Reference no: EM132189563

Case Study

South Africa accelerates its car production

South Africa is emerging as a profitable production and export base for some of the world's big auto manufacturers, despite the country's remoteness, its reputation for labour militancy and political uncertainties. South Africa has also become a key supplier of motor industry components.

With massive platinum and palladium deposits, South Africa has emerged from nowhere to take nearly 10% of the world's production of catalytic converters, which is set to increase to 25%. This did not happen by accident. It is the result of a deliberate strategy by the government to draw the world's best car manufacturers into South Africa, and drag the domestic industry from behind protectionist barriers into the highly competitive global market for cars and components.

‘When we started, the South African auto industry was in ruins,' an economist from the government's Motor Industry Development Programme (MIDP), said. ‘Domestic production could not even compete with imports, which faced duties in excess of 115%,' he adds. MIDP has kick started South Africa's ailing motor industry by attracting the world's big car makers with many financial incentives.

The new factories have had the benefit of generating thousands of new jobs and forcing hundreds of small and medium-sized local suppliers to improve quality and productivity or face extinction.

Exports of fully built cars have increased to 5 billion rand, and are expected to double within two years. At the same time, exports of components have trebled to 12 billion rand. German car manufacturers have been the first to take advantage of MIDP's export credits and investment allowances, although Italian and French companies, such as Fiat and Renault are rapidly following.

DaimlerChrysler has just announced that it is switching its entire production of right-hand drive C-class Mercedes Benz cars from Bremen in Germany to the Eastern Cape in an investment project worth 1.3 billion rand, which will create 800 new jobs at the plant and 3000 new jobs in the supply industry. Mercedes' East London factory in South Africa is now exporting C-class models to the USA, the biggest car market in the world.

BMW has invested 1 billion rand upgrading its Rosslyn plant near Pretoria, which will export 75% of the 40 000 3-series cars produced each year to Britain, Germany, Japan, America, Australia, Hong Kong, Singapore, New Zealand, Taiwan and Iran. Daily output has increased five-fold since creating 900 new jobs at the Rosslyn plant, and an estimated 18 000 jobs in the car component industry.

The Eastern Cape remains one of the poorest regions in the country. Average black disposable income stands at a low 5000 rand a year, compared with the white population's 45 000 rand a year. When Volkswagen were looking for 1300 workers to replace those who were sacked for participating in an illegal strike, 23 000 turned up outside the factory gates in the hope of being chosen.

The extra incomes created by the industry help to boost other local industries such as retailing and house construction. The success of MIDP ‘has been a huge confidence booster for us,' the MIDP spokesperson says. ‘It has enabled us to bring about big productivity improvements, stabilise employment, reduce the real cost of new vehicles, and give consumers more choice.'

Questions:

Q1. List four multinational companies that have invested in South Africa.

Q2. Using the case as well as your own knowledge, explain three reasons for these manufacturers setting up factories in South Africa.

Q3. Analyse the benefits South Africa appears to be gaining from such investment.

Q4. Evaluate whether the government of South Africa should continue to support investment by multinational businesses in its economy.