Trade and Industrial Policy in the South African auto industry

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. 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. Legend: High Low 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 Indirect Influence on industry 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

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 • 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