Automotive sector: briefing by Economic Development Department & Department of Trade and Industry

Economic Development

09 June 2015
Chairperson: Mr M Cele (ANC) (Acting)
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Meeting Summary

The Department of Trade and Industry (DTI) gave the Committee a full breakdown of the participants in the South African motor vehicle industry. There were seven original equipment manufacturers (OEMs) -- Ford, Nissan and BMW (in Gauteng), Toyota (in Durban), Mercedes (in East London), General Motors (in Port Elizabeth) and Volkswagen (in Uitenhage). The automotive industry was the largest manufacturing sector in SA economy, accounting for with 7.2% of the gross domestic product (GDP). OEMs supported around 30 000 jobs, while component suppliers employed around 80 000.  566 083 vehicles were produced in SA in 2014 and the 2015 projection was 627 500, which represented only 0.63% of the global market. Automotive exports in 2014 were R115.7 billion, or 12.7% of SA’s exports. SA has many trade arrangements related to the automotive sector in the United States, Europe and the Southern African Development Community.

The SA government had supported the industry with the Motor Industry Development Programme (MIDP) in 1995 and the Automotive Production and Development Programme (APDP) through the Automotive Incentive Scheme (AIS) in 2013. From these programmes, the automotive export value had grown from R4.2 billion in 1995, to R86.9 billion in 2012. The productivity index had grown from ten vehicles per employee in 1995, to 18.5 in 2012. Total vehicles manufactured had grown from 389 392 in 1995, to 539 538 in 2012. Capital expenditure had grown from R847 million in 1995, to R4.7 billion in 2012. R6.9 billion had been invested by OEMs in 2014. The AIS had created 11 351 jobs through the R6.9 billion incentives approved, with a total investment of R25 billion for 245 projects. There had also been finalisation of the SA Electric Vehicle (EV) road map, creating an environment for standards to allow EV son the roads. The AIS had now been extended to people carriers/mini buses, trucks and buses. The goal for the DTI was to reach 1.2 million vehicles exported per annum by 2020.

The Economic Development Department (EDD) then discussed the role of the International Trade and Administration Commission (ITAC), the Competition Commission and the Industrial Development Corporation (IDC). The IDC’s net approvals of R3.6 billion to 51 companies had created around 7 000 jobs and saved around 5 000. From 2013 to 2014, there had been R34.2 billion in rebate credits administered by ITAC. The Competition Commission looked at collusion among manufacturers of automotive components, with 121 cases being investigated.

In discussion on the automotive industry as a whole, Members questioned its importance to the country, the status of the South African-developed electric car, the Joule, the quality of the jobs being produced, local content and whether SA could make its own car. The DTI confirmed that the industry was vital for the economic multiplier effect it had, both upstream and downstream. The jobs produced were highly skilled and well paid. The industry had a net positive benefit after taking the incentives into account, and these incentives were vital to keep the industry alive. The Joule had been a “big bang” project that had failed to deliver a sustainable and credible business plan, and had fallen through. The DTI recommended that SA should look to incremental growth and development through the programmes they were currently running, rather than starting a new car company which would cost hundreds of billions of rand, and which was unaffordable.

Meeting report

Briefing by Department of Trade and Industry (DTI)

Mr Mkhululi Mlota, Chief Director: Automotive, DTI, described the automotive industry. There were original equipment manufacturers (OEMs), vehicle assemblers and component suppliers. On the manufacturing side, there were seven OEMs: Ford, Nissan, BMW (in Gauteng), Toyota (in Durban), Mercedes (in East London), General Motors (Port Elizabeth) and Volkswagen (Uitenhage). There was a widespread base of automotive suppliers, with about 120 first tier suppliers. The automotive industry was the largest manufacturing sector in the South African economy, accounting for 7.2% of the gross domestic product (GDP). The OEM employment level was approximately 30 000, and the component suppliers employed approximately 80 000.

566 083 vehicles had been produced in SA in 2014, and the projection for 2015 was 627 500. This was only 0.63% of the global market. The vehicles were well built to high quality standards. Automotive exports in 2014 amounted to R115.7 billion, or 12.7% of SA’s exports.

The types of vehicles produced locally included BMW’s 3 series, Nissan’s 1-ton truck, VW’s Polo, the Mercedes Benz’s C-Class and Toyota’s Corolla/Hilux. There were also a large number of locally-made components, such as catalytic converters, seats, engines, tyres, and radiators.

SA had many trade arrangements related to the automotive industry, such as the African Growth and Opportunity Act (AGOA) in the US, the European Union’s (EU’s) Foreign Trade Association (FTA), the Southern African Development Community’s (SADC’s) Free Trade Area (FTA), and other potential regional industrialisation agreements. The number of registered vehicles in 2013 was 9 548 729 and the number projected for 2015 was 10 364 908.

