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Overview

Market

Describe the significance of, and developments in, the automotive industry in the market.

South Africa has an active automotive sector and major multinational original equipment manufacturers (OEMs) such as Daimler, BMW, Toyota, Volkswagen, Nissan and Ford manufacture motor vehicles in South Africa for local sale and for exports. Many of these major international automotive players are making sizeable investments in South Africa leading to a further increase in production. After increasing by 26.7 per cent between August 2015 and August 2016, vehicle exports decreased by 7.4 per cent between the first half of 2016 and the second half of 2017. Additionally, an export growth of 3.6 per cent is predicted in the 2017 to 2018 period.

The South African automotive industry accounted for over 7.5 per cent of South Africa’s GDP in 2015, amounting to 300 billion rand, and the automotive sector contributed to 14.6 per cent of the total national exports in 2015, amounting to 151.5 billion rand.

The South African automotive industry contributed 7.4 per cent to the GDP in 2016, and exports of automotive products accounted for 171.1 billion rand, amounting to 15.6 per cent, of South Africa’s exports in 2016.

At present South Africa has over 110 tier 1 component suppliers, 75 per cent of which are multinational; and most of the tier 2 and 3 suppliers are made up by more than 200 local companies. However, South Africa’s automotive industry still relies on imports of components.

Regulation

What is the regulatory framework for manufacture and distribution of automobiles and automobile parts, such as vehicle-type approval process as well as vehicle registration and insurance requirements?

The National Road Traffic Act, 93 of 1996, and the National Road Traffic Regulations require that manufacturers, builders and importers of vehicles and manufacturers of vehicle number plates apply for registration to the Road Traffic Management Corporation and may not manufacture, build or import vehicles for business purposes if they are not registered.

However, it is a requirement of the National Road Traffic Act that all motor vehicles, whether or not they are to be driven on public roads, be registered and licensed by a registering authority appointed in terms of the Act, unless they are specifically exempted. Failure to do so is an offence and punishable by certain penalties subject to the extent of the contravention of the law.

There is no statutory requirement that obliges an owner of an automobile to insure it.

Development, manufacture and supply

How do automotive companies operating in your country generally structure their development, manufacture and supply issues? What are the usual contractual arrangements?

Joint venture agreements and M&A transactions generally follow internationally accepted patterns. The multinational OEMs generally operate through traditional dealer networks. Dealerships and distributorships are often structured on a franchise basis, with a country ‘master franchisee’ appointing a network of retail dealers.

Distribution

How are vehicles usually distributed? Are there any special rules for importers, distributors, dealers (including dealer networks) or other distribution partners? How do automotive companies normally resolve restructuring or termination issues with their distribution partners?

Retail dealerships and distributorships are generally structured on a franchise basis, with a country ‘master franchisee’ (where the vehicles or components are imported) or manufacturer appointing a network of retail dealers. The relationships are governed by the terms of the contract. In the case of a relationship that is structured as a franchise, the agreement must comply with the requirements of the Consumer Protection Act, 68 0f 2008 (CPA) and the Regulations promulgated thereunder that govern franchise agreements.

The South African Automotive Industry Code of Conduct was adopted in January 2015 to regulate interactions between persons conducting business in the automotive industry and their interactions with consumers. According to the Code, its purpose is to provide for an alternative dispute resolution scheme between consumers and all participants in the industry and to create an industry ombudsman to administer the scheme. In terms of the Code each supplier in the industry has to establish its own internal dispute resolution procedure.

If a dispute between a consumer and supplier is not resolved within 30 days, then the consumer may refer the dispute to the Motor Vehicle Industry Ombudsman of South Africa (MIOSA). Referral of a dispute to the MIOSA allows for the dispute to be resolved in an expeditious manner through alternative dispute resolution methods (eg, conciliation and arbitration), and therefore the potential arises for the parties in dispute to reach a settlement agreement prior to the dispute being referred to litigation.

Mergers, acquisitions and joint ventures

Are there any particularities for M&A or JV transactions that companies should consider when preparing, negotiating or entering into a deal in the automotive industry?

