The economic crisis, competition and the auto industry: a view from the south Pre- ICN Competition and Development Forum

1. The economic crisis, competition and the auto industry: a view from the southPre- ICN Competition and Development ForumZurich, June 2009 Anthony Black School of Economics University of Cape Town

2. outline • Introduction • International developments: The depression in the auto industry • The response of governments: Growing subsidies and protection • Impacts in developing countries • Response in South Africa • Consolidation and competition in the auto industry • Conclusions - what forms of support are appropriate?

3. “By the time we finish with this in the next 24 months, as far as mass producers are concerned, we’re going to end up with one American house; one German of size; one French–Japanese, maybe with an extension in the US; one in Japan (Toyota), one in China and one potential European player”. Sergio Marchionne, Chief Executive, Fiat “What the US is doing right now is highly problematic in terms of competition. One day we in Europe will wake up with a big headache because of it…….Under normal circumstances we would heavily attack what they are doing as competitive distortions. If Daimler for instance had received anywhere near the amount of money General Motors is getting we would have a car war in Europe and overseas” Hans-Peter Keitel, head of Germany’s BDI industry federation

4. International developments: the depression on 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

7. Is the auto industry a special case? • Apart from the financial sector the auto industry looks set to receive special treatment • Why? • The industry is large and very visible • The companies themselves are large • Sector is highly cyclical • Workforce and firms are highly organised • Production is regionally concentrated • Long history of state support • Going through major adjustment • Shift to low cost countries • Environmental developments • Technological developments

8. The response of governments • Protectionism on the rise but taking a different form • Subsidies, procurement provisions, licensing requirements, import bans, anti-dumping ,market support • Subsidies take form of cheap loans and loan guarantees as well as direct transfers to firms • World Bank has identified 57 varieties of protectionism across all sectors and countries • 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

10. What are the implications? • Whether support is tariffs, subsidies or preferential procurement policy it remains protectionist • Despite pledges by G20 countries to avoid protectionism, 17 out of 20 have introduced 47 measures which limit trade at the expense of other countries • Spectre of ‘subsidy contagion’ along the lines of Smoot Hawley? • In the auto industry, subsidies linked to maintaining national production • US support for the Big Three; Canada had to follow suit • French support for Renault tied to maintaining domestic production • German government choice of suitor for Opel influenced by pledge on jobs • Proposed British support for Vauxhall contingent on retaining production in Britain • GM decision to build new small car in the US instead of China

11. 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 • Component firm exports have been negatively affected • VWSA benefited directly from market support measures in Germany

12. The response in South Africa • Slowing global sales impacted on last year’s policy review outcomes • But SA still dropping tariffs albeit very gradually • Task team established last year to consider short term support measures • Prospect of an auto industry bailout strongly opposed by then Finance Minister, Trevor Manuel • “lottery where those with the loudest voices receive the most money” • Since April election prospect of bailout type support may have increased with new economic leadership more disposed to industrial policy

13. 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

15. South African vehicle assemblers’ passenger car production as a proportion of total global family output, as well as actual unit change from 2003 to 2007

16. Consolidation and competition in the automotive industry • Given weakness in global auto sector, will further consolidation take place in an industry already dominated by relatively few firms? • Perhaps not…. • New entrants, for example from China, India and Russia; and also examples such as Opel • Mergers have a very poor record in the auto industry • Technological changes impacting on the nature of production

17. Are there factors which will mitigate against greater protection? • International trade rules and bilateral agreements • Greater vertical specialisation and the emergence of global supply chains has meant that exporters have greater influence and will ensure input prices are minimised • Some argue that this has altered the political economy of protection

18. 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

19. “Out in front this business (the auto industry) is glamorous like Las Vegas. But behind the scenes the industry machine is complex and chaotic. We look round at what to invest in and its hard to justify the economics”. Sergio Marchionne, Chief Executive, Fiat