1. Trade and Industrial Policy in the South African auto industry
Presentation to Portfolio Committee on Trade and Industry
Anthony Black
University of Cape Town
August 2009

2. Overview Global developments
South African automotive policy and its impact
Motor Industry Development Programme (MIDP)
Automotive Production and Development Programme (APDP)
Global crisis and the SA automotive industry

3. Vehicle production: 1980, 1999, 2007

5. What policies are required for developing countries to develop their automotive industries in more open trade environments?
Necessary to define a regional or national ‘automotive space’ which is protected by policy measures (e.g. tariffs)
These measures need to be acceptable to trading partners and in today’s world will most likely be phasing down
Policy needs to ensure that the industry is competitive and can attract foreign investment
Policy needs to prepare industry for more open trading environment
E.g. reductions in tariffs and other forms of support

6. Protected autonomous markets Integrated peripheral markets
Viable ‘automotive spaces’ for emerging producer countries in the global industry
Protected autonomous markets
China, India, Korea
Integrated peripheral markets
Mexico, new EU member states
Emerging regional markets
ASEAN, Mercosur
South Africa?

7. Comparative tariff levels *average level

8. GEIA Group: direct subsidies (1956 – 1961)
Pro-Alcohol: encourage use of alcohol-based
fuels
Sector Chamber: tax relief
Automotive Regime: import tax reductions
Befiex: manufacturing industry focused – encourage exports
Production Process Development
Programme: incentives for technological investments (2008)
All countries have direct and indirect automotive industry support measures except Turkey who adhere to EU regulations of free trade
Direct
Influence on industry
Indirect
Automotive Mission Plan (2006 – 2016)
National Automotive Testing & R&D Infrastructure Project (NATRIP)
Fuel subsidies
State level capital subsidies
Fiscal policies: excise duty structure rationalization
Simplified taxation: implementation of VAT
State level incentives: localised tax breaks and single window approvals
Weighted tax reduction on R&D
Brazil
Malaysia Industrial Development Authority : provide tax relief for manufacture of transport equipment, components and accessories
Northern Corridor Economic Region (2007 – 2025) : allowance on qualifying CAPEX
East Coast Economic Region (2007 – 2019) : allowance on qualifying CAPEX
National Automotive Policy : grants provided
MJEPA : sharing technical expertise
Ninth Malaysia Plan (9MP) (2006 – 2010) : Automotive Development fund
Third Industrial Masterplan (IMP3) (2006 –
2020) : generating investments
India
No direct support programmes
Support for R&D
OTAM Automotive Research Centre
ITU Istanbul Technical University
Other programmes focus on hydrogen vehicles, hybrid vehicles and alternate transport fuels
FDI support
Free Trade Zones
Malaysia
Turkey
Legend:
Low
High 8

9. South African automotive policy I
History of protection
high protection (115%)
local content requirement since 1961
1989 – Phase VI
Resulted in:
High costs and inefficiency
Low exports
Low volume, multimodel plants - minimum efficient scale not achieved

10. South African automotive policy II
1995 – Motor Industry Development Programme (MIDP)
Local content requirement abolished
Gradual tariff reductions
1995 – 65%
2007 – 30%
2012 – 25%
Duty free allowance for components
Import-export complementation
Rebate import duties by exporting

11. Objectives of MIDP To be achieved via:
Lower vehicle prices and improved competitiveness
Sustainable industry and employment
Improved economic contribution
To be achieved via:
Phased integration into global industry
Encouraging modernisation and upgrading
Increased volume and economies of scale through growing exports and gradual rationalisation

12. International assembly plants – daily production rates in the late 1980s

13. The Impact of Higher Volumes and Economies of Scale

14. Recent growth performance
Industry performed relatively well versus MIDP objectives set in 1995 (the current recession aside):
Positive: Turnover growth, export growth, competitiveness, rationalisation
Negative: Import levels (local content, vehicle imports)
Neutral: Employment growth, investment
Industry has performed well versus the SA manufacturing average
Evident in terms of contribution to manufacturing sales, employment, value added & gross salaries.
Rapid increase in labour productivity

