Shifting gears: The automotive sector is set to increase local manufacturing

Already one of the largest industrial segments in South Africa, the automotive sector is gearing up for some major changes scheduled to take effect in January 2013, when an import-incentive scheme that successfully expedited the development of the industry will be replaced by a programme designed to foster more local production of components. The step is a crucial one, and while the details have yet to be finalised, it has won the support of major stakeholders. South Africa’s goal is to more than double annual production by 2020, and this policy change is aimed at meeting that target as well as deepening the local labour force’s role in the process.

MIDP: During the apartheid era, South Africa’s automotive industry was small and highly protected, and import replacement was a major economic goal. In 1995, priorities shifted to employment as a driver of economic policy and the new government introduced a scheme designed to take advantage of the increase in access to global markets.

The Motor Industry Development Programme (MIDP) provided global automakers with financial incentives to set up plants in South Africa, primarily with exporting in mind, but also to service local demand. Total production was about 472,000 vehicles in 2010, which is roughly average for the last several years, although depending on global demand production can range between 350,000 and 600,000 units. The goal is to get up to 1.2m vehicles annually by 2020. In terms of global production, the country’s current output represents a market share of between 0.6% and 0.8%, and comprises approximately 11.9% of the country’s total exports.

Under the auspices of the MIDP, the number of cars produced per automotive employee on an annual basis has reached 16.6 from a figure of less than 10 before the plan’s introduction, according to figures from the National Association of Automobile Manufacturers of South Africa. A common industry measure of quality is the number of problems per 100 vehicles, which sunk from 182 in 2001 to 93 in 2009. Efficiency can also be measured in terms of the number of cars per model produced in the country, which has increased from 9000 to 29,900.

CHALLENGES AHEAD: Maintaining this level of rapid development over the coming years may become more challenging, however. South Africa is no longer thought to be as much of a low-cost labour destination as it used to be, for example, as a result of steadily increasing wages and a robust tradition of collective bargaining. A lack of new investment into existing infrastructure has also become an issue, as costs and congestion at the port of Durban, which handles most of the automotive sector trade, continue to increase. Costs there are as much as 60% higher than in similar ports in countries against which South Africa benchmarks its auto industry’s competitiveness, including major South-east Asian auto producers such as Thailand.

Electricity costs have also climbed as a result of the national electricity authority, Eskom, raising rates to help fund a capital campaign that will add new capacity and upgrade existing infrastructure. Electricity costs increased by 26.3% between 2010 and 2011. Prices have been rising at roughly the same rate since 2007. “The success of the industry is vitally dependent on first-class logistics, said Bodo Donauer, managing director of BMW South Africa. “Goodwill only goes so far, and we need to see tangible improvements. The ports are expensive and productivity is low, and infrastructure to export to the rest of Africa is virtually non-existent.”

A RESPECTED PRODUCER: In spite of the challenges, South Africa shows no signs of losing favour among leading global automakers. It was a vote of confidence when Mercedes Benz opted to keep production of its C-class sedan in the country, for example. The German firm produces cars for US consumers at East London, in Eastern Cape State, have won multiple awards as the top-quality cars in the market from JD Power, a US market research firm that specialises in consumer-satisfaction surveys.

What is clear, however, is that building on the past successes and current activity will require a new strategy, which is what prompted the Department of Trade and Investment (DTI) to replace MIDP, which expires in 2012, with a new policy and incentive schemes come January 2013.

ROSY OUTLOOK: The new plan is called the Automotive Production and Development Programme, or APDP. The idea is to ensure the sector has a greater impact on the economy and on national employment levels by increasing local components manufacturing, and sourcing more of the semi-finished goods in the domestic market.

Unlike the MIDP, which targeted its incentives at the car manufacturers themselves, the ADPD aims to incentivise suppliers as well. The programme has four main mechanisms to develop the sector’s domestic supply chain. Final details were not expected to be known until early in the second quarter of 2012, but the broad outlines of the new plan are clear.

The first aspect of the plan is the Automotive Investment Scheme, which has already been put in place and backdated to July 2009. It is available to both manufacturers and component suppliers, and allows them to claim 20% of their investments into domestic production against their tax burdens. This has already encouraged new investment, including commitments of R13bn ($1.6bn) from carmakers and their suppliers, which will support the creation of 24,000 jobs, according to the DTI.

The second aspect is a freezing of import tariffs on vehicles and parts at 25% and 20%, respectively. An exception will be made for vehicles from the EU, which will be taxed at 18%.

The third category of incentives is a local-content allowance, which will apply to all facilities producing at least 50,000 vehicles a year. It will allow them credits against taxes paid on relevant imports in 2013 equivalent to 20% of the sales value of their production. That number will fall over the course of the ADPD, making local production more attractive in the coming decade. The rate is scheduled to drop to 19% in 2014 and 18% from 2015 to 2020.

The final of the four main incentive programmes also offers credits against import taxes. These will be determined according to the levels of local content in parts and components. There may also be additional incentives to protect local industries that are more marginally competitive, such as alloy wheels and leather upholstery, which are unlikely to be spelled out until full details of the plan are released.

Automakers in the country appear supportive of the new incentive regimes. CEOs and managing directors such as BMW South Africa’s Bodo Donauer and Toyota South Africa’s Johan van Zyl have told local media in recent months that boosting production will be made easier with a steady supply of quality components at competitive prices. According to Donauer, the success of the industry is also dependent on improvements to infrastructure and logistics. “We need to see tangible improvements to grow the industry,” he said. “The ports are expensive and productivity is low, and infrastructure to export to the rest of Africa is virtually non-existent.”

TRUCKS WAITING: The ADPD’s scope is limited to covering the production of cars, light trucks and other commercial vehicles. However, the DTI is, according to local media reports, considering a set of incentive programmes similar to the ADPD to stimulate production of heavier commercial vehicles of more than 3500 kg of gross mass.

This segment of the automotive market has historically received less attention from government – a local content programme that set high standards for engines and transmissions was taken out of effect in 1994, and the MIDP only addressed rates for imports. As the ADPD comes into play, industry players expect to see more domestically produced cars – with more locally produced parts – on the roads. If the plan proves successful, it may pave the way for the further production of larger vehicles as well.

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The Report: South Africa 2012

Industry chapter from The Report: South Africa 2012