Two issues in particular, and unique to the local environment, need to be taken into account by investors:

  • South Africa operates an exchange control system, and accordingly when investing in South Africa, investors will need to consider what exchange control permissions may be required for the purposes of setting up their local operation. Generally exchange control regulations are intended to be applicable to residents. Non-resident investors need to be aware of certain matters such as:
  • Loans from overseas companies to local companies require exchange control approval from the South African Reserve Bank (SARB).
  • It is important that share certificates held by non-residents are endorsed as ‘non-resident’ by an authorised dealer of the SARB, in order to enable the non-resident shareholder to remit funds arising from its shareholding, such as dividends and loan repayments, out of South Africa. Authorised dealers are generally the large commer­cial banks to which SARB delegates certain authorities.
  • South Africa has implemented what is known as Broad-Based Black Economic Empowerment, a system aimed at redressing economic inequalities caused by the apartheid system. This is a fairly complex area, requiring more detailed advice. However, any investor into the South African automotive industry will need to take this into account in structuring any JV or M&A transactions contemplated.

Incentives and barriers to entry

Are there any incentives for investment in the automotive market? Are there barriers to entry into the market? What impact may new entrants into the market have on incumbents?

Important opportunities for investors stem from the Automotive Production Development Programme (APDP) policy scheme. Established in 2013, it is aimed at stimulating local production of automotive components and maintaining incentives for OEMs manufacturing passenger cars and light commercial vehicles in the country.

The APDP is based on four pillars:

  • stable import tariffs (25 per cent for vehicles, 20 per cent for components);
  • the Vehicle Assembly Allowance (VAA) (which authorises OEMs producing at least 50,000 vehicles per year to import 20 per cent of needed components duty-free);
  • production incentives and
  • the Automotive Investment Scheme (AIS), aimed at stimulating investment and strengthening the automotive value chain.

The VAA is in the form of duty-free import credits issued to vehicle assemblers. It commenced in 2013.

The AIS is an incentive designed to grow and develop the automotive sector through investment in productive assets to be used in the manufacture of new or replacement models and components that will increase plant production volumes, sustain employment and strengthen the automotive value chain. It is a cash grant amounting to between 20 and 30 per cent of qualifying capital investment, payable over three years.

Product safety and liability

Safety and environmental

What are the most relevant automotive-related product compliance safety and environmental regulations, and how are they enforced? Are there specific rules for product recalls?

The National Road Traffic Regulations contain comprehensive provisions prescribing the requirements with which vehicles must comply in order to be operated in South Africa. These include detailed compliance requirements for equipment including lights, windshields and windshield wipers, lights and reflectors, tyres, seatbelts and fuel systems. No vehicle may be registered unless the owner is in possession of a current certificate of roadworthiness issued in respect of that vehicle by a registered vehicle testing station.

In terms of the Standards Act, 8 of 2008, the South African Bureau of Standards is authorised to prescribe standards which, while not automatically compulsory, contain technical specifications or other precise criteria designed to be used consistently as a rule, guideline or definition. It is arguable, in appropriate circumstances, that failure to comply with the prescribed standards in respect of any product would constitute evidence of negligence or even deliberate disregard for the health and safety of consumers and the public at large. Standards have been prescribed, inter alia, in respect of matters such as exhaust emissions and the environmental effects of air conditioners and vehicle paints.

Product recalls are governed by the CPA. The National Consumer Commission, in terms of its powers under the CPA, has developed guidelines to help suppliers plan for and respond to an incident where the recall of potentially unsafe consumer products is required. Suppliers are obliged to notify the Commission when they undertake a recall, preferably before the recall is commenced, but in any event within two days of the supplier initiating the recall. The notice must state that the goods are subject to a recall and set out the nature of the defect or the dangerous characteristic of the goods. In addition, the notice should include an explanation of the problem, including the hazard associated with the product and information about any known injuries or incidents associated with the product and action taken by the supplier to identify and correct the cause of the hazard, including the outcome of any root cause analysis.

