BMW’s further Investment stoppage Threatens South Africa

As thousands of workers had went on strike demanding higher pay, world’s largest maker of luxury vehicles Bayerische Motoren Werke AG (BMW), freezed its output in South Africa.

By the time the employees agreed on the deal on Oct. 6 regarding the 10 percent wage increase for next year, BMW had already faced a great loss of 13,000 car production and failed to complete their targets on some export contracts. Hence they finally took a decision to stop further expansion in South Africa.

The strikes were observed among the workers in seven car makers including Toyota Motor Corp.(7203) and Volkswagen AG (VOW). It had cost the auto industry a loss of minimum 20 billion rand ($2 billion) as said by NAAMSA. Economy may be adversely affected as foreign investors are threatening to decrease their expansion plans due such labour instability.   

“This prolonged strikes will greatly affect the reputation of South Africa as a reliable supplier at international levels” - said by Nico Vermeulen, director of Naamsa, said in a phone interview on Oct. 7 from the capital, Pretoria. These kind of disruptions may decrease the growth rates of this year by 0.5% - according to Peter Worthington, an economist at Johannesburg-based Absa Bank Ltd.’s corporate and investment banking unit. The domestic product growth has already reached the grounds to 2% as forecasted by the central bank which is the slowest value since 2009 recession.

Due to labour instability further investment does make any sense. Not only BMW but other companies are also thinking the same due to the labour issues.

SA depends on the flows from foreign countries to help finance its current account requirements which has reached 6.5% of GDP in the second quarter. Moving little back, in 2012 Africa’s largest economy attracted $4.6 billion in foreign direct investment or 1.2% GDP - according to data from the Organization for Economic Cooperation and Development. This is similar to $20.8 billion or 2.3 percent in Argentina which is having the same economy to SA. According to central bank the portfolio inflows from abroad into South Africa is around $5.5 billion last year.

“Some or the other problems in the industrial relation are likely to affect the FDI coming in the country.” - Punam Chuhan-Pole, lead economist for Africa at the World Bank, said in a conference call from Washington on Oct. 7. Investors have increased their idea of risk in South Africa since August 2012, when massive strikes had stopped the operations at the Anglo American Platinum Ltd. and other mining companies. The rand had gone down by 15% against dollar this year.

In August the inflation had reached the heights of 6.4% which was more than the central bank’s 3% to 6% target increase in the second consecutive month. Weakening rand value and rising wage demands have avoided policy makers from lowering its interest rate from 5%.

BMW’s plan to stop further expansion in SA “amounts to political and economic blackmail” - Karl Cloete, deputy general-secretary of the National Union of Metalworkers of South Africa, said in an e-mailed statement on Oct. 10.

Neren Rau, chief executive officer of the South African Chamber of Commerce and Industry said that for investors it is rather a bigger concern in managing risk than making political statement. In a phone interview on Oct. 8 he said that it is just a discussion, it is not about going against South Africa and the government.