Automobiles have been powered, for the most part, by the trusted internal combustion engine (ICE) since being massed produced from the early 1900s. ICE technology has evolved, with suppliers and OEMs (Original Equipment Manufacturers) investing extensively to increase engine performance whilst reducing emissions.
However, stringent global emission regulations, coupled with increased activism by environmentally-conscious consumers, have necessitated that the industry seek alternative technologies to propel vehicles. What is almost certain is that the availability of ICE-powered vehicles will diminish in the near future – mostly because many countries have already announced that the sale of ICE vehicles will be banned. Countries - particularly the UK and in Europe - have already announced the prohibition of the sale of ICE-powered vehicles from as soon as 2025. Other countries will follow. As OEMs experiment with options, electric vehicles (EVs) are most likely to be the most popular powertrain of choice.
During 2019 (the period before disruptions caused by COVID), 23% of vehicles manufactured were sold to Europe, 23% to North America and 48% to Asia. The remaining 6% were distributed between South America and Africa, with Africa accounting for only 1% (source: Organisation Internationale des Constructeurs d'Automobiles). It’s no surprise then, that developments in Asia, Europe and North America will have a significant impact on the specification of products that OEMs research, develop and, ultimately, manufacture. In this highly competitive sector, the achievement of economies of scale is imperative. OEMs will be discerning in deciding what technologies to invest in, meaning that if volume driver markets ban ICE, the business case to continue building and supporting ICE-powered vehicles is eroded, even if there are small markets (like Africa) where ICE may still be permitted. It must be highlighted that some experts do not believe that EVs will be adopted as quickly as policy regulators and other stakeholders believe for a variety of reasons, including lack of infrastructure, pricing and the adaptability of customers to change.
The automotive sector is one of South Africa’s largest contributors to employment and GDP, offering employment to around 100 000 people. The country exports around 60% of production to foreign markets. Therefore, consumer and regulatory developments in these export markets have a significant impact on local industry. No EVs are currently assembled in South Africa, but some hybrid vehicles are built locally and an opportunity to grow this into a niche exists as markets transition into EV supply. Local component manufacturers also benefit from the export of ICE-related components for assembly and distribution in global markets.
If the local industry does not transition into the production of components and assembly of EVs, it will not only lose the opportunity to reap the rewards of participating in this emerging technology, but the sector is at risk of diminishing. At least 100 000 jobs may be at risk in an already struggling economy.
The EV Green Paper (dtic, 18 May 2021) recognises that a coherent strategy by all stakeholders is required to transition to the production of EVs. It is not merely the OEMs who have the challenge of leading this - a holistic and collaborative execution plan is required.
What needs to happen
The ability to achieve scale is a key strategic driver to support a business case for OEMs and component manufacturers in deciding whether to invest in an economic zone. Input costs are also a critical aspect, given the competitive landscape in both the sector and the geographies. We live in an increasingly complex world and assessing the viability of doing business in a territory requires robust and integrated thinking.
Just like an engine, a battery is a significant element of an automobile. In most cases, engines in South African assembled cars are imported. However, batteries are volumetrically larger and heavier than engines. This means that the logistic costs of landing imported battery assemblies are higher, making it financially unviable. There are a limited number of battery manufacturing plants and these are concentrated in Asia, aggravating the challenge of getting batteries to South Africa at a palatable cost.
In order to really participate in the assembly of EVs, investment in a local plant may be considered to produce battery cells. The challenge is that none of the OEMs, individually, build sufficient units to validate a commercial case for an OEM to build a battery plant. A possible solution to this conundrum could be for a separate economic hub to be created where manufacturers jointly invest in such a plant. This would work to the extent that technology is such that component sharing is possible between OEMs. Similarly, existing global battery component manufacturers could be encouraged to invest in a plant in South Africa. The APDP2 (Automotive Production and Development Programme - Phase 2) incentives would be required to be enhanced, in addition to the consideration of other support for a commercial case for such an investment.
Notwithstanding the achievement of building a battery plant locally, the viability of the local industry is also contingent on the terms and conditions of bilateral trade agreements with target countries that would allow us land South African built EVs at competitive prices.
What would also be welcomed are increased incentives for the technology investments that are required, as NEV (New Electric Vehicle) platforms become prevalent - especially in the component subsector. The biggest obstacle to localisation is often in matters such as retooling and testing, as South African-based manufacturers look to divert production out of existing global component hubs. These incentives could be in the form of a higher AIS (Automotive Incentive Scheme) or even supplementary tax incentives for NEV specific components. The added investment the fiscus may need to make in this regard, would be rewarded by the multitude of economic benefits, including job creation, technology transfer, and new business opportunities that result from greater domestic component production.
In tandem, the local consumption of EVs, specifically driven by the largest consumers of vehicles (government, rental market and corporate fleets), could serve as a catalyst to drive up local demand and consumption - facilitating scale and thereby improving the business case for local investment. This would require financial incentives for local consumers, traditionally driven by taxation allowances, as well as a robust and reliable infrastructure to charge and maintain EVs. The current allowances see a higher import tax levied for EVs compared to their ICE counterparts. Additional incentives - such as reduced licence costs, subsidised tolls, parking and charging infrastructure, as well as dedicated supplier parks and preferential utility provision - could drive up local demand and scale.
Most Tier One component suppliers in South Africa are globally owned and have the internal and global technical knowledge or partnerships to supply whatever commodity or component subsystem is required, irrespective of the OEM platform. There are also locally headquartered suppliers that have track records of producing high-quality components at specifications suitable for OEM assembly.
Key determinants of component supply into the NEV space will include proactive work in the skills and technology preparation areas. NAACAM has been at the forefront of this, with programmes such as High Gear and the Yakh’iFuture platform directly responding to this. Component companies should also make use of the skills development funding available through an agency like MerSETA, to ensure their workforce is skilled up to levels required by global technology changes.
EV is a turning point in mobility and our local sector’s ability to remain relevant will be determined by how quickly stakeholders embrace the opportunity to make the necessary shifts to capitalise and grow our contribution to global markets.
Ghitesh Deva, Partner and Automotive Sector Leader
Additional contribution by Renai Moothilal, Executive Director, NAACAM