An analysis of the impact of the first phase of South Africa's motor industry development programme (midp), 1995–2000

Abstract

The South African motor vehicle industry is an important branch of the local manufacturing sector, contributing significantly to manufacturing value added and employment. Over the last decade, the local industry has undergone a series of policy reforms, and in recent years has increasingly been exposed to globalisation. This article reviews the role of government policy in shaping the industry, and examines the impact of the first phase of the Motor Industry Development Programme on the industry for the period 1995–2000 in respect of domestic production, automotive industry employment, export performance and the automotive trade balance. The article concludes that even though the industry registered strong export growth that contributed to improving the automotive trade deficit, it was deficient in sustaining domestic production and employment levels. The imminent challenge for the local industry's development is to maintain its export growth trajectory in the long term in the absence of costly government protective incentive mechanisms.

1 INTRODUCTION

Over the last few decades, the South African automotive industry has undergone major policy reforms. Changed government support and tariff liberalisation have been significant drivers of the development and performance of the local automotive industry in recent years. More specifically, in September 1995, the government of South Africa launched the Motor Industry Development Programme (MIDP). This novel automotive programme reflects an increasing gearing of policy towards enhancing the export possibilities of vehicle manufacturers and component producers through a number of government incentive or support mechanisms that reduce their import duty liabilities. These government support mechanisms offered under the MIDP have, in fact, tended to increase the effective protection for the local industry by imposing costs on it and South African vehicle consumers. The MIDP was intended to achieve a number of objectives, among which are included enhancing automotive exports and international competitiveness, attracting foreign investment and rationalising the industry.

The future of the domestic motor industry is of considerable importance for the development of South Africa's manufacturing sector and, indeed, for the economy as a whole. (The motor sector relevant to this study includes the manufacturing of vehicle components and assembly, and motor trade. Motor trade includes vehicle retailing, distribution, servicing and maintenance.) The motor sector contributes about 5,3 per cent of the national economy's gross domestic product (GDP) and employs in the region of 273 600 workers (NAAMSA, 1999). It is a generator of inter‐industry linkages, and has close links with other manufacturing subsectors, such as leather, textiles and plastics.

The motor industry includes the manufacture of auto components and assembly of vehicles, and excludes motor trade. For the most part, the article refers to the motor industry as defined here. The motor industry is also a large net consumer of foreign currency; in 1998, automotive imports totalled about R20 billion and exports about R10 billion (DTI, 1999). The motor industry's export share in total manufacturing exports declined in the early to mid‐1990s, but has since increased – thus establishing itself as one of the most successful exporting sectors in South African manufacturing.

One successful outcome of the industry's performance has been the strong export growth of both automobiles and auto components under the MIDP, which has been largely due to the government's protected export promotion strategies offered to vehicle and component manufacturers. These include the import–export arrangements and the productive asset allowance, instituted in 2000, that actually raises the effective protection levels of the local motor industry (see Flatters, 2002). Likewise, government support in terms of providing export incentive schemes has been noted to be one of the main reasons for the rapid export growth and development of automotive industries in countries such as Australia, Brazil, India and Malaysia (Chudnovsky et al., 1996; Humphrey, 1998; Sidorenko & Sarfudin, 1998; Tyndall, 2000). In particular, the export incentives provided by the MIDP tend to have had costly implications for domestic production and automotive employment, as well as for South African vehicle consumers. Nevertheless, export expansion remains crucial to the future growth and sustainability of South Africa's automotive industry, as the size of the domestic market is relatively limited.

This article primarily focuses on automotive policy relating to light vehicles – which include both light passenger vehicles (LPVs) and light commercial vehicles (LCVs) – and motor components. Its purpose is twofold. First, the article provides an overview of policy developments in the South African automotive industry and highlights major policy reforms over the last four decades. Second, it analyses the impact of the MIDP on the performance of the industry with respect to domestic production, automotive employment, exports and the automotive trade balance for the period 1995–2000. The article also provides brief policy developments of the second and third phases of the MIDP. It closes with the main outcomes of the first five years of the MIDP for the development of the South African automotive industry.

2 DEVELOPMENTS OF AUTOMOTIVE POLICY IN SOUTH AFRICA

Since the early 1960s, the industry developed within a general framework of import substitution strongly influenced by protectionism, namely local content policy. Table 1 summarises the evolution of South Africa's automotive policy from 1961 to the present.

