South Africa is the second largest economy in Africa. Its people have a higher living standard and its economy is relatively stable compared with other African countries. South Africa has a vast territory and a developed transportation industry, which means that the demand for vehicles is large. However, South Africa has almost no auto brand of its own, which gives some Chinese auto companies a chance to see.
BAIC, a Chinese automobile manufacturer, after being put into operation in 2018, has become the largest one-time investment automobile factory in South Africa. BAIC's chairman said the plant has created 1500 jobs for South Africa in the first phase and expects to create another 2500 after the project is finally completed. Seems like BAIC developed so well at the beginning.
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However, in Australia, which is also a commonwealth country on the other side of the ocean, something remarkable has happened. Toyota stopped manufacturing cars and engines in Australia at the end of 2017, which is not the first car company to stop production in Australia. Many additional car companies have successively terminated their local automobile manufacturing businesses. Toyota's output in Australia has been declining for nearly a decade, with 200000 in 2012 and 400000 in 2004. Toyota is such a big company that its cars are so popular all over the world, so it is hard to believe that even Toyota will be forced to stop production. We can't help but wonder whether foreign auto companies in South Africa, such as BAIC, will encounter the same dilemma.
Economies of Scale refer to the cost advantage experienced by a firm when it increases its level of output. The advantage arises due to the inverse relationship between per-unit fixed cost and the quantity produced. The greater the quantity of output produced, the lower the per-unit fixed cost. Many factors can make enterprises achieve economies of scale, such as better use of fixed capacity, technical development, financial advantages, and specialization. But in my opinion, to achieve economies of scale, two things are crucial: low enough costs and large enough production scale. Australia's economic environment and market demand have not allowed Toyota to achieve economies of scale. Will BAIC do better in South Africa?
It is reported that the main reasons for Toyota's suspension in Australia are as follows: Firstly, the Aussie dollar is too strong. In 2017, the yen was 82 to 1 against the Australian dollar, which is not a good thing for Japanese enterprises like Toyota. In Australia, all initial investments, including plant construction, staff wages, raw material purchases, and other expenses, are settled in Australian dollars. Such a high exchange rate of the Australian dollar will undoubtedly increase the production cost. Secondly, labor costs in Australia are too high.
As we all know, Australia is a developed country with good social welfare, which means a high salary level. In 2017, Australia's average salary was $80000, far higher than that of other big automakers such as China. As a result, because of the high cost, Toyota has no way to achieve the objective production scale and finally has to stop production. However, the South African market is so different from Australia that I don't think the above two reasons will hinder BAIC's development. First of all, the South African Rand's exchange rate against RMB is very low, only 1 to 0.4. In recent years, the exchange rate has continued to decline, which is undoubtedly good news for Chinese auto companies like BAIC. Secondly, the labor cost in South Africa is also very low. The average monthly salary of South African workers is only 6400 Rand (about 400 dollars), while the salary of Chinese workers in the same period has more than doubled, which means that the firms can employ the same number of workers only by paying less than half of China's wages. In short, the economic environment of South Africa can provide a very significant advantage, which helps BAIC to achieve economies of scale: much lower input price. On the other hand, in terms of market demand, South Africa can also make it easier for car companies to achieve economies of scale. The survey shows that the consumption of new cars in the Australian domestic market is declining. With the increase in population density in Australia's big cities, more and more people choose public transportation or bicycle travel. In addition, the cars produced in Australia can only be sold in Australia. Because of Australia's unique geographical location, it is very expensive to transport cars to countries other than New Zealand. These factors led to Australia's automobile market demand not meeting the conditions for Toyota to reach scale economy. However, the car market in South Africa is considerable. And in recent years, there has been quite good growth. South Africa's total auto revenue reached $38.1 billion in 2018, compared with $37.57 billion in 2017. Not only that, South Africa also has significant advantages in geographical location. South Africa borders many countries, which provides great convenience for automobile export. Cars produced in South Africa can be easily exported to other countries in Africa. In 2018, the export volume of automobile products was US $13.52 billion, equivalent to 14.3% of South Africa's total exports. As the largest manufacturing sector in the country's economy, South Africa's manufacturing sector accounted for 29.9% of its manufacturing output in 2018.
The huge market demand and the convenience of export have brought great dividends to the automobile industry in South Africa, which undoubtedly provides excellent conditions for the formation of a scale economy.
Finally, if you want to know more about the production efficiency of South Africa's automobile industry, I would like to introduce a measurement method called two-stage DEA.
As we mentioned earlier, the cost of car production in South Africa is already very low. If car companies want to maximize profits, they should increase profits rather than reduce costs, so we are supposed to use the approach of output maximization. In the first phase, we are measuring the productivity of wages and investment, which is the effectiveness of transforming wages and investment to yield. In the second stage, we want to measure the transformation of products to revenue, which is the speed of cost recovery and the profit created by the cars that have been produced. By using this method, we can have a more intuitive understanding of the production efficiency of the automobile industry in South Africa.
That’s everything, thanks for your reading!
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