Product liability and recall

Describe the significance of product liability law, and any key issues specifically relevant to the automotive industry. How relevant are class actions or other consumer litigation in product liability, product recall cases, or other contexts relating to the automotive industry?

Under section 61 of the CPA, the producer, importer, distributor or retailer of any goods is liable for any death or injury to persons, or damage to property, caused as a consequence of supplying any unsafe goods, a product failure, defect or hazard in goods, or inadequate instructions or warnings, irrespective of whether the harm resulted from any negligence on the part of the producer, importer, distributor or retailer and even where there is no direct contractual relationship between the plaintiff and the producer, importer, distributor or retailer concerned.

Product liability cases arising from latent defects or poor workmanship in motor vehicles and falling outside the ambit of the CPA are dealt with according to common law delict (tort) principles and depend on whether the manufacturer or supplier was negligent in this regard either for the latent defect or poor workmanship.

As mentioned above, in appropriate circumstances, failure to comply with the prescribed standards in respect of any product would constitute evidence of negligence or even deliberate disregard for the health and safety of consumers and the public at large and may also give rise to consumer claims in terms of the CPA.

Class action litigation is a relatively new area of law in South Africa, as recent legislation has opened the way for class actions to be recognised in South African courts.

Disputes

Competition enforcement

What competition and antitrust issues are specific to, or particularly relevant for, the automotive industry? Is follow-on litigation significant in competition cases?

There are no recent recorded cases in South Africa in which competition concerns were raised in respect of automotive manufacturers as such. However, the following cases are relevant to the automotive industry.

South Africa, in line with many other jurisdictions, is investigating cartel conduct in relation to the automotive parts industry. In October 2014 the South African Competition Commission (the Commission) announced that it had launched investigations into ‘price fixing, market division and collusive tendering in the market for the manufacture and supply of automotive components supplied to OEMs arising from information it had received that manufacturers of automotive components colluded when bidding for tenders to supply components to OEMs. On 22 September 2017, the Commission published a Draft Competition Code of Conduct for the Automotive Sector (the Code) in the Government Gazette for public comment. The Code seeks to address identified concerns in the aftermarket automotive industry and will bind various signatories such as OEMs, government bodies and industry associations. The Code followed the Commission’s extensive advocacy work and engagement with various stakeholders following concerns of anticompetitive conduct. The Code seeks to promote transformation and foster inclusive growth in the automotive industry. Although the Code has generally been welcomed, concerns have been raised about the practical implementation of the Code and challenges which will be faced to ensure a successful outcome.

South Africa has a corporate leniency policy in place, in terms of which any party that is involved in cartel conduct and is the first to come forward to supply information in relation to the alleged conduct may obtain leniency from prosecution. Market talk is that there was a whistle-blower involved who sparked the investigation. There have been no press releases since then, but we understand that the investigation is ongoing.

An earlier case involving shipping companies transporting vehicles to and from South Africa is nearing its end. In 2012 the Commission initiated a complaint against a number of shipping lines in relation to price fixing and market division (and subsequently expanded the complaint to include collusive tendering) in the market for the transportation of vehicles, equipment and machinery to and from South Africa. A number of shipping lines have concluded settlements with the Commission and have agreed to pay administrative penalties.

Although follow-on litigation has been somewhat slow since 1999 when the Competition Act came into force, it is evident that this is bound to change. In terms of section 67(b) of the Competition Act, a litigant that has suffered damages as a consequence of anticompetitive conduct may rely on the findings of the competition authorities in pursuit of those damages. In this vein, the litigant is required to produce a certificate of the competition authorities’ ruling that confirms their finding that the conduct in question is in contravention of the Competition Act and this constitutes conclusive proof that it is anticompetitive. The first successful follow-on proceedings were brought by Nationwide Airlines (Pty) Ltd (in Liquidation)(Nationwide) against South African Airways (Pty) Ltd (SAA) pursuant to a Competition Tribunal ruling against SAA in respect of a travel agent incentive scheme that SAA had put in place many years ago. The Competition Tribunal held that the incentive scheme in question was anticompetitive and therefore in contravention of section 8 of the Competition Act. Nationwide successfully took the follow-on damages case to the High Court and was granted damages against SAA. Another airline, Comair, took a similar case to the High Court and is currently awaiting judgment.

