IDC Corporate Profile
Day Month Year
Does the South African Automotive Industry deserve a bailout? Presentation to Automotive Industry Conference
Shakeel Meer Divisional Executive: Industrial Sectors
Port Elizabeth 7 October 2009
Contents • IDC Corporate Profile • Economic Context • Implications • IDC Role
IDC Corporate Profile
The IDC: Corporate profile • Established in 1940, the IDC is a self -financing, State-owned development finance institution • The vision of the IDC is to be the primary source of commercially sustainable industrial development and innovation to the benefit of South Africa and the rest of the African continent • Provides financing to entrepreneurs engaged in competitive industries and enterprises based on sound business principles • Pays income tax at corporate rates and dividends to the shareholder • Aims to maximise developmental and financial returns within an acceptable risk profile
The IDC’s Head Office in Sandton (Johannesburg)
Vision
The IDC is a self-financing national development finance institution whose primary objectives are to contribute to the generation of balanced, sustainable economic growth in Africa and to the economic empowerment of the South African population, thereby promoting the economic prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the building of competitive industries and enterprises based on sound business principles.
Outcomes
Objectives
To be “the primary driving force of commercially sustainable industrial development and innovation to the benefit of South Africa and the rest of the African continent”
Mission
The IDC’s vision, mission, objectives & outcomes
Supporting industrial development capacity Promoting entrepreneurship Sustainable employment
Growing sectoral diversity
Regional equity
Growing the SME sector
Industrialisation in the rest of Africa
Broad-based black economic empowerment
Environmentally sustainable growth
New entrepreneurs entering the economy
Achieving developmental objectives Financial year 2008/09: • Funding approvals amounted to R10.8 billion, up 27% on the previous year • Largest portion of funding (52%) for start-ups and expansions in South Africa • 39% increase in the number of approvals to 231 • 69% of the total number of funding approvals to SMEs • Increased funding approvals to the rest of the African continent by 38% to R2.9 billion • The funding activities will facilitate in the creation of: – more than 24 200 direct new jobs in SA – around 5 000 in the rest of Africa • Funding of R500 million approved for distressed companies – 2 500 jobs expected to be saved
Industrial development approach • IDC addresses market failures / gaps by supporting investments, which may otherwise not happen, in partnership with private sector companies • IDC investments are for development purposes, with the ideal investment being one that generates developmental as well as financial returns • This entails taking a higher risk profile than commercial financiers in order to support the development of sectors and new entrepreneurs through …
Diversifying the economy through supporting a range of sectors
Encouraging the introduction and development of new industries and products
Developing internationally competitive companies
Supporting the establishment of greenfield developments
Supporting expansions of existing businesses
Facilitating the entry of new entrepreneurs and supporting their development
Supporting the growth and development of small and medium businesses into competitive players
Encouraging regional development by supporting companies with regional comparative advantages
Financial instruments IDC offers a wide array of financial instruments to entrepreneurs, including :
•
– – – – – – – – – •
Equity Quasi-equity Commercial debt Wholesale & bridging finance Share warehousing Export/import finance Short-term finance Guarantees Venture capital
These may be provided singly or in combination
Flexible deal structuring
Economic Context
South African economy: Economic growth at a 25-year low Worst recession in 25 years, with speed and shape of SA recovery yet highly uncertain Real GDP growth 15
% Change (q-o-q)
10
5
0
V W U
?
