SA motor incentives insufficient

Automakers have been enticed by Mexico’s costs, location and economy. ( Imelda Medina/Reuters)

Automakers have been enticed by Mexico’s costs, location and economy. ( Imelda Medina/Reuters)

Governments worldwide are rolling out the red carpet for the automotive industry in the form of investment incentives such as lowered tariffs and rebates.

South Africa is no different but its incentives, considered very generous by some, are nowhere near good enough to earn it the title of the preferred investment destination.

The incentives have been controversial, in part because they are intended to create trade neutrality in the automotive sector, yet they chalked up a reported R49-billion trade deficit in 2012.

The department of trade and industry said estimated duty rebates from 2009 came to R23.6-billion. And investment support of R15.9-billion has been approved.

South Africa has attracted global vehicle brand manufacturers, despite the geographical location being far removed from major markets.

Through a range of incentives, the government has provided support in the automotive and component industry which contributed an estimated 7.6% to gross domestic product during 2011.

Tug of war
But the ritual tug of war between unions and employers, which this year resulted in an unprecedented seven weeks of strike action in the sector, already has one major vehicles manufacturer running scared in favour of more attractive investment locations, of which there are many.

BMW said the labour situation has resulted in any future plans for the allocation of additional production volume to be put hold.

Company spokesperson, Guy Kilfoil, said the company lost almost 16% of its annual production during the strikes and South Africa was discounted to produce a new range because of the unreliability of supply that labour unrest can cause.

Strike action hasn't helped to tip the scales in South Africa's favour when there are plenty of other nations vying for foreign direct investment in the automotive industry, which is considered to have massive multiplier effect with forward and backward links into virtually every other industry.

Under South Africa's automotive production and development programme, which replaced the motor industry development programme on January 1, automotive manufacturers do qualify for a range of benefits: when exporting their products or selling locally manufacturers receive import duty credits.

On top of this, the import duty is frozen at 25% for light vehicles and 20% for components until 2020 — better than tarriffs in other protected markets such as China, India and Malaysia.

SA seriously limited
But Lyal White, director of the centre for dynamic markets at the Gordon Institute of Business Science, said that, as a single market, South Africa is seriously limited and the environment is not conducive to investment or expansionary plans.

"Original equipment manufacturers look at the market potential in the various regions, infrastructure, incentives and business environment and South Africa does not come up as positively as others in Mexico, Brazil, Thailand or the Philippines."

Mexico, the world's eighth largest automaker, has different advantages, not necessarily incentives, said Lorena Isla, research manager for Latin America at business consulting firm Frost & Sullivan.

Despite unions — and strike action — Mexico is next door to the United States, the second largest vehicle industry in the world.

It has low labour costs when compared with that of the US and the quality of labour is better than other low-cost locations such as China and Brazil.

Mexico also has free trade agreements with more than 40 countries and has a special agreement with the Mercosur area (Brazil, Argentina, Uruguay, Paraguay, Venezuela and Bolivia), so it is considered an export hub.

Mexican states compete among themselves
Also, "in the last 15 years Mexico has shown a very stable macroeconomic environment that is becoming an important driver to attract foreign direct investment. Low inflation and a stable exchange rate are very important for vehicle manufacturers' cost structure," Isla said.

She noted that states in Mexico compete among themselves to attract investments, but these incentives are tailored to each company and are negotiated at a private level and not a government programme.

White said the energy and labour costs in Brazil and Mexico are similar to South Africa, but the existing markets in those countries and proximity to new and larger markets is much better.

In Brazil incentives are high and unions are powerful.
The government offers tax breaks to boost the nation's car industry, which accounts for around 20% of economic output.

A new tranche of incentives was announced in October last year and could cost the government about $395-million in lost revenue. Brazil is part of Mercosur, and so original equipment manufacturers are able to trade almost tariff free among themselves, White said.

Anthony Black, a professor in the school of economics at the University of Cape Town, said quite a few countries have higher tariffs than South Africa although one would have to consider all subsidies, rebates and other incentives.

Problem with disparity
"We do have problem in terms of disparity in categories of workers. Our labour costs are not cheap when compared with countries with a similar per capita income like Thailand – their costs of all categories of labour are quite a bit lower than ours."

So despite tariffs of 80%, Thailand is one of the lowest cost production locations.

In 2008, a project with the United Nations Industrial Development and the trade and industry department attempted to benchmark the motor industry development programme against similar automotive policies in Thailand, Brazil, India, Australia and Turkey.

"Our consensus was that, given the South Africa location and challenges, the policy was best suited to African interests, and promotes production commercially in South Africa, which ultimately aids in job creation and foreign direct investment flow," said Sarwant Singh, senior partner at Frost & Sullivan, who led the project.

But were it not for these incentives, an automotive industry in South Africa may not be possible at all.

Kilfoil said these development programmes are in place to mitigate against the geographic and logistic disadvantages of producing cars in and exporting them from South Africa.

Making very little financial sense
"All original equipment manufacturers agree that it would make very little financial sense to produce cars locally," he said.

"In effect, these programmes put local manufacturing plants at a similar level of competitiveness to other northern hemisphere plants in terms of logistics."

Kilfoil said it's imperative that other production input factors, such as labour and local suppliers, are at globally competitive levels of productivity, skill and quality to maintain the competitive status quo.

"Two months of strike action, which removes nearly 16% of annual production, is not a globally competitive labour environment."

Numsa has said, however, it cannot be held to ransom by any investor especially in the context of huge unemployment, poverty and inequality.

Black said he did not think South Africa's labour costs are hugely out of line but noted the industry is facing real problems of competitiveness and pressure from head office to produce.

Cost of operating increases
White said the cost of operating for original equipment manufacturers has increased. Energy costs are higher and labour costs are much higher relative to the market size.

But South Africa's geographical dislocation is beginning to change as Africa booms. "The region is going to become a very significant market," Black said. "We will for once be in the right place at the right time."

White said South Africa would have to work on its competitiveness.

"If South Africa wants to attract new investments and reinvestments," he said, "We will need to revisit the investment environment for labour and energy and infrastructure, but even more importantly, focus on integrating with Southern African Development Community and the rest of Africa — Kenya and Nigeria and Angola."

Lisa Steyn

Lisa Steyn

Lisa Steyn is a business reporter at the Mail & Guardian. She holds a master's degree in journalism and media studies from Wits University. Her areas of interest range from energy and mining to financial services and telecommunication. When she is not poring over annual reports, Lisa can usually be found pottering about the kitchen. Read more from Lisa Steyn

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