Jump start: New support for the automotive segment

It is often observed that the development of South Africa’s manufacturing activity over recent decades presents something of an anomaly: while the end of the country’s international isolation in 1994 marked the beginning of a period of sustained manufacturing growth, the sector’s contribution to GDP has nevertheless declined as a percentage of the total.

As an employer of some 1.7m South Africans, manufacturing is a strategic priority, and broad-ranging initiatives such as the Manufacturing Competitiveness Enhancement Programme (see overview) are testament to the government’s long-standing commitment to the sector. However, South Africa’s greatest success in boosting manufacturing activity has come as a result of its sector-specific planning with regard to the automotive industry, which has benefitted from a history of policy reform that has become the envy of other sectors.

In 2012 the Motor Industry Development Programme (MIDP), credited with turning around South Africa’s automotive industry came to an end, and on January 1, 2013 its replacement, the Automotive Production Development Programme (APDP), came into effect. Assessing the effectiveness of one and the potential of the other is not only of interest to the nation’s vehicle and vehicle component manufacturers, but also to a wider industrial sector keen for the government to repeat its success elsewhere.

The MIDP

The MIDP was put in place in 1995 and was formulated as a response to the challenges of trade liberalisation, globalisation of markets, rapid technological advances and rising customer expectations that faced the nation’s insular automotive industry on its emergence from the apartheid era. In essence the initiative represented a structural change aimed at transforming a sector characterised by low volumes of imports and exports and import duties on vehicles and components of up to 115% into a more liberal regime capable of competing internationally. The programme consisted of four principal schemes: a phased reduction of import duties on both vehicles and components; an export-import system by which vehicle and component exporters could enjoy lower duties on imported vehicles and components relative to their exporting activity; a system of import duty rebates for components and intermediate inputs used on vehicles and components which were later exported; and a duty reduction on imported components of 27% of the value of vehicles produced for the domestic market.

Over the course of its lifetime the MIDP was reviewed and extended twice, most notably with the addition of the Productive Asset Allowance that provided further import duty credits equal to 20% of the value of qualifying investments. Its central objective, however, remained the same: to encourage local vehicle manufacturers to specialise in one or two high-volume models, so they achieve an economy of scale through exporting them, while models not manufactured in South Africa might be imported.

Programmed Results

The impact of the MIDP on South Africa’s automotive sector has been considerable. “There would not be an automotive industry in the country without the MIDP,” Norman Lamprecht, the executive manager of the National Association of Automobile Manufacturers of South Africa (NAAMSA), told OBG. “One of the most important functions of the programme has been to establish long-term policy certainty, which is not always the case in emerging markets. I have always regarded this as a competitive advantage for South Africa.”

Vehicle exports grew from a negligible amount in 1995/96 to 277,893 units in 2012, while in value terms the nation exported around R4bn ($490m) per year at the start of the programme against approximately R86.9bn ($10.6bn) in 2012. The South African automotive industry has emerged as the largest local manufacturing sector, accounting for 80% of Africa’s total production and exporting high-quality vehicles and components to global markets, including the US and Europe. All of the world’s major vehicle manufacturers have established operations in the country, with the largest exporters by volume including Toyota, followed by Volkswagen, BMW, MercedesBenz and Nissan. Likewise, eight out of the world’s top 10 component firms are present in the country, producing everything from vehicle air conditioners and alarm systems to engine transmission shafts and shock absorbers. Moreover, the success of the sector has been felt across a wide array of industries that complement it, such as plastics, rubbers, metals and leathers, while the wider economy has also benefitted from its rapid growth.

“There have been numerous indirect benefits, an important multiplier effect – for every job directly created there are another five in areas like logistics, engineering, financial services and so on,” said Lamprecht. The MIDP has, to summarise, met all of its core objectives and conferred a host of other benefits upon the broader economy.

A New Programme

Given the success of the government strategy, the conclusion of the MIDP at the close of 2012 and the commencement of a new programme in 2013 has been a source of great interest to the industry. The change of regulatory regimes has been a smooth one, and is broadly welcomed by the major players. Consultations regarding the APDP began in the mid-2000s, and the structure of the new programme is broadly similar to its predecessor: a targeted tariff regime (by which import duties on vehicles and components will be frozen at 2012 levels through to 2020) combined with other investment incentives. The latter include: the Automotive Investment Scheme, which amounts to a cash grant of 20% of qualifying investment paid to original equipment manufacturers (OEMs) and component manufacturers over a three-year period; the Vehicle Assembly Allowance, which takes the form of duty-free import credits issued to OEMs, based on 20% of the ex-factory vehicle price initially, to be reduced to 18% after 2013; and the Production Incentive, also in the form of duty-free import credits that will begin at a high of 55% and be reduced progressively to 50% of value added.

The Production Incentive replaces the similar export-based scheme of the MIDP, and therefore exemplifies the major difference between the old and the new programmes: whereas the MIDP heavily incentivised exports, the new APDP is designed to boost value addition, and therefore incentivises production rather than shipping goods overseas.

Setting Goals

The goal of the APDP is an ambitious one: to raise vehicle production in South Africa to 1.2m units per year by 2020, and in doing so significantly alter the processes, technologies and scale on which the domestic industry currently operates. One of the most important aspects of the new programme is its reinforcement of the policy stability which has allowed manufacturers to plan decades in advance and given them the confidence to invest in the country. The fruits of this long-term, consultative approach to policy formulation can be seen already. In early 2013 BMW began production of the new 3 Series, following a R2.2bn ($270m) upgrade to its plant outside Pretoria, and the company plans to increase production capacity at the facility to 90,000 units per year, with the addition of a third shift which will create 600 new jobs.

Mercedes-Benz South Africa (MBSA), having produced 60,000 units of the W204C-Class in 2012, has announced that it will start production of the new C-Class model, the W205, in 2014. In 2012 the company invested more than R1.5bn ($180m) in its South African operations, and it plans to do the same in 2013. Meanwhile, Ford Motor Company South Africa (FMCSA) announced in late 2012 that it would increase the number of shifts in its Silverton assembly plant and its Struandale engine plant, in response to the rapidly growing demand for its Ford Ranger pickup truck. The move created around 800 new jobs, and comes on the back of a R4.3bn ($520m) upgrade of its South African infrastructure aimed at boosting production over coming years.

The continued investment by OEMs based in South Africa is a vote of confidence in the APDP, which has been almost universally welcomed by the industry. Notable exceptions to the chorus of approval are a small number of component manufacturers, particularly those of catalytic converters, the production of which is almost entirely bound for export. This segment of the industry benefitted more from the export-focused MIDP and has therefore expressed their reservations about the APDP and its emphasis on in-country value addition.

Just how these firms will be affected by the implementation of the APDP is one of the more interesting questions that will be answered over 2013 and 2014. Furthermore, the possibility of the programme being extended to include medium and heavy commercial vehicles is another potential development that industry analysts are expecting in this period.