Still time to adjust the motor industry master plan
For once, government ineptitude may be a blessing. When policy designers were devising the 2021-2035 SA automotive master plan, they had no notion of Covid-19 or the mayhem it would cause.
So when they devised a strategy to increase vehicle production by 133%, double employment and grow the value of local content in each vehicle by 50%, they thought the only barriers would be normal local and international economic cycles. So much for normality.
Production and job loss forecasts for this year are such that to meet the 2035 targets of 1.4million vehicles and 240,000 jobs, production after 2020 may have to grow by 300% and employment by nearly 150%.
How fortunate, then, that the government has been unforgivably slow in finalising the master plan. The broad principles have been known for years, but with just more than eight months to implementation, the industry is still waiting for final details — the percentages and technicalities that will make it work.
Policy designers now have the opportunity to shape the master plan to current circumstances, rather than anticipated ones. Tim Abbott, MD of BMW SA and president of the National Association of Automobile Manufacturers of SA (Naamsa), says that if the lockdown continues much longer, companies may fall short of production targets that allow them to claim incentives through the Automotive Production and Development Programme. The programme, launched in 2013, will continue, adjusted, within the overall automotive master plan.
Prof Justin Barnes, the government’s chief independent adviser on automotive policy, says other changes are necessary. Among them, the government should adapt a rule excluding vehicle and components companies from recouping up to 35% of new investments if employment numbers drop. Jobs are already being shed because of Covid-19 and a loss of incentives would cost many more.
Of the 120,000 people employed by vehicle and components manufacturers, Naamsa CEO Mike Mabasa estimates up to 20% — 24,000 people — could be retrenched if the Covid-19 lockdown stretches into May.
In response to a multiindustry government survey on the effects of the lockdown, he also suggests up to 30% of small and medium automotive companies could shut down. These would be almost all in the components supply chain.
That is just existing small and medium businesses. The industry has created a R6bn transformation fund to help black companies enter a predominantly white industry. Most of these will also be in the supply chain but some now will not get a chance to open their doors.
Then there are other industries that rely on the automotive industry. An Econometrix study found that 58.8% of the carpet industry’s output goes to vehicle and components companies. The same goes for 55% of leather products, 28% of rubber, 16% of iron and steel. Employment in all these sectors will be affected by motor industry woes.
So will the economy. The motor industry is responsible for nearly 30% of industrial production, 14% of exports (R178.8bn in 2018) and nearly 7% of GDP.
No wonder Barnes wants the government to free the motor industry from lockdown to resume vehicle assembly. Not all assembly, just that required to meet export commitments. If not, foreign competitors could take over orders and start a drip of business away from SA producers. For an industry that exports 64% of what it produces, that is a terrifying prospect.
In a policy brief to the government, Barnes says motor industries in other countries are already preparing to resume production. SA is part of “complex global value chains” and if it can’t fulfil orders, it will be “displaced” by plants in other countries. Demand in export markets will be much lower in coming months but that is where SA must focus to secure its future. As for the SA market, Barnes says short-term sales will be “disastrous”.
Even before the pandemic, the local market was heading for its sixth decline in seven years. To kick-start it, Renai Moothilal, director of the National Association of Automotive Component and Allied Manufacturers, says the government should consider tax and credit breaks. Duties and ad valorem taxes account for more than 40% of the price of many vehicles.
Covid-19 has underlined the need for decisive state intervention. As part of the auto master plan, the government has committed to creating transport and trade infrastructure that will allow the industry to flourish. That includes ports and railways. How they will manage future growth, when they are already unable to cope with existing numbers, isn’t clear.
Barnes says in his policy brief: “While the national government was praised for its handling of the lockdown, the opposite applies to the way Transnet and Portnet have communicated with the motor industry both in preparation for, and during, the lockdown. It was deemed inconsistent, unclear, disorganised and generally ineffective.”
The SA motor industry is unrecognisable from its pre1995 mould when fierce protectionism, fed by anti-apartheid sanctions, bred an industry with no concept of competitiveness. Since then, successive development policies have created a world-class player, albeit a very small one. That progress mustn’t be thrown away, says Barnes.
Everything must be done to avoid “a decline in automotive value addition that renders the industry less important in global value chains and moves the industry closer to the margins of global production activity”.
AN ECONOMETRIX STUDY FOUND THAT 58.8% OF THE CARPET INDUSTRY’S OUTPUT GOES TO VEHICLE AND COMPONENTS COMPANIES