South African Automotive Industry – Impact of Globalisation

1. Introduction

This paper discusses the impact of globalisation on the South African automotive industry in the business context. It explains the concept of ‘globalisation’ and the importance of globalisation on the South African automotive industry. We explore the innovation, development and skills required in a globalized industry. This paper summarises of the current research of the business imperatives of globalisation in the South African automotive industry, which must be aligned with foreign investment and ownership, development of local skills, manufacturing and exporting.

2. A Definition of Globalisation

According to Held and McGrew [2003:3], the term ‘globalisation’ denotes the growth of connections between various countries that exists as society and states become increasingly entangled in worldwide systems and an exchange of communication via interaction.

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Kugut (1999:166) defines globalisation as a means of union between nations and companies achieving a common way of doing things. Gill (1999:70) defines globalisation as a method of growing economic integration, and a rising economic interdependence between the different economies of countries. Kiely (1998:3) defines globalisation as a world that has brought closeness of different economies, cultures and societies. Braithwaite and Drahos (2000:8) define globalisation as the growth of social, cultural, economic and political relations worldwide.

These definitions highlight the magnitude of globalisation. A number of theorists present various meanings for globalisation. Essentially, all of these definitions describe economic, political and social integration on a worldwide scale. The globalisation method occurring in one part of the world influences what is taking place in other parts.

3. Globalisation as an Investment Driver of Growth in the Automobile Industry

According to Flatters [2005], Foreign Direct Investment (FDI) has increased substantially in the South African automobile industry since 1995. It is difficult for South Africa to compete against other automotive supply chains around the world. This requires large amounts of capital, experience, skilled workers, and the latest technology systems. According to Zhu, Xu and Lundin [2006], high-end technology is required for any industry to compete in a sustainable manner, and this is very costly in terms of finance and time. According to Flatters [2005], in 1995 the initialization of the Motor Industry Development Plan (MIDP) and the Productive Asset Allowance (PAA) incentive scheme set a high standard of Foreign Direct Investment in the South African automotive industry. As a result, investment in this sector is high and vehicle exports have grown.

4. Positive effects of globalisation in South Africa – Innovation in the South African Automotive Industry

According to De Klerk [2006], ever since the Motor Industry Development Plan (MIDP) was brought in by the government in 1995, the South African automotive industry has integrated into the global automotive supply chain. The MIDP have removed all the competition from the automotive industry. Initially, when foreign ownership had a part in the South African automotive industry, it seemed as if it would have a negative impact on the South African automotive industry. According to De Klerk, JJ [2006], foreign ownership is exactly what the South African automotive industry needed. According to Lourens & Barnes [2004], in order to improve in the industry, South African automotive industry technology needs to be improved. This requires foreign capital investment, and the opportunity for the domestic market to take advantage of it. When foreign and domestic markets work together, the technical knowledge is transferred to the developed country, which is then able to progress forward. Many authors have confirmed that when a country inherits the technology that comes with Foreign Direct Investment, the host country will have a very good base to develop its industry further. [Sadoi, [2008]; Doctor, [2007]; Basser, [2008], Lorentzen and Barnes, [2004]]

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According to Flatters [2005], South Africa has attracted substantial foreign investment over the past few years – for example, Daimler Chrysler, and Alfa Romeo have invested here. However, this is very little compared to other developing countries. Multinational enterprises (MNE) view South Africa according to its size and for the potential for future growth in its domestic market. MNE look at the advantages that can taken from unsettled exchange rates in developed countries, the experience and quality of the workforce, and whether it is a low cost centre compared to other nations.

According to De Klerk [2009], South Africa presents a beneficial emerging market for the multinational enterprises. South Africa’s population growth has increased by 8 percent (around 3571 350) in 1994 and by 11.9 percent (around 5333 550) in 2000, and is still growing. There are advantages that can be taken from the defect of the exchange rate.Wessells (2004) says that since the death of the Bretton Woods system, countries worldwide may choose an exchange rate ruling. According to De Klerk [2009], South Africa has a promising economy with an unpredictable currency, which is seen as a great benefit to the multinational enterprises. The quality and competence of the South African automotive workers are not of high standard. According to De Klerk [2009], the industry has a lack of skills and a surplus of untrained laborers.

5. Foreign Ownership, Education and Skills Development

According to De Klerk [2009], it is expected that the same level of skills in a developing country be matched to that of the foreign investor. However, in developing nations the level of education is not that high. According to a literature review by Chatterji & Montagma [2008] on foreign ownership, the multinational enterprise expects developed countries to have a high level of education before investing. Nevertheless, foreign direct investment continues although the standard of education is not high. The research done by authors Chatterji & Montagma [2008] around training and processes and routines found that:

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