The SA government had supported the industry with the Motor Industry Development Programme (MIDP) in 1995 and the Automotive Production and Development Programme (APDP) in 2013. There had been tremendous growth in the industry as a result of this support. From this programme, the export value had grown from R4.2 billion in 1995, to R86.9 billion in 2012. The productivity index had grown from ten vehicles per employee in 1995, to 18.5 in 2012.Total vehicles manufactured had grown from 389 392 in 1995, to 539 538 in 2012. Capital expenditure had grown from R847 million in 1995 to R4.7 billion in 2012. R6.9 billion had been invested by OE manufacturers in 2014.

The APDP goals were:

  • Stable tariffs, which were 25% for light vehicles, and 20% for heavy vehicles.
  • A vehicle assembly allowance, which allowed manufactures with more than 50,000 vehicles p.a. to import a percentage of their components free (20%, decreasing to 18% over three years).
  • A production incentive, which allowed for the duty-free import of vehicles or components, 55% of value added in the supply chain.
  • An Automotive Incentive Scheme (AIS), which stimulated investment in job creation in SA’s automotive sector. It was a cash grant paid over three years with a minimum benefit calculated at 20% for OEMs and 25% for suppliers.

AIS had created 11 351 jobs through R6.9 billion of incentives approved, with a total investment of R25 billion for 245 projects.

There had been the finalisation of the SA Electric Vehicle (EV) road map, creating an environment for standards to allow electric vehicles on the roads. Support for the development and production of EVs was needed, as low volumes presented a challenge. The EV legislation should be finalised this year.

Southern Africa represented an opportunity for expanded SA supply chain development. In the medium to heavy commercial vehicle segment, the DTI was looking to encourage localisation and commercialisation, through deepening component manufacturing.

A review of APDP was under way even while the programme was still running, in order to make adjustments if necessary.

Toyota is looking to develop the Quantum mini bus here, while Tata was considering investing locally too. AIS had been extended to people carriers/mini buses, trucks and buses.

There was an Auto Supply Chain Competitiveness Initiative aimed at collaboration between the major industry players, including business plan activities and measuring and targeting value-adding opportunities.

The goal for the DTI was to reach 1.2 million vehicles per annum by 2020. This would depend on local and global economic factors. Mercedes had invested R5 billion, GM R1 billion, and Ford R3.6 billion recently into South Africa.

Briefing by Department of Economic Development

Ms Tanya van Meelis, Chief Economist, spoke about the Economic Development Department (EDD), which had been set up in 2009. Its oversight included the Industrial Development Act, the Competition Act, the International Trade and Administration Commission (ITAC) and the Infrastructure Development Act.

The Industrial Development Corporation’s (IDC’s) net approvals of R3.6 billion to 51 companies had created around 7000 jobs and saved around 5 000. 12 660 jobs had been generated or saved over a five year period.

ITAC administered the APDP programme. They worked out the rebate credits that were due on the programme. The rebate was a reduction in import tax, due to the OEM exporting and creating jobs. From 2013 to 2014 there had been R34.2 billion in rebate credits.

ITAC had reduced the duty on pistons for engines from 20% to duty free in 2010/2011, hydraulic brake fluid from 10% to duty free in 2012/2013, and CV joints from 20% to duty free in 2013/2014. Rebates had been issued for insulated cables in wiring harnesses in 2010/2011. Tariffs for safety glass and batteries had been increased to protect the local manufacturers. ITAC controlled the import and export of vehicles, to protect the market.

The Competition Commission looked at collusion by manufacturers of automotive components. There had been an investigation into 121 automotive component manufacturers, and an investigation into two panel beaters that had colluded on auto body repairs and panel beating work.

Discussion

Mr P Atkinson (DA) asked what the effect of load shedding on the motor vehicle sector was. People were becoming machine operators instead of car assemblers, so what was the quality of these jobs? Why had there been a drop in rebate credits to R9 billion in 2015? What had been the contribution of the Northern Cape to the automotive sector?

Mr S Marais (DA) thanked the Department for the job split. On the import tariff, was it actually 25%, as he had heard of 18% tariffs being imposed? How did one define locally made products, as many of the raw materials and machines were imported? He commented that with the system becoming so automated, few jobs were being created. What were the rewards for SA companies for local production and local components, as opposed to taking punitive action against foreign companies? What were the examples of collusion from the Competition Commission? What had happened to the Joule electric car? The APDP was costing SA money, so had the DTI done a comparison to see if the net benefits from the programme were positive?

Mr S Tleane (ANC) said that the current competition was between international firms. What did SA need to do to produce its own car? What was the vision for SA to put its flag in the automotive world market? SA could box smartly by focusing on a few platforms. Were the automotive companies doing this?

