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N8/1 (e-mail)
11^th August, 2008

To: REPRESENTATIVES AT GENERAL MEETINGS
RECIPIENTS OF NAAMSA MEDIA RELEASES

Ladies and Gentlemen,

QUARTERLY REVIEW OF BUSINESS CONDITIONS : MOTOR VEHICLE MANUFACTURING INDUSTRY : 2^ND QUARTER, 2008

ATTACHED, for information purposes, is a copy of NAAMSA’s quarterly review of business conditions for the South African motor vehicle manufacturing industry, during the second quarter of 2008, as submitted to the Director-General, Department of Trade and Industry.

Industry vehicle sales, export and import statistics for 1995 through 2010 are reflected on the attachments to the submission.

Key features

• Industry employment levels declined further during the second quarter, largely due to operational adjustments at two of the industry’s assembly operations.
• Industry capacity utilisation levels continued to hold up well on the back of growing export business.
• Industry domestic sales projections remain largely unchanged but vehicle production/export projections continue to reflect growth.
• New car and light commercial vehicle sales expected to remain under severe pressure as a result of tight monetary conditions, growing inflationary pressures, high levels of personal and household debt and the slowdown in economic activity levels.
• As new vehicle exports start to reach their full potential and with further growth in automotive component exports, the industry is on target during 2008 to achieve a much better performance in its overall trade balance.

NAAMSA OFFICES: PRETORIA

 N8/1
11^th August, 2008

The Director-General
Department of Trade and Industry
Private Bag X84
PRETORIA
0001

Dear Sir,

QUARTERLY REVIEW OF BUSINESS CONDITIONS : NEW VEHICLE
MANUFACTURING INDUSTRY : QUARTER ENDED 30^TH JUNE, 2008

NAAMSA submits the following report on business conditions in the South African new motor vehicle manufacturing industry during the second quarter of 2008.

1.   EMPLOYMENT LEVELS AND TRENDS

The number of persons employed by the South African new vehicle manufacturing industry – comprising the major new vehicle manufacturers and specialist commercial vehicle and bus manufacturers – during the second quarter of 2008 may be set out as follows –

Compared to the 36 475 positions at the end of the first quarter of 2008, aggregate industry employment declined by 416 jobs during the second quarter of 2008 to 36 059 jobs. 

With the exception of two major employers whose operations are subject to operational adjustments and restructuring, employment at the industry’s other major employers remained stable during the quarter.

2.   NUMBER OF SHIFTS

The majority of most vehicle manufacturers operate on a multi-shift basis in the production of vehicles and components for domestic and export markets.  Various manufacturers operate on a single production shift basis, whilst the majority operate double shifts in selected areas such as machining, press shops, paint shop operations and body shop.  In some instances, three shift operations take place.

3.   AVAILABILITY AND PRICE TRENDS OF COMPONENTS AND RAW MATERIALS

3.1     COMPONENTS

          Imported Components

The availability and supply of imported original equipment components, during the second quarter of 2008, remained good. 

During the quarter, the landed cost of imported components continued to be affected by exchange rate volatility and particularly exchange rate depreciation.  Oil based materials and products - rubber, plastics, polymers, lubricants, composites - continued to reflect above average cost increases.  

          Local Components

During the second quarter of 2008, the supply of locally produced components normalized. 

Domestic and imported cost pressures continue to impact on prices of local components.  Domestic component companies continue to take steps to attempt to offset the cost increases.  Key factors contributing to higher local component prices include relentless rises in the costs of steel, aluminium commodities, manpower, electricity and financing.

3.2     RAW MATERIALS

          Imported Materials

The availability of imported raw materials, where applicable, remained good.  Rising global commodity and oil prices continued to exert substantial upward pressure on costs.  This was compounded by a weaker exchange rate during the quarter.

Substantial Increases in prices of imported steel and aluminium were reported, compounded by the weaker Rand.

          Local Materials

Local raw material price movements continue to mirror international pricing trends. Availability remains good.  A major increase in prices of local automotive steel grades was experienced during the quarter with a further substantial increase expected effective August, 2008.

4.       UTILISATION OF PRODUCTION CAPACITY

Average motor vehicle assembly industry capacity utilisation levels, for the periods indicated, may be illustrated as follows –

The industry average capacity utilisation levels improved, during the second quarter, in the light, medium and heavy commercial vehicle production sectors.  The car manufacturing sector recorded a slight decrease in capacity utilization during the quarter.

5.   NEW INVESTMENT/INVESTMENT APPROVALS : 2007 ACTUAL AND 2008 PROJECTION

NAAMSA reports the industry’s aggregate capital expenditure on an annual basis.   Details of actual industry capex for 2000 through 2007, in Rand millions, as well as the projection for 2008 – are as follows –

Planned investments for 2008 show some recovery, however, invariably projections tend to be higher than eventual actuals.

6.    BUSINESS CONDITIONS AND PERFORMANCE INDICATORS

Business Conditions : Second Quarter, 2008

2008 second quarter passenger car sales at 69 829 units recorded a decline of 18 406 units or 20,9% compared to the 88 235 new cars sold during the corresponding quarter of 2007.  Combined commercial vehicle sales during the second quarter of 2008 at 51 426 units reflected a fall of 5 550 units or a decline of 9,7% compared to 56 976 units sold during the corresponding quarter of 2007.

On a quarterly basis, sales of new cars, light and medium commercial vehicles recorded sharp declines compared to the corresponding three months of 2007.  In sharp contrast, sales of new commercial vehicles registered strong gains rising to record levels on the back of strong investment in infrastructural development projects.

Automotive Industry Exports and the Industry’s Trade Deficit

The automotive industry has been a net user of foreign exchange for many years, however, there is a distinct possibility that, for the first time since 1995, the industry could achieve a modest trade surplus during 2008.

The downturn in the domestic market should result in a reduction in imports, particularly of built-up vehicles.  At the same time, the more competitive exchange rate will boost exports.  By way of illustration, exports of automotive components rose from R30,5 Billion in 2006 to R39,1 Billion in 2007 and should increase further during 2008 to about R50 Billion.  Moreover, the rapid increases in new vehicle exports – as illustrated by the table hereunder – will contribute to an increase in export revenue from R29 Billion in 2007 to about R45 Billion in 2008.

The combined 2008 component and vehicle export revenue is estimated to reach R95,0 Billion versus a projected total industry import revenue figure of approximately R92,0 Billion translating into a modest trade surplus of around R3 Billion for the year.  The industry’s trade deficit during 2007 amounted to R34,6 Billion.

Brief Comment on Prospects for the Second Half of 2008

Taking account of volatile financial market conditions, lower levels of consumer sentiment and business confidence - the short term outlook for the domestic automotive industry remains negative.  The lagged effect of interest rate increases, growing pressure on consumers as a result of sharp increases in inflation, especially energy and food, will reinforce the negative trend.  Additionally, most importers and manufacturers have implemented price increases to partly recover the relentless and record cost increases in materials and automotive inputs and to compensate for the weakness in the exchange rate.  In most instances, however, price adjustments remain well below the domestic inflation rate.

In contrast to the weaker domestic sales environment (with the exception of the heavy commercial vehicle segment which continues to be supported by the infrastructural development boom), production of new motor vehicles continues to receive support from higher vehicle exports.  The substantial growth in vehicle and component exports will lend support to local vehicle and component manufacturing operations.

N.M.W. VERMEULEN
DIRECTORR

Attachment 1 - Industry Vehicle Sales, Export and Import Data :  1995 - 2010
(click to view)

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