Developments of automotive policy in South Africa

Period	Automotive policy	Key policy instruments
June 1961–February 1989	Phases I–V: local content programme	• Local content scheme introduced with varying content levels implemented by weight
		• Excise duty rebate scheme
March 1989–August 1995	Phase VI: structural adjustment programme	• Domestic content scheme adjusted for value targets
		• Import–export complementation (IEC) scheme introduced
September 1995–June 2000	MIDP: first phase	• Local content regulations abolished
		• Tariff phase‐down schedule for imported vehicles (40 per cent) and components (30 per cent) by 2002
		• IEC scheme continued; export credits increased.
		• Duty‐free allowance (DFA) and small vehicle incentive (SVI) scheme implemented
July 2000–7	MIDP: second phase (after mid‐term review)	• Tariff phase‐down to continue until 2007 – imported vehicles (30 per cent) and components (25 per cent)
		• IEC phase‐down from 2003 to 2007
		• Introduction of new production‐based DFA in 2000, to be discontinued by 2007
		• SVI phased down and eventually discontinued by 2003
		• Introduction of a productive asset allowance

The introduction of the local content programme (LCP) in 1961 was intended to increase the utilisation of domestic components in the production of motor vehicles and ultimately to develop it into a full‐scale manufacturing sector (see Boxall, 1989; Damoense, 2001). The main theme of the local content programme was that the local industry evolved through a series of local content phases, Phases I–V, which lasted from June 1961 until February 1989. Phases I–V were weight‐based, with local content levels ranging from a low 15 per cent in 1961 to 66 per cent in 1980. Thereafter, local content remained at 66 per cent by weight, but was amended and based on a weighted average measure across an entire model range. In other words, original equipment manufacturers (OEMs) were not required to achieve the targeted local content percentage on every individual vehicle model but across the entire vehicle model range. Up to this point, the local content programme had been ineffective in reducing the proliferation of vehicle models, saving foreign exchange, and developing a local automotive industry with jobs, skills and established capacity.

As the industry developed, key policy changes were made to the programme. In the late 1980s, in line with South Africa's progress towards trade liberalisation, a structural adjustment programme for the motor industry was introduced. This programme primarily focused on the objective of saving foreign currency and enhancing automotive exports. According to the Board of Trade and Industry, the 66 per cent local content based on weight was equivalent to an estimated 37,24 per cent local content by value (BTI, 1988), which contributed forcefully to the widening gap of the industry's trade deficit. Phase VI differed from the previous five phases in that it assessed local content on the basis of value instead of weight. The idea was that Phase VI would significantly reduce the industry's import invoice by at least 50 per cent (BTI, 1989). Hence, this could be attained by promoting export growth of automotive products. The export facilitation scheme introduced under Phase VI led to substantial growth in total automotive exports – 28 per cent per annum (calculated from TIPS, 1999).2 However, Phase VI did not adequately reduce the usage of nominal foreign exchange by the motor industry as the policy had intended. The net automotive trade deficit increased by 33 per cent in nominal rand terms over the period 1989–94.

The industry's stagnant performance throughout the 1970s and 1980s led to another transformation in policy, which became effective in September 1995. The government introduced a new motor industry programme, the MIDP, in compliance with the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO), established under the Uruguay Round in 1994. The first phase of the MIDP ran from September 1995 to June 2000, which will be examined at this juncture. Prior to June 2000, the Mid‐Term Review of the MIDP was conducted in July 1999. It proposed certain amendments to the existing programme in an attempt to meet the challenges of globalisation and rapid technological changes. This led to the second phase of the MIDP, effective from July 2000, which is expected to conclude in 2007. Recently, it was publicised that a third phase of the MIDP is anticipated to run from 2008 to 2012.

The primary objectives of the MIDP included (DTI, 1999; NAAMSA, 1999):

1.	Developing a globally integrated and competitive local motor vehicle and component industry
2.	Stabilising long‐term employment levels in the industry
3.	Improving the affordability and quality of vehicles
4.	Further promoting the expansion of automotive exports and improving the sector's trade balance
5.	Contributing to the country's economic activity

3 KEY FEATURES OF THE FIRST PHASE OF THE MIDP

The MIDP is based on Australia's Button Car Plan, with particular reference to tariff reform and export facilitation. The MIDP is essentially an extension of the previous industry policy (Phase VI of the LCP) in terms of export facilitation; namely, the import–export complementation (IEC) scheme where export credits could be used to offset import duties, thus effectively attempting to reduce the industry's import duty liability. From September 1995, local content requirements were abolished under the MIDP.

Other features that are absent from Phase VI but incorporated under the MIDP include: a tariff phase‐down programme for both completely built‐up vehicles (CBUs) and components, and government support schemes – duty‐free allowance (DFA) and the small vehicle incentive (SVI) scheme.

