020 : Manufacture 1 200 000 vehicles in South Africa !

Questions that we need to Ask :

• Is it possible ?

• What needs to happen to be able to produce

1 200 000 vehicles in SA ?

• What will the results be if we manufacture 1.2 million vehicles?

Contents

• History of the Sectoral Development Policy in the SA motor industry

• Vision 2020

– Growth plan for Motor Manufacturing in SA : Towards 1 200 000 production

• Localisation – A Strategic Pillar

• Conclusion

Sectoral Development Policy

Motor Industry in SA Years Policy Instrument

1959 Increase in duty on passenger cars and light commercial vehicles,

levy an excise duty, additional protection to domestic component

manufacturers, create rebate provisions subject to local content

requirements.

1961 – 1963 Phase I :15% to 40%. Ad valorem duty set at 35% up to a maximum

of 100% depending on the value and the weight of the car.

1964 - 1969 Phase II : increase local content in mass from 45% in 1964 to 55% in

1969.

Motor Industry in SA

Years Policy Instrument

1971 – 1976 Phase III : 52% at the beginning of 1971 to increase to 66% on 1

January 1977.

1977 - 1978 Phase IV : A two-year standstill phase

1980- 1988 Phase V :66% by mass in respect of motorcars and 50% by mass in

respect of light commercial vehicles.

1989 - 1995 Phase VI : Local content based on value as opposed to mass. 55% at

the inception of the programme to 75% (including exports) by the

year 1997. Reduce the foreign exchange used by the vehicle

manufacturing industry by about 50% over the period 1989 – 1997.

Motor Industry in SA

Years Policy Instrument

1989 - 1995 Import duty was increased to 50% ad valorem and on passenger

vehicles to 100% ad valorem.

1994 Reduction of the duty on passenger cars to 80% af valorem from

1Janury 1994.

1995 Reduction of the duty to 75% ad valorem from 1 January 1995 on

passenger cars.

• Customers

– Affordability

• Industry

– Plant modernisation

– Model line-up rationalisation

– Local production of volume models

• Economy

– Employment

– Investment

– Exports

OBJECTIVES OF THE MIDP

1 • Significantly Grow Vehicle

Production in South Africa

2 • Increase local value addition in

the automotive supply chain

3 • Increase employment in the

automotive supply chain

OBJECTIVES OF THE APDP

21

Vehicle Production and the Various phases of the Motor Industry Development Plan

0

100 000

200 000

300 000

400 000

500 000

600 000

700 000

800 000

900 000

1 000 000

1960 1970 1980 1990 1995 2000 2005 2006 2010 2015 2020

Exports Local Market

Start-up

Phase

Initial

Growth

Isolation Phase Revitalisation Growth Phase

149,7%

36%

-17,3% 16% -8,3%

48%

57,7%

☀

20,4%

?

Vision 2020

Legend:

Domestic Market only

The roadmap towards 1.2 mil vehicles and achieving international competitiveness

13

2005 2013

350,000

600,000

Loca

l pro

du

ctio

n v

olu

me

per

an

nu

m

Domestic supply with some global and regional exports MIDP

Investment Support

AIS

Other IPAP 2

MIDP/ APDP

1995

Vulnerable

Sectors Light

Vehicles MCV / HCV

IDC

Legend:



14

2005 2013

350,000

600,000

Loca

l pro

du

ctio

n v

olu

me

per

an

nu

m


Vulnerable

Sectors Light

Vehicles MCV / HCV

Investment Support

IDC

AIS

Local content Development

Other IPAP 2

1995

MIDP/ APDP

0%

20%

40%

60%

80%

100%

Past Future (High-volumePlayers)

Future (Low-volume/Premium Players)

Imported Imported in Local Local

35-40%

70-80%

Local C

onte

nt

Excl. e

ng

ine &

ge

arb

ox

Local Content Development

40-50%

15

Brazil 104

W. Europe 100

Mexico 89

Russia 107

Malaysia 94

E. Europe 93

Cz. Rep 95

India 85

China 91

Thailand 92

RSA 107-110

Supplier Cost Competitiveness 2013

16 EUR 1 : ZAR 10.50

South Korea 88

USA/Canada 91

North Africa 86

Is this a real Threat? Hyundai/Kia in SA as an example

17

Hyundai/Kia produce in South Korea (cost index 88) and India (cost index 85), ship cars to SA, pay 25% import duty and are still highly competitive in SA

