NAAMSA and NAACAM 5 Year Automotive Sector Business Plan

1. NAAMSA and NAACAM5 Year Automotive Sector Business Plan

2. Presentation overview • Please note: • Presentation is supplemented by word document and A3 summary • Data compiled from: • Individual firm inputs • Previous industry research • 3 x industry engagement sessions South African automotive industry status quo Five year sector strategy and plan Priority interventions to support business plan realisation

3. 1. South African automotive industry status quo

4. Factoring in its considerable multipliers and spillover effects, the South African automotive industry makes a substantial contribution to South African GDP – manufacturing and extended value chain Automotive Industry Export Council, Automotive Export Manuals, 2015- 2018

5. South African automotive component production also dominated by exports (R million), whether directly or via OEM assembly South African component production (2017) Source: Automotive Export Manual, 2018

6. Domestic automotive industry is dominated by multinational owned firms that are committed to South Africa. Evident from export contracts secured, extent of investment, and initiation of transformation journey South African auto industry investment levels, 2014-2017 • All OEMs compliant on BBBEE scorecard – improved average score from 59.6 in 2016 to 62.3 in 2017 • 9% of component manufacturers Level 1or 2 on BBBEE scorecard in 2018 versus 4.5% in 2017 • Dealership BBBEE status and ownership mapped • Establishment of OEM Transformation Fund to drive Black industrialist participation in portions of value chain open to national capital – Tier 2-3 of manufacturing value chain, dealerships and authorised repair facilities Source: NAAMSA (for OEMs); South African Automotive Benchmarking Club (for component manufacturers) * Capital spend (NAAMSA) as a % of Motor Vehicles sales (Stats SA)

7. South African vehicle market has struggled for extended period. Consumption represents balance of imported and locally produced units. Latent demand of 2.2 million units annually Increasing tax burden crippling to South African market demand, especially at entry level South Africa slipped in global market rankings: 22nd in 2014 to 24th in 2017 Source: NAAMSA; * NAAMSA projections (July 2018)

8. South Africa’s automotive trade balance has improved on the basis of increased vehicle exports, and reduced domestic consumption. Increased localisation presents a major opportunity, provided supply chain competitiveness improves Industry trade position has shown continuous improvement and moved to a net surplus of R10.3 billion in 2017 Source: Automotive Export Manual, 2018

9. Status quo summary • The South African vehicle assembly industry has grown its output, increased its local content, and expanded employment within its supply chain, despite: • A declining, excessively taxed domestic market; and • A dormant regional market, dominated by pre-owned vehicle imports • Recent production performance has been underpinned by export growth into distant, developed economy markets, placing substantial competitiveness pressure on the industry, especially in light of South African cost movements, labour instability and transformation imperatives that strategically challenge the industry’s position within Global Value Chains • The Automotive Production Development Programme (APDP) has supported the industry in the face of domestic challenges

10. 2. Five-year Sector Strategy and Plan The South African automotive industry has worked with the Department of Trade and Industry to develop a South African Automotive Masterplan to 2035. Its five year business plan is therefore located within this aspirational plan

11. The South African Automotive Masterplan’s 2035 vision, objectives, and strategic implementation pillars South African Automotive Industry Masterplan, 2017

12. Vehicle production to grow to 800,000 units • Exports compensating for poorly performing domestic market: • Plans to 2020 per individual OEM forecasts • Strong local market recovery from 2021 required – 5% annually • Annual export growth of 7.5% for 2021 to 2023 • SAAM targets for 2023 to be missed by only 30,000 units: • Domestic market – 24,000 units • Exports – 6,000 units – African underperformance NAAMSA 5-year business plan to 2023 versus SAAM 2023 target 800 000 628 000 Local content to increase from 39.19% to 42% versus SAAM target of 43% - competitiveness, domestic supplier capability improvements, but FDI concerns and government administered prices remain major issues

