South Africa’s automotive industry faces a growing threat after the European Parliament in February approved a law to effectively ban the sale of new petrol and diesel cars in the European Union (EU) from 2035.
The new law, which aims to speed up the EU’s switch to electric vehicle exports, will make it impossible to sell new fossil fuel-powered vehicles in the 27-country region.
Local vehicle industry pundits say SA’s auto sector is under pressure as global markets commit to EVs, while it continues to move at a snail's pace towards e-mobility.
On 14 February, EU lawmakers approved a ban on new fossil fuel cars, effective 2035.
As global countries race to establish zero-emission vehicle policies and incentives to increase rollout and make EVs more affordable for the general public, SA sees a slower growth of EV adoption compared to the rest of the globe.
This is predominantly due to high costs associated with importing EVs, non-existing legislation to enable local production of EVs and supply constraints in SA, say experts.
Mark Lacey, head of resource equities at global asset manager Schroders, believes that although leading vehicle manufacturers such as Mercedes-Benz, Volkswagen and BMW report they are on track to phase out internal combustion engine vehicles, it’s been a real challenge for traditional original equipment manufacturers (OEMs) to fundamentally change their way of thinking about producing vehicles.
“With pressure from both the regulatory and investor communities, international car manufacturers will have to adapt – and as one of their suppliers, South Africa will need to follow suit – and quickly. As a traditional OEM, you now need a supply of rock commodities like lithium nickel,” says Lacey.
“You also need to figure out the different architecture of moving to electric vehicles. You have to really reimagine the way you think, and it costs billions and billions of dollars to make this transition. The road will be a difficult one. One hurdle locally is regulatory constraints.”
The global automotive investment community has said it will not give any value for the old vehicle architecture that historically has been produced and it wants these OEMs to produce EV vehicles. The proof is in the valuations − you see the difference between the valuation for a company like Tesla versus Ford, as an example, adds Lacey.
High value companies like Tesla, which were early to market and had relatively no competition, have benefited from their EV strategy, says Lacey. This paints a big picture of where investors want these companies to go in order to take advantage of EVs’ growing market share, which has almost doubled over recent years, he notes.
“Tesla is ranked as the world's eighth most valuable company – with a market capitalisation of $582.60 billion. Compare that with Ford, which makes many more cars, but is valued at just around $47 billion.”
To date, more than 20 countries have announced the full phase-out of combustion vehicle sales over the next 10 to 30 years, including countries such as Germany, France, Netherlands, Sweden and Italy, which have national policies and targets to encourage the EV shift, according to a report by the International Energy Agency.
According to Edward Makwana, GM of Legacy Motor Group, the local industry will need to adapt quickly to the changing demands of the vehicle market, and invest in research and development to stay ahead of the competition.
With the right investments and support, SA has the potential to become a significant player in the EV market and can continue to drive economic growth through automotive exports, he points out.
“South Africa's thriving automotive industry is facing a new challenge as the global market increasingly shifts towards electric vehicles. Our country's largest export destination, namely Europe, is at the forefront of this change, which could have a significant impact on our automotive sector.
“The shift towards EVs will significantly alter the demand for traditional internal combustion engine vehicles, which South Africa has been exporting in large quantities to Europe. The transition to electric cars will also bring new competition from established electric vehicle manufacturers, which could make it more challenging for South African companies to compete in the European market,” explains Makwana.
Local vehicle industry players have for years brought to light the numerous challenges hindering the country from progressing in the EV market.
These include the lack of supportive regulatory frameworks and additional incentives to safeguard EV sales from the high costs resulting from the economic downturn, and insufficient public charging stations across the country.
In March 2021, the Department of Trade, Industry and Competition released the Draft Auto Green Paper as a step towards establishing a clear policy foundation that will enable the country to coordinate a long-term strategy that will position it at the forefront of advanced vehicle and vehicle component manufacturing.
In July 2021, the Automotive Production Development Programmecame into operation – to ensure SA develops production capacity of EVs in what is anticipated to be a growing part of the local automotive market.
Shortly after this, government published a draft paper for public comment on a roadmap to the production of fully-electric vehicles; however, there has been no update from government since.
Lacey believes supply constraints will be an even bigger hurdle for local vehicle manufacturers.
“There are three key materials for the production of batteries which go into EVs: lithium, nickel, and cobalt. All of these materials are in short supply and all have witnessed a relentless surge in price over the last two years, albeit none as great as lithium. Lithium is the most sought-after, with its value having risen tenfold since the start of 2021.
“I'd say there's an arms race right now in building out not only EV platforms, but also managing this tricky supply chain. Given that automakers around the world have pledged an investment of a trillion dollars, I would say they are taking things very seriously,” comments Lacey.
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