Industrial Policy Action Plan implementation public hearings: Manufacturing, clothing, automotive sectors

Meeting report

Industrial Policy Action Plan hearings
The Chairperson noted that everyone in the country agreed upon the importance of value-add, manufacturing and industrialisation, but not everyone agreed on how to get there.

Beneficiation in the mining industry: Prof Ben Turok submission
Professor Ben Turok (ANC) said that he would address value-chains in the mining industry, but also wanted to put this in the context of what was happening in Africa. The African Union (AU), European Union (EU), and development banks had adopted the “Mining Vision for Africa” and a recent conference of the African Development Forum had addressed value-add and beneficiation. He regretted that the debate on this in South Africa was lagging behind.

In 2010 Citibank had stated that South Africa was the best-resourced country in the world for minerals, excluding oil. He summarised the high concentrations of raw minerals in South Africa, but said that there was presently little downstream beneficiation or fabrication. The mining industry presently contributed 7% to GDP, although the Chamber of Mines claimed another 10% indirect contribution, through 500 000 direct jobs and the same number of indirect jobs in this sector, and significant downstream opportunities. However, these claims did not satisfy critics, who felt that the natural resources were not yielding sufficient benefits. Historically, on the Continent, and in South Africa, mining had developed as an enclave, self-sufficient and self-contained, in a sea of under-development, except for Witwatersrand, where there were different dynamics. Associated industries were not generally placed around the major mining industries. South Africa had declared that the minerals were the property of the people, owned by the state on behalf of the people, and that mineral wealth was the heritage of all South Africans, which was the reason for mining companies having to be licensed. However, the question was whether that licensing ensured downstream benefits.

Prof Turok highlighted the value chain of minerals, from exploration through extraction and processing, to refining. That would be followed by beneficiation, semi- and final fabrication. The Chamber of Mines (COM) had said that it supported greater manufacturing beneficiation, and some mines did do some processing and beneficiation. However, the COM suggested that mines were not competent to do manufacturing and the key drivers were not related to the comparative advantages inherent in resource endowment, but the competitive advantages. Prof Turok believed that the separation of mining and manufacturing was artificial, as there were close linkages. COM suggested that mining contributed through taxes and employment, and that manufacturing should stand alone, perhaps with state subsidies. It objected to any obligations being placed on mining companies to supply processed minerals to manufacturing concerns, at anything less than international price levels. However, the manufacturers held that this separation led to the payment of import parity prices for steel, which priced them out of competition. In particular, Chinese imports were destroying manufacturers.

Prof Turok repeated that there was an anomaly in that natural resources were exported in raw form, to be beneficiated and fabricated elsewhere, and the final product was imported back, after value was added abroad. South Africa no longer even manufactured machinery for the mining industry. The development of linkages, such as had grown up in Witwatersrand, would enhance the economy. South Africa was currently was losing research and design skills, resulting in de-industrialisation. The chrome industry, for example, was now controlled from London, using South African minerals, and this was true of most mining companies, except African Rainbow Minerals.

Prof Turok set out some recommendations that could correct the situation. Firstly, he believed that there should not be an “iron wall” between mining and manufacturing. Many companies in Africa were focusing on core competencies of mining but he believed that other elements of value-add could be developed through economic cooperation agreements. He proposed that a thorough analysis was needed of each stage of the value chain, to assess exactly where and how the value was added, so the country could intervene at the relevant point. For instance, whilst Australia did not beneficiate a great deal, it had developed lateral linkages in design, technology and other engineering areas, and would export these technologies. Several years ago, South Africa was the world leader in deep-level mining techniques, and that kind of specialism needed to be developed for export again.

Prof Turok said that a fully integrated economic beneficiation strategy required as much attention to be paid to industries and services at the input stage of the mining sector, as was paid to post-mining and industrial use. Singapore did not have minerals, yet made everything itself, which put paid to the notion that proximity was needed between minerals and manufacturing. In South Africa, of course, there was a prime advantage in proximity of resources, which could reduce costs.

Favourable tax and other incentives had been suggested as another strategy. However, he cautioned that experience in other countries had shown that the short-term gains through such incentives could, in the long term, disadvantage local enterprise development. Certainly, it was not of advantage to allow foreign investors to bring in skills and allow export of capital, as this allowed foreign companies to get rents, beyond what was reasonable, leading to exploitation, with hazardous social consequences, as the Marikana disaster showed.

There was another argument that the state should not intervene, and the market forces should be allowed to operate freely. However, Prof Turok pointed out that markets in mining were generally imperfect, due to monopolies. Industrialisation of South Africa would not happen through the COM and the mining companies. The manufacturing industry was not competitive, due to insufficient maintenance of road, rail and ports.

One of the issues raised by the black mining companies in South Africa was the licensing requirements, which did little to help historically disadvantaged South Africans. They suggested that licences should specify quantities allowed for export, prices for domestic users, environmental concerns and other socio-economic considerations. In addition, it must be recognised that mining was a depleting activity.

There were difficulties in many countries, because of the need for economy of scale. Botswana had managed always to negotiate advantages for the domestic situation with foreign companies and ensure that something was coming back to Botswana. De Beers had also agreed to bring back polishing and cutting functions to Botswana.

Prof Turok summarised that all countries had to make value-add, but this would require business skill and fine industrial practitioners. There was a need to establish partnerships between state and private sector, to ensure that each contributed strongly to the process.