Dispute resolution mechanisms

What kind of disputes have been experienced in the automotive industry, and how are they usually resolved? Are there any quick solutions along the supply chain available?

Disputes in the automotive industry arise between suppliers themselves, between suppliers and trade unions on behalf of employees and between consumers and suppliers. Disputes arise in relation to all aspects of the automotive industry but most frequently in regard to distributor or dealership agreements, quality of vehicles and components, wage disputes, unfair dismissal of employees, and collective agreements with trade unions.

The South African Automotive Industry Code of Conduct was adopted in January 2015 to regulate interactions between persons conducting business in the automotive industry and their interactions with consumers. According to the Code, its purpose is to provide for an alternative dispute resolution scheme between consumers and all participants in the industry and to create an industry ombudsman to administer the scheme. In terms of the Code each supplier in the industry has to establish its own internal dispute resolution procedure.

If a dispute between a consumer and supplier is not resolved within 30 days, then the consumer may refer the dispute to the MIOSA. Referral of a dispute to the MIOSA allows for the dispute to be resolved in an expeditious manner through alternative dispute resolution methods (eg, conciliation and arbitration), and therefore the potential arises for the parties in dispute to reach a settlement agreement prior to the dispute being referred to litigation.

In addition, the Motor Industry Bargaining Council (MIBCO) has been accredited by the Commission for Conciliation, Mediation and Arbitration (CCMA) to resolve most types of labour and industrial relations disputes that occur in the automotive industry. Its dispute resolution procedures mirror those of the CCMA, namely mediation, conciliation and arbitration.

Should a labour relations dispute not be resolved in terms of one of the methods stated above or should it not be practical to resolve a dispute in such a way, such as when a strike in the automotive industry is taking place, then an urgent application can be made to the Labour Court to obtain an interdict (injunction) which prohibits the striking suppliers, employees or trade unions from continuing with the strike. In this regard, the interim injunction can also serve the purpose of preventing irreparable harm from occurring.

Distressed suppliers

What is the process for dealing with distressed suppliers in the automotive industry?

It is prudent to actively engage with a distressed supplier in order to determine its current financial position and ascertain whether it can continue to supply goods or services on the same contractual terms. It is advisable to obtain the latest financial information from the supplier.

If the supplier is unable to continue supplying on the same terms or could become insolvent, the creditor can approach a court to place the supplier in business rescue.

An application for business rescue can be brought by a creditor as a mechanism to successfully engage with a supplier and to renegotiate the current contract terms of supply. The applicant nominates the business rescue practitioner who will take over the management of the company.

The first goal of effective business rescue proceedings is to restructure the supplier’s affairs and restore it to a viable concern. If this is not possible, then the implementation of a business rescue plan should result in a better return for the creditors or shareholders than immediate liquidation.

Business rescue protects all affected parties whereby the business rescue practitioner ensures that the various interests at stake are equitably balanced within the constraints of the legislation.

Intellectual property disputes

Are intellectual property disputes significant in the automotive industry? If so, how effectively is industrial intellectual property protected? Are intellectual property disputes easily resolved?

Intellectual property is well protected in the South African environment.

Four principal types of intellectual property enjoy statutory protection in South Africa: patents, designs, trademarks and copyright.

Patents

A patent may be granted for any new invention or idea. To obtain protection for an invention, it must constitute an inventive step that has not already been used, made known or made available to the public anywhere in the world.

Applications for patents are made to the South African Companies and Intellectual Property Commission (CIPC) and may be made by the inventor or by any other person who has acquired the right to apply from the inventor.

A patent is limited to the country in which it has been granted. Generally, this right entails the granting to a patentee of the right, in the particular country, to prevent other persons from making, using, exercising, disposing of, offering to dispose of, or importing the patentee’s invention. In South Africa, the duration of a patent is 20 years, subject to the payment of annual renewal fees.

