GREG MARUSZEWSKI: Who pays for SA’s motor industry?

If a major manufacturer were looking around the globe for the best place to site a new motor plant, South Africa would not be anywhere near the top of their list.

Geographically, the country is poorly situated for exporting, lying far from the major global markets, and South Africa has experienced unreliable electricity supply in recent years, with price increases well above inflation, which has had a detrimental effect on the manufacturing sector.

While some of the major motor giants have placed their plants by the coast, others are Gauteng-based, and the road and rail routes to the coast are plagued by bottlenecks, crime and inefficiency, while the ports themselves are still beset by delays.

So, what is the magic factor that keeps the state-of-the-art, highly sophisticated motor industry rooted in South Africa? It is hundreds of billions of rand in subsidies and grants, tax breaks and discounted import tariffs.

This year, a review is to be conducted into the subsidy framework for the motor sector — the Automotive Production & Development Programme (APDP), which is intertwined with the motor masterplan. The APDP, now in the second phase leading up to 2035, involves refunds of customs duties and investment incentives.

It raises the question of who the winners and losers from South Africa’s costly motor subsidy strategy might be. The country has a general 25% import duty on vehicles (18% from the EU and UK), though this can be discounted through the APDP with tariff credits earned through local vehicle production.

But while they may offer protection to domestic manufacturers of vehicles, the impact of import tariffs is an increase in prices for the consumer.

Squeezed by cheap imports

While some might argue that the current 25% import tariff is already too high, such is the concern that local vehicle manufacturers are being squeezed out of the market by cheap imports that deputy trade, industry & competition minister Zuko Godlimpi told MPs last month that South Africa will have “no option” but to impose anti-dumping duties.

The industry has called for a tariff hike of 25%-30%, with some even seeking tariffs as high as 35%. But while manufacturers may voice fears that cars are being dumped in the South African market, importers will argue that the Chinese and Indian plants are just more efficient, and therefore more cost-effective, than the South African vehicle assemblers.

South Africa, the world’s 21st-largest car producer, celebrated 100 years of production last year. But in recent years local vehicle production has stagnated at about 0.6%-0.7% of the global total.

The motor manufacturing sector contributes 3.2% to South Africa’s GDP, with a further 2% contribution from the motor retail sector, and it is a big balance of payments contributor. It employs 115,000 people. Exports of vehicles and motor components account for about 15% of total South African exports.

However, the motor sector is also highly subsidised. Industry watchers estimate that total benefits for South African vehicle manufacturers — including discounts on import tariffs — totalled R38bn in 2021/22, rising to R46bn in 2022/23. This is about R400,000 for each direct job.

Does SA’s motor industry have a future?

Given the enormous amount of support it is receiving through state subsidies and inflated vehicle prices, it is worth asking whether South Africa’s motor manufacturing has a sustainable future. The experience in Australia, where motor manufacturing collapsed in 2017 (but where retail remains healthy), might offer some answers.

Motor manufacturing failed in Australia because, despite maturity, its low-scale and high-cost structure exposed it as structurally uncompetitive. This is also a serious challenge in South Africa. As in South Africa, there was low domestic demand in Australia. The local market is weak, with just fewer than 600,000 vehicles sold last year.

There is a heavy reliance on imports, with Chinese and Indian vehicles accounting for 52% of all showroom sales. Meanwhile, just more than 408,000 vehicles were exported by South Africa last year.

Production costs were high in Australia, without the ability to realise economies of scale. This is also a problem in South Africa, where motor producers face high logistics, energy and labour costs, as well as no large market on the doorstep.

While there are government commitments to continue to support the motor sector in South Africa under the APDP until 2035, there are no guarantees beyond that.

The APDP has been costly for taxpayers and consumers, and it has failed on almost all counts. The target is for domestic motor production to reach 1.4-million units a year, but it sits at about 600,000, and few industry experts believe we are likely to see the scale of growth that has been targeted.

The architects of the latest stage of the APDP also sought a big jump in employment in the motor sector, achieving 224,000 jobs, but recent figures suggest we have reached just more than half that level at 115,000 jobs.

Another key APDP target is to boost local content to 60%, but we are failing to move forward as fast as we need to, as local content has stagnated below 40% in recent years.

While vehicle sales increased by about 15% last year, much of the increase was due to sales of imports, mainly from China. This has led to calls for new Chinese motor firms to set up manufacturing and assembly plants in South Africa.

As the review of the APDP takes place this year, there are likely to be growing demands for more transparency about the very large sums from the public purse that go into what the motor sector’s critics see as a vanity industry.

The government has announced grant incentives for investment in electric vehicle (EV) production, but South Africa will need to catch up fast, as China and India have already transitioned far faster, have enormous domestic markets and have achieved impressive economies of scale, which is what makes their exports to South Africa so competitive.

While US President Donald Trump has watered down US targets for transitioning to EVs, global sales continue to rise, albeit at a slower pace. The South African domestic market for EVs is tiny, and growth is unlikely to be substantial unless the government can offer incentives to persuade more local motorists to purchase EVs — something the Treasury has previously resisted.

As the review of the APDP takes place this year, there are likely to be growing demands for more transparency about the very large sums from the public purse that go into what the motor sector’s critics see as a vanity industry. Certainly, there is little evidence of the South African motorist deriving much financial benefit from the existing support framework, which appears primarily to reward foreign-owned vehicle producers rather than the domestic consumer.

Amid many competing demands on the public purse, the motor manufacturing industry in South Africa needs to find a way to survive without such excessive subsidy from the taxpayer and motorist. Or it must be allowed to die.

• Maruszewski is a former MD of Volvo Cars South Africa.