Discussion
Dr W James (DA) supported the suggestions for engagement in the mining industry, as the symbiotic relationship between state and mining industry had gone to the political heart of the country. He agreed with the need to focus on technology, which could include deep refrigeration, air-conditioning at the stopes, transport and use of dumpsters. He believed that the Industrial Policy Action Plan (IPAP) and its linkages to mining must be investigated. There had been few changes in migrant labour since 1994, which was one of the problems in Marikana. Some shifts were still nine-months long. He suggested that the organisation of the labour market and labour supply had to be examined further.

Prof Turok agreed, and said that the country had failed its miners. Zimbabwean mines had long since recognised that adequate housing for staff was a vital consideration. That supported the notion that mines should not be working as “enclaves”. If there were upstream and downstream linkages, labour would be developing and becoming settled as it had done in Johannesburg. Mining could not exist in a vacuum and value-addition linkages were critical to understanding mining.

Mr G McIntosh (COPE) agreed that beneficiation was not the responsibility of the mining industry. He said that there was huge beneficiation already happening, as shown by SASOL, Eskom beneficiating coal, Safcol that had created furniture factories at Ugie, and Sappi and Mondi who were beneficiating timber. However, there were some anomalies, such as the export to Japan of chip, and the export of chrome. Richards Bay used bauxite to turn it into aluminium ingots that were exported. He thought that South Africa should be mining what it had, and believed that more investigation was needed into the advantages that South Africa offered.

Prof Turok said that whilst he accepted that beneficiation might be happening, there was no written research on it, and no coherent studies had been carried out on the strategic implications; although individual factories and industries could be quoted. It would be necessary to create a policy from the case studies, including those from Industrial Development Corporation (IDC).

Mr X Mabaso (ANC) agreed that the markets could not do everything. The relationship between other industries and mining was critical, and training should not be done only by outside academic institutions, but by industries at their workplaces. Students should receive thoroughly relevant skills. In addition, the continent of Africa should look at how it could function as a unit, perhaps with specialties in certain countries, rather than competing.

Prof Turok agreed, and noted that more integration was taking place. Discussions were beginning to take shape around regional infrastructure programmes that would help Africa, and the key was to assess what countries added value, and how – for instance, railways, ports and transport. In South Africa, Richards Bay was under control of the private sector, which was laying down rules for the port.

Mr N Gcwabaza (ANC) noted the comment about the challenges with the Mineral and Petroleum Resources Development Act, and asked how these could be addressed.

Prof Turok said that this legislation dated back to 2002, yet many clauses were still not implemented and the Department of Mineral Resources had produced documents on beneficiation. This Act had been criticised as seriously lacking in any vision of how natural resources could be used for the benefit of the country. He suggested that the country was being too cautious.

Mr Gcwabaza asked what “package” could be developed in the country.

Prof Turok said that mining impacted strongly on trade and industry. The mining industry was currently importing 70% of needs, but the consequences for the rest of the economy were not being discussed.

Dr James asked about rare earth minerals; China was sitting on its own and importing South Africa’s minerals. He asked for comment, as there was no beneficiation.

Prof Turok agreed that South Africa was exporting rare minerals, and that was of concern. He stressed that South Africa should be looking to how to maximise the benefit of its resources, and should be using its monopolies to its advantage. He referred to ferrochrome again, and agreed that South Africa should look scientifically to how to re-develop this industry.

Apparel Manufacturers of South Africa (AMSA) presentation
Ms Marthie Kemp, Managing Director: PEP Clothing, and Representative of Apparel Manufacturers of South Africa (AMSA), outlined the state of the South African clothing industry. She noted that this was regarded as the cheapest job creating sector in South Africa, at R20 000 per job. The formal industry employed 57 000 employees, and represented at least 50% of the total clothing jobs in South Africa. Problems still existed, but progress had been made in some areas.

The two highest cost components into the industry were fabric and labour. Only 1% of woven fabric used, and less than 40% of knit fabric, was sourced locally. The duty structure on fabrics was 22%, and this translated to an additional 15% being added to the cost of making the clothing. The textile industry was not equipped to supply clothing manufacturers in South Africa, but if relief was given to fabrics sourced locally, this would reduce clothing costs. The new wage settlement for 2013 enabled better management of overhead costs, and improved relationships with labour. In spite of some job losses in some companies, there had been growth and stabilisation in large areas of the industry.

Ms Kemp addressed the impact of the Clothing and Textile Competitiveness Programme (CCP). The Production incentive (PI) and CTC Improvement Programme (CTCIP) were important. PI was a grant for training and capital expenditure, based on percentage value-add. This incentive had been welcomed, although it was yet too soon to assess whether it translated into job creation. However, it was known that the PI enabled manufacturers to stabilise their organisations, which was a preliminary to growth. There was improved competitiveness with automation that led to cost reduction. There were many challenges with red tape at the Industrial Development Corporation (IDC), which were a problem for the smaller companies who lacked internal infrastructure. That was being addressed with the IDC and the Department of Trade and Industry (dti).

The CTCIP provided support for projects in efficiency and productivity. This had resulted in changes in the cluster, and in individual companies, allowing, for instance, consultants to be brought in. Once again, it was too soon to assess whether this affected job creation, but after stabilisation, jobs would normally follow. 

In relation to local procurement, Ms Kemp said that large volumes that government institutions procured from clothing manufacturers (such as uniforms) offered opportunities for the clothing sector. However, AMAP was not aware of any new entrants to tenders, although there were a number of manufacturers attending to government tenders.

