SA car industry facing 'biggest disruption', warns Toyota CEO

From the newsletter

Toyota SA CEO Andrew Kirby warns that the decisions made in the next few years will have a profound impact on the future of South Africa's auto industry.  These decisions, particularly those surrounding government policy and investment in new technologies, will shape the industry's trajectory, influencing job creation, skills development, and the types of vehicles sold in the country.The budget statement clearly stated that “investors seeking to assemble electric vehicles in-country will be granted import exemptions on semi-knocked down (SKDs), completely-knocked down (CKDs), and fully-built units (FBUs)”

• Experts and other industry leaders alike have raised the alarm, emphasizing that now is the time for South Africa to make bold investments in EVs.  

• Even President Cyril Ramaphosa, during his speech at the Auto Week conference, in October, urged industry players to be proactive in the clean energy revolution or risk being left behind as the world transitions to EVs.

More details

• The global shift towards EVs presents both a challenge and an opportunity for South Africa, one of Africa's leading automotive manufacturers. 

• To successfully navigate this transition, the nation must strategically consider its vehicle sourcing, balancing imports with locally produced options, particularly as key export markets, such as the UK, where Toyota exports its Hilux model, are implementing phase-out policies on non-zero emission vehicles. 

• This poses a threat to South African manufacturers, who risk being locked out of these markets unless they embrace EVs. 

• Recognising the urgency—and the potential economic impact on a sector that contributes 4.9% to the nation's GDP and employs over 110,000 people—the government has outlined its commitment to supporting the transition to EVs. 

• Through a published white paper, it has set clear goals and outlined incentives for EVs and hydrogen-powered vehicles, allowing car manufacturers to claim 150% of investments spent in the first year.  

• During the Auto Week conference, the president also announced that the white paper would be revised to include hybrids and plug-in hybrids, along with subsidies to encourage consumer adoption of EVs.

• While welcoming the announcement, Toyota SA CEO Andrew Kirby highlighted the challenges, stating: "It's difficult to pivot to producing electrified cars when a handful are sold in South Africa, with no incentive to sell, drive, or purchase new energy vehicles."

• He further emphasised the need for structures that can be put in place that are fiscally neutral and cost-free to accelerate the transition, including the automotive master plan Automotive Production Development Programme 2 (APDP2) regulations of 2021. 

• These regulations could provide a framework for supporting the industry's shift towards EVs without placing an undue burden on taxpayers.  

• Kirby also emphasised the need for South Africa to increase its production capacity to over 1 million cars annually to ensure the industry's sustainability and advocated for a more aggressive approach to establishing South Africa as a manufacturing hub for exports across the African continent. 

• This would reduce reliance on European markets, although the region presents its own unique challenges.

• Not all African countries can manufacture vehicles, but there are countries that can benefit from participating in the value chain, such as component manufacturing, instead of importing from Asia. 

• However, existing structural issues, such as high import duties and the ad valorem tax—a luxury excise tax that exponentially increases with the price of the vehicle and which has not been updated since 1995—threaten to hinder these efforts.  

Our take

• South Africa's focus on EV manufacturing is achievable due to its mature market. However, high EV costs necessitate government subsidies to ensure competitiveness and drive sales

• Regarding export ambitions, tariffs imposed on Chinese vehicles by the USA and European Union present a favourable opportunity for South Africa to compete against heavily subsidized Chinese EVs.

• But South Africa needs a cautious approach noting that a slower shift to EVs would compel manufacturers to invest significantly in both electric and ICE vehicles. This would lead to costly consequences, as automakers would be forced to maintain a dual-investment strategy for an extended period, creating a significant financial burden for the industry.