Unemployed at 25% in South Africa as BMWs Drive Too Few Jobs

At a Daimler AG (DAI) plant that overlooks the East London harbor in South Africa, robots help produce one of the world’s best-selling luxury cars. A line of one-armed, orange, computerized machines works under minimal human supervision, attaching panels to chassis for Mercedes-Benz C- Class sedans.

Stuttgart, Germany-based Daimler is one of a bevy of global auto giants, including Bayerische Motoren Werke AG (BMW), Ford Motor Co. (F) and Toyota Motor Corp. (7203), who have pumped about 32 billion rand ($4.65 billion) into South Africa during the past decade to create the nation’s biggest manufacturing industry, Bloomberg Markets magazine reports in its June issue.

“This is a growing market for us,” says Bernd Schwendtke, 42, a German national and chief financial officer at Mercedes- Benz’s South African unit. “The government offers a range of support. We have a flexible and committed labor force.”

The auto industry is one of several bright spots in Africa’s largest economy. Car companies produced 472,049 vehicles last year in South Africa, 26 percent more than in 2009, on their way to a government goal of 1 million by 2020. The stock market and the rand in South Africa, the world’s largest producer of platinum, have also rallied during the global commodities boom.

Yet the nation’s rise as a world-class automaker, with automated assembly lines, has barely made a dent in reducing the joblessness that still plagues the economy almost two decades after the end of apartheid. An already high unemployment rate of 21.9 percent in the final quarter of 2008 spiked to 25.3 percent in the third period of last year as the global credit crackup and a surging rand threw about 1 million more South Africans out of work.

Protests

The rate dipped to 25 percent in the first quarter of this year -- still the highest of 61 developed and emerging countries monitored by Bloomberg.

Protesters have been pouring into the streets throughout the country, venting rage over their economic plight and lack of basic services such as running water and sanitation. South Africans organized a record 111 demonstrations last year -- drawing as many as several thousand people, according to Municipal IQ, a Johannesburg-based independent local government research group. The street actions threaten to erode the political dominance of the African National Congress, which rode to power with the end of state-sanctioned segregation in 1994.

Apartheid Legacy

Amid the fury, the government of President Jacob Zuma, 69, announced in November a massive program to create 5 million jobs and slash unemployment to 15 percent by 2020. Just as the government used subsidies to fuel the auto revolution, it now plans to lift the domestic agriculture and mineral-processing industries, which are more labor intensive than car production.

“Apartheid left us with a legacy of disempowerment, landlessness, inequality of opportunity and millions of unemployed young people,” Finance Minister Pravin Gordhan said in a speech to Parliament in February. “We cannot view the fact that 42 percent of young people between the ages of 18 and 29 are unemployed as merely a statistic. We have got to do things differently.”

In a shantytown on the northwestern outskirts of Pretoria, Andries Makwela picks through a heap of rubbish beside a railroad line. He bends pieces of metal in half and stuffs them into a torn dog food bag to carry them to a scrap dealer, which pays him 2 rand for each kilogram of material. With few job skills, Makwela, 28, stands little chance of getting hired at a BMW plant about 5 kilometers (2.7 miles) away. There, 1,600 full-time workers, assisted by 99 robots, produce 250 3-Series sedans a day.

Soaring Rand

“I don’t think it’s possible to find a job in this country,” says Makwela, who lives in a shack with his single mother.

President Zuma’s biggest challenge to creating jobs in manufacturing, which makes up 15 percent of the economy, has been the soaring rand, says Stewart Jennings, president of the National Association of Automotive Component and Allied Manufacturers. The rand rose 39 percent against the dollar from the start of 2009, hammering exports of manufactured goods and causing hundreds of factories to close.

The currency has appreciated as near-zero interest rates in developed countries encourage investors to place money in South Africa, where the central bank’s benchmark lending rate is 5.5 percent. Net purchases of bonds and equities by nonresidents amounted to 89.5 billion rand last year and 102 billion rand in 2009 -- the most since at least 1994.

Inflows

In South Africa, the stock market rose as shares of mining companies such as Anglo American Plc (AGL) surged along with metals prices. The FTSE/JSE Africa All Share Index gained 16 percent from the beginning of 2010 through May 10, compared with a 21 percent jump for the Standard & Poor’s 500 Index.

“South Africa has attracted substantial portfolio inflows over the last two years,” says Roderick Ngotho, an emerging- markets strategist at Royal Bank of Scotland Group Plc in London. “Continued global demand for commodities and South Africa’s relatively high interest rates were supportive for the rand.”

Gill Marcus, the governor of the South African Reserve Bank, said in October that while the rand’s strength is harming the economy, there’s little the authorities can do about it. The central bank and the National Treasury spent $7.4 billion accumulating foreign reserves last year in a bid to moderate the rand’s gains, to little avail.