The economic literature regarding motor industry‐specific programmes adopted by many low‐volume automobile‐producing economies, such as Argentina, Australia, Malaysia, the Philippines and others indicate that the above‐mentioned measures, or similar ones, are common features of automotive programmes. See, for example, Tacaks (1992), Chudnovsky et al. (1996), Sidorenko & Sarfudin (1998) and Tyndall (2000).

Tariffs on imported passenger vehicles fell from 65 per cent in 1995 to 40 per cent by 2002, while tariffs on imported components dropped from 49 per cent in 1995 to 30 per cent in 2002. Tariffs were phased down faster than was required from South Africa's commitment to the WTO and GATT. The lowering of tariffs has led to increased demand for imported CBUs, and imported components used in the assembly of export CBUs. Falling tariffs in conjunction with the IEC and the DFA have provided component suppliers with the opportunity to benefit from flexible sourcing arrangements with foreign firms.

Effectively, the IEC – also referred to as the export facilitation scheme – operates as an export subsidy to OEMs and component producers. The idea behind the IEC was that OEMs must earn sufficient foreign exchange by exporting, in order to offset foreign exchange used to import components. Moreover, the local content value of exports referred to as the ‘qualifying value of eligible exports’, may be used to rebate the import duty payable on CBUs and components. Import duty rebate credit certificates (IRCCs) are issued by the Department of Trade and Industry (DTI) and then used to offset import duties payable. One rand of IRCC is earned for every one rand of local content value exported. The IRCC feature provides effective protection of between 30 and 40 per cent to CBU exporters and between 26 and 30 per cent to component exporters (Flatters, 2002).

A DFA equal to 27 per cent of the manufacturer's wholesale vehicle price can be rebated against the duty payable on imported components used in the production of vehicles for the domestic market. The DFA is an allowance that subsidises high‐value import components that are not readily available locally or are relatively expensive on world markets. In essence, the DFA increases the effective rate of protection (ERP) for vehicles produced for the domestic market. According to Flatters (2002), depending on the level of import content – say, for example, 30 per cent (or 70 per cent local content), and given 2002 tariff rates (30 per cent for components and 40 per cent for CBUs) – the ERP including the DFA is estimated to be as high as 62 per cent. Moreover, the ERP may even surpass 100 per cent if the import content is about 70 per cent. When excluding the DFA allowance, given 30 per cent import content and 2002 tariff rates, the ERP is estimated at 44 per cent (Flatters, 2002).

In recent years, the composition of the South African car market has shifted towards the production of smaller, cheaper and fuel‐efficient models initially encouraged by the structure of Phase VI and the SVI allowance under the MIDP. The SVI has assisted in somewhat reducing the price of entry‐level vehicles, causing price wars in the lower segment of the car market. On the other hand, the SVI allowance has caused distortions in the small car market segment by imposing higher welfare costs to the local industry, and bringing about a further proliferation of vehicle models. Initially, when the SVI was introduced, it offered an allowance equal to 3 per cent for every R1 000 below the vehicle price qualifying value of R40 000. By 2000, the SVI allowance dropped to 2 per cent and the qualifying value increased to R44 000. However, vehicle price inflation has been rising, exceeding the qualifying value prescribed under the MIDP, hence no (if any) benefits have been forthcoming to vehicle manufacturers from the SVI allowance.

The combined government policy measures of the MIDP have increased the effective protection of the South African motor industry in the face of increased tariff liberation imposing detrimental costs to the development and growth of the industry. Incentives provided under the MIDP are estimated to cost the local industry in the region of R11 billion per annum (Plummer, 2002).

4 STRUCTURE OF THE LOCAL AUTOMOTIVE INDUSTRY

Seven domestic OEMs produce a little over 300 000 units of passenger cars and light commercial vehicles annually for the local market. OEMs are geographically concentrated in Gauteng (Nissan SA, Samcor, BMW SA), the Eastern Cape (VW SA, Delta, Daimler Chrysler) and KwaZulu Natal (Toyota SA) (Table 2). In addition, there are 11 medium and heavy commercial assemblers and eight independent importers. In the components sector there are 220 domestic component firms and another 150 independent suppliers producing components for the local and export market. Import duties have been lowered but still remain relatively high according to global standards.

