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There’s no room in business for sentiment. Like a gigolo who has served his purpose of making a client feel loved and desirable, the motor industry development programme (MIDP) is preparing to be ditched with scarcely a backward glance.
The MIDP, in place since 1995, will make way at the end of next year for the automotive production and development programme (APDP), which will shape the industry until 2020. Already motor and components companies are looking beyond the current programme and to the future.
The impact of these changes on the local motor industry landscape is sure to be a major talking point when the industry meets at the Johannesburg International Motor Show to be held at Expo Centre, Nasrec, from October 6-16.
The MIDP has had plenty of critics down the years. It has been accused of subsidising inefficient motor companies and penalising SA consumers through inflated prices.
There is some substance to these charges. Between 2005 and 2010 the industry’s trade deficit — the amount by which the value of vehicle and components imports exceeded exports — was over R160bn. And however much apologists may argue mitigating circumstances, there is no denying that it has often been cheaper to buy SA-made vehicles overseas, than here at home.
Nevertheless there is no doubt that the MIDP will leave the SA motor industry in a much healthier position than it found it. Indeed, without it, one could argue there might be no industry at all. Before the MIDP came in, SA carmakers were protected by mountainous import duties of up to 115%.
The industry was a byword for inefficiency and poor quality. Left to its own devices in a world where tariff barriers were coming down, there could have been only one outcome.
The impact on jobs and regional economies, particularly in the Eastern Cape, would have been devastating. And however big the industry’s trade deficit, it’s worth asking how much greater would be the country’s deficit if it imported all its vehicles and spare parts, with no export income.
The biggest achievement of the MIDP has been to create an industry whose quality is not open to question. The programme’s incentive focus on exports has brought home to the industry the need to meet the highest international standards. C-Class sedans built in East London by Mercedes-Benz SA have been rated by the JD Power automotive research group to have better quality than any other car imported into the US. The Volkswagen Polo, also built in the Eastern Cape, is Japan’s import car of the year.
Where the industry still falls short is on productivity and costs — though these failings are not all of its own making. SA’s distance from international supply and export markets is a big disadvantage. So is the country’s infrastructure. The ports and railways are inefficient and expensive. Labour is also an issue. Unions are fond of comparing SA wages with those in Germany, Japan and the US. Such comparisons are irrelevant. SA’s direct competitors for vehicle and components business are China, Thailand, Eastern Europe and other developing economies. Against them, our labour costs are high.
Despite these challenges, the industry has transformed itself over the last 16 years. APDP planners say the new programme will take the industry to the next level.
There is little in common between old and new. The MIDP’s incentives are based on exports and benefit vehicle manufacturers. The APDP, which rewards production, offers its benefits to vehicle manufacturers and components suppliers alike. Government believes the industry is not sustainable without a strong local supply base. One of the APDP’s main platforms is the encouragement of greater local content.
By that, it means real local content. Components companies supplying parts direct to vehicle assemblers are known as Tier One suppliers. Their suppliers are Tier Two which, in turn, rely on tiers three and four. Many of the Tier One companies are multinationals, which source a large proportion of their sub-components from overseas
In recognising that multinationals will dominate the Tier One level government wants them to use more local suppliers and service providers.
Mass-production vehicle producers like Volkswagen SA and Toyota SA have set minimum targets of 70% “real” local content. Toyota SA president Johan van Zyl says: “If you want to create jobs you have to manufacture something. That means sourcing locally at every level of the supply chain. With the APDP you have to know the value addition at every tier. I think this programme is the right one for the country.”
BMW SA MD Bodo Donauer adds: “We must have a true local supply base. Our companies should not just be workbenches for others from overseas.”
BMW SA will build the next-generation 3-Series, mainly for export, from 2012. It is one of several local motor companies to announce multi-billion rand product plans in response to the APDP.
The biggest carrot is the already-introduced automotive investment scheme (AIS), which is backdated to July 2009 and allows vehicle and components producers to claim back 20% of production-related investments. Another 10% is available under exceptional circumstances, which include training and job-creation.
Another important part of the APDP is an assembly allowance for motor companies building a minimum of 50 000 light vehicles annually. Their reward will be duty-free import credits, equivalent to 18% of the value of vehicles. Other elements of the programme include a production incentive based on “value-added” — defined by the department of trade and industry (DTI) as “manufacturer’s selling price, less input materials” — and import tariffs frozen at 25% on vehicles and 20% on components. Vehicles from the European Union will enjoy a preferential 18% tariff.
If there are misgivings around the APDP, they reflect the fact that many of its details and definitions have still to be finalised. Given the DTI’s history of tardiness and making decisions only under duress, not everyone is convinced the APDP will be 100% ready for its introduction on January 1 2013. But there seems consensus that enough will be known to make it workable.
VWSA MD David Powels, who is also president of the National Association of Automobile Manufacturers of SA (Naamsa), says the APDP will have in-built flexibility that will allow it to be adjusted where necessary.
“There will be review points along the way so that if there are unintended consequences, we will be able to repair them. Nothing is irreversible. That should give all of us confidence, vehicle manufacturers and components companies alike.”