Passenger

Mark

et

Share

Legend:



18

2005 2013 2020 And Beyond

350,000

600,000

1,200,000 Lo

cal p

rod

uct

ion

vo

lum

e p

er a

nn

um


Tooling Initiative

Vulnerable

Sectors Light

Vehicles MCV / HCV

Investment Support

IDC

AIS


Other IPAP 2

Preferential Procurement

1995

MIDP/ APDP

Legend:



19

2005 2013 2020 And Beyond

350,000

600,000

1,200,000 Lo

cal p

rod

uct

ion

vo

lum

e p

er a

nn

um


Tooling Initiative

Vulnerable

Sectors Light

Vehicles MCV / HCV

Investment Support

IDC

AIS


Existing trade Agreements

AGOA SADC EU

Other IPAP 2


1995

MIDP/ APDP

Legend:



20

2005 2013 2020 And Beyond

350,000

600,000

1,200,000

Loca

l pro

du

ctio

n v

olu

me

per

an

nu

m

Domestic supply with some global and regional exports

Enhanced International Competitiveness

MIDP

Tooling Initiative

Beneficiation Strategy

Vulnerable Sectors

Light Vehicles

MCV / HCV

Investment Support

IDC

AIS



AGOA SADC EU

Other IPAP 2


1995

MIDP/ APDP

Legend:



21

2005 2013 2020 And Beyond

350,000

600,000

1,200,000

Loca

l pro

du

ctio

n v

olu

me

per

an

nu

m



MIDP

Tooling Initiative


Vulnerable Sectors

Light Vehicles

MCV / HCV

Investment Support

IDC

AIS



AGOA SADC EU

Infrastructure Development

Electricity

Tariffs

Other IPAP 2


1995

MIDP/ APDP

[%] 2008 – Index 100

Energy 30 25 25.3 25.6 11 10

22

CPI 9.5 6.3 3.5 6.1 5.7 5.5

Cumulative Inflation Cost Increases Energy vs. CPI (2008 – 2013 FC)

Legend:



23

2005 2013 2020 And Beyond

350,000

600,000

1,200,000 Lo

cal p

rod

uct

ion

vo

lum

e p

er a

nn

um



MIDP

Tooling Initiative


Vulnerable Sectors

Light Vehicles

MCV / HCV

Investment Support

IDC

AIS



AGOA SADC EU


Ports and Rail

Electricity

Tariffs

Other IPAP 2


1995

MIDP/ APDP

Legend:



24

2005 2013 2020 And Beyond

350,000

600,000

1,200,000 Lo

cal p

rod

uct

ion

vo

lum

e p

er a

nn

um



MIDP

Tooling Initiative


Vulnerable Sectors

Light Vehicles

MCV / HCV

Investment Support

IDC

AIS



AGOA SADC EU


Ports and Rail

Electricity

Tariffs

Other IPAP 2


Labour

Industrial stability

Productivity

1995

MIDP/ APDP

Nr of working days lost due to strikes SA vs other Countries

25

Note: Days lost during 2010 for SA = 20.6 Mio

Country GDP

(Mio USD) 2010

Canada 1,574,051

South Africa 357,259

France* 2,582,527

Spain 1,409,946

Britain 2,247,455

Ireland 204,261

Italy 2,055,114

Australia 1,235,539

Germany* 3,315,643

USA 14,657,800

Belgium 465,676

Finland 239,232

Denmark 310,760

Poland 468,539

Netherlands 783,293

Sweden 455,848

Russia 1,465,079

Legend:



26

2005 2013 2020 And Beyond

350,000

600,000

1,200,000 Lo

cal p

rod

uct

ion

vo

lum

e p

er a

nn

um



MIDP

Tooling Initiative


Vulnerable Sectors

Light Vehicles

MCV / HCV

Investment Support

IDC

AIS



AGOA SADC EU


Ports and Rail

Electricity

Tariffs

Other IPAP 2


Labour


Skills / training

Productivity

Wage Inflation

1995

MIDP/ APDP

Cumulative Inflation Cost Increases

Auto Wages vs. CPI (1993 – 2013 FC)

[%]