South African OEMs – ownership structure, makes of vehicles and market share, 1998

SA OEM	Ownership structure	Vehicle make	Market share, % 1998
Toyota	72,2% local (Wesco), 27,8% Toyota Motor Corporation (Japan, 1996)	Toyota	25,3
Volkswagen	Volkswagen AG	Volkswagen, Audi	21,5
Samcor	55% Anglo American, 45% Ford (1994)	Ford, Mazda, Mitsubishi	15,7
Delta	51% local, 49% General Motors (1997)	Opel, Isuzu	14,5
Daimler Chrysler	Daimler Benz AG (1992), Chrysler (1998)	Mercedes‐Benz, Honda, Colt (Mitsubishi)	7,7
Automakers	Nissan Motor Company (Japan, 1997) 50%, Nissan Diesel Motor Company (Japan) 4,3%, Mitsui and Company (Japan) 8,7%, Sankorp (local) 37%	Nissan, Fiat	9,4
BMW SA	BMW AG	BMW	5,9
Source: Barnes (1998), Cokayne (1999), Van der Walt (1998).

Table 2 outlines the ownership structure of local OEMs. Since the 1990s, all OEMs have become partly or wholly owned subsidiaries of the world's leading motor manufacturers. This has contributed to increased inflows of foreign investments into the local industry, because local OEMs are now integrated into international production and marketing networks of parent transnational firms. Recent trends in corporate strategies of automotive transnationals have mainly taken the form of cross‐border mergers and acquisitions facilitated through foreign direct investment, such as the merger involving Daimler Chrysler in 1998, worth US$41 billion. The number of strategic partnerships, especially in the area of research joint ventures in advanced transport technologies, is also rising. Thus, the oligopolistic structure of the world automobile industry is increasingly being driven by innovation technology‐based competition, which poses challenges for the local automotive industry.

Labour productivity in the South African automotive industry has improved in recent years – since 1995, average labour productivity has increased by about 5 per cent per annum (AM&LT Strategy, 2002). Quality performance levels are also believed to have improved, although internationally some still perceive South African quality standards to be inferior. However, evidence of rising exports of CBUs and components, and rising foreign investments suggests otherwise. In addition, the BMW SA plant at Rosslyn (Gauteng) achieved the company's global quality award in 2002, demonstrating high‐class quality in vehicle manufacturing (AM&LT Strategy, 2002). Together, productivity growth and quality improvements have been crucial in the face of dynamic transformations in the world automotive industry and South Africa's increased exposure to international competition.

In the world automobile industry, South Africa contributed less than 1 per cent (0,75 per cent) in 1996 – but it has nevertheless been ranked 18th among the 20 top‐producing nations worldwide, coming after Brazil and India (NAAMSA, 1999). In 2000, South Africa contributed 0,61 per cent to world production and lost its rank from 18th to 19th (NAAMSA, 2001). Even so, South Africa is responsible for about 80 per cent of Africa's vehicle output. Table 3 presents comparative data of the South African automotive industry in an international context with respect to selected low volume‐producing countries – Australia, India and Malaysia.

Comparative automotive statistical data: selected low‐volume producing countries, 1990s

Country	South Africa	India	Malaysia	Australia
Number of domestic car producers – 1995	7	3	14^a	4
Number of component firms	280	365	281	<200
Number of independent suppliers	150
Production of passenger cars – 1997 (units)	228 179	486 132	239 000	312 908
Imports as share of domestic market – 1997	12	13 (CKDs only)	20	53
CBU exports (units) – 1997	10 458^b	37 161	21 087^b	51 757
	8 000^c		1 434^c
Growth rate – component exports (current US$ million)	17%^d	30%	–	20%
Vehicles registered – 1997 (millions)	6,8	6,2	3,2	11,1
Notes: ^aIncludes importers of vehicles, ^bCBU exports – passenger vehicles, ^cCBU exports – commercial vehicles, ^dgrowth rates for 1996–8. CKDs=completely knocked‐down kits. Sources: Compiled from ACMA (2000), Barnes (1998), DOC (1999), DTI (1999), Humphrey (1998), Mascitelli (1999), NAAMSA (1999), Narayan (1998), Sidorenko & Sarfudin (1998), Tyndall (2000).

As mentioned earlier, the size of the domestic market is relatively small in relation to the number of OEMs. Table 3 indicates that seven OEMs in South Africa are too many when compared with Australia and India, which have three and four OEMs, respectively, given the dimensions of their domestic markets. The contrast is even more striking with the automotive industries of major producing countries. Germany produces 4 million and Japan 6 million vehicles per annum, yet each only have six OEMs (Stewart, 1992: 31).

