South Africa’s real economic challenges are beginning to=20
Reg Rumney reports Alarm bells have begun to ring for the economic outlook for=20 South Africa. As the election “miracle” begins to be discounted,=20 doubts about the underlying soundness of the economic structure=20 have begun to mount. It is not only that economists are by nature pessimists — not for=20 * othing is economics known as the dismal science. The hugeness=20 of the economic challenge is beginning to become apparent. Lurking problems include: * A mediocre growth rate in a country with an estimated formal=20 unemployment rate of around 43 percent will not even mop up=20 * ew entrants into the job market. * Added to this, the union movement is pushing, in its proposed=20 amendments to the draft Labour Bill, for less flexibility, with=20 more and stricter government regulation of the labour market.=20 Inflexible labour markets are likely to deter new foreign investors=20 and add to South Africa’s uncompetitiveness. * Foreign direct investment, at about R800-million last year, has=20 picked up, but is by no means a flood, and is concentrated on=20 buying existing businesses rather than on greenfield projects. * The glowing export performance of past years has been shown to=20 be less than miraculous, in the light of the ease with which export=20 income has been overtaken by spending on imports, spurred by=20 economic growth. For the second month this year, the trade=20 balance — exports minus imports — went R135-million into the=20 red in May. * A lack of movement on the delivery of basic needs in terms of=20 the Reconstruction and Development Programme threatens=20
* South Africa has found itself in what is arguably a “debt trap”,=20 where money has to be borrowed to pay interest on loans already=20 raised, adding to the debt in a snowball effect. The interest burden=20 of government debt this year is projected to be 18,5 percent of=20 total government spending. Put another way, around R1 out of=20 every R5 of taxpayer’s money is spent on servicing the debt. * Little progress has been made in spelling out government policy=20 on privatisation of State assets, which could be used to run down=20 government debt. * A forecast Budget deficit for this fiscal year — the gap between=20 government revenue and spending, which has to be borrowed — is=20 beginning to look high at 5,8 percent, after two years of economic=20 recovery. The Department of Finance appears to be looking at a=20 Budget deficit of five percent next year. * No obvious progress is discernable in bringing down the high=20 crime rate, which is a deterrent to domestic and foreign=20
Plan to make cars more affordable Karen Harverson Local car prices have increased above inflation over most of the=20 past 10 years and are unlikely to drop as a result of the=20 implementation of the Motor Industry Development Plan for=20 * ocally produced cars in September this year. National Association of Automobile Manufacturers of South=20 Africa (Naamsa) director Nico Vermeulen says the plan is=20 designed to promote greater affordability but each vehicle=20 assembler will react individually. He anticipates that production of small volume car models will=20 decline by half within the seven-year implementation period of=20 the plan, while the proportion of imported completely built up=20 units (CBUs) — currently less than one percent of the R17-billion=20 a year new car industry — will increase. New car sales are expected to reach 230 000 this year, compared=20 with last year’s 190 716, which was 20 percent lower than the=20 peak of 301 528 reached in 1981.=20 “We expect car sales to gradually surpass the 1981 peak by the=20 end of the millenium provided the South African economy=20 experiences real growth of four to eight percent in the next five=20 years,” says Vermeulen. Seventy-five percent of cars sold in South Africa are sold into the=20 corporate and fleet markets. As an industry, the automotive sector exported R1,8-billion CBUs=20 and components last year. Current car market leader Volkswagen has no plans to reduce car=20 prices across the board despite its launch in April this year of the=20 * owest-priced small car in the market. “In the past we’ve been premium priced but are now embarking=20 on a realignment in the cost of our cars relative to our=20 competitors. We’re holding prices, as opposed to cutting them,=20 for a period of time,” says marketing director Graham Hardy. Toyota SA public relations manager Roger Houghton says that=20 Toyota will not drop prices of existing models, although he=20 believes the MIDP will lower car prices in real terms over a=20 period of time. Samcor managing director Arthur Mutlow says the company has=20 already lowered the prices of the vast majority of its passenger=20 and commercial vehicles and supplies the two lowest-priced entry- * evel five-speed, 1,3 hatchbacks and sedans. He comments that these cuts are not short term, but a change to=20 the company’s basic pricing structure. Nissan South Africa chairman John Newbury says he does not=20 anticipate any immediate reduction. “However, local assemblers=20 will be under