She summarised what was needed in the sector. Firstly, in relation to fabric input costs, she said that currently, the textile companies did not supply to the clothing industry and immediate relief was needed here. Slow progress remained a challenge, as did the red tape for new entrants, as there were huge opportunities posed in relation to local procurement, yet large quantities were still being imported. Illegal trading and under-invoicing posed a threat to the country, not only in this sector. AMSA had had many workshops with SARS, specifically around reference pricing, which was the minimum value at which a garment should be imported to South Africa. SARS focus groups would include AMSA representatives. Other challenges, which were self-explanatory, related to utility costs, the need for better infrastructure, transport problems for workers, fuel price and the volatility of the rand.

Discussion
Ms S van der Merwe (ANC) asked for more information about textiles, saying that the textile sector had also been a beneficiary of production incentives as well as competitiveness programmes, so she wondered why they were still not able to supply the apparel industry

The Chairperson thought that the textile industry had received a large injection of cash some years ago, and at that stage Parliament was told that manufacturers did not plough back into equipment to ensure it was replaced. She wondered if the industry was still driving businesses into the ground.

Ms Kemp explained that clothing factories currently imported, because the fabrics for the industry, driven by consumer requirements, were not being made locally. In addition there were problems around price, competitiveness and service delivery. In some cases, fabrics were manufactured but were not at competitive prices She agreed that some factories had driven themselves into the ground, losing skills and equipment.

Mr Ralph Roytowksi, President, AMSA, said that the vast majority of textiles produced were industrial, and the apparel side was not as important to these industries.

Ms van der Merwe asked for more detail on the utility costs. During these hearings, much input had been made on the detrimental effects of the costs of electricity.

Ms Kemp noted that electricity bills were high, and because the industry was labour-intensive, every person would be drawing electricity to run individual sewing machines.

Mr McIntosh wanted to question the statement that the clothing industry was the cheapest creator of jobs, as he thought that tourism and farming would have held this place. He wondered if the cost of buildings was included.

Ms Kemp explained that the calculation was done on the basis that it was much cheaper to buy a sewing machine than other machinery, and it would take only six weeks to train a machinist.

Mr McIntosh was pleased to hear of better relationships created with labour. He believed that cultures of conflict remained in many industries, and he commended this industry for its spirit of reconciliation.

Mr McIntosh was concerned at the suggestion that other people must be helped to get into the industry, and wondered if the Committee could do anything to assist. The real success stories seemed to be in the larger firms, and he wondered if smaller firms were unable to compete.

Ms Kemp said that there was a collaborative effort around the labour resolutions. The larger firms tended to have formal structures, with managers, and were often part of big corporates, with access to in-house assistance. However, large firms started small, and it was recognised that the small firms would contribute to industry growth.

Mr X Mabaso (ANC) said the Committee had been told that bogus cooperatives would sometimes be formed, to avoid labour-legislation obligations. He wondered how prevalent that was, and what percentage of the clothing industry was comprised of cooperatives.

Mr Roytowksi said that 50% of the industry did not belong to AMSA and, although AMSA did not have the exact figures, he calculated that probably about one-third of the total industry comprised cooperatives. They did operate differently, did not conform to bargaining council rules, and were not controlled in any way by labour unions.

The Chairperson asked if there was any idea of what they were contributing to the overall production.

Mr Roytowksi said that AMSA had not made an attempt to get that information, but it was quite easy for people to set up and operate in the industry.

Mr Gcwabaza noted the statement that there was still difficulty with the IDC, but asked what exactly was the stumbling block, particularly because this was a well-established industry.

The Chairperson asked what steps had been taken to contact ITAC.

Ms Kemp explained that many meetings and discussions had been held with ITAC and SARS around the fabrics being imported. The tariff structures were quite broad. The difficulty was that one specific type of fabric that was not manufactured locally could not be cleared, under one code, without allowing other fabrics under the same code also to be exported without duty. There were proposals on how to safeguard the textile industry locally.

The Chairperson questioned what would be included in “apparel”.

Mr Roytowksi said that this would include garments knitted directly from thread, such as pantyhose, as well as clothing cut from ready-made fabric.

The Chairperson asked for written details of the demographic breakdown of membership, and further written information on cooperatives.

Eastern Cape Socio Economic Consultative Council (ECSECC) submission
Mr Russell Grinker, Development Specialist, Eastern Cape Socio Economic Consultative Council, said the Council (ECSECC) was a multi-stakeholder organisation that put forward the views of labour and business. ECSECC would be notified of company closures and retrenchments. In the last year it did several tours of local industry, mostly in East London and Port Elizabeth, to try to understand the impact of the ongoing economic crisis and better understand the manufacturing sector. Eastern Cape (EC) remained one of the provinces with the highest unemployment rate, at 31.8%. Manufacturing was the third largest contributor to GDP, but had been very badly affected.

ECSECC outlined some of the industries that it had examined (see attached presentation). The recession had expedited the collapse of industries that had been in crisis for some time, due to problems of competitiveness and profitability Quite a lot of restructuring had gone on, that led to job loss, and this was expected to continue. The consequence was that the historically uneven spatial development, and disproportionately negative impacts on the Historically Disadvantaged Sectors (HDI) sectors was worsening, and the province was lagging behind in attempts to deepen democracy and eliminate historic inequalities. There were, however, some innovative industries.

EC had ongoing challenges. Manufacturing employment was stagnant over the last decade, despite major investment in the Coega and Ngqura. The key question was how to stop retrenchments and attract new investment. There were major problems in infrastructure, particularly roads and railways, and harbours were not up to scratch. He tabled a slide showing the recent damage to the N2, saying that East London was still cut off from Port Elizabeth and the coastal roads could not cope with traffic.

