The Impact of COVID-19 on the South African Automotive Sector - April 2020 By Dr Martyn Davies and Mike Vincent - Deloitte
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The Impact of COVID-19 on the South African Automotive Sector April 2020 By Dr Martyn Davies and Mike Vincent
The Impact of COVID-19 on the South African Automotive Sector
With over 80% of the global economy The global picture
currently in some form of lockdown In line with strict government-led social
and rolling blows to economic activity and economic shutdowns, most original
as more countries are put into lockdown, equipment manufacturers (OEMs) are
it is common cause that the world has shuttering their manufacturing plants
not faced a pandemic of this scale in across Europe, North America and South
recent times.1 Africa. As a result of these shutdowns,
Moody’s has predicted that global demand
Many analyst forecasts indicate that the for passenger vehicles will shrink by
global economy will fall into recession as approximately 14% in 2020.8
growth grinds to a halt in many countries,
financial conditions tighten sharply and Based on Moody’s forecast, this would
labour markets deteriorate. Goldman translate into a reduction of over
Sachs, for example, expects the world 13.5 million passenger vehicles not being
economy will contract by 1%. This is a manufactured in 2020. These figures
larger decline than during the 2008-09 may even be on the conservative side,
financial crisis.2 depending on when and to what extent
consumers are willing to spend, as well as
Already, COVID-19 has had a major when industries are able to restart.
impact on China. Industrial output fell by Many analyst forecasts
13.5% y-o-y over the months of January In line with this dramatic forecast slump, indicate that the global
and February, retail sales contracted by Moody’s has downgraded a number of the
20.5%, fixed investment by 24.5% and real global auto OEMs including BMW (to A2),
economy will fall into
estate investment by 16.3% over the same Ford (Ba2), Toyota (Aa3), Honda (A2), and recession as growth grinds
period. The COVID-19 pandemic impact on Nissan (Baa3). The ratings agency has also to a halt in many countries,
business is immediate and severe and no put under review other leading auto firms
country or industry will be spared.3 such as Daimler, JLR, PSA Group, Renault, financial conditions tighten
VW, Volvo and McLaren Holdings.9 sharply and labour markets
The importance of the South African
automotive sector VW Group has revealed that it is already
deteriorate. Goldman Sachs,
The automotive cluster is an important burning through €2bn per week following for example, expects the
industrial sector in South Africa. The its plant closures and the collapse in
world economy will
broader automotive sector accounted demand.10
for 6.8% of gross domestic product (GDP) contract by 1%. This is a
in 2018.4 These dire forecasts are unprecedented. larger decline than during
In comparison, following the post-Lehman
Considering that the overall figure for Brothers financial shock from September the 2008-09 financial crisis.
manufacturing value added as a share 2008, the automotive demand declined
of GDP stood at 11.76% in 2018,5 the auto roughly 8% over a two-year period.11
industry accounts for a significant chunk
of South Africa’s entire manufacturing Governments step in
capacity. Automotive manufacturing Considering the scale of industrial
furthermore employs 110 000 directly destruction, the situation globally requires
and indirectly, with the broader automotive immediate support and enablement
sector accounting for 457 000 jobs.6 It is from governments. It is imperative that
the only manufacturing sector that has wages are protected and that consumers
shown notable progress, supported are given as much support as possible
by proactive industrial policy from the in order to minimise a long-term and
Government.7 protracted decline in demand. Some
market commentators are already warning
The continuity of the South African of a “lost decade” for the auto industry.12
automotive sector is thus critical to the But the real challenge lies in maintaining
future industrial and economic landscape demand after factories are able to re-open,
of the country. and this rests with the consumer.
