Linda Ensor
6 October 2008
Johannesburg — The timing of the MIDP's replacement is unfortunate, but vehicle exports should rise in the long run.
THE government's new automotive production and development programme (APDP) is not expected to result in a decline in motor vehicle and component exports even though it will no longer be based on an export incentive as was the previous motor industry development programme (MIDP).
However, manufacturers predominantly geared towards exports are likely to increase production volumes and focus more on the local market to sustain their profit levels.
The key to the new programme will be a market-neutral production incentive that will apply whether the products are destined for the export or local markets.
The switch from an export incentive was necessary to bring SA into line with World Trade Organisation (WTO) requirements that outlaw direct export subsidies.
A production incentive would encourage volume growth and economies of scale, driving down prices and promoting exports.
Although the data has not been made available publicly, economic modelling conducted by the Industrial Development Corporation (IDC) on behalf of the government showed that the effect of the new programme on the trade balance would be insignificant, says Nimrod Zalk, chief director of the trade and industry department's industrial policy .
IDC chief economist Lumkile Mondi would not disclose the findings of the research, but emphasised that SA, as an underperforming exporting country, needed to increase its exports generally and its motor vehicle exports in particular.
He said that the bottom-line objectives of the new programme were to ensure that the original equipment manufacturers remained in SA; that new ones were encouraged to locate here; that a strong automotive component sector was developed; and that SA's vehicle manufacturers were globally competitive.
Because of strong links between the automotive sector and other sectors of the economy, its growth would deepen the productive capacity of the economy as a whole. What could change under the programme is the mix of exports along with changes in import replacements.
Mkhululi Mlota, trade and industry department director of the automotive sector, said the impact of the programme would differ from company to company. Some car manufacturers would be in a better position than others to localise, while those geared towards exports could shift focus to produce more for the local market.
Mlota did not believe the new support package would result in price increases for exports.
The success of the MIDP since its introduction in 1995 can be seen in motor-vehicle production figures, which have climbed from 388442 units to 534490 units last year, a rise of 38%. Exports during this period increased from 4% of total production to 32%.
The department hopes that under the new volume-centred programme, vehicle production will more than double to 1,2million vehicles a year by 2020.
As the local market will not be big enough to absorb this additional output, exports are also expected to increase. However, sustaining the current share of exports to total production will be a tough call in the immensely competitive global motor industry.
It is estimated that vehicle exports would have to more than double next year from this year's forecast 266000 to be on track to reach the 1,2-million target. The current slump in global sales will make this difficult to achieve.
"The industry is facing one of the worst times globally as automotive growth slows down. Also, consumer demand is shifting to more fuel-efficient vehicles in response to the oil price and environmental concerns," Trade and Industry Minister Mandisi Mpahlwa said when releasing details of the new programme.
"There is now increased competition from low-cost and market-booming regions such as eastern Europe and Asia, with a continuing overcapacity problem that puts added pressure on our industry that still produces and sells hardly 1% of the vehicles in the global automotive market.
"Notwithstanding the successes achieved since 1995, the industry faces a number of challenges. Economies of scale in assembly and the depth of domestic component manufacturing are not yet internationally optimal.
"Relatively few automotive components dominate the export basket, while the local content of the exported vehicles has somewhat stagnated. Also, most of the growth in domestic sales has been serviced by imports, resulting in a growing trade deficit. However the current domestic downturn and growth in exports is likely to reverse this situation in 2008."
The new programme includes import tariffs of 25% for completely built up vehicles and 20% for components used by vehicle assemblers. A local assembly allowance will allow light-vehicle manufacturers with an annual production volume of at least 50000 units to import 20% of their components duty free for three years from 2013. It would fall to 18% thereafter.
To foster beneficiation, a duty credit production incentive will be introduced in 2013 to replace the current export-based scheme. It will be applied at a rate of 55%, falling to 50% over five years, a shift upwards from the initial 50% to 45% proposal that the catalytic converter industry was unhappy about. An additional 5% will be considered for vulnerable sectors.
Value-addition will be defined as sales minus raw materials. To support investment in new plant and machinery, there will be a direct grant or investment allowance from next year equal to 20% of the project value over three years. There will also be company- specific allowances such as a maximum additional 10% for costs such as training, technology, transfer, localisation, research and development and commissioning.
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