Mr M Mbatha (EFF) asked what local platinum resources had done to assist in producing components more cheaply, and whether this value had been passed on to the consumers? Even when a car was produced locally, it cost way too much compared to overseas, such as the United Kingdom (UK). Why did middle income consumers still have to struggle with high-priced basic local cars? How was the national interest protected by this industry?

Mr M Cele (ANC) queried where the IDC was investing. How did the EDD explain the fluctuation in credits -- could they be sold or traded?

Ms C Matsimbi (ANC) asked how the Department could get SA to manufacture all the vehicles locally. What was the policy that the Department needed to set to up total local production?

Mr Gareth Strachan, Deputy Director General, DTI, replied that if SA were to produce its own car, the design, commercialisation, production, taking it to market and innovation, would cost hundreds of billions of rands. In Thailand, most of the cars were made by Toyota, Mitsubishi and Honda and were exported to Australia and the rest of the East. Thailand had few resources apart from tourism and agriculture. They had a laser-focused policy on electronic and automotive development though. He felt that SA could not afford to build its own car, but could create an automotive hub. This could be done through policy instruments that supported localisation through the APDP. The DTI had asked Joseph Stieglitz, winner of a Nobel Prize in Economics, to look at the net benefit from this industry. SA needed global firms to up-skill workers and reach higher standards of quality, reliability and timeliness. The supply chains needed to be developed in partnership with the government and the OEMs. The automotive sector had a large number of upstream economic multipliers, such as leather, plastic etc, and downstream in terms of ports, rail and transport. The skills developed in making a vehicle were very high and in the component manufacturers, the job intensity was greater, adding extra value.

The Joule was an example of spending money on a new, high risk, big bang project that could go wrong, and the Government should rather look at incremental growth in existing developments. The statistics on the UK were unknown, but the DTI would provide the information to the Committee. The amount of platinum used in catalytic converters was very small, and the local firms did not get cheaper platinum -- they received incentives from the automotive programmes. An economic zone for fuel cell technology which uses platinum had been developed. MTN and Vodacom were utilising this technology. This was where platinum would add more value.

The biggest constraint on the industry was the small domestic market. The DTI was looking at working with other countries in Africa, such as Nigeria, for assisting in manufacturing components. There were complex problems in aligning with other economies. The best possibility was that the SADC free trade area was increased into Africa. The EDD had created a unit that would look at inter-Africa regional integration. Australia had gone another route and abandoned the automotive industry, as it exported a large number of resources and were involved in agri-processing. Every industrialised country had an automotive sector though. It was vital and the SA government believed that it would stimulate the economy. If the incentives were removed, it would destroy the industry. It was a choice – did the government want to support this sector, or another? The SA government had chosen to stand by this sector.

Mr Mlota said that the import duty for light motor vehicles was 25%, but the EU was given a preference of 7%, thus the 18% that had been spoken of. On the measurement of local manufacturing content, all imported content was removed, although it did include a mark-up. Raw materials were removed, and only the value added was included as local. On tariffs and rewards, they firstly looked to see if there was a local manufacturer and based the tariff on that. They looked at it on a case by case scenario. It was a reward for local firms to have protection.

OEMs had backups for load shedding. The component manufacturers struggled with the load shedding, however, as it could hamper their supply services. Some of them had considered other sources of energy, such as waste, and were working with local municipalities to have better schedules and prevention strategies for load shedding. What needed to be looked at was whether it was the face value of the credit rebate, or whether it included the offset import values. The DTI would investigate the drop in 2015.

On the Joule, the IDC had got involved and taken some of the shareholding, and the DTI had also become interested. A few holes were found in the business plan to move it forward to commercialisation. The Department of Science and Technology had taken the work and research on the Joule to the Nelson Mandela Bay University. It had been wrapped up and would not be invested in further. The benefits of the APDP outweighed the costs. The difference in the MIDP and APDP was the investment vehicle, as there was a cash grant now under the APDP. Some companies had moved to neighbouring countries, such as Botswana, where they could still benefit from the programme. On the Northern Cape, they were using the area for testing. The data was unknown but could be provided. There were a number of factors that affected the pricing of a vehicle, such as a number of duties and taxes, and the specifications.

Ms Van Meelis responded on the quality of jobs. The OEM jobs were well paid and highly skilled. There was a huge amount of energy put into retaining and up-skilling these jobs. On the competition front, the inputs of components required competition in pricing, and OEMs also needed a level of competition. The after-sales market created jobs and stimulated investment. The Commission looked at the insurance industry and repair work to make sure it was competitive. ITAC’s mandate was to make sure there was fair trade, so it did look at price disadvantages and whether the industry needed support. The EDD would provide details of the cases of the Competition Commission shortly. The IDC invested in OEMs and local manufacturers. For example, they had invested in Ford to save jobs in SA. The credit rebates could be sold once. The drop in rebates in 2015 was due to a change in the way it had been calculated by ITAC.

The meeting was adjourned.

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