Trade and Industrial Policy in the South African auto industry

Presentation to Portfolio Committee on Trade and Industry

Anthony BlackUniversity of Cape Town

August 2009

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

Vehicle production: 1980, 1999, 2007

Percentage of World Production, 1980, 2005

0

1

2

3

4

5

6

Australia SouthAfrica

CzechRep.

India Mexico Brazil Korea,Rep. of

Country

%1980

2005

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

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?

Comparative tariff levels *average level

IndirectDirect

All countries have direct and indirect automotive industry support measures except Turkey who adhere to EU regulations of free trade

Bra

zil

India

Mala

ysi

aTurk

ey

Automotive Mission Plan (2006 – 2016)National Automotive Testing & R&D Infrastructure Project (NATRIP)Fuel subsidiesState level capital subsidies

Fiscal policies: excise duty structure rationalizationSimplified taxation: implementation of VATState level incentives: localised tax breaks and single window approvalsWeighted tax reduction on R&D

No direct support programmes

National Automotive Policy : grants providedMJEPA : sharing technical expertiseNinth Malaysia Plan (9MP) (2006 – 2010) : Automotive Development fundThird Industrial Masterplan (IMP3) (2006 – 2020) : generating investments

Malaysia Industrial Development Authority : provide tax relief for manufacture of transport equipment, components and accessoriesNorthern Corridor Economic Region (2007 – 2025) : allowance on qualifying CAPEXEast Coast Economic Region (2007 – 2019) : allowance on qualifying CAPEX

GEIA Group: direct subsidies (1956 – 1961)Pro-Alcohol: encourage use of alcohol-based fuelsSector Chamber: tax reliefAutomotive Regime: import tax reductions

Befiex: manufacturing industry focused – encourage exports Production Process Development Programme: incentives for technological investments (2008)

Support for R&DOTAM Automotive Research CentreITU Istanbul Technical UniversityOther programmes focus on hydrogen vehicles, hybrid vehicles and alternate transport fuelsFDI supportFree Trade Zones

Influence on industry

Legend: Low High

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

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

Objectives of MIDP

– 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

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

0

500

1000

1500

2000

2500

3000

3500

4000

Japan inJapan

US inN.America

All inEurope

NICs Australia SA

Low

Average

High

The Impact of Higher Volumes and Economies of Scale

ReduceAssembly Costs

ReduceComponent

Costs

Scaleeconomies inComponents

Reduce VehiclePrices

IncreaseVehicleVolumes

Scaleeconomies in

Assembly

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

Outlining the increased importance of exports to domestic production for passenger and light commercial vehicles

0

100,000

200,000

300,000

400,000

500,000

600,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Year

Uni

ts

0%

10%

20%

30%

40%

50%

60%

Perc

ent

Domestically produced vehicles for the export market

Domestically produced vehicles for the local market

Exports as % of total domestic production

…, as well as auto components

Source: the dti/TISA

SA component exports: 1995 to 2006

3,318 4,0515,115

7,8959,674

12,640

18,586

22,88321,269 21,733

23,277

30,503

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Ran

ds

(Mill

ion

s)

South African passenger and light commercial vehicle imports:1995 to 2010 projection

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08* '09* '10*

Year

Un

its

Passenger LCV

Despite the growth in exports, the import threat is apparent, evident in terms of significantly increased vehicle imports

Source: NAAMSA

Imports increase rapidly as tariffs decline…..

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

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)

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

Policy proposals

1. Tariffs

2. Market neutral duty free allowance

3. Market neutral production incentive

4. Productive Asset Allowance

5. Catalytic converters

MIDP and APDP tariffs to 2020

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

Projected growth in industry model

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

Global light vehicle production:1998 to 2007 actual & 2008 to 2012 projected

51.654.2

56.254.1

55.657.9

61.063.0

65.5

69.266.2

59.3

64.8

71.7

77.0

80.281.5

82.7

50

60

70

80

90

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Year

Uni

ts (M

illio

n)

OICA (1998-2007) PwC (2008-2015)

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

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

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

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