German companies in South Africa

They use the Cape as a springboard for business in the rest of the continent

If you’re looking for the roots of black resistance in South Africa, you can’t avoid the Eastern Cape. Between 1778 and 1878, no fewer than nine border wars were fought in this region between white settlers and the indigenous Xhosa tribe. The Eastern Cape was the birthplace of African nationalism and a rallying point for those fighting against apartheid.

It was in this politically unstable region that the center of the South African car industry was established in the 1920s. Investment incentives and the harbors of Port Elizabeth and East London encouraged first Ford (in 1923) and General Motors (in 1924), and shortly after World War II, VW and Daimler (then still Mercedes-Benz) to set up production facilities there. BMW followed a little later with their own factory in the Pretoria/Johannesburg region in the province of Gauteng, where many other German companies have established subsidiaries

The German Chambers of Commerce in South Africa estimates there are about 550 German companies operating in South Africa today, employing about 70,000 people. Each employee has between eight to 10 dependents. Most of the companies use the Cape as a springboard for their activities in the rest of the continent.

One of these is the gas and technology company Linde, which through its takeover of British competitor BOC two years ago, now owns Afrox, the African market leader in industrial gases. Afrox, founded more than 80 years ago, has been listed on the Johannesburg Stock Exchange (JSE) for 45 years. Linde’s business in Africa has now expanded to other subsidiaries in Botswana, Kenya and Namibia.

For Linde, South Africa remains its most important location, despite recent violence there directed at immigrants from elsewhere on the continent. That is because of the country’s  well-developed financial system. And South Africa is no more expensive than other African countries because a logistics infrastructure already exists there.

Despite complaints over a lack of qualified workers and concerns over high crime rates, trade between Germany and South Africa has grown rapidly in the past few years: Germany is by far the biggest supplier of goods to South Africa with annual growth rates that average 10 percent, although that rate may slow a little this year as the world’s economy cools. The South African currency, the rand, has plunged 20 percent against the euro since the beginning of the year, considerably boosting the price of imports for South Africans. That will mainly impact the car sector – it has sold 30 percent fewer cars this year compared to a year ago.

In no other sector is the precarious balance between opportunity and risk as pronounced as it is in the car industry. South Africa’s location, far away from world markets, its small domestic market and relatively high port, labor and transport costs, have made the Cape considerably less attractive internationally. The African National Congress government continues to delay the extension of a special support program for the car industry through 2012. And that is so in a situation where carmakers need to plan long term due to slow sales.

The new program is now due to be unveiled this month. But the long delays have already had an impact. VW is no longer going to build the new right-hand-drive Golf model on the Cape, bringing production back to Wolfsburg instead. At the same time, the only way the large carmakers can react to the cost problems associated with South Africa’s location and its market size is to produce cars there in greater volume.

Until now, the development program for the car industry has been a classic example of what could be possible in South Africa with a little more imagination and planning. The program, under which the South African government grants export credits, has led to a unique export offensive by the car companies based in the country. Daimler, VW and BMW have all retooled their factories there in recent years – and integrated them fully into their global sales strategies.

– Wolfgang Drechsler