N8/1 (e-mail)
1^st March, 2010

To: REPRESENTATIVES AT GENERAL MEETINGS
RECIPIENTS OF NAAMSA MEDIA RELEASES

Ladies and Gentlemen,

QUARTERLY REVIEW OF BUSINESS CONDITIONS : MOTOR VEHICLE MANUFACTURING INDUSTRY : 4^TH QUARTER, 2009

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 forth quarter of 2009, as submitted to the Director-General, Department of Trade and Industry.

Industry vehicle sales, export and import statistics for 1995 through 2011 are reflected on the attachments to the submission.

Key features

• Substantial increase in projected industry capital expenditure for 2010.
• Since the middle of 2009, industry employment levels have remained stable.
• Continuing recovery in industry capacity utilisation levels from historically low levels recorded during the first half of the year.
• New car and commercial vehicle sales projected to improve in 2010. Expected improved economic activity levels, the benefit of lower interest rates on the back of declining inflationary pressures and an improvement in the financial position of consumers should contribute to a modest improvement in new vehicle sales in 2010.
• Projected higher export sales, in line with further recovery in the global economy, expected to lead the recovery in the SA Automotive Industry.
• The implementation of the revised Industrial Policy Action Plan (IPAP) should boost the future growth and development of the auto parts and vehicle manufacturing industries, enhance industry business confidence and support incremental investment in productive capacity.

NAAMSA OFFICES: PRETORIA

 N8/1
1^st March, 2010

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 31^ST DECEMBER, 2009

NAAMSA submits the following report on business conditions in the South African new motor vehicle manufacturing industry during the forth quarter of 2009.

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 fourth quarter of 2009 may be set out as follows –

Compared to the 30 325 positions at the end of the third quarter 2009, aggregate industry employment declined by 164 jobs during the four quarter of 2009 to 30161 jobs  – a decline of 0,5%

Despite the challenging operating environment characterised by pressure on domestic new vehicle sales and export sales, during the quarter, employment levels at the industry’s major employers remained stable.  

2.   NUMBER OF SHIFTS

Most manufacturers operate on a single production shift basis, some operate double shifts in selected areas such as machining, press shops, paint shop operations and body shop. 

During the quarter, at various times, a number of vehicle manufacturers continued to operate on the basis of a shortened production week.

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 fourth quarter of 2009, remained good. 

During the quarter, the landed cost of imported components continued to benefit due to the strength of the Rand against major currencies.

          Local Components

During the fourth quarter of 2009, the availability and supply of locally produced components remained relatively satisfactory, although some instances of problematical availability were reported due to industrial action at suppliers as well as quality issues.  Furthermore, as a result of low industry volumes and ongoing financial stress experienced by suppliers, availability and security of supply is at risk at certain suppliers.

The relentless focus on global cost competitiveness and vehicle manufacturers’ cost reduction targets continues to pressurise suppliers.  The strengthening of the Rand causes domestic components to become less competitive. 

3.2     RAW MATERIALS

          Imported Materials

The availability of imported raw materials, where applicable, remained good.  Pricing remains a function of exchange rate movements and commodity price trends.

          Local Materials

Local raw material price movements continue to mirror international pricing trends. Availability risk continues to be reported as a result of the failure of several raw material suppliers due to low industry volumes. 

4.       UTILISATION OF PRODUCTION CAPACITY

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

Industry average capacity utilisation levels, during the fourth quarter of 2009, improved substantially in all major sectors.  Inventory replenishment and higher production for export markets were the main contributing factors.

5.   NEW INVESTMENT/INVESTMENT APPROVALS : 2009 ACTUAL AND 2010 PROJECTION

NAAMSA reports the industry’s aggregate capital expenditure on an annual basis.   The aggregated data is based on Capital Expenditure details supplied by the seven major vehicle manufacturers.  Details of actual industry capex for 2000 through 2009, in Rand millions, as well as the projection for 2010 – are as follows –

The decline in industry capital expenditure by vehicle manufacturers during 2009 was in part due to the impact of the global financial and economic crisis and the associated deferral of various investment projects.  The substantial increase in planned capital expenditure during 2010 may be attributed to the recent finalisation of the Automotive Investment Incentive Guidelines and Investment Projects by manufacturers to gear up for the impending Automotive Production and Development Programme (APDP).

Capital expenditure by vehicle manufacturers has remained relatively stable in recent years.  The 2006 peak was due to major production capacity expansion at one major OEM.  

6.    BUSINESS CONDITIONS AND PERFORMANCE INDICATORS

Business Conditions : Fourth Quarter, 2009

2009 fourth quarter NAAMSA reported passenger car sales at 56 207 units recorded a decline of 6 628 units or 10,5% compared to the 62 835 new cars sold during the corresponding quarter of 2008.  Combined commercial vehicle sales during the fourth quarter of 2009 at 32 294 units reflected a fall of 8 064 units or a decline of 20,0% compared to 40 358 units sold during the corresponding quarter of 2008.