2The Impact of COVID-19 on the South African Automotive Sector
The British Government will provide companies but there is doubt that these Current announced measures in South
funding of up to 80% of employees’ monies will make their way into the OEMs Africa may, however, not be sufficient to
monthly salaries up to a maximum of in light of their foreign ownership. It is provide support for the wider automotive
£2 500. For employees of auto dealerships, more likely that the OEM-funded black ecosystem in the economy. In the coming
the Government will reimburse up to 80% economic empowerment fund – capitalised weeks it will become clearer as to how
of salaries if their jobs are “at risk”.13 at approximately R6bn16 – could be tapped much deeper the Government will have
into to support the companies in the local to dig into its pockets to support a pillar
In the United States, no dedicated auto components supply chain. industry of the economy.
sector support measures are in place, With suppressed demand ahead, lost
but the auto OEMs and suppliers will According to Renai Moothilal, Director of production will not recover. The three-week
likely benefit from industry-wide liquidity- the National Association of Automotive forced closure in South Africa will in effect
boosting measures aimed to shore-up Component and Allied Manufacturers be longer due to reduced inventories.
consumer spending. (NAACAM), “The fund is an available The challenge is that it will prove difficult
resource that can be deployed quickly. We for auto companies to pay full salaries
In France, the Minister of Finance Bruno should definitely consider using it”. This was beyond the official three-week shutdown
Le Maire stated last week that “[…] sectors echoed by Tim Abbot, CEO of BMW SA and if production is not restarted soon.
like the aeronautical sector and automobile President of the National Association of
sector […] need support today. It won’t Automobile Manufacturers of South Africa In light of depressed production volumes,
systemically be nationalisation; it could (NAAMSA) saying that “it is certainly an the Automotive Investment Scheme
be recapitalisation.” President Emmanuel option”.17 (AIS) – an incentive that both OEMs and
Macron further said “We won’t let industrial component manufacturers enjoy under
champions disappear in smoke because However, the health and durability of the the APDP – will have to be renegotiated
there is a crisis unprecedented since components firms is tied to the OEMs between industry and the Department
1929.”14 which need to restart production as of Trade, Industry and Competition (DTIC).
soon as possible. If OEMs can restart, the The AIS requires OEMs to achieve a
Government support in South Africa supply chain will be able to recover quickly, minimum of 50 000 units produced
The South African Government is depending, of course, on the health and per annum within three years, with
contemplating establishing a “National wellbeing of its workforce. The experience component supply manufacturers also
Disaster Benefit” fund that could potentially of the automotive components sector and benefitting from this link to the production
draw from the R30bn capitalised its robustness was evident in Japan after value chain.19
Unemployment Insurance Fund (UIF).15 the Fukushima disaster in 2011. Honda,
The Industrial Development Corporation for example, was one Japanese OEM able
(IDC) will make available R3bn for wider to restart domestic production about one
industrial funding for South African month following the disaster.18
Figure 1. South Africa’s passenger Figure 2. South Africa’s light truck The British Government
vehicle production by volume (2019) production by volume (2019)
will provide funding of
BMW
Isuzu, 7% BAIC, 2% up to 80% of employees’
18 746
20% 4 757
monthly salaries up
69 524
to a maximum of £2
VW
45%
Toyota,
41%
500. For employees of
Daimeir
25%
153 239 Ford, 36%
91 968
103 638 auto dealerships, the
86 414 Government will reimburse
Ford
1%
Toyota
9%
Hyundai-
Kia, 1%
Renault-
Nissan,
up to 80% of salaries if
3 834 29 654 2 905 13% their jobs are “at risk”.
32 836
Source: Deloitte calculations based on Marklines, 2019
3The Impact of COVID-19 on the South African Automotive Sector
More a demand-side, less a supply-side local auto industry. Exports were already Africa are responsible for the sub-Saharan
problem under pressure in February showing a African market and these businesses are
The real difficulty will be to address year-on-year decline of 8.4% (30 832 units) continuing for now, but are likely to be
the demand side, both locally and compared to the same month a year ago.22 curtailed in the coming days and weeks.