-5 Q1 '09 (-6.4%) 1984 Q3 -6.5%
-10 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: SARB
Shaded areas indicate recession
South African economy: Insufficient demand of increasing concern Output constraints in Manufacturing 90 80 70
% Rating
60 50 40 30 Interest rares
20
Insufficient demand Political climate
10 0 2000
2001
Source: BER
2002
2003
2004
2005
2006
2007
2008
2009
South African economy: Renewed currency strength Currency strength indicative of the presence of ‘carry trade’ and revived interest in emerging markets assets. If sustained, it could aggravate weak economic conditions & worsen the current account deficit. Exchange rate developments 12
16 Rand-Euro
11
15
10
14
9
13
8
12
Rand per Euro
Rand per USD
Rand-USD
26 June ‘09 7
11
6
10
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun08 08 08 08 08 08 08 08 08 08 08 08 09 09 09 09 09 09 Source: Bloomberg
South African economy: Most distressed major sectors within manufacturing Volumes of Production
Manufacturing sector
Average monthly % change (y-o-y) over 6-month period ending: Mar-08
Motor vehicles, parts and accessories and other transport equipment
Oct-08
Mar-09
Spare capacity changes
% change from most recent high
Current spare capacity levels
Business confidence
% point increase in spare capacity since Q3 ‘08
Index point decline since most recent high
0.4
-0.7
-35.3
-49.2
29.2%
13
77
-0.5
-3.7
-23.5
-27.5
47.5% (iron & steel) 24.4% (metal products)
29.3 (iron & steel) 5.8 (metal products
94 (fabricated metals) 77(basic metals) 77 (machinery)
Furniture and other manufacturing division
9.3
6.0
-14.9
-29.1
15.3% (other manufacturing)
Textiles, clothing, leather and footwear
6.5
-2.5
-11.7
-23.8
Glass and non-metallic mineral products
3.2
-2.0
-10.9
Petroleum, chemical products, rubber and plastic products
7.6
9.8
Wood and wood products, paper, publishing and printing
0.0
Radio, television and communication apparatus and professional equipment
Basic iron and steel, non-ferrous metal products, metal products and machinery
9.6(other manufacturing)
77 (furniture)
23.4% (textiles) 29.6% (leather)
4.2 (textiles) 7.4 (leather)
59 (textiles) 48 (clothing)
-20.5
19.8% (non metallic)
6.2 (non metallic)
86 (non-metallic)
-7.2
-15.4
17.5% (basic chemicals)
4.4 (basic chemicals)
72 (plastics) 64 (chemicals)
2.4
-7.0
-17.3
17.3% (wood & wood products)
4.2 (wood & wood products)
100 (wood) 82 (printing); 50 (paper)
2.9
3.0
-5.2
-17.1
N/A
N/A
N/A
Food and beverages
3.0
4.0
2.7
-6.8
N/A
N/A
81 (beverages); 78 (food)
Electrical machinery
11.3
11.6
4.7
-8.6
19.5%
1.2
83
Total manufacturing
3.3
2.3
-13.2
-21.6
21.4%
6.5
67
Source: IDC analysis
South African economy: Manufacturing sub-sectors reporting sharpest fall in production volumes Sectors most impacted upon experienced a steep fall in production activity Most distressed sectors in manufacturing (6 month to March '09 average y-o-y % change ) Basic iron and steel Parts and accessories Motor vehicles Insulated wire and cables Leather and leather General purpose machinery Bodies for motor vehicles Other textile Sawmilling and planning of wood Other manufacturing Structural metal Non-metallic mineral Basic chemicals Special purpose machinery Publishing -50
-45 Source: StatsSA
-40
-35
-30
-25 %
-20
-15
-10
-5
0
South African economy: Manufacturing - IPAP sector performance 2007
2008 Manufacturing output growth by sub-sector in 2008
Manufacturing output growth by sub-sector in 2007 Total Manufacturing
Total Manufacturing
Textiles Clothing
Textiles Clothing
Basic chemicals Other chemicals Plastic products
Basic chemicals Other chemicals Plastic products
Paper products Furniture
Paper products Furniture
Metal products Machinery Transport equip.
Metal products Machinery Transport equip.