Historically, the auto sector had been the highest contributor to manufacturing employment in this province, and the EC provincial government had developed a cluster approach to support the sector, but there were continuing declines in employment, which underlay the general decline. Other key sectors showing a decline included food and beverages, light engineering and chemicals, whilst there were now very few of the original clothing and textile factories still running. The electronics and pharmaceutical industries were also in decline. The dti textile support programme sought to assist, but already too much had been lost. The economic decline meant a smaller tax base for municipalities, which forced them to charge higher tariff and rates increases than other metros, due to their reduced capex, and the need to restore their own liquidity. For instance, Nelson Mandela Metropolitan Municipality (NMMM) used to have cash reserves of R1.9 billion but these, by the last year, had reduced to R60 million. The high tariffs made the environment for industry and industrial growth more difficult.

Mr Grinker tabled a list of strategic challenges as suggested by other industry players. These included lack of beneficiation of raw materials and unfettered imports and dumping. Improved logistics were required, to ensure that delicate equipment could be properly transported without damage. Revitalisation of agro-production in the rural areas was a challenge, as currently they contributed very little to the provincial economies. The rise in game farms damaged productive farmers. The dairy industry was in crisis, and urgent attention was needed to this. Inefficient local government services were another problem. Some of the solutions suggested had included attention to tariffs, prohibition measures, enforcement of standards, appropriate budget for upgrades, subsides, supply chain studies, and local procurement. The recent climate disasters meant that there would be huge costs.

Since making these visits, the ECSECC had interacted with various national departments, included Economic Development Department (EDD) and dti, and had presented the studies to the union NUMSA, national government and the business chambers.

He noted that some of the comments made by industrialists were critical of what dti had done to date. They felt that the industrial policy was poorly implemented, apart from the Motor Industry Development Programme. The New Growth Path included active industrial policies. However, the budget allocated to this in EC was only 2% of total national budget, and this raised doubts that it was taken seriously. The IPAP did not have impact in the EC. There was minimal impact of the Manufacturing Competitiveness and Enhancement Programme (MCEP), the flagship programme of the dti. There had been complaints that detailed implementation reports were not made, and that the programme incentivised CAPEX and not employment, although this was a matter that was not scientifically proven. The EC Industrial Jobs Stimulation Fund, run through the Eastern Cape Development Corporation, showed some promising growth.

Mr Grinker spoke to the budgetary allocations. The emphasis of the budget continued to be on the social side, with limited resources to industrial and agricultural development. He set out comparative percentages, and said that the provincial Economic Development Department received less than 2% of budget.

He summarised that ECSECC felt the critical issues to be problems of services, which ran across all utilities, of electricity, water and sanitation. Buffalo City had been unable to deal with waste and it was being transported to Port Elizabeth. Lack of maintenance of roads was significant. There was no stability of services, with electricity breakdowns being common. An integrated network of adequate scale was needed. Local procurement was the obvious way forward, but the potential was not seen to stimulate this, and EC needed a genuinely active industrial policy. ECSECC had noted some incredibly sophistical and forward-looking industry, but many people did not think South Africa was capable of such innovations, and lack of belief also had to be tackled.

Discussion
The Chairperson noted the flooding that cause damage to the roads and said this could have been prevented by damming further upstream.

Mr B Radebe (ANC) said that government did have some strategies to counter the challenges named, of unfettered imports, logistics, and government services. He asked if ECSECC had contacted the Regulator of Compulsory Specifications, which should be able to control imports, and what the result had been. He also questioned its relationship with SARS. He also questioned if ECSECC participated in the municipalities’ consultative processes to draw the Integrated Development Plans (IDPs).

Mr Litha Mcwabeni, Development Specialist, ECSECC said that more attention was paid to the logistics problems. He pointed out that Eastern Cape was located far from other centres, yet ECSECC had visited a family-run firm in East London that noted that its source of raw materials, and its major market, was Gauteng, leading to the need to transport back and forth. It was a question of policy what could be done with areas disadvantaged by location. Transport tariffs did not help the issue. It was impossible to reintroduce the artificial Bantustan incentives, although some textile manufacturers had suggested that they would like this to be applied back to the railways.

He noted that whilst there was participation in the IDP processes, industry still had major problems when electricity prices rose, particularly for small industries that supplied the automotive sector. He was not sure why those issues were not being raised in the IDP forum, but it could be that these firms’ bargaining power was limited.

Mr Grinker added that the issues of imports had been raised, through ECSECC passing on comments from industry to the right channels. ECSESS did not deal with these issues directly.

Mr Radebe and Mr McIntosh asked for clarity on the tenure challenges.

Mr Grinker said that the restitution process was very slow; although local communities were granted farms eight years ago, the process was not yet completed, and they were not being helped to become more productive. In addition, many had not received restitution for betterment.

Mr McIntosh appreciated the existence of the ECSECC, which was indicative of some of the work in the province. He asked if anything was being done to create a bypass or to repair the roads. If transport between Buffalo City and Nelson Mandela Bay was being diverted, this was not helpful.

Mr Mcwabeni said that there had been some significant investment in transport. The intra-network was a problem. Large trucks had been re-routed to the smaller towns. However, these roads had not been designed for such heavy traffic, and these areas were historically disadvantaged, from a transport point of view. He was not sure whether the Eastern Cape had the capacity to deal with those problems.

Ms van der Merwe noted the engagement with stakeholders, but wondered if the discussions had included the extraordinarily high percentage added to electricity tariffs in Nelson Mandela Bay Metro, which must surely contribute to the difficulties.