internationally. Last year, 386 863 vehicles With global demand having plummeted Exports of built-up vehicles to the rest of
were exported from South Africa – an in March, this does not bode well for the Africa amounted to 22 998 units in 2019
annual record with growth over 10% short term. Looking over the horizon, in with the leading markets being Ghana,
compared to 2018. Exports of passenger all likelihood the APDP’s manufacturing Kenya and Zimbabwe and Mozambique.24
cars registered a substantial gain of 17.7% target of 1.4 million vehicles by 2035 is now The adverse impact on the hospitality and
that year.20 in jeopardy and much will depend on the tourism sectors will also impact vehicle
global economy’s medium-term recovery.23 sales given the sizeable contribution that
Exports constituted 61.25% of total the car rental industry makes to new car
production, bringing in R114bn in According to Mike Whitfield, Chairman of sales. For example, this was 16% of new
2018.21 There is a sizeable and growing Nissan Africa and Managing Director of car sales in February, given stocking up in
dependence on the export market by the Nissan Egypt, OEMs based out of South expectation of the coming Easter vacation
period. In the short term, car rental firms
will be dumping over 30 000 cars in the
Figure 3. South Africa’s top 10 vehicle export markets by volume (2019) domestic market in line with their fleet
utilisation models, further compounding
the challenges being faced by the OEMs’
Rest of world manufacturing lines.
18%
Altogether, the local market has been
Botswana suppressed for a number of years already,
Australia 2%
France with sales declining by 2.8% last year (536
Namibia 3% 42% Germany 626 units sold; see figure 4). It is highly
likely that domestic sales forecast for
USA 4%
4% 2020 will be significantly less with analysts
Spain 4% forecasting this in the region of 450 000
Japan units. The most recent sales figures
9% 10%
released for March 2020 indicate that new
UK
vehicle sales have dropped 30% compared
with the same month in 2019.25
Source: Deloitte calculations based on The Department of Trade, Industry and Competition data
With the collapse in demand and a very
uncertain outlook, the auto industry will
Figure 4. Vehicle sales in South Africa, number of units sold (2009-20f) undergo rapid consolidation.
Source: NAAMSA, Fitch Solutions, 2020
4The Impact of COVID-19 on the South African Automotive Sector
Respond, recover, thrive
The automotive industry is already
grappling with rapid change and disruption:
congested cities with inadequate
infrastructure deterring car purchasing;
technological shifts toward embracing
new battery elective vehicle (BEV) power;
and the rise of new competitors moving
into the mobility industry. And now it faces
an unprecedented economic crisis that is
rapidly unfolding.
The global auto industry may face
significant disruption and wide-sweeping
restructuring. As per conversations with
CEOs, the two major priorities at the
moment are their people’s well-being and
raising cash for their business.
OEMs will be forced to adjust to a
suppressed market by right-sizing their
cost base. “Undoubtedly, there will be a
different automotive sector coming out of
this,” says Whitfield.26
But the example of China’s emerging If Governments can take drastic action important than elegance. Stabilising the
consumer and industrial recovery holds to “flatten the curve” of infection rates business will be critical. This will include
out hope. 80% of global car production at an early stage, this results in a quicker identifying organisational vulnerabilities
involves “Made in China” parts. The Chinese suppression of the outbreak. The above- and securing business continuity and
economy is now cautiously reopening and mentioned study evaluated the 1918-20 financing.
economic activity reviving. influenza pandemic and found that swift
action 10 days prior to the onset of the In time, the world will start emerging from
Of VW’s 33 plants in China, only two remain pandemic increased manufacturing the constraints of COVID-19 and the next
closed, albeit at reduced utilisation.27 employment by roughly 5% in the challenge will revolve around recovery
Car sales in China dropped by 80% in post-pandemic period. Implementing plans including ramping up the return of
February28 (the greatest contraction on restrictions beyond this for an additional employees, managing claims and contract
record) but are expected to pick up with 50 days increased manufacturing dispute resolution, collaborating with
VW expecting sales to reach 1 million in employment by 6.5% after the pandemic customers and suppliers to synchronise
March.29 Figures to be released in the subsided.32 operations and reviewing orders versus
coming days will reveal the extent of China’s commitments and inventory.