pressure to meet the price challenge of imported=20 vehicles and the entire question of improving productivity now=20 assumes critical importance in containing costs.” Delta Motor Corporation sales and marketing director John=20 Cuming feels the MIDP is unlikely to cause price cuts in the short=20 term although in the longer term, duties will be lowered and a=20 reduction in the real price of new vehicles can be expected. BMW public affairs GM Chris Moerdyk says the company has=20 reduced prices on a number of models although price lists do not=20 reflect this. “While the price of a specific model might have increased by=20 three percent, additions to it include driver and passenger airbags,=20 an upgraded engine and the free maintenance content within the=20 purchase price has increased from two years to five years, all of=20 which amounts to added value of about six percent, with the result=20 that the price is three percent lower.” He comments that recent price cuts by Volkswagen and Samcor=20 applied only to models that were more than 10 years old. =20 “We intend to convert the BMW plant from a production facility=20 catering for all South Africa’s BMW requirements to an export- based plant producing one model in far greater volume for world=20 markets, and using part of the foreign earnings to import a=20 relatively smaller volume of other BMW models required by the=20 * ocal consumer,” he says. He adds that pricing is dictated by both=20 economy of scale production and the local exchange rate. “In=20 BMW’s case, with the rand losing steadily against the=20 Deutchmark, it is difficult to reduce prices significantly.” By concentrating on exports in the future, BMW hopes, in the=20 * ong term, to double or treble its current volume locally. Vehicle sales are expected to reach 230 000 this year compared=20 with last year’s 190 716 which was 20 percent lower than the=20 peak of 301 528 reached in 1981.=20 Contrary to widespread expectations, car prices will not be cut=20 drastically this year. However, when the new Motor Industry=20 Development Plan is implemented in September, the price hikes=20 which domestic car buyers have endured over the past five years=20 are likely to be contained.=20 “Car prices have been increasing above inflation for the past five=20 years, mainly due to the phase 6 local content programme,” says=20 National Association of Automotive Component and Allied=20 Manufacturers (Naacam) director Denzyl Vermooten. This=20 programme, based on value, has inherently inflationary elements,=20 he says. For instance, export incentives were built into the price of=20 the locally manufactured vehicles, resulting in domestic buyers=20 subsidising automotive exports. One of the aims of the new plan is to make cars more affordable=20 for South Africans by improving the competitiveness of the=20 automotive industry and lowering barriers to overseas=20
Vermooten says that the industry must take steps to reduce the=20 variety of models being built locally to enable component=20 manufacturers to produce higher volumes of a reduced variety of=20 parts. Bigger production runs would bring down component costs.=20 About 30 percent of the components used are locally=20
South Africa has seven assembly plants producing 10 marques=20 (brands) — with more than 40 models in total — for a local market=20 of only 300 000 vehicles. Average production per model is about 7=20 500 units compared to well over 100 000 in Japan, Europe and the=20 United States. Even low volume producer countries, such as=20 Brazil and Australia, produce more than 30 000 units per model. The plan will force local assemblers to choose one of three routes:=20 increase local content of vehicles, concentrate on the export route,=20 or a combination of both. Rationalisation of certain sectors of the 44 000-employee, R8- billion-turnover component sector is expected to occur depending=20 on the course taken by the vehicle assembly sector. Some models may be discontinued and, if these models revert to=20 being completely built up (CBU) imports, the component industry=20 will not show much growth and jobs will be lost. “However, if the=20 route taken by manufacturers involves the importation of=20 completely knocked down (CKD) units, then certain components=20 will continue to be purchased locally,” says Vermooten. He adds that it is vital that the plan is constantly monitored to=20 determine the impact it is having on the industry to enable=20 government to take remedial action to counter any adverse effects=20 that materialise. The plan hinges on three strategies to encourage vehicle=20 assemblers to continue to assemble locally. It offers a 27% duty=20 free allowance (DFA) on the wholesale value of vehicles=20 assembled locally; an import/export trade rebate allows the duty=20 free importation of vehicles and components equal to the local=20 content value of the motor vehicles and components exported; and=20 in accordance with the General Agreement on Tariffs and Trade,=20 duties on motor vehicles will be reduced from 65 percent to 40=20 percent, and on components from 49 percent to 30 percent, over a=20 seven-year period.