Mr Grinker responded that the ECSECC did offer technical support to the two metros but there were ongoing difficulties that were not being rapidly resolved. The reducing tax base of municipalities affected their ability to support industry and promote industrial development.

Ms van der Merwe asked if there was any prognosis for Coega, as it should have set long-term goals to produce results. She also asked for more clarity on the consequences of the difficulties in metros. It seemed that more planning was needed to turn matters around.

Mr Mcwabeni said that the investments were staring to bear fruit, but from an employment point of view, it must be remembered that EC had started from already-high unemployment that was further impacted upon by the recession. This led to migration. High-end skills were not the competence of the provincial administration.

Mr G Selau (ANC) said that there had been much emphasis, in the past, on the green economy, but the presentation had said nothing about reducing greenhouse gases, but instead, there was focus on unemployment and beneficiation. It must be remembered that sustainable paths must be found for the future.

Mr Grinker said that the provincial Department of Economic Development had held summits on this issue.

The Chairperson said that the challenge of efficient local government was related to renewables.

Dr James commented that this presentation would assist the Committee to exercise its oversight over the dti, and said that whilst there may be criticism it should be recognised that dti had some significant achievements. In many cases the provincial administration in Eastern Cape was not coming up to scratch – particularly in education, where vocational education was all done by private investors. The EC was simply not providing the skills that the country needed.

Mr Mcwabeni said that he could not answer for the provincial government, but there were both historic and systemic problems here.

National Association of Automobile Manufacturers of SA (NAAMSA) submission
Mr David Powels, President, NAAMSA, and Managing Director, VW, outlined the global environment for automotive manufacturing, noting the manufacturing, import and export figures in a series of graphs (see attached presentation for full details). He noted that Western Europe figures had dropped, which was significant because South African manufacturers exported there. There was a strong growing trend on demand, but there was still volatility.

Charts of where the growth was happening in the sector illustrated that much of the growth was happening in the emerging markets, including China, which had 55% of global automotive production. He compared the production across the world, highlighting production also in South Korea (5 million units) and India (4 million units). The production in South Africa over the last three years showed that South Africa was at less than 1% of global production, dropping to 0.66% from 0.8% in the last three years. However, the exports as a percentage of total South African exports, had grown, from 4.1% in 1995 to 11.9% in 2010.

The MIDP had been discussed from time to time, but it had enabled South Africa to become a player in the export markets. The prognosis for the following year was quite good, although it was driven by demand. The reason for the increase in exports was that Toyota, Ford and BMW had shown good exports. A similar picture was shown for component exports. There had been significant and ongoing investment by the SA Automakers (7 car and 2 truck producers). Over the period from 1995 to 2014, investments were in excess of R52.2 billion. This showed strong commitment to sustainable investment in South Africa.

The demand for cars showed a less positive picture, with declines from 2006 to 2009. There were recoveries in the last two years and about 8% growth was expected in the next year. However, the problem was that this was not sustainable, and there was not any breakthrough past the 600 000 vehicle level. The growth in the passenger car market showed some sustainability. The man in the street was buying more cars, with government and rental industries buying less.

Production showed a similar picture to development. In this and the following year, the figure was around 600 000 cars, but this was only 6% or 7% of worldwide demand. Finally, he noted that over the last decade the production and exports had grown exponentially higher than the comparative growth globally.

Mr Powels said the key challenges in the auto industry were related to cost competiveness. He illustrated this by saying that South African cars cost 10% more to produce than Western Europe. Investment in the auto industry was moving to the East, since this came in at up to 15% lower than Western Europe. One of the reasons was lack of scale, although there were others. NUMSA claimed that this was not impacting on the industry, but a comparison of Kia and Hyundai showed that their market share of 5% in 2003 had now risen to 17% Many cars being sold in South Africa were produced in India or Korea, and, despite their 25% import duty, they were still highly competitive.

Another challenge in the auto industry was the cumulative cost of inflation that outstripped the CPI, as the wage increases had been much higher than CPI.

The improvements to the rand since some of the current export projects had been started meant that the value of the exports was dropping, and some exporters had lost 11% of revenue. However, the costs of material, including parts bought from suppliers, had taken a turn for the better, and there had been productivity gains in the supply chain, including initiatives. Overhead overheads, including indirect labour, had risen  - for instance, energy costs had risen 218%, and labour by 140% over a four year period. When the charts were compared, this resulted in significant deterioration of export competitiveness, exacerbated by the low economies of scale.

The dti and the industry wanted to grow production to 1.2 million by 2020. This, however, demanded that South Africa must export more. It was particularly essential to concentrate exports in sub-Saharan Africa and position South Africa as a trade supplier, through trade agreements.

Mr Powels said that the Motor Industry Development Programme (MIDP) programme had taken the industry forward, and the Automotive Productive Development Programme (APDP) programme was intended to underpin the 1.2 million production. This was included in the slides, but was not presented during the meeting. Some of the matters needing work had been presented to the Minister of Trade and Industry. He tabled a chart showing the developments. APDP, AIS and Local Content formed a good basis. However, the tooling industry was not globally competitive and it was not sure whether this could survive. Aggressive work was needed on several issues to ensure the growth to 1.2 million. Good progress was shown in the local market for fuel quality, and the Fuel Industry Roadmap was gazetted. There had been some growth in ports and rail, but the capacity and supply of electricity, along with the tariffs, remained a problem. He stressed that this was not a question of the industry trying to drive down prices, but there was a real need to improve logistics to improve efficiencies. There was a need to look at other incentives, beyond APDPD, for local supply of material, instead of imports. 