Automotives & parts
Automotives & parts -2
Source: Stats SA
0
2
4
6
8
% Change
10
12
14
16
-10 Source: Stats SA
-5
0
5
10
% Change
15
20
25
South African economy: New vehicle sales plunging in 2009, but expected to recover New Vehicle Sales and Domestic Production 700 600
Units ('000)
500
Domestic Production Domestic sales of local production CBU Imports Exports
Forecast
400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Naamsa
Global economy: Access to credit versus demand for funding Accessibility of finance and levels of demand compared to global average
South African economy: Subsiding skills constraints more visible Output constraints in Manufacturing 70
60
Skilled labour
Semi-skilled
Unskilled labour
Raw materials
% Rating
50
40
30
20
10
0 2000
2001
Source: BER
2002
2003
2004
2005
2006
2007
2008
2009
Implications for Local Industry
Pressure on industry • Local motor vehicle market depressed • Global motor industry depressed • Export demand lower • Strong Rand • Parent companies under financial pressure – Difficulty in providing support – Difficulty in providing alternate markets
• Local uncertainty based on parent companies and technology suppliers internationally facing survival questions or mergers • Suppliers and customers under pressure • Uncertainty on timing of turnaround
Impact at business level The economic crisis is impacting businesses on various levels
Financial institutions tightening credit criteria, extending less credit
Unable to source finance from traditional sources
Lower demand for products and services
Business confidence lower, cutting costs and investing less
Firm
Lower levels of foreign demand
Internal cash flow pressures Creditors and debtors under financial pressure
Consumer confidence lower, spending less
Excess stock build-up
Value added by industry • Exports – Vehicles – Components – Export propensity of 25.5% vs 19.6% for manufacturing as whole
• • • • • •
Employment Skills development Foreign direct investment Technology Processes Associated businesses – Input industries – including steel, aluminium, plastics, electronics, leather, etc. – Service – including engineering, logistics, tooling, etc. – Other services- including finance, wholesale and retail, advertising, etc
Value reduction • Imports – Components – Vehicles – High import penetration of 75%
• Oil imports • Dividend outflows • Protection – Cost to fiscus – Cost to consumers – Cost to business
• Environment impact – carbon emissions
International support for Industry • Import duties • Non-tariff barriers – Explicit restrictions on imports
• Local content requirements • Direct subsidy to manufacturers • Consumer subsidies • Research funding • Government purchases • Buy local campaigns • etc
SA path - Need
• Not a “normal” downturn in economic cycle • Crisis not fault of local industry • Need to have level playing field • High unemployment – decent jobs a priority • Sector important to SA – as explained above
Can we afford not to support the sector?
Challenges
• Limited resources • Can’t afford blanket bailouts • Can’t afford to support foreign operations • Can’t support non-viable businesses that will fail in any case – delay the inevitable • SA small player - less than 1% • Need integration into international plans • WTO?
Approach • Need to focus and prioritise • Cost-benefit analyses • Type of support and approach by industry needs to be appropriate to support desired behaviour and maximise benefits for cost - possible questions to be asked: – Exports – Competitive pricing – Local procurement – Vehicle types – Green – Fuel efficient – Size – Skills development, – Employment levels, – Appropriate vehicles for local market – Local transport plans – Increase competitiveness over time
Role Players
• All need to contribute –Company –Shareholders –Parent company –Suppliers –Customers –Management –Employees –Banks –DFIs –Government
South African economy: Capacity utilisation in SA higher than in many countries
Automotive Industry Executives’ Perceptions of Future Changes in Market Share (KPMG / 2009) 100% 6
7
10
10
11
14
14
15
90% 12
16
17 28
30 36
80%
22
22
32
30
28 26
70%
63 43
60%
51 39
50%
40%
69
73
45
81
Decrease Remain the same Increase
37 44
48
53
78 68
67
62
30%
60 24 43
20%
12
40 33
33
32 20
10%
21
20
17
15
13
10
hr ys le r C
Fo rd
Fi at M er ce de s M its ub Pe is ug hi eo t/C itr oe n Su ba ru G /F en uj er i al M ot or s
br an ds
W BM
us si an R
H
To yo ta H yu nd ai /K ia
br an ds
In di an
on da Vo lk sw ag R en en au lt/ N is sa n
C
hi ne se
br an ds
0%
Industry changing
• New model investment decisions • Shifts in market shares • Shifts in countries positions • Industry restructuring • Shifts in demand – eg. smaller vehicles, environmentally friendly In every challenge is an opportunity. How will SA position itself?
