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R4.5bn capacity expansion safe as VW cuts costs, says VWSA MD

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Volkswagen’s planned R4.5-billion investment in South Africa is safe and will not be affected by a $1.1-billion cutback in yearly spending by the German automaker, says Volkswagen Group South Africa (VWSA) MD Thomas Schaefer. 

The cost-cutting exercise comes as Volkswagen attempts to deal with the fallout of a diesel emissions scandal, which saw the company rig the test results of a number of its models sold abroad.

Locally sold Volkswagen models adhere to domestic emission standards and are not affected. Volkswagen has set aside $7.3-billion for repairs and compensation to customers, ruining its profit forecast for the year. The company could also face a fine of up to $18-billion in the US alone.

Volkswagen has set aside $7.3-billion for repairs and compensation to customers, ruining its profit forecast for the year. The company could also face a fine of up to $18-billion in the US alone.

VWSA has been asked to “cut all unnecessary spending, such as on travel”, notes Schaefer. However, the R4.5-billion production investment announced earlier this year is “not affected” – in fact, money has already started flowing to upgrade and expand the Uitenhage plant, in the Eastern Cape, set to produce two new models. 

The investment will see the plant increase capacity from the current 120 000 vehicles a year to 150 000 vehicles a year. The plant will move from a two-shift, five-day operation to a three-shift, 24-hour, five-day operation. The current two production lines – that of the Polo Vivo and the Polo – will also be merged into one production line. 

A single production line will allow for flexibility within the workforce, notes Schaefer, with one line’s operators not standing idle should demand for that line’s model dip. A third shift will expand VWSA’s workforce, with parts suppliers also likely to create new jobs. Shaefer cannot, however, yet quantify the increase. Production of the two new models should start in 2017, he says, as the current models reach the end of their life-cycle. 

Both models will be for the local and export markets. Only the Polo is currently exported from South Africa, to 44 markets worldwide. “We have not finished our evaluation on which specific models will be produced in South Africa,” says Schaefer. What is known is that both models will utilise VW’s small car MQB platform, which is used to built anything from a Saveiro half-ton pickup to a small sports-utility vehicle. Whatever VWSA builds locally will have to have significant support in the local market, emphasises Schaefer. 

“We want to have a typical 30 jobs [vehicles] an hour plant. That, by VW standards, is a healthy, effective plant. Smaller than that is never really efficient.” The investment will see the Uitenhage operation move from a predominantly right-hand-drive plant, to one also producing left-hand-drive vehicles in “significant numbers”. Local component content is also set to increase, up from 71% on the Vivo and 72% on the Polo (excluding the engine), to a target of 80% on the new models. 

Another target is to increase the contribution of small and medium-sized black enterprises in the production of the new model, says Schaefer. “We already have an incubator at Uitenhage, and now we need one of those squared.” VWSA is “not worried” about the fact that government’s industry support scheme, the Automotive Production and Development Programme (APDP), has been in review for more than a year, says Schaefer. 

The APDP is scheduled to come to an end in 2020. Production plans such as at VWSA will produce models with a life-cycle well beyond 2020. “We have had some good discussions with the Department of Trade and Industry. We are confident we will have government support beyond 2020,” says Schaefer. 

“Yes, the programme will probably be amended here and there, but we are convinced of government’s commitment to the automotive industry in South Africa.” Schaefer would, however, like to see government clinch an African trade agreement that would assist VWSA in exporting vehicles beyond South Africa’s neighbours. 

A bigger domestic new-car market will also be helpful, as will greater labour stability and lower inflation. 

Engine Production 

VWSA also currently produces the 1.4 l and 1.6 l petrol engine for the Polo Vivo, for the local and export markets. Production will reach an estimated 120 000 units this year. 

The current engine is set to “run out by 2018, 2019”, says Schaefer. “We will continue engine production beyond this period, so we are looking at some new generation engines for possible local production.” VWSA produced 112 000 vehicles at its Uitenhage plant last year, with this set to increase to around 119 000 vehicles in 2015, says Schaefer. Schaefer is a mechanical engineer by training. The German is familiar with the South African automotive market, as he worked in East London from 1998 to 2002, at Mercedes-Benz South Africa. An original stay of six months turned into five years as he met and married a South African woman.

(Source: Engineering News)