BMW labour woes hit hard

BMW South Africa hit production targets due to a month-long work stoppage. (Reuters)

BMW South Africa hit production targets due to a month-long work stoppage. (Reuters)

For four weeks BMW – the world's largest maker of luxury vehicles – halted output at its only plant in South Africa as thousands of workers went on strike to demand higher pay.

By the time car assembly and auto-component employees agreed on October 6 to accept a 10% wage increase for next year, BMW had lost 13 000 cars in production, missed supply targets on several export contracts and took a decision to stop expansion in South Africa.

The strike at factories owned by seven carmakers, including Toyota and Volkswagen, cost the industry at least R20-billion in revenue, according to the National Association of Automobile Manufacturers of South Africa (Naamsa). The damage to the economy may be even more severe as foreign investors threaten to scale back expansion plans as labour instability worsens.

"One of the main risks is that a prolonged strike will damage South Africa's reputation and track record as a reliable supplier to international markets," Nico Vermeulen, director of Naamsa, said on October 7 from the capital, Pretoria. "To be a reliable supplier, you need labour stability."

Output crippled
Strikes this year have crippled output in industries from mining to construction to aviation, undermining economic expansion and job creation in a nation where one in four people are unemployed.
The disruptions may cut this year's growth rate by 0.5 percentage points, according to Peter Worthington, an economist at Johannesburg-based Absa Bank's corporate and investment banking unit. The central bank has already downgraded its forecast for gross domestic product growth to 2%, which would be the slowest pace since a 2009 recession.

"BMW has clearly had enough of the labour situation and the risk/reward of further investment simply doesn’t make sense for them," Peter Attard Montalto, an economist at Nomura International in London, said in a emailed note to clients on October 4. "There are many other companies thinking the same thing because of labour issues."

South Africa relies on inflows from abroad to help finance its current-account deficit, which reached 6.5% of gross domestic product (GDP) in the second quarter. Most of that foreign capital has come from investment in stocks and bonds, inflows that can be volatile as global sentiment fluctuates.

Risk perception
In 2012, Africa's largest economy attracted $4.6-billion in foreign direct investment, or 1.2% of GDP, according to data from the Organisation for Economic Co-operation and Development. That compares with $10.8-billion, or 2.3%, in Argentina, which has a similar-sized economy to South Africa. Portfolio inflows from abroad into South Africa amounted to about $5.5-billion last year, according to South Africa's central bank.

"Difficulties in industrial relations are likely to impact FDI [foreign direct investment] coming into the country," Punam Chuhan-Pole, lead economist for Africa at the World Bank, said in a conference call from Washington on October 7. "There are a whole host of issues – labour issues and social issues – that are making investors more cautious."

Investors' perception of risk in South Africa have increased since August 2012, when violent strikes shut operations owned by Lonmin, Anglo American Platinum and other mining companies. Moody's Investors Service, Standard & Poor's and Fitch Ratings downgraded South Africa's debt for the first time since the end of apartheid in 1994. The rand has plunged 15% against the dollar this year, the worst performer of 16 major currencies tracked by Bloomberg. It was trading at 9.9055 per dollar as of 8.01 am in Johannesburg.

Platinum Strike
Anglo American Platinum said at the beginning of the year it will cut as many as 14 000 jobs as part of a restructuring plan. It scaled back those plans following pressure from labour unions and the government. A two-week strike by the biggest union at its South African operations, which ended on October 10, cost the company at least R1-billion rand in lost revenue, chief executive Chris Griffith said a day later in an interview on Johannesburg-based SAfm radio.

Rising wage costs are adding to pressure on inflation and threatening to curb investment plans. Construction workers won pay increases of as much as 12% following a three-week strike in August and September that cost employers an estimated R2.7-billion in lost revenue, according to the South African Federation of Civil Engineering Contractors.

"The reality is that the agreed wage increases will have to be passed on to our employers in any new work we may tender, which may well impact on their investment or expansion plans," said Norman Milne, president of the federation and commercial director at Johannesburg-based builder, Basil Read Holdings. "Labour is becoming more and more expensive with no commensurate improvement in productivity."

Inflation accelerated to 6.4% in August, exceeding the central bank's 3% to 6% target for the second consecutive month. Rising wages and a weaker rand have prevented policy makers from lowering its benchmark interest rate from 5%.

BMW's plan to halt expansion in South African "amounts to political and economic blackmail", Karl Cloete, deputy general secretary of the National Union of Metalworkers of South Africa, said on October 10.

For foreign investors, managing risks is a bigger concern than making a political statement, said Neren Rau, chief executive officer of the South African Chamber of Commerce and Industry.

"It's not about being against South Africa and the government, it's a clinical business decision," he said on October 8. – Bloomberg

Client Media Releases

Call for papers opens for ITWeb Cloud, Data Summit & DevOps Summit 2020
The world awaits Thandi Hlotshana