There were three key drivers under labour: productivity, industrial stability, and skills and training. Labour was becoming more problematic. There had been progress in productivity, but wage inflation remained problematic, with the industry having to settle for sums significantly higher than inflation over the last cycles. 

If production were to grow, the demand must also grow, and other countries who were growing their own industry were unlikely to be a market for South Africa, so again he emphasised the importance of looking to sub-Saharan Africa. However, it was necessary also to increase the local market. APDP did not look at how to grow demand, but the competitiveness of the sector. The industry took a realistic view of the challenges. The ability to realise the vision would be dependent on active engagement between NAAMSA, the Automobile and Component Manufacturing sector, government, labour, Transnet and the IDC. All six, working together, could create a viable industry, but one failure could destroy it.

National Association of Automobile and Component Manufacturers (NAACAM) submission
Mr Mpueleng Pooe, Representative, National Association of Automobile and Component Manufacturers, said that this Association (NAACAM) represented automotive suppliers in South Africa, and had 180 member companies. Many of the points presented by Mr Powels applied also to his industry. The members of NAACAM, who were described as Original Equipment Manufacturers (OEMs) produced components –selling 35% to local and 45% to overseas manufacturers.

Production last year was R75 billion, an improvement on the 2010 levels. Employment was at around 69 000 in the suppliers, but the job opportunities lay with the OEM industry. More than half the OEMs were small enterprises.

Mr Pooe tabled a comparison of the components and parts exports, as well as their destinations. He noted that in recent years, the local content in vehicles had declined. The MIDP and APDP structure allowed OEMs to use duty credits to import components, duty free. They were using more multinational suppliers, and then assembling components from imported sub-components. The cost competitiveness had deteriorated. The deficit was R39 billion in 2011. A concerted effort was need to commit to localization, supported by incentives.

The first issue was that decisions on vehicle and component production were made globally. The local production volumes were low, limiting economies of scale. The industry’s competitiveness in South Africa was dependent on many factors outside its control, such as costs of electricity, the fact that wages rose above inflation, without production improvements, problems around logistics, monopolies in material suppliers, exports of scrap, and currency rates. In addition, other countries offered subsidies, and lower wages and higher productivity enabled them to reduce costs. Local suppliers would have to match these targets. Many countries imposed additional duties on subsidised parts. The South African ports were amongst the most expensive in the world. Significant artisan shortages forced premium wages as an artisan would earn seven times as much in South Africa as in Thailand.

It must be remembered that imported cares made up 70% of the market in South Africa, a figure higher than in other countries. Its import duties, at 25%, were lower than all other developing countries, despite the lower numbers of cars produced locally. The duties could be rebated by credits, for spare parts imported. Government Preferential Procurement that existed for local buses was not extended to cars.

The objective of the APDP was to double production of vehicles, to 1.2  million. However, the first barrier was that there was no volume incentive, since the OEMs would already earn the maximum Vehicle Assembly Allowance at annual production of 50 000. Production Incentives were given on local value, but the more exports, the more duty credits available. These parameters needed to be revised urgently. Mr Pooe noted that the automotive suppliers were facing a tougher future because of global numbers. The anomalies in APDP just outlined could prevent long-term objectives being achieved. His sector fully endorsed the IPAP general support, but there was a need to address the barriers to competitiveness, Infrastructure investment was required, monopolistic practices had to be addressed, and there was a need to facilitate and improve productiveness and skills as well as a more stable currency. He added that the previous problems around electricity, outlined by ECSECC, applied to some suppliers in this sector as well.

Ford oral submission
Mr Jeffery Nemeth, President and CEO, Ford Motor Company of SA, outlined the realities of the situation in South Africa, from the perspective of Ford. Ford had, over the last six years, reduced the number of models it was building, from 22 to 15. Since cost was driven by volume, the rise in production was equated with a drop in costs. This initiative could bring South Africa closer to the EU cost levels. He showed pie-charts of old and new models. He noted that about 75% export volume was needed because the domestic market would not support those kinds of volumes. Economies of scale would drive more localisation. He stressed that any attempt to drive local content through legislation would serve to push investment away, but economics of scale, which made economic sense, would actually attract investment.

He gave some comparative costings of the Ford Ranger at Ford factories in South Africa, Thailand and Argentina. Thailand produced the vehicle at 88% of the cost of South Africa. The APDP benefit to the Ford SA plant was that 6% of 7% would be given back, and when this programme was approved, Ford SA agreed to try to equal Thailand’s costs levels, although in the last three years it had reached a 5% to 6% gap on that commitment.

The recent investment of Ford South Africa was outlined, describing the investment in plant (R34 billion) and the fact it exported about 70 000 vehicles to 148 countries. Parts were also being manufactured. It had recently hired a second shift, on the back of stronger demand. Prior to APDP, local content was at about 57%, but it had grown to 68%, through launching the new vehicle at higher volumes. The local material buy had increased by 309%, leading to job creation in the supplier base as well as Ford’s own plant. It had introduced all new suppliers to South Africa, and obtained export opportunities for 17 local suppliers, in 14 commodities.

He described the Ford Supplier Incubation Centre, which addressed the government mandate of economic empowerment, creating sustainable jobs, and promoting small business skills. 10% of Ford’s suppliers were based in the Incubation Centre, where they were being provided with production and process knowledge, and business opportunities. However, Mr Nemeth said that this was not an easy task, and his own staff had been seconded there, to ensure that the correct quality of supplies was produced. It was recognised that these new firms would need substantial assistance, and the incubation would not happen overnight. It was right for the country.