IDC Role
IDC differentiation vis-à-vis commercial financiers
Commercial financiers • • • •
Shorter-term view, consolidation Tighter credit criteria Restructuring portfolios Less credit being granted
IDC • Long-term view on companies’ viability • Accommodative credit criteria, willing to consider applications for funding from new clients in distress for cyclical reasons • Assisting existing clients in distress • Honouring investment budget
Assisting companies in distress • R6.1 billion set aside to assist distressed companies over the next two years • Approach to funding companies in distress: – To ensure long term sustainability of enterprises: interventions will be on a firm by firm basis. – Focus will be on companies that are experiencing difficulties/distress due to cyclical downturn – Business must prove historical viability, and demonstrate structural improvements that will enhance long term competitiveness. – Businesses being assisted should demonstrate that the business case re-emerges within a reasonable timeframe, once global/domestic conditions improve. – Interventions should be to the benefit of the company being assisted and not relieve existing shareholders or other financiers from their obligations.
IDC Response • Participation in presidential task teams. • IDC playing a counter-cyclical role - will not cut back. • Client profile typically higher risk - existing clients require support • Need to look post crisis – greenfields and expansions need to be supported. • Fill expansion funding gaps left by banks. • Support for businesses facing cyclical difficulties. • Engaging with industry players. • Engaging with banks. • Increasing overall level of investment.
Criteria for funding companies in distress • Businesses might be experiencing problems due to a variety of reasons: – Loss of sales due to decreasing demand. – Increasing input costs as suppliers increase prices to compensate for decreasing sales volumes. – Non payment or late payment from debtors affected by the crisis. – Lack of access to credit. – Existing shareholders unable to inject more capital into a business.
• Business can experience cash-flow problems, declines in profitability, or even a trading loss for the period since March 2008. • Businesses in distress should be able to demonstrate sustainability – only companies in distress as a result of the crisis considered. – The strategic nature of companies (capacity, industry, location, employment) will be considered in cases where the firm has not been profitable.
• The company must have a clear turnaround plan which contributes to the sustainable recovery of the business – return to acceptable levels of sustainability within 18 months.
Special considerations for evaluating applications • Possible need to identify areas for business enhancement. • Might be a need for consolidation or rationalisation – business and industry. • Companies’ performance monitored closely. • Buy-in from other stakeholders essential – shareholders, management, other funders, creditors, employees. • Possible need for business support.
Funding instruments • Structured depending on business need and capacity. • Short or medium/long term facilities. • Working capital facilities - finance the working capital requirements (stock, debtors and creditors) as well as operational expenses of the business. • Guarantees - to guarantee outside facilities. • Suspensive sale facility or loan facility - finance capital expenditure which could improve a company’s viability. • Equity - could be considered where the company is undercapitalised. • Capital deferments and debt conversion (existing clients). • Capital moratoriums and interest capitalisation.
Application of funding • The purpose of the funding is to rescue the capacity and employment during the challenging phase of the cycle. • Funds should be retained in the business to fund working capital requirements and operational expenses and capital expenses where it will result in the improvement of efficiencies and improve the competitiveness of the business. • Intention is not to bail out shareholders or banks. • Funding not used for: – normal expansions – covered by normal IDC finance, – to fund exits for existing shareholders, – refinancing existing facilities, – share buy-backs.
IDC funding: Conditions attached to approvals • Some restrictions attached to approvals for distressed funding (done on a case-by-case basis): – – – – – – –
Management remuneration; Payment of dividends; Repayment of shareholders loans; Existing shareholders disposing of their shareholding; Payments to creditors; Capital repayment of bank loans; Job losses.