economic normalisation. China now offers This is clearly a case of willful short-term
hope and lessons30 for other countries pain to avoid longer-term structural Many businesses will have identified the
grappling with the COVID-19 scourge. damage to the industry. The outcome may value of a digital future and new ways of
still be uncertain, but the South African working. This future promises improved
A recent study by authors affiliated to the automotive industry must be protected at efficiencies, cost out and quicker response
US Federal Reserve Board, the Federal all cost. times. Thriving in the next normal will
Reserve Bank of New York, and MIT Sloan be for those businesses who see these
School of Management suggests that there What should the response of auto convulsive changes as opportunities not to
is not a tradeoff between suppressing the executives be? be missed.
virus and economic activity. Instead, the COVID-19 is having a major impact on the
act of suppressing the virus ultimately whole business ecosystem. In the short
leads to improved economic activity. This is term, businesses will need to respond to
consistent with what we are now seeing in the immediate challenges of the COVID-19
China.31 lockdown where speed will be more
5The Impact of COVID-19 on the South African Automotive Sector
Endnotes 10 Financial Times, 2020. VW hit by €2bn-a-week [Online]: https://www.wheels24.co.za/News/
1 Fitch Solutions, 2020. Covid-19 Recession: Three cash drain. Available [Online]: https://www. SA_vehicle_sales/coronavirus-impacts-new-sa-
Downside Scenarios for the Global Economy. ft.com/content/26e4cb7c-f588-4cdf-ae50- vehicle-sales-during-february-20200304
0a834e8ea57f 21 Fin24, 2019. A look at SA’s auto manufacturing
2 See for example, Daily Maverick, 2020. How
much could Coronavirus cost the SA economy? 11 IT-Online, 2020. Covid-19 spares nobody: the industry. Available [Online]: https://www.
A preliminary estimate. Available [Online]. mobility impacts of a global pandemic. 27 fin24.com/Companies/Industrial/am-sunday-
https://www.dailymaverick.co.za/article/2020- March 2020. Available [Online]. https://it-online. read-a-look-at-sas-auto-manufacturing-
03-27-how-much-could-coronavirus-cost-the- co.za/2020/03/27/covid-19-spares-nobody-the- industry-20190712
sa-economy-a-preliminary-estimate/ mobility-impacts-of-a-global-pandemic/ 22 NAAMSA, 2020. NAAMSA commentary.
3 Fitch Solutions, 2020: Covid-19 Growth 12 Fortune, 2020. Europe’s auto factories Available [Online]: https://www.naamsa.co.za/
Revisions: Tracking Lower. are closing. Experts fear a lost decade is SalesStats
coming. Available [Online]: https://fortune. 23 Department of Trade, Industry and
4 The broader automotive sector includes both
com/2020/03/17/coronavirus-impact- Competition, 2019. Geared for Growth: South
manufacturing and retail activity. The National
shutdown-european-auto-sector-volkswagen/ Africa’s automotive industry masterplan to
Association of Automobile Manufacturers
of South Africa (NAAMSA), 2020. NAAMSA 13 The Guardian, 2020. UK government to 2035. Available [Online]: https://www.thedti.gov.
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naamsa.co.za/SalesStats coronavirus crisis. Available [Online]: https:// 24 Telephonic interview with Mike Whitfield on
www.theguardian.com/uk-news/2020/mar/20/ 27 March 2020.
5 World Bank, 2019. World Development
government-pay-wages-jobs-coronavirus-rishi-
Indicators database. Available [Online]: https:// 25 Engineering News, 2020. New-vehicle sales
sunak
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Car Sectors as Priorities for Help. Available co.za/article/new-vehicle-sales-plummet-
6 Fin24, 2019. A look at SA’s auto manufacturing
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fin24.com/Companies/Industrial/am-sunday- 26 Telephonic interview with Mike Whitfield on
aeronautics-car-sectors-as-priorities-for-help
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industry-20190712 15 Bloomberg, 2020. South Africa Contemplating
27 Financial Times, 2020. VW hit by €2bn-a-week
‘National Disaster Benefit’ Fund. Available
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[Online]: https://www.bloomberg.com/news/
Production and Development Programme ft.com/content/26e4cb7c-f588-4cdf-ae50-
articles/2020-03-23/s-africa-considering-
(APDP) and the recent South African 0a834e8ea57f
establishing-national-disaster-benefit
Automotive Masterplan (SAAM). See for 28 Financial Times, 2020. Coronavirus: Chinese
example: South African Government, 2018. 16 Engineering News, 2019. Vehicle manufacturers
carmakers struggle with disruption. Available
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Extension of Automotive Production and fund. Available [Online]: https://www.