1992 – Index 100

27

0

100

200

300

400

500

600

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

FC

Cum CPI (%)

Cum AutoWage increase

(%)

Legend:



28

2005 2013 2020 And Beyond

350,000

600,000

1,200,000 Lo

cal p

rod

uct

ion

vo

lum

e p

er a

nn

um



MIDP

Tooling Initiative


Local Content / Global Suppliers

Vulnerable Sectors

Light Vehicles

MCV / HCV

Investment Support

IDC

AIS



AGOA SADC EU


Ports and Rail

Electricity

Tariffs

Other IPAP 2


Labour


Skills / training

Productivity

Wage Inflation

1995

MIDP/ APDP

Legend:



2005 2013 2020 And Beyond

350,000

600,000

1,200,000 Lo

cal p

rod

uct

ion

vo

lum

e p

er a

nn

um



MIDP

Tooling Initiative



Vulnerable Sectors

Light Vehicles

MCV / HCV

Investment Support

IDC

AIS



AGOA SADC EU


Ports and Rail

Electricity

Tariffs

New trade agreements

Mercusor

Africa (SSA)

BRIC

Other IPAP 2


Labour


Skills / training

Productivity

Wage Inflation

1995

29

MIDP/ APDP

Legend:



2005 2013 2020 And Beyond

350,000

600,000

1,200,000 Lo

cal p

rod

uct

ion

vo

lum

e p

er a

nn

um



MIDP

Tooling Initiative



Vulnerable Sectors

Light Vehicles

MCV / HCV

Investment Support

IDC

AIS



AGOA SADC EU


Ports and Rail

Electricity

Tariffs


Mercusor

Africa (SSA)

BRIC

Other IPAP 2

Fuel quality


Labour


Skills / training

Productivity

Wage Inflation

1995

30

MIDP/ APDP

SA Fuel Quality vs Global Players

31

Legend:



2005 2013 2020 And Beyond

350,000

600,000

1,200,000 Lo

cal p

rod

uct

ion

vo

lum

e p

er a

nn

um



MIDP

Tooling Initiative


Local market growth Local Content /

Global Suppliers

Vulnerable Sectors

Light Vehicles

MCV / HCV

Investment Support

IDC

AIS



AGOA SADC EU


Ports and Rail

Electricity

Tariffs


Mercusor

Africa (SSA)

BRIC

Other IPAP 2

Fuel quality


Labour


Skills / training

Productivity

Wage Inflation

1995

32

MIDP/ APDP

Passenger and LCV Market in SA

354632

623921

1200000

0

200000

400000

600000

800000

1000000

1200000

1400000

2000 2012 2020 Vision

33

Annual Local

Market increase

required until 2020

= 8 - 9%

Units

+8% for Euro

+21% for Dollar [%]

2008 – Index 100

Exchange rate impact on revenue

R/Euro 12.07 11.69 9.71 9.99 10.53 13.00

R/Dollar 8.26 8.42 7.32 7.27 8.21 10.00

Extended Auto Industry – Cumulative Costs Inflation Impacts (2008 – 2013 FC)

[%] 2008 – Index 100

Wages 8 7.5 10 9 9 7.5

Energy 30 25 25.3 25.6 11 10

Local Material

10.9 -2.2 -3.5 1.1 -0.3 3.93

CPI 9.5 6.3 3.5 6.1 5.7 5.5

+

Major deterioration of export competitiveness! =

Costs inflation impacts (2008 – 2013 FC)

[%]

2008 – Index 100

Exchange rate impact on Revenue

[%]

2008 – Index 100

Combined effect of Exchange Rate + Cost Inflation

36

“Competitive”

Localisation

Weakness

Build to print industry

Assembler culture

Limited skills and resources

Low local content (value added)

International not competitive

Strength

Wide supplier base to the 7 OEM‘s

Availablity of basic raw materials

International certification of management systems

Strong automotive assembly experience

Threat

Political situation

High crime level

Free capacities in Asia and Europe

Monopoly situation of suppliers

Price increases

Opportunities

Export of single components

Local OEM‘s to use common suppliers

Localisation of current CKD parts

Currency development

APDP / BBBEE

IPAP Initiative to support supplier

Industry SWOT Analysis

Understanding where we are!