Concluding remarks • Industry needs support • South Africa cannot afford a blanket bail-out • Support needs to be targeted • All role-players need to come to party • Need to take a long term view – beyond current crisis • IDC will continue to work with industry – long term view and confidence in sector
41
Day Month Year
Thank you The Industrial Development Corporation 19 Fredman Drive, Sandown PO Box 784055, Sandton, 2146 Telephone (011) 269 3000 Facsimile (011) 269 2116 E-mail [email protected]
Does the South African Automotive Industry deserve a bailout? Presentation to Automotive Industry Conference
Shakeel Meer Divisional Executive: Industrial Sectors
Port Elizabeth 7 October 2009
Contents • IDC Corporate Profile • Economic Context • Implications • IDC Role
IDC Corporate Profile
The IDC: Corporate profile • Established in 1940, the IDC is a self -financing, State-owned development finance institution • The vision of the IDC is to be the primary source of commercially sustainable industrial development and innovation to the benefit of South Africa and the rest of the African continent • Provides financing to entrepreneurs engaged in competitive industries and enterprises based on sound business principles • Pays income tax at corporate rates and dividends to the shareholder • Aims to maximise developmental and financial returns within an acceptable risk profile
The IDC’s Head Office in Sandton (Johannesburg)
Vision
The IDC is a self-financing national development finance institution whose primary objectives are to contribute to the generation of balanced, sustainable economic growth in Africa and to the economic empowerment of the South African population, thereby promoting the economic prosperity of all citizens. The IDC achieves this by promoting entrepreneurship through the building of competitive industries and enterprises based on sound business principles.
Outcomes
Objectives
To be “the primary driving force of commercially sustainable industrial development and innovation to the benefit of South Africa and the rest of the African continent”
Mission
The IDC’s vision, mission, objectives & outcomes
Supporting industrial development capacity Promoting entrepreneurship Sustainable employment
Growing sectoral diversity
Regional equity
Growing the SME sector
Industrialisation in the rest of Africa
Broad-based black economic empowerment
Environmentally sustainable growth
New entrepreneurs entering the economy
Achieving developmental objectives Financial year 2008/09: • Funding approvals amounted to R10.8 billion, up 27% on the previous year • Largest portion of funding (52%) for start-ups and expansions in South Africa • 39% increase in the number of approvals to 231 • 69% of the total number of funding approvals to SMEs • Increased funding approvals to the rest of the African continent by 38% to R2.9 billion • The funding activities will facilitate in the creation of: – more than 24 200 direct new jobs in SA – around 5 000 in the rest of Africa • Funding of R500 million approved for distressed companies – 2 500 jobs expected to be saved
Industrial development approach • IDC addresses market failures / gaps by supporting investments, which may otherwise not happen, in partnership with private sector companies • IDC investments are for development purposes, with the ideal investment being one that generates developmental as well as financial returns • This entails taking a higher risk profile than commercial financiers in order to support the development of sectors and new entrepreneurs through …
Diversifying the economy through supporting a range of sectors
Encouraging the introduction and development of new industries and products
Developing internationally competitive companies
Supporting the establishment of greenfield developments
Supporting expansions of existing businesses
Facilitating the entry of new entrepreneurs and supporting their development
Supporting the growth and development of small and medium businesses into competitive players
Encouraging regional development by supporting companies with regional comparative advantages
Financial instruments IDC offers a wide array of financial instruments to entrepreneurs, including :
•
– – – – – – – – – •
Equity Quasi-equity Commercial debt Wholesale & bridging finance Share warehousing Export/import finance Short-term finance Guarantees Venture capital
These may be provided singly or in combination
Flexible deal structuring
Economic Context
South African economy: Economic growth at a 25-year low Worst recession in 25 years, with speed and shape of SA recovery yet highly uncertain Real GDP growth 15
% Change (q-o-q)
10
5
0
V W U
?
