Motor vehicle exports may be booming, courtesy of the Motor Industry Development Programme (MIDP), but where are the cheap cars and job growth promised when the programme was launched in 1996?
That’s a question labour says has not been satisfactorily answered by the government or the motor industry in their eulogies on the export-promoting MIDP, which allows manufacturers to offset import duties against exports. The duty-offset programme encourages manufacturers to focus on high-volume production runs and import the less popular models that are uneconomic to produce locally.
In many respects the programme has succeeded. South Africa produces just 26 models today, down from 42 five years ago, though consumers have far greater choice in terms of imported models. The motor industry is South Africa’s fastest growing export sector and industry profitability is rising.
Productivity is also up: direct labour costs per vehicle have fallen 30% in the past five years. The MIDP was recently extended to 2012, with some modifications, to provide policy certainty for the industry.
But the unions remain highly critical. “When the MIDP strategy was decided, it was supposed to have brought down car prices far lower than they were. This hasn’t happened,” says Jeffrey Ndumo, researcher for the National Union of Metalworkers of South Africa. “The other problem we have with the programme is that it has resulted in job losses — about 16 500 since the programme started.
“While it’s true there have been job gains on the component side, we question how sustainable these are.”
The National Association of Automobile Manufacturers of South Africa’s annual report for 2002 gives the employment scorecard: 31 700 employed in assembly that year, virtually unchanged from 1999. The tyre industry lost about 600 jobs over the same period, while there have been job gains in the component and retail sectors. In total, industry employment is up to 303 700 from 280 870 in 1999.
Ndumo says the employment figures look flattering if 1999 is chosen as the starting point, but that the 16 500 jobs have been shed since 1995. “Employers are rewriting history by saying that the MIDP was intended to stabilise employment, when one of its purposes was to grow employment,” he says.
Congress of South African Trade Unions economist Neva Makgetla believes the MIDP places insufficient emphasis on employment and is not a great model for other sectors to emulate. She says the employment gains on the component side of the industry are concentrated in two sub-sectors: catalytic converters and leather seats.
National Association of Automobile Manufacturers of South Africa executive director Nico Vermeulen concedes there have been job losses in assembly and tyres due to rationalisation and higher levels of automation, but that the Automotive Industry Export Council Employment Survey shows 4% compound growth in total industry employment since 1999. Permanent employment in the component sector grew more than 10% to 74 000 over the same period.
“Looking at the big picture, the MIDP has been an exceptional success,” says Vermeulen. “You can criticise aspects, but you have to ask what the alternative was. Without the MIDP, car prices would be far higher than they are today because some manufacturers would have pulled out, reducing competition. Without the MIDP, there would have been massive job losses.”
Prices
Vermeulen says vehicle prices increased at below-inflation rates between 1995 and 1998 when the rand weakened sharply. Why, then, have car prices not fallen now that the rand is 40% stronger than it was in January last year?
Econometrix economist Tony Twine says manufacturers shouldered some of the currency depreciation pain in 2002 when prices increased by about 19%, far less than the rate of the rand’s decline against the dollar and the euro.
Car prices have hardly moved since 2002, but they have not dropped either, according to the official price lists. However, new car buyers are getting discounts on dealer list prices through interest rate sweeteners, deferred payment plans and free maintenance contracts.
Says Twine: “It is extremely damaging for manufacturers to drop their list prices, because this affects the residual values of all existing models already purchased. So manufacturers and dealers are offering other kinds of deals to lower the total package cost.”
The MIDP is credited with rescuing South Africa’s once highly protected motor sector from an uncertain future. When in 1994 South Africa signed the General Agreement on Tariffs and Trade — since superseded by the World Trade Organisation (WTO) — import tariffs on cars were 115%. Today they are 38%.
Steel and Engineering Industries Federation economist Mike McDonald says the MIDP gave manufacturers time to adjust to the more competitive environment, provided they worked quickly to ramp up exports and to offset falling import tariffs.
The export figures tell the story: the number of vehicles exported jumped to 125 306 last year, from just 11 553 in 1996. In rand terms, last year’s exports were worth R17,2-billion, up from R7,4-billion in 2000.
Add automotive components to the mix, and exports sales were worth R40-billion last year, double what was earned in 2000.
Of the R23-billion in export sales by component manufacturers last year, about 40% were from catalytic converters and leather seats. As the MIDP is of doubtful legality in terms of WTO rules, because the government is foregoing revenue to support the industry, some question whether these sectors could sustain a WTO challenge. At least one challenge was threatened, but never materialised.
BMW, DaimlerChrysler and Volkswagen account for the bulk of vehicle exports, with Toyota only recently joining the fray. Ford exports its 1,3 and 1,6 litre RoCam engines, manufactured in Port Elizabeth, to Asia. Next year Ford will start exporting fully built vehicles, and Nissan and General Motors are likely to follow suit.
As exports have gone up, so too, have imports. Some 84 000 imported cars were sold in South Africa last year, about a quarter of the total. The domestic market, however, has had several torrid years, with 363 000 vehicles sold last year, down from 421 000 in 1996. This year, volumes should be about 6% up on 2002, lifted by lower interest rates.
Manufacturers’ pre-tax profits hit R4,6-billion last year, up from R3,9-billion in 2001 and R1,25-billion in 2000. Margins have improved after several lean years, notably between 1996 and 1999, when profits were marginal or non-existent.
Another positive spin-off for the MIDP is the level of fixed investment in plant, expected to reach R3,1-billion this year, double the 2000 level.
The MIDP aims at balance of payments neutrality, with exports equalling imports. It is still about R9-billion in deficit, though the gap is narrowing.
All this is good news for the industry and the government, but cheap cars remain as elusive as ever. One proposal from Wesbank’s CEO Ronnie Watson is to amend South Africa’s archaic financial instalment-sale rules, which limit repayments to 60 months and require a 10% deposit.
Extending the use of leases, where no deposit is required, would bring vehicle affordability within reach of many more lower to middle-income South Africans.