By: Premeshin Naidoo - Managing Director and Sector Head for TMT and Industrials at Absa CIB

South Africa’s automotive sector stakeholders were abuzz following President Cyril Ramaphosa’s recent announcement of some major upcoming changes to government’s industrial policies. A series of incentives appear to be on the cards to support new energy vehicle (NEV) technologies – such as battery electric vehicles (BEV) and hybrid electric vehicles (HEV). Speaking at NAAMSA SA Auto Week 2024 conference in Cape Town, the president introduced the idea of a series of tax rebates or subsidies for consumers to accelerate the adoption of such vehicles in SA, stating this could help ensure the country’s relevance in the global automotive supply chain – especially if local manufacturers take up the opportunity to invest in this major industrialisation opportunity for the region.

The momentum for NEVs is building, driven by the lower fuel costs and  significant environmental benefits. However, economic conditions and affordability remain significant barriers to widespread adoption, especially considering South Africa’s somewhat weak economic outlook. Naturally, the local energy crisis – that has thankfully abated in recent months – is also a concern for those wanting to invest in electric vehicles, though affordability remains the critical factor for South African car buyers as is the lack of widespread NEV charging infrastructure. The demand for used vehicles is strong, with a used-to-new ratio of financed vehicles increasing to 1.44 in Q2 2024, up from 1.15 in Q1 2024. This indicates a preference for more affordable options amid economic and affordability challenges. However, there has been a slight increase in consumer confidence, partly due to reduced power outages, lower fuel prices and reducing interest rate cycle.

However, it will likely be these new incentives, and investments in infrastructure to support the transition to greener technologies, that will be key to overcoming some of the obstacles in the NEV sector.  Yet it won’t be individual car buyers who will solely benefit, especially considering new vehicle subscription and shared mobility global trends. The challenge for South Africa is one of consumers supporting the local NEV industry to buy locally manufactured NEVs versus buying attractively priced Chinese imports.  

A recent survey by Deloitte showed that younger consumers are becoming more interested in vehicle subscriptions, with many questioning if they need to own a vehicle going forward. Arguably, one needs to have access to a vehicle in South Africa to maximise work and social opportunities but the days of traditional hire-purchase to eventually own the vehicle seem to be limited.  With these changing ownership preferences and rapidly increasing vehicle prices, both the OEMs and vehicle financiers are having to consider innovative financing solutions, with residual value, lease and rental type options gaining popularity, and subscription models gaining rapid interest.  The latter could be attractive to encourage the adoption of NEVs given the higher costs and concerns around battery life.

But what does this all mean for manufacturers, those that want to benefit from this push towards greener vehicles and a heightened demand? Firstly, the introduction of the Carbon Border Adjustment Mechanism (CBAM) by the EU is expected to have significant implications on exports of all vehicles. The EU is the largest export market for South African vehicles, and CBAM will impose a carbon tariff on imported goods based on their embedded emissions. This will make carbon-intensive exports to the EU more costly and less competitive. Other countries including Australia, Japan and Canada are considering a similar approach to the European CBAM. Therefore, the automotive manufacturing sector will require a swift shift towards decarbonisation and the adoption of cleaner technologies to maintain market access.

This includes accelerating the transition to electric vehicles and investing in renewable energy sources, alongside the development of strategies to reduce the carbon footprint of the sector’s production processes and supply chains, ensuring compliance with the new regulations. And we can’t afford to fall behind, as Morocco has already overtaken South Africa as Africa’s top vehicle producer – with a focus on EV production cited as the reason for this rise. Growing competition (albeit in lower volumes) is also present in countries across the continent, like Egypt, Nigeria, Ghana, and Kenya.

According to a recent study by global market intelligence provider, Fitch Solutions BMI, South Africa will likely have to address a series of logistical challenges, an increase in vehicle imports, and political risk to regain its auto-manufacturing lead in 2025. The recent presidential announcement is a phenomenal step, but further action will be required to ensure the automotive sector maintains its status as a crucial pillar of South Africa’s economy – contributing 5.3% to the GDP, 21.9% of total manufacturing output and supporting 110 000 jobs. In recent years, it has experienced both prosperous and daunting challenges but has continued to evolve alongside changing global market dynamics.

Despite recent challenges, however, industry leaders remain cautiously optimistic about modest growth in 2024, demonstrating the sector's resilience and adaptability. However, Absa’s research analysts still noted a 6% decline in new vehicle sales between August 2023 and 2024.

It is likely too soon to tell if the upcoming changes to the manufacturing and overall automotive sector can reverse these recent trends, but there are major opportunities among the challenges. 

The industry's ability to adapt to changing market conditions, consumer preferences, and regulatory requirements will be key to its success, however government policy needs to consider the structural, technological, and economic factors – and the need to rapidly evolve. Innovation and sustainability will play crucial roles in driving growth and ensuring long-term resilience, but deliberate action from both the public and private sector will be required for true industry transformation.