Donald Trump’s tariffs pummel South African carmakers

For almost seven decades, Mercedes-Benz has run a sprawling plant in South Africa’s impoverished Eastern Cape, exporting C-class sedans to dozens of countries.

The company’s only factory in Africa, it is a linchpin of an automotive sector that directly employs about 115,000 people in South Africa and has become the centrepiece of the country’s post-apartheid industrial revival.

But that success story is starting to fray as the factory reels from a 25 per cent levy imposed by the US, its largest single export destination.

Workers and local politicians worry the Mercedes-Benz plant could drastically cut production, after South African car exports to the US fell 90 per cent in the second quarter compared with a year earlier, according to its manufacturers’ association.

Major lay-offs would be a heavy blow to an industry already in trouble. The automotive sector, which produces two-thirds of South Africa’s manufacturing exports, has shed some 4,000 jobs and closed a dozen factories in the past two years.

Mercedes-Benz said “no decision has been made on the future of the East London manufacturing plant” and that it regularly assesses its global operations “to ensure long-term sustainability and competitiveness”. The company said Europe as a whole buys more cars from the plant than the US.

The sector’s decline has heaped pressure on President Cyril Ramaphosa’s coalition government, which is struggling to end more than a decade of economic woe that has left a third of citizens unemployed. Last year, GDP per capita was still 28 per cent below 2011 levels.

The South African Federation of Trade Unions has decried an “escalating jobs bloodbath devastating every sector of our economy”, with threatened losses hitting industries from agriculture to transport.

“I cannot see an easy way out, especially if the tariffs stick,” said Zwelakhe Mnguni, of Johannesburg-based Benguela Global Fund Managers, who bemoaned the lack of internal investment over the past decade.

Manufacturing, which represents 13 per cent of GDP, has been throttled by corruption, confused government policy, soaring crime rates that deter investment and a long-standing crisis with the state electricity provider, analysts say.

Ramaphosa has proposed a R940bn ($54bn) investment plan, promising to revive manufacturing and create jobs, but President Donald Trump’s tariffs are a major obstacle to growth. Central bank governor Lesetja Kganyago has said US duties could cause about 100,000 job losses in South Africa, with farmers and carmakers hit hardest.

“Economic growth today happens in the advanced part of the economy, but the middle part of the economy is gradually disappearing,” said Dawie Roodt, founder and chief economist of the investment manager Efficient Group.

In a further blow, manufacturers in 32 African countries were braced to lose zero-tariff access to US markets, when the African Growth and Opportunity Act (Agoa) expired on Tuesday.

Losing access to Agoa could cause a 17 per cent fall in South Africa’s manufacturing exports to the US, with losses concentrated in metals, vehicles and chemicals, according to data from the International Trade Centre, a UN agency.

“The implications for a few countries will be debilitating,” ITC executive director Pamela Coke-Hamilton told the Financial Times.

To tackle the crisis and absorb costs, Mercedes-Benz is considering sharing the factory, which employs 2,400 people, with another carmaker, two people familiar with discussions told the FT.

Boarded up shops in East London’s rundown town centre hint at unemployment rates that hover about 40 per cent in the province.

It could potentially become “a ghost town if the Mercedes-Benz plant, an anchor of that local economy, comes to a grinding halt”, Mikel Mabasa, chief executive of South Africa’s Automotive Business Council (Naamsa) said at a conference this month.

The country’s struggles have been fuelled by a wave of deindustrialisation that has plagued South African manufacturers over the past decade.

Recent cuts at ArcelorMittal South Africa could lead to thousands of job losses in the vehicle components industry, trade unionists say. Last month, Ford laid off 470 employees at its assembly plant in Pretoria — despite announcing more than R16bn of investment there in 2022.

“When an automotive giant like Ford takes such drastic steps, it is a warning to the entire industry,” said Willie Venter, secretary-general of trade union Solidarity.

The Eastern Cape, the country’s poorest province, has been among the hardest hit. Goodyear tyres closed its manufacturing plant in June, leaving 900 employees out of a job. ContiTech, a subsidiary of tyremaker Continental, also announced plans to scale down its operations on the cape.

As various western companies retrench, South Africa may have some consolation through investment from China and India.

Sixteen Chinese car brands — up from two — have set up shop in South Africa in the past decade, said Mabasa, the Naamsa leader. “They want to invest in the country, they want to reindustrialise, use South Africa as a gateway to the rest of the continent,” he said.

India-based Mahindra & Mahindra has said it will boost its South African plant’s capacity by two-thirds, with plans eventually to manufacture vehicles using South African components and employ thousands of people.

But, hit hard by US tariffs, those countries’ carmakers are also expected to pivot towards South Africa as an export market, undercutting domestic producers. It will probably “see a flood of imports . . . as China redirects exports away from the US”, RMB chief economist Isaah Mhlanga said at a seminar in Johannesburg this month.

The government has announced incentives to support exporters switching to electric vehicles, which are in heavy demand in Europe, their main export destination. But overall output is far off target — at just over half a million, production figures last year missed the government’s goal by more than a third.

Some industry leaders are pushing for a more radical idea that would cut the country’s reliance on trading partners on faraway continents: a pan-African motor industry.

“The continent buys 1.3mn new vehicles per year, a figure which will grow significantly,” Busisiwe Mavuso, chief executive of Business Leadership South Africa, wrote in a note. “It is now more important than ever . . . to focus on the rest of Africa.”

Additional reporting by Sebastien Ash in Frankfurt