THE GLOBAL PERSPECTIVE: South Africa's motor industry is divided into two sectors, manufacturing, and retail and maintenance. Combined, they contributed 6.6% of GDP in 2003, about half of which came from manufacturing and half from retail.

The growth of motor manufacturing has been largely due to exports of both built-up vehicles and components. Exports outside the Southern African Customs Union (SACU) grew by around 33% a year in rand value from the early 1990s to 2003. Though this is an impressive figure, growth was from a near zero base. Exports within SACU are seen as domestic sales as these areas are included in the trade licences issued by parent companies to their South African subsidiaries. The vast majority of exports go to Europe, Asia, and Oceania, with a trickle to the United States.

Despite this growth, motor industry exports from South Africa still amounted to just 0.2% of global demand for built-up vehicles in 2002. Domestic demand in 2002 equalled 0.7% of global production of approximately 55 million vehicles.

EXPLOITING ADVANTAGE: South Africa's manufacturing sector does not mass produce anything. We have always 'batch produced' and continue to do that. Except for gold and platinum, we have no true absolute advantages which give long-term competitive strength. What batch production does give is comparative advantages in global trade and it therefore plays a part in promoting our export activities.

South African motor and component manufacturers are adept at rearranging lines to produce runs of components for used vehicles - production that would be unviable for larger manufacturers. With about 650 million cars on earth there is room for us to exploit this comparative advantage. Production of right-hand drive models is an example of where batch production gives South Africa a comparative advantage over larger international manufacturers.

THE DOMESTIC MARKET: South Africa's domestic market is fragmented and heavily populated on the supply side - combined there are around 900 passenger and light commercial model derivatives in a 450 000 unit market.

Two great hopes have sustained the supply side of the market: firstly, hope for the emergence of the black market; secondly, the hope of a sub-Saharan market.

Since the 1980s the black market has grown from 11% of new vehicle sales to about 30% two years ago. However, this does not amount to an increase in total sales as emigration has reduced the size of the white market. This year South Africa will set a new record of 460 000 for new vehicle sales, breaking the old record that has stood for twenty years. Thanks to exports it is possible that South Africa's domestic production will increase from 350 000 to 550 000 units between 2002 and 2005. While this is a gratifying increase for the local industry, it is not significant in global terms.

In sub-Saharan Africa the SACU absorbs 70% of the market. There is only limited potential for growth outside the union and poverty will continue to delay the emergence of east, west, and central African markets for a very long time. The north African market is more easily reached by European manufacturers and therefore does not provide much opportunity for South African manufacturers.

CLOUDS ON THE HORIZON: Domestic demand will ensure that the retail and maintenance sectors of the industry remain secure. But the automobile manufacturing sector could be removed on the whim of a board of directors elsewhere in the world. In this regard it is of concern how our trade unions react to the goodwill of a foreign parent company producing vehicles in South Africa. Union threats that strikes in South Africa could jeopardise global supply are meaningless and unintelligent when the relative contribution of South African motor manufacturing to global supply is so small.

Black economic empowerment (BEE) and equity dilution are also of concern. BEE is necessary but the motor industry is a risky one where few global players make money consistently. The demands of the industry require vast sums of operating and equity capital. In South Africa, manufacturers move through troughs and peaks that extend 15% on either side of the trend line. Few industries can tolerate such a 30% fluctuation. If the aim of BEE in the industry is 25% equity ownership, that means ownership of risk and losses as well as any potential profits. Onerous responsibilities would likely be demanded by parent companies of new BEE players to provide equity and operating capital. Failure to attract such capital will deter parent companies from BEE ventures. It is not unlikely therefore that an industry charter may be drawn up where parent companies that do not usually sell equity in their subsidiaries are exempted from doing so in South Africa.

Competition commission investigations into resale price maintenance - or price fixing - are a third concern. Car retailing in South Africa comprises two series of events. First is the establishment of a list price which, together with discounts and sweeteners, establishes the discount package price. A second series of events includes negotiations over a trade-in price for the buyer's old vehicle, monthly repayments, and the residual value of the new vehicle. These are inversely related to the decisions taken in the first stage. When combined with negotiable interest rates these two processes do not leave a great deal of room for resale price maintenance.

Retailers are likely to offer more vociferous defence to the commission's investigations than Toyota did in 2004 when it paid an admission-of-guilt fine.

THE FUTURE: The industry is no more or less robust than any fraction of the motor industry in the rest of the world. Globally, our current size does make the industry somewhat insignificant. However, if it can grow towards exporting 4% of either global component or new vehicle demand it will become a major player. Then industry players would need to ask South Africa's opinion before they make decisions. The South African economy does have the potential to become a significant manufacturer in the motor industry if we do not become greedy. We are ten percent of the way there.