BMW invests as automakers shine amid South African gloom


2015-bmw-7-series1As South Africa’s economy languishes near a recession there is one major success story: The car industry.

While mining companies such as Anglo American Platinum Ltd. and Lonmin Plc are among businesses cutting jobs and output in Africa’s most-industrialized economy, two of the world’s biggest automobile makers have announced investment of more than 10.5 billion rand ($737 million) in the past four months.

Companies including BMW AG, Volkswagen AG and Ford Motor Co. are taking advantage of the state’s automotive development program, which offers benefits and incentives to manufacturers. South Africa’s seven biggest vehicle producers have invested at least 24 billion rand in their plants in the past five years, helping to boost domestic output by about 30 percent, even after two consecutive years of strike-related stoppages and as local sales of new vehicles decline. Exports have climbed 44 percent in the same period.

The automotive industry “is one of the few examples we have of how industrial policy can really be an advantage to the country,” Gina Schoeman, an economist at Citigroup Inc., said in Johannesburg on Nov. 16.

While the incentive program ends in 2020, the government said this month it may extend the support and will lower the qualifying production threshold.The continuation of the program will be vital to the industry’s growth, Nissan Motor Co.’s local managing director, Mike Whitfield, said in an interview this month in Bloomberg’s Johannesburg office.

“If we didn’t have an automotive policy it’s highly unlikely we’d build cars here,” he said. “The numbers won’t work.”

As a result of the government program, German carmaker BMW has chosen its South African plant as the first outside the U.S. to produce the X3 luxury sports-utility vehicle and will spend more than 6 billion rand to switch from the 3-Series. That follows Volkswagen AG’s announcement that it will invest more than 4.5 billion rand to build new vehicle models, increase capacity and improve how it gets components and other materials to its factories. Nissan is also planning to build a new model from 2018 and double output from its plant at Rosslyn, near Pretoria.

The government’s decision to ease the qualification criteria for incentives will probably lead to further investment, according to National Association of Automobile Manufacturers of South Africa director Nico Vermeulen.

“A number of companies are evaluating strategic opportunities and looking at setting up plant and capacity,” he said by phone on Tuesday. “It will enable smaller manufacturers to consider investing and becoming producers in South Africa.”

Challenges facing the automakers include a potential repeat of plant stoppages in both 2013 and 2014. The first was as a result of strikes at their own operations, and then at component suppliers the following year. The next round of wage negotiations is scheduled to start in 2016. Meanwhile the broader economy contracted in the three months through June because of power shortages and a fall in commodity prices. New vehicle sales fell 8.6 percent in October from the year earlier.

Even so, domestic automotive production is forecast to increase almost 10 percent to 622,000 vehicles in 2015, Naamsa said this month. The growth is being driven by exports: 55 percent of the cars produced in South Africa last year were transported to other countries, according to Naamsa, which predicts the percentage of exports will rise to 68 percent this year.

Vehicles and accessories accounted for 11.3 percent of South Africa’s total exports in the first nine months of the year, up from 9.9 percent in 2010.

Exports from South Africa are also supported by a 19 percent decline in the rand against the U.S. dollar this year, the second-worst performer of 16 major currencies tracked by Bloomberg. The rand strengthened 0.7 percent on Wednesday to 14.18 at 4:55 p.m. in Johannesburg.

The government’s decision to extend the carmaker’s incentive program was extremely encouraging, BMW South Africa Managing Director Tim Abbott said in a phone interview.

“That gave us the confidence to say yes,” he said. “We’ve been here 42 years, we don’t see that changing at all.”