Although South Africa had taken over some of the business formerly being done in Thailand, there was a gap. There was higher productivity, per employee, in Thailand. Because of its higher costs, the South African plant actually needed to be twice as productive as Thailand, which it was not. The main challenge lay in labour skills and labour instability. The average income tax rate in South Africa was higher than Thailand, and so were municipal rates. The average plant to port cost was around 89% higher in South Africa than Thailand, and about  73% higher than Argentina, whose plant was a similar distance away from ports. The government in South America realised that exports had needed help, and therefore provided preferential transport rates to port, to allow greater competitiveness. Port-only charges were 88% higher in South Africa than in Thailand, and significantly higher than in Argentina. Average inbound transportation costs were 82% higher than Thailand, and 17% higher than in Argentina. However, the local content was higher. Labour production days lost over the last two years were around 99,4% lower in Thailand, and 82% lower in Argentina, than in South Africa. Ford had now reached out to NUMSA, and was holding quarterly strategic sessions on challenges and strategies, and trying to include labour in the process and meet expectations. There was progress but it had to be pursued aggressively. Another problem was that when suppliers’ labour days were lost, they could not bring in extra labour at weekends, without charging far more, whereas this could be done in other countries.

Mr Nemeth said that although Ford was now committed to remaining in South Africa for the next three years, it was unlikely that Ford in Detroit, USA, would commit and invest again unless the gap in production costs could be closed. This meant that improvements were required to utilities, service delivery to local communities, and mobility of workers. A social contract was needed between management, business, labour and government. Appropriate skills had to be developed. He noted that Ford had taken two years to reach Level 6 targets for Broad Based Black Economic Empowerment (BBBEE). It refused to front, and USA would not allow local ownership. NAAMSA must collaborate with other partners to formulate a win-win solution for the auto sector.

Discussion
Mr McIntosh noted that for many years, foreign investors had had a huge lateral impact in growing South Africa. He asked what would happen if African Growth and Opportunity Act (AGOA) which was not a free trade agreement, but a unilateral act by USA, was withdrawn.

Mr Powels said that a significant portion of export went to North America and non-renewal of AGOA would have serious implications. The projections outlined earlier had assumed sustainability in AGOA. It was important to secure current trade agreements as well as bolster them with others.

Mr Pooe agreed that if ALGOA were to be withdrawn, this would cause substantial problems in all related sectors. He was not sure whether there had been formal moves to extend it.

Mr Radebe was concerned about the gap in production costs that Ford had mentioned, and wondered how this would be closed.

Mr Nemeth responded that it arose through the differences in costs of labour, transport, productivity, and costs of the plant. There was a long list of how this could be addressed. Part of the solution could lie with Transnet negotiations. He would send a full summary to the Committee.

Mr Radebe said that BBBEE was an imperative, because of the non-homogenous society, and said that this must not be seen as an impediment.

Mr Radebe asked if there were labour issues in Thailand that contributed to zero loss of production.

Mr Nemeth responded that he was not familiar with this country’s labour laws, but would send a written response once he had research the issue.

Mr Radebe asked that the written response should elaborate what needed to be done.

Ms van der Merwe also suggested that her questions be addressed in writing. Three key areas – port areas, electricity charges and scrap metal – would be taken up seriously by the Committee, because these had been listed consistently as constraints by other small manufacturers. She also noted that the problems had to do with scale. The NAAMSA presentation stressed the question of exports, but NAACAM said that exports must increase. She asked to whom exports were made currently, and what the projections were for improvement of the figures in Africa.

Mr Powels said that currently the South Africa motor exports were around 50 000 to 60 000, to Europe, Japan and Australia. Ford exported to numerous markets. BMW exported mostly to North America and Asia. He would send a full breakdown in writing.

Mr Pooe said his presentation did set it the exports of the OEMs, and he would revert with a forecast on the future.

Mr Mabaso questioned the value chain and black ownership challenges, and asked what could be done to resolve the issue of low ownership by blacks, and what the possible solutions were.

Mr Powels said international companies did understand the local South Africa context, as most had been operating in South Africa for around 60 years. It became tricky when the BBBEE initiatives eroded competitiveness. It was necessary to drive transformation in a way that did not do this. He said that in VW, like Ford, the company policy would not allow for local ownership. However, all other aspects of transformation had been handled quite well. There was an understanding of the necessity for it in South Africa. VW had gone from level 8 to level 4 BBBEE rating, but the global view was that under the new codes, VW could drop to no rating.

The Chairperson asked for more clarity on the impacts of stay-aways on suppliers.

Mr Pooe said that the main challenge that if time was lost during the week, the suppliers would have to pay much higher rates to get workers in over weekends.

The Chairperson noted that local content had to do with business decisions globally, but Mr Powels had outlined that there had been increases in local content over time. She asked if Mr Nemeth could give similar figures. She also asked if there was any one area that could be isolated to achieve a win-win situation to address the challenges, in the short term.

Mr Nemeth thought transport was the biggest source of the inability to compete, since it was an enabler of economic activity. Transnet had a different make-up, and, as a parastatal, should be giving prime consideration to supporting economic activity.