13. Production and local content growth to 2023 driven by substantial additional investment by vehicle assemblers • Key to amplified investment is growth in the domestic and regional markets as the industry is overly dependent on exports to distant markets 5 Year forecast • Planned OEM investment to 2023 is over R40 billion for 2019 to 2023; should unlock >R20 billion in auto component investments; create space for Black industrialist participation at Tier 2 and 3 of value chain

14. Employment within value chain to increase to 135 000 in 2023, 80 900 of whom will be youth and 33,500 female • Major productivity gains modelled to 2023 – 5% annually at OEMs and 3% at component manufacturers – key to export competitiveness • Employment within value chain to still grow 14% (>16,000) - primarily on back of CBU export volumes and local content growth • Youth employment to grow from 55% to 60% of total • Female employment to grow from 20% to 25% of total • Labour relations stability major concern to realisation of employment objectives Note: Total employment youth and female proportion based on OEM survey data only

15. AUTO’S - TRANSFORMATION SCOPE Dealers & Retail OEM’s Component manufacturers Automotive Transformation Fund Black Ownership/Leadership Black Ownership/Leadership • Preferential Procurement • Enterprise Development • Skills Development Informal sector growth & Township Revitalization Localization

16. INVESTMENT PRIORITIES R 39.4 Billion DEVELOPMENT OF THE TOTAL AUTOMOTIVE VALUE CHAIN Dealers & Retail OEM’s Component Manufacturers OEM IDEAL NOW OEM Tier 1 Tier 1 Tier 2/3 Upliftment of informal sector Advanced manufacturing technology Tier 2/3 Develop tier 2/3 suppliers

17. 3. Priority interventions to support business plan realisation Based on a survey of NAAMSA members and industry engagement sessions involving senior industry leaders committed to the realisation of the five year plan

18. Five-year business plan imperatives Potential to 2023 identified • Vehicle production to 800 000 units (62% exported) • Investment R40b • Local content to >R94 billion (42% per unit) • Employment to 135 000, of which 60% youth and 25% female • Black industrialist participation at Tier 2 and 3 of supply chain Demand-side imperatives • Excessive taxes on vehicles crippling to domestic market development – market potential and associated multipliers being undermined • Market access and establishment of a regional automotive pact critical to the development of regional value chains – South Africa to emerge as SKD supply node for emerging African vehicle assembly base • Maintenance of preferential access to US, UK, and EU markets key to exports Supply-side imperatives • Resolution of fuel quality and port and rail cost issues key to sustainable exports • Improved labour market stability and associated labour relations • Insufficient investment support, especially for new, advanced technologies • Supplier development key to localisation • Resolution of political instability key to future FDI

19. Auto Sector’s 7 priority requests to support the industry’s 5year plan Other major priorities to 2023 can be driven by OEMs and automotive component manufacturers – investment, supplier development, localisation, transformation, employment – but need substantial progress in the above priorities Local market stimulation (1) Establishment of a regional automotive pact that develops regional value chains and a growing, sustainable African market (2) Fuel quality to international standards (6) Uncompetitive port and rail efficiencies, reliability and cost (4) Investment support for new, advanced technologies (6) Improved industrial relations legislation (foundational) Coordinate supply chain skills development in value chain (6)

20. Recommended action plans to support the industry’s 5year plan • Domestic vehicle affordability • Workshop with DTI and National Treasury on demand stimulation • Examination of ad valorem duties on demand stimulation and Treasury revenue • Fuel quality to international standards • Clean fuel summit with major public and private stakeholders • Urgent resolution and agreement on clean fuel implementation timeline • Improved industrial relations legislation • National review of labour relations act in support of job creation and industrialisation • Resolution of strike legislation and consultation processes • Investment support for new, advanced technologies • Confirmation of SAAM position on New Technology AIS • Tailored incentives to attract new technology investment in auto’s • Establishment of a regional automotive pact • Joint DTI and AAAM initiative in place – broader government support required • Uncompetitive port and rail efficiencies, reliability and cost • Continuity of constructive engagement with port and rail authorities • Coordinate supply chain skills development in value chain • Creation of a consolidated auto components chamber at MerSeta