JSP/MSP

Parts

54%

Local Parts

46%

Lo

cal V

en

do

r

V-V

• 46% of Local

Parts Cost is V -

V Parts from

Overseas

• Highly affected

by exchange rate

fluctuation

• Logistics cost is

high

Other 2%

JPY 12%

EUR 14%

USD 18%

ZAR 54%

Local Vendor Parts

Breakdown

Reality: Net Local Content = ONLY 25%

Current Local Content Image

Opportunities

Electrical / Electronic

Chassis and Drive-train

Body

19%

15%

23%

10%

• Axles • Differentials • Drive shafts • Brakes

• Harnesses • Starter motors • Alternators • Wiper systems • HVAC

• Cockpit • Seats • Door panels • Carpets

• Bonnets • Bootlids • Side frames • Doors 6%

5%

3%

7%

XX%: % of total material cost YY%: True local material plus value add as % of total material cost Note: %’s indicative only

• Glass • Paint • Bumpers • Mirrors

Exterior

Interior

33% 14%

– Exchange Rate

5

7

9

11

13

15

17

19

Exchange Rate Projection

USD1 EUR1

Now2013

FC2025

USD

EUR InflationaryDifferential> 37%

Why Local Content ?

Increasing Differential - Competitiveness

• Job Creation

Why Local Content ?

Unemployment: National Average = 24.9% SA Population by Age: 2012

Sustainable Future

Ways to Improve Local Content Using The APDP Benefits

Improve Competitiveness NOT Profits

Price CIM CIL Price CIM CIL

Glass

100 1.77 1.06 91 1.68 0.97

Casting

100 1.06 0.87 89 0.95 0.76

Before APDP After APDPExamples

9% Improvement

11% Improvement

Ways to Improve Local Content Beneficiation

Export

Destinations:

China, Europe,

Japan, Asia-Pacific,

Middle East, South

Korea

Iron

6th Largest of 50

Export

Destinations:

China, Europe

20th of 45 countries

Copper

1 24 5

79 8

1214 15

1820

22 2325

27

34 35 36

4345

Export

Destinations:

China, Europe

12th of 38 countries

Lead

1 2 3 4 5 6 7 8 9 1011121314151617181920212223242526272829303132333435363738

Export

Destinations:

China1 2 3 4 57 8 9

13 1416 15

1921 22 23

27 28

33 34

41 42 43

9th of 43 countries

Aluminium

• Primary Raw Materials

All major

Commodities

available in

RSA

–

High Potential

Strategy Alignment Maximize Government Support and Utilize Local Materials

Ways to Improve Local Content Beneficiation

Finished Part Machining

Foundry Die Making Alusaf

Not OEM

Specific

http://www.soylualuminyum.com.tr/wp-content/uploads/aluminium-casting_1644_1.jpg

http://www.google.co.za/imgres?imgurl=http://www.pinnaclecrc.com/pr_pictures/Sandvik/SAN265/CoroMill 790 - Endmill - Cavity - Milling - HSM - Aluminium.jpg&imgrefurl=http://www.pinnaclecrc.com/pr_pictures/Sandvik/SAN265/&usg=__IshqoxCj4uWMph8uQt8jWdXMxVg=&h=2480&w=2480&sz=1236&hl=en&start=5&zoom=1&tbnid=KdqTEbGAu7ix8M:&tbnh=150&tbnw=150&ei=7hXIUP7hFcSKhQefn4GADQ&prev=/search?q=aluminium+machining&num=10&hl=en&tbo=d&biw=1024&bih=571&site=imghp&tbm=isch&itbs=1

Ways to Improve Local Content OEM Collaboration

Imperatives to sustain (manufacturing) industry

• Policy certainty and predictability with appropriate levels of support and investment incentives

• Labour stability • Average annual volumes per platform produced to increase to globally

competitive levels (minimum 80 000 units) with local content levels to increase to 70% plus for volume producers

• SA Supplier Competitiveness to improve to/align with average European costs

• Focused Industrialisation Strategy to broaden SA supplier chain and increase manufacturing depth

• Productivity to improve from 15 cars to 30 cars per employee per annum and continued industrial relations stability

• Massive investment in Training and Skills development at all levels • Substantial improvement in logistics competitiveness and infrastructure

Date post:	18-Dec-2014
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