Paying through the exhaust

Hot on the heels of a Competition Commission finding that South African car prices are on average 14% more expensive than in Europe, the motor industry this week announced record vehicle sales last year of more than 600 000 units for the first time—R125-billion in total sales.

The 14% difference cost buyers of new cars an additional R17,5-billion.

Put another way, it’s like paying VAT of 14% twice—the first 14% payment going to the taxman, the second to the motor industry.

On an entry-level R70 000 car, the 14% difference amounts to R9 800, and R70 000 on a high-priced R500 000 sport utility vehicle.

The motor industry is the post-democracy manufacturing success story. Vehicle exports have grown from a desultory 15 700 in 1995 to 145 000 last year. If components are included, exports ballooned from R4,2-billion to R40,7-billion in 2004.

The industry has attracted massive investment, up from R1-billion in 1995 to R3,5-billion in 2004, exceeding R2,5-billion every year since 2001.

The motor sector is now the country’s largest manufacturing sector if the after-market is included; in 2004 it contributed 7% to gross domestic product.

Domestic sales have been buoyant, cheered by relatively low interest rates and the new spending power of the emerging black middle class.

But critics say that investment success has come on the back of consumers who pay over-the-top prices.

Canadian expert Frank Flatters, who analysed the motor industry development programme (MIDP) as part of a review process commissioned by the government, found that motor companies had received R55-billion in duty rebates during the eight years the programme has been running.

Just two companies, DaimlerChrysler and BMW, have received payments of R21-billion under the MIDP.

Flatters said that direct MIDP payments totalled R15-billion a year in 2002 and 2003, more than that budgeted for spending on education.

Flatters, describing the South African motor industry as “one of the most profitable vehicle markets in the world”, said the MIDP worked through subsidising production of vehicles and components for both the domestic market and for export.

“The subsidies are paid for by domestic consumers of vehicles in the form of restricted choice and higher prices.”

Flatters said the subsidy programme was only possible because of import duties of more than 30% and a virtual ban on used car imports, which “make car prices much higher than necessary”.

International Monetary Fund (IMF) staffers have also criticised the MIDP. The latest annual review of the South African economy says it is a complicated incentive scheme, with unclear costs, designed to make the local motor industry internationally competitive.

“Experience in other countries suggests that local-content programmes in the motor industry tend to raise costs and prices, reduce competition, and generate few, if any, benefits for employment,” the IMF review says.

“An independent review of the MIDP, which could take into account the consumer and general national interest in lower vehicle prices and a more efficient motor industry, would be a useful counterweight to strong vested interests in the continuation of the programme.”

The MIDP is also failing another test—job creation. Flatters records that during the first five years of the programme employment fell by 17%. “Since 2000 employment has more or less stabilised, but has not grown.

“Investments of more than R12-billion since 2000, have resulted in virtually no job growth in vehicle assembly.”

The National Association of Automobile Manufacturers of South Africa (Naamsa) says that total automotive employment has increased from 280 000 in 1999 to 303 700 at the end of 2003. Naamsa member companies in September last year employed 34 600 people.

Last month, the Competition Commission imposed collective penalties of R31,6-million on six motor companies—General Motors, DaimlerChrysler, Nissan, Volkswagen, Subaru and Citroën—and said that it was negotiating with a seventh, BMW. Failing a settlement this month, BMW would be prosecuted, the commission said.

The penalties—Toyota agreed to pay R12-million the previous year—follow complaints of resale price maintenance where the companies refused to allow retail outlets to offer price discounts.

The commission said its investigation into excessive pricing revealed that prices of models sampled were on average 14% higher in South Africa when compared to similar models in European Union countries and the United Kingdom.

“The analysis took differences in tax, vehicle specifications and motor plans into account. However, to sustain an excessive pricing case, the commission has to firstly establish that a firm is dominant, that it has a market share of at least 35% in any of the market segments for motor vehicles.

“We found that none of the parties met the threshold for dominance. A case in terms of section 8(a) of the [Competition] Act could therefore not be pursued.”

The commission is encouraging car buyers to negotiate better prices. It says it will “continue to keep a close eye on motor vehicle prices. The commission will participate in the MIDP review process, conducted by the Department of Trade and Industry, and highlight its concerns regarding the prices of new vehicles.”

The MIDP has been in operation for 10 years and has successfully contributed towards the industry’s integration into global markets, says Naamsa. “The South African automotive industry is today a global source of high technology, high quality automotive products available at internationally competitive prices.”

The association also points out that motorists have a huge choice, with numerous brands and 1 100 different models to choose from.

Naamsa executive manager Norman Lamprecht says individuals are at liberty to import new vehicles into South Africa without the need to go via dealers or the motor vehicle manufacturers. The transport costs and the duties payable will remain the same.

The empire strikes back

The way the Competition Commission calculated the car price differences is not clear. Factors that have to be taken into account when making international price comparisons include:

  • marketing/distribution differences. In many other countries delivery charges are levied, which have to be added to the list prices in those countries;
  • specification differences. Air conditioning and maintenance plans may or may not be included and can make a big price difference;
  • in South Africa VAT of 14% is levied, while other countries have lower sales taxes;
  • an ad valorem tax, which varies between 0,5% on entry level vehicles and up to 20% on vehicles costing R950 000 or more, is levied by the Treasury; and
  • import duty is 32% ad valorem compared to the 2,5% in the United States or 10% in Europe.
“This duty is levied under the motor industry development programme and provides protection to the South African automotive industry, the largest manufacturing sector in the economy,” says Lamprecht.

Duties and taxes can add as much as 45% to 50% to the retail price of a vehicle. This is very much lower in other countries, he says.

Lamprecht says an independent study by Justin Barnes of BM Analysts in Durban showed South African vehicle prices “compared well and are more competitive that United Kingdom prices”.

Kevin Davie

Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote. Read more from Kevin Davie

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