Mr Powels agreed that Transnet needed to be an industrial enabler. This would require a mind shift. The second priority was the supply chain as the assembler was reliant on costs of components, which included energy and other input costs. He said that VW had aggressive plans to address the  daily business of improvement of productivity, better production and better skills. There was unprecedented activity and investment across the sector. However, external cost drivers needed to be addressed on a wider scale. He noted again that the APDP did not address the question of how to grow the local market. There was a price sensitivity in the market, and the cumulative taxes (income, VAT and ad valorem taxes) were around 20% for a small car, rising to 40% for a medium sized car. There was a need to make cars in South Africa more affordable. Global competition would regulate the prices. Brazil had many programmes to grow its market including economy of scale, and driving up demand by reducing taxes, although he cautioned that this would have to be done in a sustainable way, and not for one year at a time. South Africa had to export to make its production viable, and to supply a growing market.

The Chairperson said that was an important issue and asked that more detail be given in writing.

Mr G Hill-Lewis (DA) asked what efforts or resources the companies had put into marketing a “buy local” initiative. Retail chains could not tell the customer which of the vehicles were made in South Africa, and this point perhaps needed more attention.

Shatterprufe presentation
Mr Trevor Thomas, Financial Director, Shatterprufe, noted that the company had four major plants in the country. It was established in 1935. It had capacity to do about 1.8 windscreens, and 4.5 million toughened pieces per annum. It supplied domestic and export markets and was the only manufacturing supplier to the OEMs. Shatterprufe was a high energy user because the glass was shaped by bending in furnaces. R1 billion was invested in a dedicated automotive flat glass line in 2008. It employed 1 270 people, with 9 554 based in Port Elizabeth. Its capital investment was R500 million and it made about R30 million per annum fixed investment

Shatterprufe’s sales revenue was summarised, over the last two years (see attached presentation). Again, Mr Thomas noted its high energy use. The economic downturn had affected exports. Electricity costs had increased by 236% since 2007.

Shatterprufe was making various efforts to improve its competitiveness, where it had control over the costs. It had invested in technology improvements, including entering an agreement was made with one of the biggest manufacturers in the world, to stay abreast of world class technology and practices. Many initiatives were around improving efficiency and yield and reducing waste. It was involved with a cleaner production programme to improve energy efficiency. It had invested in new product development. It had a more flexible manufacturing capacity to do short-run manufacturing, and invested in people, although it had had to retrench 221 people since 2010, due to the fact that it was not competitive. It had tried to absorb financial losses to avoid closure, and made leveraged loans to support the business. It had held engagements with the NMBMM to try to negotiate for reduced electricity costs, and although there was substantial discussion, there was little progress as although the Metro at one stage had agreed to set a special rate, this was found not to be any improvement.

Many companies in EC were in severe financial distress. The current and planned electricity costs were unsustainable. Shatterprufe heeded to be globally competitive but it was impossible to show price reductions when costs were so excessive. It competed on a global platform where other countries were not exposed to similar increases. The OEMs were not able to accept price increases, if Shatterprufe tried to pass them on. Shatterprufe was further disadvantaged by relatively low economies of scale, and the process meant that the cost of change-over was high in relation to production. It was currently making a loss and was subsidised by the remainder of the PG Group. The Group would have to decide whether to sustain the automotive sector, but if Shatterprufe closed, this would affect local content.

He concluded that a number of companies had banded together and approached the Municipality to request a special tariff for high-energy users. Should NMBMM not be able to provide globally competitive rates, the alternative was that the companies should be allowed to benefit from direct Eskom supply, otherwise they would close and jobs would be lost. Shatterprufe pleaded for assistance from the Committee.

Discussion
Mr Hill-Lewis wondered why Shatterprufe had not moved its plant to municipalities where the surcharges were less expensive.

The Chairperson responded that in her personal opinion, it was undesirable that production plants should not move areas of high unemployment.

Mr Thomas said the essential point was the mark-up on electricity tariffs in the NMBMM. However, it would be far too expensive and therefore not viable for Shatterprufe to move its plant and lift the furnaces. In addition, it was currently located near to the car manufacturers. The talks with the municipality were ongoing and Shatterprufe had been led to believe that things would change, but they had not

Mr Hill Lewis noted that the electricity costs were making up 9% of the cost of sales. They were therefore not the only reason why Shatterprufe was not making a profit, and he wondered what else was making it uncompetitive.

Mr Thomas said his presentation already had outlined the other steps that Shatterprufe was taking to improve its competitiveness, where it could, but at the end of the day, the infrastructure costs were provided by government. If they were not competitive and reasonable it was not only Shatterprufe, but a number of other companies, that would not survive. Transport and labour costs had been raised in the past. A comprehensive plan was in place for those issues within Shatterprufe’s control.

Mr Radebe asked whether any studies had been done on how international competitors managed their costs.

Mr Thomas responded that Shatterprufe did benchmark itself against other companies. There were already some initiatives it was taking, on the investment and labour productivity side, as well as training and other investments. However, the most prohibitive costs remained as electricity, transport and labour. He was fully aware of the differences between process efficiencies and competitiveness.

The Chairperson noted that plants were located in different metros. There had been emphasis on the high costs in the NMBMM, but no mention was made of the costs in the others. She asked if all three forms of production used the same amount of electricity.

Mr Thomas said that electrical furnaces were used to heat the glass to 600 degrees in all the processes, in two plants in Port Elizabeth, and one in Pretoria, but for the latter Shatterprufe contracted directly with Eskom. The other plants were smaller users of electricity, as they did not form the glass itself.

The Chairperson asked for a written indication of the costs of importing glass.

Adoption of Minutes
Members adopted Minutes of 14 September 2012, 19 September 2012, and 21 September 2012, without amendments.

The meeting was adjourned.