In 1997, the production of LPVs for the export market in South Africa was relatively low comparatively (see Table 3). South Africa produced 10 458 units of passenger cars in 1997, compared with Australia (51 757 units), India (37 161 units) and Malaysia (21 087 units). However, South Africa's production for the export market increased more than fivefold over the period 1997–2000, which indicates the strong export performance of local OEMs. LPV exports increased from 10 458 units in 1997 to 58 204 units in 2000 over a three‐year period, which is an increase of 457 per cent. Compared with Australia, LPV exports increased from 51 757 to 101 018 units for the same period, representing an increase of 95 per cent. Looking at the growth of export components over a two‐year period (1996–8), South Africa experienced an average annual growth rate of 17 per cent in nominal US dollars. In this respect, South Africa compares favourably with Australia but poorly with India, which achieved an average growth rate of 30 per cent for the same period.

Pre‐MIDP, net profits before tax – a measure of profitability for the seven OEMs – increased from R328 million in 1992 to R2 032 million in 1995.3 Profitability of the now eight OEMs fell from R2 032 million in 1995 to a loss of R547 million in 1997, and recovered to R1 285 million in 2000. Profitability was adversely affected in 1996–7 mainly because of increased international competition following tariff liberalisation, underutilised manufacturing capacity, low production volumes and sluggish domestic demand. Between the introduction of the MIDP in 1995 and 2000, fixed investment expenditure by South African OEMs increased from R847 million to R1 562 million (NAAMSA, 2001). The level of fixed investments by South African OEMs compares unfavourably with other low volume‐producing countries such as Argentina, Australia and Brazil.

5 IMPACT OF THE MIDP: PERFORMANCE OF THE SOUTH AFRICAN AUTOMOTIVE INDUSTRY IN THE 1990S

5.1 Production

Total domestic production (which includes domestic sales and CBU exports) of light vehicles has been bleak both in terms of units and value for the period 1995–2000. Annual revenue from the new light vehicle industry increased minimally from R25,8 billion in 1995 to R29,6 billion in 2000 in nominal rands. Over the last decade, the production of light vehicles for the domestic market contracted by about 17 per cent; that is, from 335 000 to 277 608 units. However, CBU exports increased significantly from about 10 000 units in 1990 to 67 352 in 2000. CBU exports account for 20 per cent of automotive production, compared with only 3 per cent a decade ago.

Figure 1 provides trends in total domestic production, domestic sales, CBU export production and CBU imports for the period 1995–2000. CBU exports and CBU imports followed an upward trend over this period, while total domestic production and production for the domestic market followed a downward trend. It can be observed from the figure that CBU exports contributed strongly to the upward trend in total domestic production from 1998. More specifically, CBU exports increased by 331 per cent, while domestic production fell by 22 per cent and total domestic production fell by 8 per cent between 1995 and 2000. Hence, the strong increase in export production could not turn around the negative trend of total domestic production. However, between 1998 and 2000, total domestic production started showing a positive trend, increasing by 15 per cent as a result of export expansion in the face of subdued domestic demand.

Light vehicle production (domestic and exports) and imports in units, 1995–2000

Notes: DPROD = domestic sales; EXP = CBU export production; TOTPROD = total domestic production; IMP = CBU imports. Source: NAAMSA (2001).

Figure 1 shows that import CBUs have been rising consistently since the inception of the MIDP in 1995, except for a brief fall of 9 per cent between 1998 and 1999, which may have been due to the exchange rate weakening by almost 20 per cent in 1998. Imported CBUs have made up for the shortfall in domestic production, especially in terms of importers offering a wider range of vehicle models to the more sophisticated South African vehicle buyer.

Weak domestic demand is one of the main challenges facing the local industry. This is reflected in the subdued demand for new light vehicles in South Africa, which has fallen somewhat since the mid‐1980s, as indicated in Figure 2. (Note that not all vehicle sales are reported to NAAMSA, particularly by importers in South Africa. Vehicle sales are thus believed to be somewhat underreported.)

Figure 2 shows annual retail sales of LPVs and LCVs, as well as annual per capita GDP growth. The strong association between vehicle sales and per capita gross domestic growth is apparent from the figure. Since the 1970s, these variables have fluctuated quite considerably; however, it appears that there has been a relatively stable trend for annual sales of LPVs and LCVs, while per capita GDP seems to have been on a downward trend. This implies that vehicle sales were relatively moderate in the face of declining GDP per capita. Nevertheless, the affordability of new vehicles remains a crucial issue to South African consumers. This is reflected in the fact that 65 per cent of the 6,8 m vehicles registered in South Africa are over ten years old (NAAMSA, 1999). Further, it is worth noting that over 80 per cent of new vehicle sales represent corporate purchases (Duncan, 1997).

Trends in annual retail light vehicle new sales and annual per capita GDP growth

Notes: LPV = light passenger vehicle; LCV = light commercial vehicle; PGDP = per capita gross domestic product. Sources: NAAMSA (2001), World Bank (2000).

