Keeping the wheels spinning

You may be paying more for your car, but it is good for the economy according to the Department of Trade and Industry (DTI).

Cars in South Africa are about 15% more expensive than they could be because of the motor industry development programme (MIDP). But the DTI’s head of industrial policy, Nimrod Zalk, says the economic spin-offs are worth it.

“Let’s be clear, yes, to a certain extent cars will be more expensive in South Africa because we have the programme,” says Zalk. “I don’t think we can hide that or pretend that it is not the case.”

But Zalk says the net effect of the programme is beneficial to the economy.
“There are strong spillover effects from this industry and it multiplies through the economy. It is an industry that draws on sectors like steel, plastics and leather. We are trying to strike a balance by supporting the industry and not ignoring the consumer market,” he says.

The MIDP was launched in 1995 to support the country’s automotive industry. Its “flagship industrial policy” has boosted the sector’s vehicle production from 388 442 units in 1995 to 534 490 units in 2007, as well as contributing to 16% of South Africa’s total exports.

However, the news has not been all good and the programme has come under heavy criticism for increasing the price South African’s pay for their cars. In addition, Australia threatened to lodge a complaint with the World Trade Organisation (WTO) because the export subsidies included in the MIDP were major WTO contraventions, otherwise known as red-light subsidies.

The result is a new-look MIDP, which has been restructured to be more WTO compliant and named the automotive production-manufacturing programme (APDP) following a lengthy review process launched in 2005.

The plan is for the new APDP to double vehicle production to 1,2-million by 2020.

Zalk says because the MIDP linked import duty credits to exports, it was vulnerable to the fast-track complaint system of the WTO, which could have forced South Africa to remove its subsidies.

“The new programme is a more market-neutral instrument, it doesn’t matter which market you are selling to the domestic or export market,” says Zalk.

He says the new subsides included in the APDP fall under orange-light subsidy category and are subject to complaint but the WTO is unlikely to rule that the subsidy is illegal.

“Theoretically it is actionable but we think it is very unlikely, given that everyone else who plays in these areas give orange-light subsidies.

“There is some risk of WTO action, but we don’t think it’s huge. This is an industry that is supported in every country, we are not in a zero tariff game as some people have suggested,” says Zalk.

“The only way for us to be in this industry as a country is to provide subsidies. Where support has been removed, such as in Australia, they have pretty much lost their industry,” he says.

So how does the new programme work?

The APDP is made up of four components; the first is the retention of stable moderate import tariffs.

From 2012 the import tariffs on already assembled vehicles imported into the country will drop from the current 30% tariff to a 25% tariff, while the 20% import tariff on components will remain the same.

The second component is the local assembly allowance, which allows vehicle manufacturers with a plant volume of at least 50 000 units a year to import 20% of their components duty free.

Zalk says this means that if a vehicle retailed for R100 000 and the manufacturer was importing R20 000 worth of components for that car, only R4 000 of that would be duty free, the remaining R16 000 would be subject to the 20% import duty.

Zalk says this is aimed at encouraging economies of scale and also supporting local assembly.

The third component is the production incentive in which manufacturers can earn a duty credit according to the production value they add.

Zalk says on a simple level the value add equates to sales minus raw materials, so if a car retails for R100 000 and raw materials cost R80 000, the value add will be R20 000. The production incentive would be 55% of the R20 000, which is R11 000.

The final component is the automotive investment allowance, which takes the form of a direct grant to support investment in new plants and machinery.

“What it allows for is a grant of 20% of the capital required for the project over three years,” says Zalk.

He says this should be implemented from 2009 and the DTI is still in discussions with treasury to get these grants placed on the budget because they are not duty-based investments.

Support for other industries needed
The Department of Trade and Industry’s (DTI) head of industrial policy, Nimrod Zalk, says that one of the biggest failings of post- apartheid industrial policy has been the lack of state support.

“One of the arguments was why the motor industry should get so much: why not redistribute to other industries,” says Zalk.

“There has been an appropriate level of support here that has driven really solid growth. We need similar levels of support in other industries that are more labour intensive and value adding. We shouldn’t look to detract from or water down the MIDP [motor industry development programme], but rather look to build programmes that have a similar level of support and similar economic gains in a range of other sectors,” says Zalk.

He argues that the sectors with the biggest growth curves are the automotive and natural resource based manufacturers, while labour intensive manufacturers such as mining and agriculture have stagnated over the same period.

He says because policy instruments support these industries, it implies that growth in these industries did not happen automatically. Sectors in need of their own support instruments include machinery, transport equipment, agro-processing, business process outsourcing and tourism.

He says that while some of these sectors have received some support, it has not been on the scale of the MIDP. “There is a potential to ramp these sectors up, in fact it is absolutely necessary,” says Zalk.

Not going green just yet
The automotive production-manufacturing programme (APDP) may go green some day, but not just yet.

The Department of Trade and Industry’s (DTI) head of industrial policy Nimrod Zalk says that for now the focus of the APDP remains solely on production and employment.

But there is potential for a green friendly policy to be worked into the APDP in the future.

“We think that purely for commercial reasons it makes sense to push for higher environmental and emissions standards because that is the way things are moving,” says Zalk.

“At the moment we are not saying we can give a better deal than someone who is more environmentally friendly. We haven’t gone down that route yet,” he says.

One area that needs to be looked at is whether the APDP can be used to attract hybrid cars.

“We want to actively pursue that but we need to test the waters and the appetite in South Africa for that type of manufacturing,” says Zalk. “Frankly we need to understand that market a lot better. I don’t think we understand the dynamics of that market well enough yet.”

Zalk says the industry is committed to introducing tougher emission standards but that the process requires coordination between DTI and the Department of Minerals and Energy and the fuel manufacturers.

Lloyd Gedye

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