-5 Q1 '09 (-6.4%) 1984 Q3 -6.5%
-10 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: SARB
Shaded areas indicate recession
South African economy: Insufficient demand of increasing concern Output constraints in Manufacturing 90 80 70
% Rating
60 50 40 30 Interest rares
20
Insufficient demand Political climate
10 0 2000
2001
Source: BER
2002
2003
2004
2005
2006
2007
2008
2009
South African economy: Renewed currency strength Currency strength indicative of the presence of ‘carry trade’ and revived interest in emerging markets assets. If sustained, it could aggravate weak economic conditions & worsen the current account deficit. Exchange rate developments 12
16 Rand-Euro
11
15
10
14
9
13
8
12
Rand per Euro
Rand per USD
Rand-USD
26 June ‘09 7
11
6
10
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun08 08 08 08 08 08 08 08 08 08 08 08 09 09 09 09 09 09 Source: Bloomberg
South African economy: Most distressed major sectors within manufacturing Volumes of Production
Manufacturing sector
Average monthly % change (y-o-y) over 6-month period ending: Mar-08
Motor vehicles, parts and accessories and other transport equipment
Oct-08
Mar-09
Spare capacity changes
% change from most recent high
Current spare capacity levels
Business confidence
% point increase in spare capacity since Q3 ‘08
Index point decline since most recent high
0.4
-0.7
-35.3
-49.2
29.2%
13
77
-0.5
-3.7
-23.5
-27.5
47.5% (iron & steel) 24.4% (metal products)
29.3 (iron & steel) 5.8 (metal products
94 (fabricated metals) 77(basic metals) 77 (machinery)
Furniture and other manufacturing division
9.3
6.0
-14.9
-29.1
15.3% (other manufacturing)
Textiles, clothing, leather and footwear
6.5
-2.5
-11.7
-23.8
Glass and non-metallic mineral products
3.2
-2.0
-10.9
Petroleum, chemical products, rubber and plastic products
7.6
9.8
Wood and wood products, paper, publishing and printing
0.0
Radio, television and communication apparatus and professional equipment
Basic iron and steel, non-ferrous metal products, metal products and machinery
9.6(other manufacturing)
77 (furniture)
23.4% (textiles) 29.6% (leather)
4.2 (textiles) 7.4 (leather)
59 (textiles) 48 (clothing)
-20.5
19.8% (non metallic)
6.2 (non metallic)
86 (non-metallic)
-7.2
-15.4
17.5% (basic chemicals)
4.4 (basic chemicals)
72 (plastics) 64 (chemicals)
2.4
-7.0
-17.3
17.3% (wood & wood products)
4.2 (wood & wood products)
100 (wood) 82 (printing); 50 (paper)
2.9
3.0
-5.2
-17.1
N/A
N/A
N/A
Food and beverages
3.0
4.0
2.7
-6.8
N/A
N/A
81 (beverages); 78 (food)
Electrical machinery
11.3
11.6
4.7
-8.6
19.5%
1.2
83
Total manufacturing
3.3
2.3
-13.2
-21.6
21.4%
6.5
67
Source: IDC analysis
South African economy: Manufacturing sub-sectors reporting sharpest fall in production volumes Sectors most impacted upon experienced a steep fall in production activity Most distressed sectors in manufacturing (6 month to March '09 average y-o-y % change ) Basic iron and steel Parts and accessories Motor vehicles Insulated wire and cables Leather and leather General purpose machinery Bodies for motor vehicles Other textile Sawmilling and planning of wood Other manufacturing Structural metal Non-metallic mineral Basic chemicals Special purpose machinery Publishing -50
-45 Source: StatsSA
-40
-35
-30
-25 %
-20
-15
-10
-5
0
South African economy: Manufacturing - IPAP sector performance 2007
2008 Manufacturing output growth by sub-sector in 2008
Manufacturing output growth by sub-sector in 2007 Total Manufacturing
Total Manufacturing
Textiles Clothing
Textiles Clothing
Basic chemicals Other chemicals Plastic products
Basic chemicals Other chemicals Plastic products
Paper products Furniture
Paper products Furniture
Metal products Machinery Transport equip.
Metal products Machinery Transport equip.
