Driving foreign investment

Auto manufacturers in South Africa are expected to double vehicle production by 2020 in response to revised government incentives according to industry commentators.

The new Automotive Production/Manufacturing Programme was approved by Cabinet on Wednesday and will replace the Motor Industry Development Plan (MIDP), which comes to an end in 2012.

The plan is the culmination of years of negotiation between powerful, foreign-based industry players such as Mercedes-Benz, BMW and General Motors.

Some manufacturers threatened to withdraw manufacturing facilities from South Africa in response to more favourable deals offered by other governments. This move would have resulted in the loss of thousands of jobs.

Under the new plan, manufacturers will no longer be compensated for exporting vehicles as this is seen as a contravention of World Trade Organisation (WTO) rules on fair trade. Manufacturers will now be compensated for value-addition.

Trade and Industry Minister Mandisi Mpahlwa, addressing a media conference in Pretoria last Thursday, described this compensation as a ”production allowance”.

Under the MIDP, manufacturers could import vehicles without paying dutys after earning ”import credits” by exporting their products.

Mpahlwa said the revision of the MIDP started in 2005 to ensure the support that government gives to the motor industry is both ”consistent with South Africa’s multilateral obligations as well as domestic priorites”.

He conceded that the South African auto industry was facing increased competition from low-cost regions such as Eastern Europe and Asia. South Africa accounts for 1% of the global automotive market.

”Economies of scale in assembly and the depth of domestic component manufacturing are not yet internationally optimal. Local content of the exported vehicles has somewhat stagnated,” Mpahlwa said.

He added that imported vehicles were mostly responsible for the growth in domestic sales, contributing to a growing trade deficit.

The support package from government to car manufacturers has increased to 30% from 20%, including an additional 10% for training. However, according to industry players this still lags behind the incentives offered by other governments.

State support in the United States amounted to 62% of total market value. In addition, South Africa is much further from the major markets than manufacturers in Europe and the US.

However, an industry leader said that South Africa remains a popular investment option for manufacturers because of its relative political stability and strategic importance in Africa. South Africa is also a signatory to various free-trade agreements, which help with exports.

”We have here first-world facilities with the lower costs of an emerging market,” one industry player commented.

The tariffs will remain the same, at 25% for light motor vehicles and 20% for components, which is, according to Mpahlwa, meant to provide just enough protection to justify continued local vehicle assembly.

The industry was warned by Mpahlwa to do its bit in exchange for government’s incentives.

”The private sector is also expected to show progress in the areas of transformation, increasing local content and contribution to skills and acquisition or training. Industry will also be expected to achieve high volumes of production so as to benefit from such improved economies of scale.”

Ways to measure the success of the new plan will be built in, to keep track of whether the incentives are achieving their expected goals.

Some economists and officials in the national treasury have criticised the MIDP saying it drives up the prices of vehicles and distorts trade. As a result, jobs created in the car manufacturing industry are offset by jobs in vehicle servicing and support industries.

Additional reporting by Nic Dawes

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