“If we don’t create an economic climate which is going to stimulate growth, then I’m afraid it doesn’t matter what incentives are there; the private sector is not going to make use of them,” Jennings says.

Incentives

At first glance, the success of South Africa’s auto industry, which exported 239,465 vehicles last year, defies logic. The nation is half a world away from major markets in the U.S., Europe and Asia, boosting the cost of transporting imported parts and cars for sale overseas. The government has lured companies with rebates on duties they pay on imported parts worth 56.9 billion rand in the four years through March 2009.

When the rebates end next year, the government, which maintains a manageable and declining budget deficit, will throw more sweeteners, worth from 14 billion to 15 billion rand a year, at the motor industry. The government expects the incentives will create about 60,000 jobs, mainly in automotive component companies, and help meet a goal of doubling annual vehicle production in eight years.

“Without the support from the government, we certainly wouldn’t be here,” Mercedes-Benz’s Schwendtke says. “The major markets are all far, far away. This logistical disadvantage somehow has to be balanced by the government.”

High Tech

Automakers also get a sales lift from gainfully employed South Africans who favor lower-priced models from Volkswagen AG (VOW) and Toyota. South Africans bought 492,956 new cars, trucks and buses last year, a 25 percent increase from 2009, according to the National Association of Automobile Manufacturers of South Africa. About 57 brands and 1,800 models compete for local consumers.

While car production has soared, the number of auto assembly jobs hasn’t kept pace due to the advance of manufacturing technology. Of the 13.1 million workers employed in all of South Africa, only 28,128 were directly employed in auto factories as of the end of last year, a 4.5 percent increase from the year before, according to the national association.

Wage Subsidies

Mike Schussler, chief economist at Johannesburg-based advisory service Economists.co.za, says the government isn’t deriving adequate returns on its incentives. He estimates each job created in the capital-intensive auto industry has cost taxpayers about 160,000 rand, or about 10 times the minimum annual wage of farmworkers.

“There are much easier and cheaper ways to create jobs than in the motor industry,” Schussler says. “It makes sense that we now diversify.”

Zuma’s new jobs program targets local companies in the agricultural, mineral, tourism and energy industries. It’s offering companies as much as 900 million rand in tax deductions to establish a new plant and subsidizing wages for youth with a 5 billion rand fund.

“We are emerging from the worst economic recession in a century,” Zuma said in the eastern town of Ermelo in February. “We have to do everything possible to create jobs.”

Procter & Gamble

Global giants such as Nestle SA, the world’s biggest food company, are expanding into South Africa without the benefit of a subsidy to sell goods in the local market. On Feb. 3, Vevey, Switzerland-based Nestle said it will invest about 67 million Swiss francs ($74.9 million) in the country, including building two new factories that will create 230 permanent jobs. And late last year, Cincinnati-based Procter & Gamble Co., the world’s largest consumer-products company, completed a 350 million rand plant near Johannesburg that produces baby-care products.

“We’re seeing more and more companies coming to South Africa with the idea of expanding northward into the rest of sub-Saharan Africa,” says Mark Mobius, who oversees about $34 billion as executive chairman of Singapore-based Templeton Asset Management Ltd.’s Emerging Markets Group. “It’s becoming more and more important. We’re very, very bullish.”

Government subsidies alone won’t generate 5 million jobs. The economy must pick up steam if President Zuma is to reach his target. The National Treasury, which says 7 percent annual expansion is required to produce that many jobs by 2020, forecast in February growth of 4 percent on average over the next three years.

Approval Rating

If Zuma’s plan falls short, the ANC risks alienating voters. The party holds 66 percent of seats in Parliament and controls eight of the nine provinces and five of the six largest towns. The government’s approval rating slumped to 59 percent in November from 70 percent the year before, a February survey shows. Local elections will be held on May 18.

In Pretoria’s Gezina district, three dozen artisans, some holding up paint rollers and trowels, wait for job offers outside of Builders Warehouse, a hardware superstore. The men flock around cars that stop in front of them, in the hope they’ll be given a day’s work. Bricklayer Mike Senwamadi, who has been coming to this street corner for 20 years, says he’s been having a harder time landing a permanent job. He gets hired a few days a week.

“The jobs are just for those in power,” says Senwamadi, a father of seven. “I come here without hope.”

While post-apartheid South Africa has proven itself as a high-tech carmaker, the government still has to show workers such as Senwamadi that they have a stake in the country’s future.

To contact the reporters on this story: Mike Cohen in Cape Town at Or mcohen21@bloomberg.net; Franz Wild in Johannesburg at fwild@bloomberg.net

To contact the editor responsible for this story: Andrew Barden at barden@bloomberg.net

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