The affordability of domestically produced vehicles is dependent mainly on disposable income, vehicle price and domestic costs of production, inflation, interest rates, exchange rate movements and GDP growth. According to the DTI (1999), vehicle prices have been falling in real terms and remained consistently lower than the consumer price index (CPI) under the MIDP. Since 1995, new vehicle prices have declined by an estimated 12,6 per cent in real terms (NAAMSA, 1999). The fall in real car prices can be attributed to the lowering of import tariffs and not economies of scale (Williams, 2000). However, this has not been evident in the domestic demand for new vehicles; vehicle consumers are still bearing the costs of the protected domestic market. Vehicle ownership in South Africa is estimated to be in the region of 100 vehicles per 1 000 people; that is, South Africa registers only 10 per cent vehicle ownership. By international standards, saturation point for vehicle ownership generally stands at around 500 vehicles per 1 000 people, that is 50 per cent (Van der Walt, 1997) in countries such as Australia (51 per cent), the United States (48,6 per cent) and Germany (51,6 per cent) (APEC, 2000). However, vehicle saturation levels globally are falling. There exists, therefore, some potential for growth in the South African domestic vehicle market.

CBU imports have increased their proportion of total domestic sales; they accounted for 6 per cent of local vehicle sales in 1995 and increased to 23 per cent in 2000, which has been largely due to the DFA facility and falling tariffs. The tariff phase‐down programme under the MIDP meant that foreign‐made vehicles became cheaper relative to domestically produced vehicles. Following the five years subsequent to the inception of the MIDP (1995–2000), import CBUs increased dramatically by just over 200 per cent. The increase in demand for CBU imports has also meant that some low‐volume vehicle models are now imported, and hence rationalisation of models has occurred in terms of fewer locally produced low‐volume models. This has provided opportunities for local OEMs to produce high‐volume models for the export market that incorporate higher local content and, in turn, achieving economies of scale that may induce lower pricing of vehicles locally.

5.2 Automotive industry employment

The automotive sector's contribution to total manufacturing employment has been declining in recent years, and contributed 5,7 per cent to manufacturing employment in 1996. It is noteworthy that unemployment has been rising and output falling in most manufacturing subsectors (including the motor industry), following acceleration in economy‐wide trade liberalisation measures by South Africa (Roberts, 1998; Edwards, 1999; Hayter, 1999; Tsikata, 1999), including many other developing countries. As mentioned earlier, productivity levels in the industry improved, which has also contributed to an extent to the fall in employment levels in the industry. Experiences in Argentina, Australia and Brazil indicate that tariff liberalisation increases the demand for foreign vehicles, thereby adversely affecting local production, and in turn contributes to higher unemployment in the automotive sectors (Chudnovsky et al., 1996; Humphrey, 1998; Sidorenko & Sarfudin, 1998; Dijkstra, 2000).

Employment in the automotive industry, namely the motor vehicle and component industries, has been declining in recent years. Trends in automotive employment in the assembly and component industries are provided in Figure 3. This figure shows that automotive employment levels have been falling somewhat over the last decade. In 1988, employment in the assembly industry was 35 000 and 60 000 in the component industry. By 2000, it employed 32 300 workers in assembly and about 38 500 in the component industry (AIDC, 2001). Component industry figures do not include the tyre industry. In 1999, employment in the tyre industry stood at 9 100 (AIDC, 2001).

Trends in motor industry employment levels: motor vehicle and component industries, 1988–2000

Sources: MITG (1994), NAAMSA (2001).

Total automotive employment has been declining (Figure 3), even though CBU exports and component exports have been increasing (see Figure 4). The incentives offered under the MIDP imply that the costs per job created in the industry are quite high (Flatters, 2002). Further, as can be noted in Figure 3, the fall in total employment has mainly contracted in the component sector, which has contributed to the fall in total automotive employment. Internationalisation of the component sector has also led to restructuring and reshaping of this sector, which contributed to the contraction of its workforce. Among the obstacles facing domestic component firms are the relatively high costs associated with the production of low volumes (lack of economies of scale), the cost of resources in the domestic market (steel, aluminium, platinum, etc.), reliance on foreign technology, and low research and development budgets (Barnes, 1998, 1999). Moreover, the component industry is comprised of too many small suppliers who are too widely scattered and not fully integrated into assembly plants. However, in recent times there has been a shift towards creating regional clusters of component firms in an attempt to foster knowledge and resource sharing, and to enhance competitiveness.

Value of automotive exports, 1990–2000

Source: NAAMSA (2001).