Automotives & parts
Automotives & parts -2
Source: Stats SA
0
2
4
6
8
% Change
10
12
14
16
-10 Source: Stats SA
-5
0
5
10
% Change
15
20
25
South African economy: New vehicle sales plunging in 2009, but expected to recover New Vehicle Sales and Domestic Production 700 600
Units ('000)
500
Domestic Production Domestic sales of local production CBU Imports Exports
Forecast
400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Naamsa
Global economy: Access to credit versus demand for funding Accessibility of finance and levels of demand compared to global average
South African economy: Subsiding skills constraints more visible Output constraints in Manufacturing 70
60
Skilled labour
Semi-skilled
Unskilled labour
Raw materials
% Rating
50
40
30
20
10
0 2000
2001
Source: BER
2002
2003
2004
2005
2006
2007
2008
2009
Implications for Local Industry
Pressure on industry • Local motor vehicle market depressed • Global motor industry depressed • Export demand lower • Strong Rand • Parent companies under financial pressure – Difficulty in providing support – Difficulty in providing alternate markets
• Local uncertainty based on parent companies and technology suppliers internationally facing survival questions or mergers • Suppliers and customers under pressure • Uncertainty on timing of turnaround
Impact at business level The economic crisis is impacting businesses on various levels
Financial institutions tightening credit criteria, extending less credit
Unable to source finance from traditional sources
Lower demand for products and services
Business confidence lower, cutting costs and investing less
Firm
Lower levels of foreign demand
Internal cash flow pressures Creditors and debtors under financial pressure
Consumer confidence lower, spending less
Excess stock build-up
Value added by industry • Exports – Vehicles – Components – Export propensity of 25.5% vs 19.6% for manufacturing as whole
• • • • • •
Employment Skills development Foreign direct investment Technology Processes Associated businesses – Input industries – including steel, aluminium, plastics, electronics, leather, etc. – Service – including engineering, logistics, tooling, etc. – Other services- including finance, wholesale and retail, advertising, etc
Value reduction • Imports – Components – Vehicles – High import penetration of 75%
• Oil imports • Dividend outflows • Protection – Cost to fiscus – Cost to consumers – Cost to business
• Environment impact – carbon emissions
International support for Industry • Import duties • Non-tariff barriers – Explicit restrictions on imports
• Local content requirements • Direct subsidy to manufacturers • Consumer subsidies • Research funding • Government purchases • Buy local campaigns • etc
SA path - Need
• Not a “normal” downturn in economic cycle • Crisis not fault of local industry • Need to have level playing field • High unemployment – decent jobs a priority • Sector important to SA – as explained above
Can we afford not to support the sector?
Challenges
• Limited resources • Can’t afford blanket bailouts • Can’t afford to support foreign operations • Can’t support non-viable businesses that will fail in any case – delay the inevitable • SA small player - less than 1% • Need integration into international plans • WTO?
Approach • Need to focus and prioritise • Cost-benefit analyses • Type of support and approach by industry needs to be appropriate to support desired behaviour and maximise benefits for cost - possible questions to be asked: – Exports – Competitive pricing – Local procurement – Vehicle types – Green – Fuel efficient – Size – Skills development, – Employment levels, – Appropriate vehicles for local market – Local transport plans – Increase competitiveness over time
Role Players
• All need to contribute –Company –Shareholders –Parent company –Suppliers –Customers –Management –Employees –Banks –DFIs –Government
South African economy: Capacity utilisation in SA higher than in many countries
Automotive Industry Executives’ Perceptions of Future Changes in Market Share (KPMG / 2009) 100% 6
7
10
10
11
14
14
15
90% 12
16
17 28
30 36
80%
22
22
32
30
28 26
70%
63 43
60%
51 39
50%
40%
69
73
45
81
Decrease Remain the same Increase
37 44
48
53
78 68
67
62
30%
60 24 43
20%
12
40 33
33
32 20
10%
21
20
17
15
13
10
hr ys le r C
Fo rd
Fi at M er ce de s M its ub Pe is ug hi eo t/C itr oe n Su ba ru G /F en uj er i al M ot or s
br an ds
W BM
us si an R
H
To yo ta H yu nd ai /K ia
br an ds
In di an
on da Vo lk sw ag R en en au lt/ N is sa n
C
hi ne se
br an ds
0%
Industry changing
• New model investment decisions • Shifts in market shares • Shifts in countries positions • Industry restructuring • Shifts in demand – eg. smaller vehicles, environmentally friendly In every challenge is an opportunity. How will SA position itself?