Designs

South African law provides for registration of designs that are intended for both aesthetic and functional purposes. Application is made to the CIPC for registration of a design. Grant of a registered design confers upon the proprietor the exclusive right to exploit that design for a specified period.

Trademarks

An application for registration of a trademark must be filed with the CIPC.

In order to be protected as a trademark, a mark must be clearly distinguishable as identifying a particular product, must not mislead consumers violate public order or morality and may not be the same as, or similar to, any another registered trademark.

Once a trademark is registered, no person may, without the authority of the registered proprietor:

  • use a mark that is identical or confusingly similar to the registered trademark on the goods or services covered by that registered trademark;
  • use a mark that is identical or confusingly similar to the registered trademark on goods or services that are similar to those covered by that registered trademark; or
  • use a mark that is identical or confusingly similar to registered trademark that is well known in South Africa on any goods or services, if the use of the infringing mark would be likely to take unfair advantage of, or be detrimental to, the distinctive character or repute of the registered trademark, regardless of any confusion or deception.

Copyright

In terms of the Copyright Act, protection is automatically conferred on an original work; registration is not required. Copyright may subsist in literary, artistic or musical works, sound recordings, films, computer programs, broadcasts, satellite transmissions and published editions of works.

In order to be afforded copyright protection, the work must have been created by a ‘qualified person’. This includes citizens of South Africa, residents and persons who are domiciled in South Africa as well as citizens, and residents and persons who are domiciled in any country that is a signatory to the Berne Convention. Where a work is created by a person who is not a ‘qualified person’, protection is also afforded where the work is first published in South Africa or one of the other listed countries.

In general, copyright in a work will subsist for 50 years from the date of first publication of the work.

Some significant judgments have been issued in recent years by South African courts in disputes involving manufacturers of motor vehicles and components, on issues including design and trademark infringements and passing off. The issue of generic or replacement parts has given rise to substantial litigation, as has the issue of dilution of trademarks by the use of the image of a vehicle bearing the mark in advertisements for products such as car polish and replacement parts. The High Court has also granted an order against the unauthorised copying of a parts numbering list by a rival manufacturer of replacement parts.

Employment issues

Trade unions and work councils

Are there specific employment issues that automotive companies should be aware of, such as with trade unions and works councils?

There have been significant employment and industrial relations issues between automotive companies and trade unions since the late 1990s. The issues in dispute primarily involved wages and other critical conditions of employment, like personal protective equipment, health and safety of employees, hours of work and employment of casual and contract labour.

During 2010 and 2013 the motor industry went on strike for almost eight weeks as a result of three-yearly wage negotiations between vehicle assemblers and the National Union of Metalworkers of South Africa (NUMSA).

In 2014, a metals and engineering strike led again by NUMSA resulted in vehicle manufacturers halting production as the necessary car components were not being supplied.

Negotiations are currently in progress between NUMSA and MIBCO. NUMSA is demanding the formation of a mega bargaining council; however, the Retail Motor Industry Organisation is against this. NUMSA has further requested that oil refineries and distributors fall within MIBCO for medical aid subsidies and housing subsidies from the employers, as well as a wage increase. The dispute has been referred to meditation talks for a resolution. Note that a works council is referred to as a bargaining council in South Africa.

New technologies

Legal developments

What are the most important legal developments relating to automotive technological and mobility advances?

While driverless cars are being pioneered in territories outside South Africa, they have yet to be tested or considered locally, and local legislation will need to consider and deal with issues such as insurance and liability and the licensing and approval of such vehicles. It is anticipated that ride-sharing and car-sharing schemes will shortly be introduced, as has recently been the case in overseas territories such as the United Kingdom and cities such as London in particular, and the Uber technology has been enthusiastically received in South Africa. It is still early days, but some believe that traditional car ownership may become affected in South Africa by car-sharing and ride-sharing schemes, and the new Uber technology. At present there is no data to show this.