Africa: Car makers’ new frontier

German, Japanese and American manufacturers are making vehicles in South Africa for export, mostly to the US and to Europe but the continent’s rising middle class presents them with their next big opportunity.

Workers fit electrical cables to the interior of a BMW 3 Series as it passes along the production line in Rosslyn, South Africa. Kevin Sutherland / Bloomberg

International car companies are looking at Africa as the last frontier for automotive growth, beginning a scramble for market share.

South Africa is the only country south of the Sahara with an established motor manufacturing industry and some of the world’s biggest car makers hope to use it as a base from which to expand sales around the continent.

German brands such as BMW and Volkswagen; Ford, Chrysler and General Motors from the US; and Japanese manufacturers Nissan and Toyota already have plants in the country. While most cars are sold locally, many are exported, mostly to Europe and the US. Now Africa is the target.

“Africa is one of the youngest markets in the world and presents huge opportunity in terms of consumption,” said Jeff Nemeth, the president and chief executive of Ford Motor Company of Southern Africa. “The buying power of African consumers is on the rise as the continent’s middle class increases exponentially.”

In April, Ford said it would invest 2.5 billion rand (Dh626.57 million) in its production plant in Pretoria, in the north of the country, to produce one of its latest products, the Everest sport utility vehicle. This follows last year’s commencement of manufacturing the Ranger pickup. Both vehicles were introduced with the African market in mind.

“The recent announcement of our production of the Everest is a natural progression of our long-term strategy in the sub-Saharan region,” Mr Nemeth said. “The Everest shares a platform and some common parts with the hugely successful Ford Ranger and we have a robust plan to increase local suppliers through increased localisation of ­components.”

Eventually, Ford intends opening plants elsewhere in Africa. It already assembles vehicles in Nigeria using parts shipped in from overseas, as does Nissan. Both plants opened within the past two years. “In future, Ford plans to expand parts accessibility and service support throughout the region,” Mr Nemeth said.

BMW South Africa is also making the pivot northwards. The German maker opened a plant in South Africa in 1973, the first BMW facility outside Germany. For years it has produced the 3-series for the US market – and most of those seen on the streets of Abu Dhabi too.

The local plant built more than 71,000 units last year, ­according to Lynette Kamineth, BMW South Africa’s spokesman. But last year, the company said it would discontinue producing the 3-series and would begin making the X3 SUV instead.

“With a growing middle class in Africa, the opportunity and potential for an African automotive sector is clear,” Ms Kamineth said. “BMW will take a medium- to long-term approach to its expansion into sub-Sahara Africa and looks forward to the contribution that we can make to unlock this potential in the years to come.”

Other automotive manufacturers are also moving on the African market. In April, the Beijing Automobile International Corporation (BAIC) said it would build a factory at Port Elizabeth on the east coast of South Africa.

BAIC is China’s fifth biggest vehicle maker, according to the company’s website. In 2014, BAIC achieved a turnover of 311.56bn yuan (Dh171.07bn) in sales and 2.4 million sold units. The South African plant will focus on pickups‚ SUVs and sedans for the African market. More than 2‚500 direct jobs will be created.

In addition, according to local media reports, up to five other international brands are in talks with the South African government about opening plants. These are said to include at least two European manufacturers and one from Asia.

“This is clearly looking at the wider African market, not just South Africa,” said Ryan Bax, industry analyst at Frost and Sullivan in Cape Town. “With a growing middle class there is a need for vehicles that can handle bad roads but also provide comfort and styling.”

Adding to South Africa’s role as a gateway to the African automotive sector is a long-term policy programme that rewards manufacturers for exports. Essentially, car companies that export more than 10,000 units a year can import vehicles and components duty free.

This allows manufacturers to sell a wide variety of brands while concentrating on building one or two marques for export. This is a much more efficient allocation of capital than attempting to build a large variety of brands across multiple assembly lines.

For example, the German manufacturer Mercedes-Benz offers about two dozen different types of vehicles across South African showrooms, from entry-level hatchbacks to sports coupes. Almost all are imported, while its plant on the east coast manufactures the C-Class sedan that it ships at a rate of about 10,000 a month.

The export credits that Mercedes receives for those sold oversees can be offset against local sales of imported cars.

Recently Mercedes said that the South African plant would soon stop building that C-Class and tool up to make the latest model in the range. Mercedes will spend 5.4bn rand on the new assembly line.

For the local plant, the contract to build the latest C-Class was a big deal. The global motor industry pits plants worldwide against each other to secure new assembly lines. So competition at a manufacturing level is between factories within the same company, rather than between car makers themselves.

Markus Schäfer, a Mercedes-Benz divisional board member, said the new C-class was a major win for Mercedes-Benz South Africa and its East London plant.

“This plant is an important element of our highly flexible production network for our highest volume Mercedes-Benz model,” said Mr Schäfer when the announcement was made in May. “With the new C-Class, we’re taking automotive production in South Africa to the next level.”

South Africa has built itself on mining but as the country’s gold reserves are depleting it has to diversify away from resource production. Car manufacturing is a possible source of future growth and the government hopes to continue its development to the point where the country becomes an integral part of world automotive ­production.