South Africa’s stable financial system, export-friendly regulations and the likelihood of its participation in a continent-wide free trade agreement are driving Ford Motor to ramp up production there with an eye toward expanding growth in the rest of Africa.
Jeffery Nemeth, president and CEO of Ford Motor Co. of South Africa since the start of 2010, says China is the world’s economic powerhouse today and India is probably next in line. But Africa is rich in commodities, including oil, and holds 60% of the world’s uncultivated arable land, Nemeth says. “In the future, Africa is the next logical global growth engine.”
With that in mind, Ford has invested $500 million to upgrade its production facility in Pretoria. Starting in September, it plans to produce 100,000 Ranger pickup trucks annually, replacing the 25,000 Focus compact cars and Bantam pickup trucks it manufactures there today.
A quarter of those units are slated for sale in South Africa and the remaining 75,000 for export to 148 countries. A bit more than half of the exports will go to mature markets and the rest to emerging markets, including African countries, says Nemeth, who's pictured below.
In fact, a pending trading agreement bodes well for future sales across Africa. The pact will reduce trade barriers between more than 25 countries that participate in three existing trade blocks comprising 526 million inhabitants and $264 billion in GDP, Nemeth says. The biggest countries include South Africa, Kenya, Egypt and Ethiopia.
Ford has production facilities around the world. An important reason for choosing to expand in South Africa is the free flow of capital in and out of the country, says Nemeth. “Other countries can be very constrained.”
The country’s four established banks, including Standard Bank and First National Bank, greatly facilitate those capital flows. In addition, South Africa’s capital markets function smoothly and its currency, the rand, is used as a standard trade currency throughout Africa, as is the U.S. dollar. “That makes our location in South Africa very attractive from a trade standpoint,” Nemeth says.
In another plus, South Africa doesn’t impose high tariffs or require a significant percentage of parts, often as high as 50% to 60%, to be made in-country. Both requirements are common in emerging-market countries to protect local plants from competition from imports. Because local suppliers often do not have the same quality of production as global suppliers, cars and other goods produced in such countries tend to have limited features. South Africa previously had a 55% requirement, but now offers a duty credit based on local value added. Ford uses the credit to offset the incoming duty on imported components.
Ford implemented in South Africa the Ranger manufacturing platform it plans to use globally, which drives efficiencies, says Nemeth. The platform is already operating in Thailand and a third plant of that design will open in Argentina by year-end.
The Toyota Hilux is the top pickup truck in terms of sales in South Africa, Nemeth says, and Ford expects to price Rangers competitively. The company sees South Africa as a mature market and forecasts 3% to 5% growth a year in auto sales. Nemeth notes that only 7 million people out of a population of 48 million have officially reported jobs. “The number of people that can afford cars is smaller than the population would suggest,” he says, but adds that the rapidly expanding lower middle class could be bolstered by a recently announced government program to add five million jobs in five years.
Peter Sun, regional head of transaction banking for Africa at Standard Chartered Bank, which has a significant presence on the continent, notes Nigeria’s attractiveness as an emerging market with a booming economy, driven partly by oil production, and increasing consumer spending power. “Second is probably South Africa,” Sun says. “These are the two quickest growing economies” in Africa.
Ford uses letters of credit to finance its trade flows. Nemeth says the first thing Ford does when it moves into a new market is establish an independent dealer or distributor. When that dealer orders vehicles from Ford’s export office, and it sends a certified letter of credit—the equivalent of cash. When the export office receives the documents, it presents them to the dealer’s bank, which releases the funds.
Nemeth says there are typically few hurdles transferring funds, because South Africa’s four main banks are present across Africa and facilitate those transactions. For that reason, Ford typically steers dealers toward those banks. Ford Credit also offers financing options, including inventory funding and, depending on the creditworthiness of the dealer, funding to buy parts.
As volumes increase and Ford develops a “critical mass,” Nemeth says, the auto company will create a sales company in the new market.
“By the time you have enough sales volume to warrant a sales company, it’s usually a pretty stable market,” Nemeth adds. “So incorporation is easier and regulations are easier to deal with.”
See more stories here about countries where multinationals have spotted opportunities.