OEMs and component producers are under pressure to further raise productivity and advance quality levels, and to diminish production costs. They are increasingly forced to compete internationally. Furthermore, there is a need for local component suppliers to progress in areas of innovation, design and engineering capacity, and new product development in order to increase their presence among first‐tier and second‐tier suppliers connected to multinational firms.

5.3 Automotive exports

The MIDP achieved significant growth in total automotive exports (23 per cent per annum), even though exports continued to come from a low base (calculated from TIPS, 1999).4 The export success of the South African motor industry has to a large extent been influenced by the export incentives in the form of IRCCs provided through the MIDP. This has been noted in countries such as Argentina, Australia, Brazil, Korea and others that adopted this type of export facilitation scheme as part of an export‐led regime (Wade, 1991; Chudnovsky et al., 1996; Sidorenko & Sarfudin, 1998; Dijkstra, 2000).

In recent years, local production for the export market has grown significantly, both in terms of light vehicles and automotive components. A number of OEMs are involved in large exporting contracts of vehicles (BMW, VW SA, Daimler Chrysler). Exports of light vehicles have increased strongly from 15 332 units in 1995 to 67 352 units in 2000, representing a dramatic increase of about 332 per cent in five years. (Note that these export figures include both LPVs and LCVs, which differs from the figures provided earlier, as they pertain to LPVs only.)

Figure 4 shows the value of component exports and CBU exports for the period 1990–2000. Undoubtedly, the rise in light vehicle exports is largely attributed to local OEMs being closely linked to their foreign parent firms. Hence they are able to participate in international markets by securing export contracts through their foreign partners and the export incentives provided through the MIDP. IRCCs issued by the DTI amounted to about R4 million in 1997 and R7,5 million in 1999 (DTI, 2001), which is an indication of the costs associated with motor industry export subsidies.

As mentioned earlier, the significant export performance was mainly attributable to the export credits awarded to the industry, which stimulated foreign and local investments that expanded production capacity for exporting. OEMs and component producers are part of transnational corporations' global strategies and networks, which have taken full advantage of import–export arrangements. Hence, large investments have been made in the production of automobiles and auto components, particularly for the export market. In particular, component exports accounted for a significant 75 per cent of total automotive exports in 1998. (Harmonised System tariff classification data were used, which were obtained and calculated from TIPS, 1999.) Under the MIDP during 1995–8, auto parts such as engines (121 per cent per annum), gear boxes (102 per cent pa), filters (76 per cent pa), silencers/exhaust pipes (76 per cent pa), wiring harnesses (60 per cent pa), axles (50 per cent pa), catalytic converters (48 per cent pa) and others grew particularly strongly in real rand value terms (calculated from TIPS, 1999). Auto parts are mainly exported to Europe, North America, Australia and the rest of southern Africa.

It is, however, interesting to point out the fact that total automotive exports grew faster in real constant rand terms for the period 1989–94 (an average annual growth rate of 28 per cent) than for part of the MIDP period 1995–8 (23 per cent) (Damoense, 2001). Note that Phase VI commenced in March 1989 and the MIDP in September 1995. In calculating growth rates for Phase VI we used the period 1989–94, excluding 1995. This is because OEMs and component producers were already geared towards the change in policy in early 1995.

In particular, exports of light vehicles grew at an average annual rate of 88 per cent in real rand terms during the Phase VI period. This can be explained by the large exporting contracts of Samcor (1991), VW SA (1992) and BMW (1994), while those of components grew at an average annual rate of 24 per cent in real rand terms. For the period 1995–8, exports of light vehicles grew at an average annual rate of 40 per cent and components at 21 per cent in real rand terms. Automotive exports have thus been performing fervently since Phase VI of the local content programme when export facilitation was first instituted.

5.4 Automotive industry's trade balance

South Africa is a net importer of automobiles and automotive components. The Board of Trade and Industry maintained there was ‘excessive foreign exchange usage by the automotive industry’ (BTI, 1988) and ‘that the automotive industry as a whole has had a large negative impact upon the balance of payments’ (BTI, 1989). The industry's reliance on imported tooling and designs, technologically sophisticated plant and machinery and high‐value auto parts has contributed to the large outflow of foreign exchange. The continued depreciation of the domestic currency also makes imports more expensive, thus increasing the industry's import bill and enlarging the trade deficit.

