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N8/1 (e-mail)
14^th November, 2008

To: REPRESENTATIVES AT GENERAL MEETINGS
RECIPIENTS OF NAAMSA MEDIA RELEASES

Ladies and Gentlemen,

QUARTERLY REVIEW OF BUSINESS CONDITIONS : MOTOR VEHICLE MANUFACTURING INDUSTRY : 3^RD 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 third 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 marginally during the third quarter, principally due to further operational adjustments at two of the industry’s assembly operations.
• Industry capacity utilisation levels continued to hold up relatively well as a result of growing export business.
• Industry domestic sales projections continue to reflect difficult trading conditions and have been revised downwards. However, vehicle production/export projections for 2008 continue to reflect growth with an expected decline of about 15%, in volume terms, during 2009 as a result of the economic slowdown in developed, mature markets.
• New car and light commercial vehicle sales expected to remain under severe pressure through the middle of 2009 as a result of tight monetary conditions, general but declining inflationary pressures, high levels of personal and household debt and a further slowdown in economic activity levels.
• As new vehicle exports start to reach their full potential together with further growth in automotive component exports, the industry will achieve a much better performance in its overall trade balance during 2008. The global economic slowdown is expected to impact negatively on automotive industry exports in 2009. The extent is difficult to quantify at this stage.
• The expected impact of the global economic crisis on the South African automotive industry is addressed in the review

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 SEPTEMBER, 2008

NAAMSA submits the following report on business conditions in the South African new motor vehicle manufacturing industry during the third 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 third quarter of 2008 may be set out as follows –

Compared to the 36 059 positions at the end of the second quarter of 2008, aggregate industry employment declined by 373 jobs during the third quarter of 2008 to 35 686 jobs. 

During the quarter, three companies increased headcount, two major employers reduced the number of employees – whilst employment at the industry’s other major employers remained stable.

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 third quarter of 2008, generally remained good. 

During the quarter, the landed cost of imported components continued to escalate principally due to exchange rate depreciation and the knock on effect of above average cost increases in oil based materials and products and steel products. 

          Local Components

During the third quarter of 2008, the supply of locally produced components generally remained satisfactory. 

Domestic and imported cost pressures continue to impact on prices of local components. 

3.2     RAW MATERIALS

          Imported Materials

The availability of imported raw materials, where applicable, remained good.  Lower global commodity and oil prices were observed but these were offset by a weaker exchange rate during the quarter.

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

          Local Materials

Local raw material price movements continue to mirror international pricing trends. Availability remains good.  Increases in prices of local automotive steel grades continued to be experienced during the quarter.

4.       UTILISATION OF PRODUCTION CAPACITY

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

Industry average capacity utilisation levels, during the third quarter, declined in the car and light commercial vehicle production sectors but showed a substantial increase in medium and heavy commercial manufacturing.

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 : Third Quarter, 2008

2008 third quarter passenger car sales at 76 631 units recorded a decline of 25 514 units or 25,0% compared to the 102 145 new cars sold during the corresponding quarter of 2007.  Combined commercial vehicle sales during the third quarter of 2008 at 46 750 units reflected a fall of 11 927 units or a decline of 20,3% compared to 58 677 units sold during the corresponding quarter of 2007.

On a quarterly basis, sales of new cars, light and medium commercial vehicles recorded further sharp declines compared to the corresponding three months of 2007.  Sales of new heavy and extra heavy commercial vehicles registered gains as a result of continued strong investment in infrastructural development projects. 

Interestingly, domestic sales of new cars during the third quarter at 76 631 vehicles showed an improvement of 6 802 units or 9,7% compared to the 69 829 cars sold during the second quarter.

Automotive Industry Exports

New vehicle exports during the third quarter and year to date continued to exceed expectations and overall industry vehicle exports will reach record levels in 2008 , as illustrated by the following figures -

Combined 2008 component and vehicle export revenue is estimated to reach R95,0 Billion contributing to a much better performance in the industry’s overall trade balance for the year.

Brief Comment on Prospects through mid 2009

Taking account of volatile financial market conditions, lower levels of consumer sentiment and business confidence - the outlook for the domestic automotive industry remains unfavourable.  Higher new vehicles prices will also serve to depress demand going forward.  Importers and manufacturers continued to implement 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, domestic production of new motor vehicles continued 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.

In the absence of relief on the interest rate front, business operations in the domestic market will continue to remain under pressure for the balance of 2008 and into the first half of 2009.  This is reflected in the attached schedule outlining industry projections through 2010.

Comment on the Expected Impact of the Global Financial / Economic Crisis on the South African Automotive Industry’s Export Business and the Domestic Market

South African vehicle and component manufacturers currently face extraordinary and extremely volatile conditions.  The volatility in global financial markets and the dramatic and extreme swings in the Rand exchange rate render planning extremely difficult.  At this stage, it is not possible to be precise about the outcome of current financial market turmoil and its impact on the South African automotive industry.  In general terms, however, NAAMSA anticipates that during 2009 new vehicle exports, particularly to the developed markets, will experience pressure and will probably be lower for the year as a whole compared to the 2008 expected total export figure of about 278 000 vehicles.  Bearing in mind that exports of automotive components by OEM’s and component suppliers have been growing recently at an annual compound rate of 30% by value and taking account of the competitive exchange rate, NAAMSA anticipates that component exports will continue to register growth, in value terms, but also at a lower rate.  New component export business could however change this scenario and boost future export business.

It is generally anticipated that the crisis in financial markets will result in an economic slow-down in the United States and the European Union – both of which represent important markets for South African automotive exporters.  On the other hand, emerging markets such as China, India, Brazil, South Africa and others will still register growth.  The impact on vehicle and component exports will depend on the extent and duration of a recession in the developed markets but this will be counter balanced to some extent by continued growth in emerging markets. 

At this stage, it is difficult to be specific about new vehicle export numbers for 2009. South African vehicle manufacturers are in regular contact with their parent companies in reviewing export market requirements and current indications are that over-all new vehicle exports during 2009 could register a decline of between 10% and 15% on the 2008 figure.  This would translate into a projected vehicle export number of 230 000 to 240 000 units which still represents a very respectable total.  A further consideration is the fact that South African produced cars and commercial vehicles are currently exported to over 70 countries globally.  This diversifies risk during the current period of financial turbulence.

Current times, internationally, are characterised by far reaching industrial shifts and challenges for the automotive industry as global companies respond to increased and unpredictable financial pressures and new regulatory requirements.  The challenge facing South African component and vehicle manufacturing companies is how best to strategically position themselves between mature and emerging markets in the international automotive environment. 

On the domestic market front, new vehicle sales are likely to continue to experience pressure during the first half of 2009, however, there are clear signs that the inflation and interest rate cycle in South Africa has peaked and as inflationary pressures abate into 2009, interest rates will also start to come down.  The second half of 2009 is therefore likely to see an improvement in the financial position of consumers and stronger economic activity levels giving rise to optimism of a recovery in demand of new motor vehicles from about the middle of next year.  For 2009 as a whole, we expect that new vehicles sales (cars and commercials), in aggregate terms, will probably record a decline of between 5% and 7% year on year.

N.M.W. VERMEULEN
DIRECTORR

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

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