VW Looks for Solutions as ‘SA Tax’ Impacts Its Competitiveness Against Imports

Volkswagen Group Africa is concerned that its locally manufactured vehicles cannot compete with imported models from other brands that lack manufacturing investments in the country, primarily due to the extra operating costs associated with running a business in South Africa.

Martina Biene, chair and managing director of Volkswagen Group Africa, stated on Thursday that local manufacturers and long-standing importers are burdened by additional costs that necessitate “a political discussion.”

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Biene mentioned that Volkswagen is not exempt from load shedding in the Nelson Mandela Bay Metro. There are also additional expenses stemming from transport and logistics issues as well as port operations.

At a National Automobile Dealers’ Association (Nada) event, she explained that Volkswagen had to acquire generators to manage load shedding, ensuring operations could continue without sending employees home, highlighting the company’s efforts to export record volumes last year, which they successfully achieved.

“We now operate two generators costing R130 million because we require significant power, but each day of operating those generators incurs a cost of R1.6 million,” she stated.

“This is an additional expense for us in Nelson Mandela Bay, and no one reimburses us for this cost, which consequently affects car pricing since that money needs to be recovered from somewhere.

“I do not seek protection as I am not a proponent of protectionism … however, how can we incentivize local businesses, manufacturing, and trading?

“I would prefer to discuss incentivization.”

Local manufacturers ‘underrated’

Biene highlighted the significant contributions Volkswagen and other local manufacturers make to the economy, including job creation, skills development, and transformation, noting that Volkswagen employs directly 4,000 individuals.

“At times, local manufacturers feel undervalued, as do legacy importers with long histories in South Africa.

“There is substantial automotive investment happening in South Africa.

“Operating a business in South Africa is not the most profitable endeavor globally, as I can assure you.”

She noted that Volkswagen is the sole automotive manufacturer in South Africa producing a model in the small car segment, which is the country’s largest segment.

However, imported vehicles in this segment that compete with the Vivo are priced lower.

“That is unjustified, and we do not set our prices based solely on profit margins.”

Biene explained that Volkswagen produces only 27,000 Vivos annually in South Africa, compared to other vehicles in the segment manufactured in different countries where production ranges from 300,000 to 400,000 units per year, allowing them to benefit from economies of scale.

These imported vehicles then enter the small South African domestic market at more competitive prices.

“That situation is inequitable.”

Deterring investment

Biene emphasized that the additional costs associated with electricity, transportation, logistics, and port operations in South Africa also negatively impact new investments within the country.

“Volkswagen globally cannot comprehend a scenario where we lack power … and this hampers my ability to present a strong business case,” she remarked.

“There are 117 Volkswagen plants around the globe – and they represent my toughest competition,” she added.

In April 2024, Volkswagen Group Africa announced a R4 billion investment in its Kariega plant in the Eastern Cape to prepare for the production of a third model, a compact SUV, forecasted to begin in 2027.

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Aside from the Vivo, the plant also manufactures the Volkswagen Polo.

Biene mentioned that the Kariega facility would shut down for a month starting mid-next month for major refurbishment.

“That decision is already finalized, so we now need to focus on the next investment opportunity.”

She confirmed that Volkswagen Group Africa is working on a business case for another model.

If successful, this could lead to halting the production of the Vivo, with Biene indicating: “I am uncertain whether we can continue producing the Vivo for as long as we did the Citi Golf.”

Crafting this new investment decision poses challenges, but “I remain optimistic.”

Unplanned power outages ‘a critical concern’

Denise van Huyssteen, CEO of the Nelson Mandela Bay Business Chamber, stated that load shedding has “stabilized more or less” in the metro apart from some recent instances – however, the significant issue lies within the electricity infrastructure and unplanned power outages.

The chamber tracked around 120 unplanned power outages last year within the city’s business districts, she reported.

“Unplanned outages are a severe concern for us.

“We have formed an electrical technical task team collaborating with Eskom and the municipality to address the hotspot areas where most outages occur,” shared Van Huyssteen.

In Struandale, where numerous factories, including Isuzu, BASF, and Ford’s engine facility are located, continuous operation is crucial, she added.

She also pointed out that vandalism contributes significantly to power outages; the municipality has failed to secure its assets, such as substations.

In Struandale, various automotive companies have taken responsibility for the safety and security of substations in their vicinity.

“This means they are ensuring that those substations are adequately safeguarded. They are investing in security measures for those substations.”

The chamber consists of 11 geographical clusters, and she noted that similar efforts are being implemented within other clusters.

Additionally, technical faults in the infrastructure stem from inadequate maintenance and municipal instability since 2016, as mayors and municipal managers often change, leading to disrupted maintenance schedules and rising operational costs in the metro.

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