16. …, as well as auto components
Source: the dti/TISA

17. Despite the growth in exports, the import threat is apparent, evident in terms of significantly increased vehicle imports
Source: NAAMSA

18. Imports increase rapidly as tariffs decline…..

19. The case against ongoing support?
Flatters - a very clear no to ongoing support!
Costs of the MIDP (protection and subsidies)
Argues that MIDP has only led to lower prices insofar as tariffs have been reduced
Lower prices would mean more cars on the road and therefore more employment in distribution, servicing etc

20. Some arguments for ongoing support
Protection has already been sharply reduced resulting in a rapid increase in imports
A further reduction would lead to plant closures
Adjustment costs of free trade would be high
Large scale support offered by competitor countries
Reduced protection may reduce economies of scale
A key issue is whether the industry can become more competitive over time (dynamic comparative advantage)

21. APDP: Strategic objectives
Set clear long term objectives of where we are trying to get to
Simplify the programme where possible
Establish a more neutral incentive structure
Make changes as gradually as possible
Provide ongoing protection for assembly and components while avoiding excessive rates of protection
Curb support for peripheral component exports
Promote an integrated value chain
Discourage further proliferation of low volume models or the establishment of new low volume assembly plants

22. Policy proposals Tariffs Market neutral duty free allowance
Market neutral production incentive
Productive Asset Allowance
Catalytic converters

23. MIDP and APDP tariffs to 2020

24. Tariff reduction in the Australian market
1995 – Tariffs 27.5% (import share 33%)
2001 – Tariffs 15% (import share 60%)
2008 – Tariffs 10% (import share 80%)
Planned further reduction in tariffs to 5% in 2010 now looks unlikely

25. Projected growth in industry model

26. The global crisis and the auto industry
Sharp fall in output, profitability and employment
But this is not new
In the US, employment in automotive manufacturing has fallen by 30% to 857,000 in September 2008 from 1.2 million in 2001
Fall in trade in automotive products has been particularly severe
In South Africa
domestic sales in 4th quarter 2008 were 30% down on 2007
Vehicle exports set to decline by 36% this year from last years record
Component sector employment fell by over 20% from Oct 2007 to Feb 2008

28. The response of governments
Protectionism on the rise but taking a different form
Subsidies, procurement provisions, licensing requirements, import bans, anti-dumping ,market support
Striking difference in the developed world is that tariffs have been much less used
In developing countries of 35 trade restricting measures, 69% involved import duties, import bans or non tariff border measures
Actual or proposed subsidies to the auto industry amount to $48 billion

30. Impact in developing countries
Developing countries may face a disproportionate share of the cutbacks
Depends on the type of country
Large dynamic market where exports are relatively less important
China, India and Russia
Those on the periphery of major markets; competitive advantage is based on lower labour costs coupled with high productivity in modern plants
Mexico , new EU member states
Worst case scenario is that developing countries become ‘swing’ or ‘saw tooth’ suppliers to global markets
A risk for South Africa which has become much more export oriented and whose production is fairly marginal in global terms
Component firm exports have been negatively affected
VWSA benefited directly from market support measures in Germany

31. What are the options in SA?
Aggressively cut interest rates and stimulate economy via countercyclical expenditure for example on infrastructure
Ensure smooth operation of credit markets
Short term assistance to firms via state owned industrial bank (IDC)
Based on cyclical rather than structural problems
Demand stimulation via lower purchase taxes
Unlikely because
Treasury already believe that the industry is overly supported
Industry itself believe that this would simply bring forward sales rather than stimulate new sales
Higher tariffs?
Not supported by industry federation, NAAMSA, due to fears of retaliation from the EU
Metal workers union (NUMSA) want much higher tariffs and support measures linked to retention of employment

32. Conclusions – what forms of support are appropriate?
1. Economic stimulation
Expansionary macro policy and ensuring smooth flow of credit
2. Selective non protectionist policies
If they are to be pursued should be non distorting e.g. encouraging new vehicle purchases
3. Selective protectionist policies
Subsidies and trade barriers will have very negative effect
Policy makers need to remember that employment in the service side of the auto industry is far greater than in manufacturing
US - 857,000 compared to 3.7 million
SA - 122,000 compared to 198,000