Trump’s tariffs an unmanageable risk for SA carmakers

From the early 2000s, an American preference for BMW 3 Series and Mercedes-Benz C-Class sedans drove enormous profits for BMW and Mercedes-Benz’s South African operations. It was an excellent example of the benefits of globalisation: South African build costs and American retail price profits.

BMW and Mercedes-Benz also applied German labour environment standards, which meant working in the Rosslyn and East London facilities provided access to notable benefits and upskilling opportunities.

Americans don’t buy hatchbacks but retain a liking for luxury sedans. That’s crucial for the SA-built W206-series C-Class.

America is a high-value market

There’s a lot of noise and panic in Naamsa | The Automotive Business Council and Government circles about what American tariffs could do to the South African car industry. Tariff math is simple, but its meaning is a bit more complicated…

America accounts for a very small percentage of South African-built vehicle exports. Last year, it was only 6.5%. But it’s value that matters, not volume. South Africa exports expensive luxury cars to North America – as opposed to, say, budget hatchbacks – which means the per-unit effect is huge. Last year, the total value of South African-built BMW and Mercedes-Benz products for American customers, plus South African automotive components, totalled R35bn. Vehicles alone were 25, 553 units.

South African BMW X3 and Mercedes-Benz C-Class builds will trigger the new 25% tariff on all imported vehicles, eroding their price-competitive sourcing. It’s a minor trade and industrial policy tragedy, as South African-made German luxury cars have developed to an excellent assembly standard, pleasing even the most demanding of American customers.

The Port of East London’s West Quay upgrade began in November 2023 and was completed this April, allowing 2 two new-gen automotive vessels to berth simultaneously.

Africa’s luxury automotive leader

For BMW and Mercedes-Benz, it’s an abundantly complex scenario. Rosslyn and East London are some of the oldest German luxury car assembly facilities outside of Europe, and have no rivals in Africa.

Other African automotive zones, such as Morocco and Egypt, don’t have the supply chain to support ultra-luxury builds like X3 or C-Class. Morocco makes more vehicles, but mostly budget Renault and Dacia hatches. In X3 and C-Class, Mzansi builds much higher sophistication and -spec cars for export.

Automotive jobs are among the best manufacturing employment opportunities in South Africa. In the Eastern Cape, especially East London, the economy is hugely dependent on Mercedes-Benz. And, not just for primary manufacturing wage employment and skills development, but also the localised supply chain that Government regulations have developed.

Tough time for suppliers

Also, more than a third of the value of automotive exports to America isn’t cars – it’s components.

The influence of tariffs and reduced US market demand for X3 and C-Class risks not only BMW and Mercedes-Benz line workers, but also local suppliers. Many of these suppliers are family businesses that have heavily invested in processes to attain global standards expected from BMW and Mercedes-Benz.

Car companies work on the expectation of consistent demand. So do their suppliers, who tool and invest to produce enough parts, just in time, for a factory running beyond 85% of its production utilisation.

Building fewer cars is not only unprofitable, it hurts all those specialist suppliers, who have ramped up production to supply parts and now have nowhere to send them. Dead capital and storage costs erode cash flow. These are all nightmare issues that the local motor industry could need to deal with if tariffs attain permanence for the next few months, or surge again, after the 90-day implementation window.

There’s a saying in aviation: to build the aircraft, you need all the parts. It’s the same with vehicles – everything matters. From tonnes of steel to tiny bits of switchgear.

Automotive supports technical training and career development for workers in zones beyond the traditional mining areas.

No winners with these tariffs

For Government, the Department of Trade and Industry and local municipalities with automotive zones, rates and tax revenue compression (because of collapsed production and exports) are a significant risk.

There’s talk of finding “new” or “alternative” markets for South African automotive exports. But The Automotive Business Council, Government and car companies will struggle to deliver that. Sourcing is global, but destination markets have established relationships with the regions they buy from.

The success of South African luxury car exports from the early 2000s to mid-2010s was built on 2 very established model lines: BMW 3 Series and Mercedes-Benz C-Class. It created an expectation that nothing could go wrong with South Africa’s high-margin luxury car export business… and now it has.

Finding more markets for Mercedes-Benz’s East London production is wildly complicated because the C-Class is a waning body style as a sedan, unlike BMW’s Rosslyn-built X3, which has stronger cross-market appeal as an executive SUV and one of the Bavarian brand’s top-selling models globally.

America and China are the only real demand markets for compact rear-wheel drive luxury sedans and 25% tariffs on East London-built C-Class variants do nothing to make them competitive. Methodologists and strategists have wildly misunderstood how product evolution influences consumer demand. “Discovering” a new offtake market for vehicle production isn’t the work of a moment…

The Mercedes-Benz plant in East London is one of the precious few technical employers in the Eastern Cape’s Border region.

Are the winners going to be Chinese?

The irony in all of this is that the South African automotive industry, like many others, has been built on tariffs. Government and Naamsa | The Automotive Business Council’s current protection for the local industry is a 25% import tariff on all vehicles sourced from outside the EU.

But could that 25% import tariff change soon, as an exchange for lower tariff access to the US market? The question that matters is if other local manufacturers, who aren’t much impacted by the US tariffs because they don’t export there, will support any reciprocal change in US/SA tariffs. Why? For the broader interest of protecting the local automotive industry supply base for all naamsa members.

Lowering import tariffs to regain US market access for German luxury car brands, might risk even lower prices on already threateningly affordable Chinese imports into the South African market. How? If our Government is forced to renegotiate with the US, the Chinese might ask for their South African market import tariff structure to be reset too. So, yeah, it’s a complicated situation. Very, very complicated.

This article was originally published on Cars.co.za.