South Africa's stable financial system, export-friendlyregulations and the likelihood of its participation in acontinent-wide free trade agreement are driving Ford Motor to rampup production there with an eye toward expanding growth in the restof Africa.

Jeffery Nemeth, president and CEO of Ford Motor Co. of SouthAfrica since the start of 2010, says China is the world's economicpowerhouse today and India is probably next in line. But Africa isrich in commodities, including oil, and holds 60% of the world'suncultivated arable land, Nemeth says. “In the future, Africa isthe next logical global growth engine.”

With that in mind, Ford has invested $500 million to upgrade itsproduction facility in Pretoria. Starting in September, it plans toproduce 100,000 Ranger pickup trucks annually, replacing the 25,000Focus compact cars and Bantam pickup trucks it manufactures theretoday.

A quarter of those units are slated for sale in South Africa andthe remaining 75,000 for export to 148 countries. A bit more thanhalf of the exports will go to mature markets and the rest toemerging markets, including African countries, says Nemeth, who'spictured below.

In fact, a pending trading agreement bodes well for future salesacross Africa. The pact will reduce trade barriers between morethan 25 countries that participate in three existing trade blockscomprising 526 million inhabitants and $264 billion in GDP, Nemethsays. The biggest countries include South Africa, Kenya, Egypt andEthiopia.

Ford has production facilities around the world. An importantreason for choosing to expand in South Africa is the free flow ofcapital in and out of the country, says Nemeth. “Other countriescan be very constrained.”

The country's four established banks, including Standard Bankand First National Bank, greatly facilitate those capital flows. Inaddition, South Africa's capital markets function smoothly and itscurrency, the rand, is used as a standard trade currency throughoutAfrica, as is the U.S. dollar. “That makes our location in SouthAfrica very attractive from a trade standpoint,” Nemeth says.

In another plus, South Africa doesn't impose high tariffs orrequire a significant percentage of parts, often as high as 50% to60%, to be made in-country. Both requirements are common inemerging-market countries to protect local plants from competitionfrom imports. Because local suppliers often do not have the samequality of production as global suppliers, cars and other goodsproduced in such countries tend to have limited features. SouthAfrica previously had a 55% requirement, but now offers a dutycredit based on local value added. Ford uses the credit to offsetthe incoming duty on imported components.

Ford implemented in South Africa the Ranger manufacturingplatform it plans to use globally, which drives efficiencies, saysNemeth. The platform is already operating in Thailand and a thirdplant of that design will open in Argentina by year-end.

The Toyota Hilux is the top pickup truck in terms of sales inSouth Africa, Nemeth says, and Ford expects to price Rangers competitively. The company sees South Africa as amature market and forecasts 3% to 5% growth a year in auto sales.Nemeth notes that only 7 million people out of a population of 48million have officially reported jobs. “The number of people thatcan afford cars is smaller than the population would suggest,” hesays, but adds that the rapidly expanding lower middle class couldbe bolstered by a recently announced government program to add fivemillion jobs in five years.

Peter Sun, regional head of transaction banking for Africa atStandard Chartered Bank, which has a significant presence on thecontinent, notes Nigeria's attractiveness as an emerging marketwith a booming economy, driven partly by oil production, andincreasing consumer spending power. “Second is probably SouthAfrica,” Sun says. “These are the two quickest growing economies”in Africa.

Ford uses letters of credit to finance its trade flows. Nemethsays the first thing Ford does when it moves into a new market isestablish an independent dealer or distributor. When that dealerorders vehicles from Ford's export office, and it sends a certifiedletter of credit—the equivalent of cash. When the export officereceives 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 Africaand facilitate those transactions. For that reason, Ford typicallysteers dealers toward those banks. Ford Credit also offersfinancing options, including inventory funding and, depending onthe creditworthiness of the dealer, funding to buy parts.

As volumes increase and Ford develops a “critical mass,” Nemethsays, the auto company will create a sales company in the newmarket.

“By the time you have enough sales volume to warrant a salescompany, it's usually a pretty stable market,” Nemeth adds. “Soincorporation is easier and regulations are easier to dealwith.”

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