IDC Role
IDC differentiation vis-à-vis commercial financiers
Commercial financiers • • • •
Shorter-term view, consolidation Tighter credit criteria Restructuring portfolios Less credit being granted
IDC • Long-term view on companies’ viability • Accommodative credit criteria, willing to consider applications for funding from new clients in distress for cyclical reasons • Assisting existing clients in distress • Honouring investment budget
Assisting companies in distress • R6.1 billion set aside to assist distressed companies over the next two years • Approach to funding companies in distress: – To ensure long term sustainability of enterprises: interventions will be on a firm by firm basis. – Focus will be on companies that are experiencing difficulties/distress due to cyclical downturn – Business must prove historical viability, and demonstrate structural improvements that will enhance long term competitiveness. – Businesses being assisted should demonstrate that the business case re-emerges within a reasonable timeframe, once global/domestic conditions improve. – Interventions should be to the benefit of the company being assisted and not relieve existing shareholders or other financiers from their obligations.
IDC Response • Participation in presidential task teams. • IDC playing a counter-cyclical role - will not cut back. • Client profile typically higher risk - existing clients require support • Need to look post crisis – greenfields and expansions need to be supported. • Fill expansion funding gaps left by banks. • Support for businesses facing cyclical difficulties. • Engaging with industry players. • Engaging with banks. • Increasing overall level of investment.
Criteria for funding companies in distress • Businesses might be experiencing problems due to a variety of reasons: – Loss of sales due to decreasing demand. – Increasing input costs as suppliers increase prices to compensate for decreasing sales volumes. – Non payment or late payment from debtors affected by the crisis. – Lack of access to credit. – Existing shareholders unable to inject more capital into a business.
• Business can experience cash-flow problems, declines in profitability, or even a trading loss for the period since March 2008. • Businesses in distress should be able to demonstrate sustainability – only companies in distress as a result of the crisis considered. – The strategic nature of companies (capacity, industry, location, employment) will be considered in cases where the firm has not been profitable.
• The company must have a clear turnaround plan which contributes to the sustainable recovery of the business – return to acceptable levels of sustainability within 18 months.
Special considerations for evaluating applications • Possible need to identify areas for business enhancement. • Might be a need for consolidation or rationalisation – business and industry. • Companies’ performance monitored closely. • Buy-in from other stakeholders essential – shareholders, management, other funders, creditors, employees. • Possible need for business support.
Funding instruments • Structured depending on business need and capacity. • Short or medium/long term facilities. • Working capital facilities - finance the working capital requirements (stock, debtors and creditors) as well as operational expenses of the business. • Guarantees - to guarantee outside facilities. • Suspensive sale facility or loan facility - finance capital expenditure which could improve a company’s viability. • Equity - could be considered where the company is undercapitalised. • Capital deferments and debt conversion (existing clients). • Capital moratoriums and interest capitalisation.
Application of funding • The purpose of the funding is to rescue the capacity and employment during the challenging phase of the cycle. • Funds should be retained in the business to fund working capital requirements and operational expenses and capital expenses where it will result in the improvement of efficiencies and improve the competitiveness of the business. • Intention is not to bail out shareholders or banks. • Funding not used for: – normal expansions – covered by normal IDC finance, – to fund exits for existing shareholders, – refinancing existing facilities, – share buy-backs.
IDC funding: Conditions attached to approvals • Some restrictions attached to approvals for distressed funding (done on a case-by-case basis): – – – – – – –
Management remuneration; Payment of dividends; Repayment of shareholders loans; Existing shareholders disposing of their shareholding; Payments to creditors; Capital repayment of bank loans; Job losses.
Concluding remarks • Industry needs support • South Africa cannot afford a blanket bail-out • Support needs to be targeted • All role-players need to come to party • Need to take a long term view – beyond current crisis • IDC will continue to work with industry – long term view and confidence in sector
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Thank you The Industrial Development Corporation 19 Fredman Drive, Sandown PO Box 784055, Sandton, 2146 Telephone (011) 269 3000 Facsimile (011) 269 2116 E-mail [email protected]
