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Driving a pan-African motor industry

Jun 12 2018 12:03
Glenda Williams

Thomas Schaefer, chairman and managing director of Volkswagen Group South Africa (VWSA). (Image supplied.)

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“I’m trying to create something pan-African,” chairman and managing director of Volkswagen Group South Africa (VWSA) Thomas Schaefer tells finweek.   

The man who has always loved cars, and from an early age has been fascinated with how things are made, is off to a flying start after having established vehicle assembly operations for VWSA in Kenya in 2016, and now in 2018, in Rwanda. 

It’s another step towards realising the continent’s potential to drive growth for Volkswagen SA and South Africa’s auto industry.

Apart from engine production, VWSA produces the VW Polo, one of the world’s most successful compact cars, as well as sibling VW Polo Vivo, SA’s top-selling passenger car.

Of the 133 000 vehicles to be produced in 2018 at Volkswagen’s plant in Port Elizabeth, 83 000 will be exported around the world.

African expansion

But an export growth path, not only for VWSA but also for SA’s auto industry, means blazing a trail into unchartered territory. 

An assembly plant in Nigeria was the first port of call for Nissan SA, followed soon by Ford SA. BMW SA also has its sights set on an assembly operation in sub-Saharan Africa, with Nigeria looking like a front runner. 

VWSA went to the opposite side of the continent to Kenya for Polo Vivo assembly. Components and vehicle body parts are supplied from SA for assembly in these regions.

Schaefer is no stranger to setting up operations in emerging markets. Much of his time during his two decades with Mercedes was spent doing this.

Now he’s back on a pioneering trail that will also contribute to a sustainable auto industry in SA.

“SA’s annual production of 500 000-odd vehicles is too small and not sustainable. What is sustainable in the long term is 1m to 1.5m. Then you have sufficient numbers for local content generation and suppliers that are sustainable,” Schaefer tells finweek

Where to for these additional cars? Not SA, because the domestic demand can’t absorb that. But the rest of Africa, says Schaefer, is on our doorstep. 

It’s a strategy that SA’s auto manufacturers have had their sights on since 2015 when the Association of African Auto Manufacturers was formed with the aim of unlocking the potential of the automotive sector in Africa.

“We need to get Africa going because the regional market will be key to our success. We can’t hope to export everything to America, and Europe is moving quickly to electric mobility.” 

Opportunity for conventional combustion engines 

SA though does not produce electric cars. Where to then to export our conventional combustion engine vehicles?

“Everyone wants to export to Japan, Australia and Europe. So we need to focus on Africa,” explains Schaefer.

VWSA’s recent $20m investment in Rwanda talks to this concept of realising Africa’s potential. 

Volkswagen Mobility Solutions Rwanda is a mobility solutions company that will offer community car sharing, ride hailing and public car sharing. 

The initiative also includes a vehicle assembly operation with an initial annual capacity of up to 5 000 units that includes the Polo. 

The mobility and dealer services are expected to be launched at the end of June, while assembly production is scheduled to start in July.

Parts and vehicles will come from SA, with the Rwandan facility set up for final assembly. This, says Schaefer, will help growth in SA and Rwanda.

Growth challenges

“What we are doing in Rwanda is a game changer to unlock Africa’s potential,” explains Schaefer. 

“There are over 1bn people in Africa. And probably only 2m can afford the cost of around $20 000 for a new car. But no less than 300m people need to get from point A to point B, so the mobility need is huge. You want to use that to get into the market to create the utilisation of vehicles,” he says.

Affordability in Africa is low. And mobility solutions could be the entry point to create fundamental change. 

But there is also the need to move away from the continent’s used-car ethos towards industrialisation.

Usually costing less than $1 000, many used cars imported into West and East Africa are five years and older.

“Africa needs to be weaned off the low-cost junk dumped on it. There is no chance for a new industry to start growing if this is not addressed. These countries need industrialisation. They all need to create jobs,” says Schaefer.

“We have a great industry in SA and we want to grow it. And working together with other African countries can be mutually beneficial.” 

Talks with Ghana and Ethiopia are taking place and discussions with Kenya about ramping up business there [that could include assembly of a second model] are also underway, reveals Schaefer.

Boosting SA’s auto manufacturing industry

Government incentives are key to keeping automotive manufacturers in the country. The current automotive incentive programme expires in 2020 and a new plan is due to commence in 2019 and carry through to 2030.   

“The APDP is a great programme and shouldn’t be fiddled with too much, otherwise it confuses international investors,” says Thomas Schaefer, chairman and managing director of Volkswagen Group SA (VWSA).   

“We are talking about the future for the next 20 years. What the auto industry needs is consistency and stability. We don’t invest for a year or two, we invest for at least one or two life cycles and that carries you into the 15-year range.”  

What does need addressing are the two import duty oddities in the current APDP plan, he says.  

One is that electric vehicles (EVs) attract a 25% duty against 18% of normal [combustion] vehicles.  

Says Schaefer: “EVs are already expensive and attracting a higher duty makes them even more unfavourable.” A reduction to 18% however is expected in the new APDP.  

The other oddity is that vehicles with one-litre engines or smaller don’t attract an import duty.  

“That [importation rule] was made for lawnmowers and golf carts. Now everybody in the emission and consumption discussion is moving into that space. 

So you have cars produced in Europe that come in cheaper than they can be produced here.  

“That does not help us manufacture here. We invested R6bn locally to produce the Polo. Now anyone can bring them in without duty. That needs to stop.”

This article originally appeared in the 7 June edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

business  |  motoring  |  auto industry
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