On a quarterly basis, sales of new vehicles in all segments registered further declines compared to the corresponding quarter in 2008.  However, the rate of decline was substantially lower than in previous quarters. The market’s low point probably occurred during the second quarter of 2009.  Despite this, year on year comparisons continue to reflect an industry in recession.

The general consensus is that the industry is in the process of emerging from the extremely severe recession in the domestic automotive market which started mid 2006.  However, any expected improvement over the short to medium term is likely to be slow and gradual off an historically low base.

Automotive Industry Exports : Following Record Export Sales in 2008, Exports Declined in Calendar 2009 but are Expected to Rebound during 2010.

2009 industry export sales data, compared to the previous four years, were as follows –

The impact of the global financial and economic crisis was reflected in the downturn in new vehicle exports in 2009 which, in aggregate terms, at 174 947 vehicle exports declined by 109 264 units exported or 38,4% from the 284 211 units exported in 2008.

Looking at the international environment and prospects for 2010, clear signs have emerged of a revival in demand for South African produced motor vehicles in international markets.  Assuming continued recovery in international markets, current indications are that the number of vehicles likely to be exported by the industry during 2010 could improve by some 56 000 vehicles or 32% over the 2009 figures principally to the major markets in the European Union, Japan and the United States.

Industry Prospects for 2010 : Modest Increase in Domestic Sales Anticipated,  Aggregate Domestic Production to Rise as a Result of Expected Higher Export Sales

After another extremely difficult year, there are indications that the South African automotive sector is on target for a modestly better domestic sales environment during 2010 and higher levels of production on the back of continued recovery in demand in export markets.

The South African economy officially moved out of recession during the third quarter of 2009, however, economic activity levels remain relatively subdued as confirmed by the severe contraction in private sector credit demand and continued steps by corporations and households to reduce debt.  Much will depend on further improvement in consumer sentiment and business confidence.  The cumulative 5% decline in interest rates between end 2008 and August, 2009 should improve the financial position of households and contribute towards an underlying improvement in the growth of vehicle sales in coming months.   Additionally, the 2010 Soccer World Cup event would boost demand by the car rental industry, promote tourism and spending and support further economic recovery.  Also reduced cost pressures on the back of the exceptionally strong Rand should facilitate stable new vehicle pricing for some time. 

Against the background of current and expected domestic and international factors – the outlook for 2010 in terms of total industry vehicle sales - including sales not reported in detail to NAAMSA - by sector are as follows –

At this stage, projections for 2010 for the new car market indicate growth of about 6,5%, the light commercial vehicle market by around 8% and sales of medium and heavy trucks and buses also around 8% in volume terms.  In aggregate terms, domestic sales are expected to improve from the 395 000 in 2009 to about 423 000 in 2010 – an increase of 7%.  However, the improvement will be off a very low base.

Factoring in the expected modest improvement in domestic sales together with the fairly substantial anticipated growth in exports, domestic production of motor vehicles in South Africa during 2010 is expected to rise from the approximately 380 000 vehicles produced in 2009 to about 445 000 units projected for 2010 – an increase in vehicle production of about 17%.

Comment On The Revised Industrial Programme Action Plan

The recent announcement regarding the implementation of the Revised Industrial Policy Action Plan (IPAP) has been well received in the automotive industry, particularly the component manufacturing sector.  The Revised Action Plan identifies a number of priority sectors, including the vehicle and component manufacturing industries, and proposes a number of strategic interventions and support measures to promote long term industrialisation and diversification within the industry and, in the process, boosting employment creation.  IPAP correctly identifies the importance of certainty and predictability in the automotive industry policy regime, namely, the Automotive Production and Development Programme (APDP) which will apply from 2013 through 2020 with the major focus of expanding a high value added production in the South African component and vehicle manufacturing industries.

The Revised Policy Action Plan also identifies opportunities to broaden and deepen localisation in the South African automotive industry.  This will involve the identification of additional localisation opportunities in various sub-sectors.  IPAP also proposes a series of measures to improve the competitiveness of automotive parts manufacturers which will also benefit from easier access to concessional industrial financing in respect of approved projects.   IPAP also proposes the provision of support and assistance to encourage the production in South Africa of electric vehicles and related components.  Importantly, IPAP will focus, as a matter of priority,  on the future development of the South African medium and heavy truck and bus industry, as well as capital equipment and agricultural vehicles, with the aim of elevating the sector to higher levels of domestic value addition. 

Overall, the IPAP announcement will boost business confidence in the industry and should support further investment in industry productive capacity, particularly in the component manufacturing sector.

The standard attached schedule reflects latest projections of industry sales, production, exports and imports.