b5392370-53b6-11ea-8841-482eed0038b1
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manufacturers-to-launch-r6bn-auto-industry- 29 Financial Times, 2020. VW hit by €2bn-a-week
https://www.gov.za/speeches/minister-rob-
empowerment-fund-2019-11-06/rep_id:4136 cash drain. Available [Online]: https://www.
davies-media-statement-south-african-
ft.com/content/26e4cb7c-f588-4cdf-ae50-
automotive-masterplan-2035-and-extension 17 Business Day, 2020. Motor industry to tap BEE
0a834e8ea57f
8 Moody’s, 2020. Moody’s - Global automakers’ fund to support companies in Covid-19 crisis.
Available [Online]: https://www.businesslive. 30 For more information on the risk mitigation
sales forecast dropped again as coronavirus
co.za/bd/companies/industrials/2020-03-24- practices in the automotive industry in China
impact deepens. Available [Online]: https://
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automakers-sales-forecast-dropped-again-as-
epidemic: Until the day breaks and the shadows
coronavirus-impact--PBC_1221271?amp;WT. 18 The New York Times, 2011. The Assembly
flee away. Available [Online]. https://www2.
mc_id=AM~UmV1dGVyc05ld3NfQ Line Is Rolling Again, Tenuously, at Honda in
deloitte.com/cn/en/pages/risk/articles/resist-
U1QU19OWTZfU0JfTlJfQ1ZfUm Japan. Available [Online]: https://www.nytimes.
risk-in-automotive-industry-while-facing-219-
F0aW5nX05ld3NfQWxs~20200327_ com/2011/04/19/business/global/19honda.html
ncov.html
PBC_1221271 19 The Department of Trade, Industry and
31 Correia, S., Luck, S. and Verner, E., 2020.
9 Bloomberg, 2020. Auto Giants Across the Globe Competition, undated. Trade, Export and
Pandemics Depress the Economy, Public
Warned of Coming ‘Credit Shock’. Available Investment Financial Assistance (Incentives).
Health Interventions Do Not: Evidence from
[Online]: https://www.bloomberg.com/news/ Accessed 30 March 2020. Available [Online]:
the 1918 Flu. SSRN. 26 March 2020. Available
articles/2020-03-25/european-auto-giants- https://www.thedti.gov.za/financial_assistance/
[Online]: https://papers.ssrn.com/sol3/Papers.
warned-on-credit-ratings-as-risks-mount financial_incentive.jsp?id=37&subthemeid=26
cfm?abstract_id=3561560
20 Wheels24, 2020. Coronavirus impacts new
32 Ibid.
SA vehicle sales during February. Available
6Contact us: Dr Martyn Davies Managing Director, Emerging Markets & Africa and Automotive Sector Leader Deloitte Africa mdavies@deloitte.co.za Mike Vincent Consulting Automotive Leader Deloitte Africa mivincent@deloitte.co.za This article was authored by Dr Martyn Davies and Mike Vincent. Research assistance was provided by Simon Schaefer, Jacques Joubert and Masego Ntsoane, and editorial assistance by Hannah Marais. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms are legally separate and independent entities. DTTL does not provide services to clients. Please see www. deloitte.com/about to learn more. Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax and related services. Our network of member firms in more than 150 countries and territories serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 286,000 people make an impact that matters at www.deloitte.com. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. © 2020. For information, contact Deloitte Touche Tohmatsu Limited.
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