Figure 5 shows that the value of both automotive exports and imports has been rising over recent years. However, the value of imports has increased faster than that of exports. The figure also shows that there has been an improvement in the industry's automotive trade balance both in nominal and in real rand terms. For the period 1988–92, the net trade deficit has been relatively stagnant due to the domestic recession, which started in late 1989 and lasted until early 1993. Thereafter, the trade balance deteriorated until 1996. The sharp depreciation of the local currency by almost 20 per cent in 1996 and 1998 contributed largely to the widening gap of foreign exchange usage and earnings in the industry. Nonetheless, in 1998 the net trade deficit was not adversely affected because foreign exchange earnings exceeded foreign exchange usage, due to considerable exports that increased by 50 per cent in that year, while imports only rose by 16 per cent. In Figure 5, the net trade deficit initially appears to be worsening; it increased from R12,2 billion in 1995 and rose to R14,1 billion in 1996. It has since improved, decreasing to about R7 billion in 2000. The significant determinant of the improved automotive trade balance is the robust export performance experienced by the industry in recent years. Despite substantial growth rates achieved in automotive exports, South Africa remains a net importer of automobiles and automotive parts, which may affect the country's balance of payments negatively.

Automotive trade balance, 1988–2000

Notes: RNTD = real net trade deficit; NNTD = nominal net trade deficit.

Source: DTI (1998, 1999, 2001).

6 POST‐MID‐TERM REVIEW OF THE MIDP

Following recommendations by the Mid‐Term Review of the MIDP, the modified MIDP took effect on July 2000 and will be extended until 2007. Further, a third extension of the programme has been announced, which is expected to run from 2008 to 2012. As this article focuses on the first phase of the MIDP, 1995 to 2000, it remains important to acknowledge and provide a brief overview of the revised MIDP beyond the scope of this article.

6.1 2000–7

Tariffs on both imported vehicles and components will continue to fall to 30 and 25 per cent, respectively, by 2007. The IEC will be phased down (i.e. the export subsidy will become smaller), and there are talks that it will most probably be phased out completely in future. IEC and export facilitation arrangements (export subsidies) are inconsistent with WTO and GATT regulations. Already Australia's export facilitation scheme no longer exists under its new programme, the Automotive Competitiveness Investment Scheme (ACIS), which was introduced in January 2001 (DISR, 1998). Other countries such as India and Korea have already been found liable for countervailing duties in this regard (Newman, 1999). However, South Africa's IEC scheme will continue its phase‐down schedule until 2007. The qualifying value of eligible exports is scheduled to fall gradually from 100 per cent of local content value to 70 per cent by 2007.

SVI will gradually be phased out by 2007. A new DFA linked to production volume targets was instituted in 2000; interestingly, it is founded on one of the principles of Australia's ACIS; namely, it imposes production volume targets encouraging OEMs to increase production so that they may qualify for the duty‐free allowance. In addition, a production asset allowance (PAA) was also introduced in 2000 to encourage firms to invest in new productive assets for assembly of vehicles and the manufacture of components for export production. The PAA is another form of export subsidy providing a duty credit of 20 per cent of the value of the qualifying investment, allowing for 4 per cent per annum over five years.

6.2 2008–12

In 2002, another review of the MIDP was conducted. Even though government support to the industry is falling and tariff liberalisation is continuing, the industry will remain semi‐protected and assisted by the government in years to come. The MIDP will run its third phase from 2008 to 2012. Tariffs will continue to fall from 30 per cent in 2007 to 25 per cent in 2012 for CBUs, and from 30 per cent in 2007 for components to 20 per cent by 2012. The IEC scheme will continue its phase‐down until 2009, and the valuation of eligible exports for the purposes of import duty rebates will remain at 70 per cent until 2012. The PAA will most likely continue until 2012. In 2006–7, a major review of the MIDP will be undertaken to examine its long‐term future for the development and growth of South Africa's automotive industry. There is a need for further cost–benefit analysis in this area to determine the sustainability of the local industry in the absence of government support and incentive schemes.

7 CONCLUDING REMARKS

The world's automotive majors are constantly seeking new opportunities to preserve their market share and power; to create barriers to entry (knowledge and size); and to reduce risks and uncertainties in an ever‐changing international competitive environment. The challenge of global excess capacity in automobile production has resulted in intensive price wars, plant closures and increased consolidations worldwide, which have had important implications for the South African automotive industry.

This article indicates that the first phase of the MIDP has been successful, especially in terms of the strong export growth of both automobiles and auto components, which contributed to the robust improvement of the motor trade balance in real terms. On the other hand, the MIDP has been less successful with regard to stagnant domestic production, a shrinking domestic market and rising automotive unemployment. This has largely been due to costs associated with MIDP incentives and support offered by the government under its protective incentive‐based regime. There is the possibility that automotive exports may come under pressure as the export subsidy (IEC) is lowered and if other government support measures are reduced. This is especially so with respect to transnational auto firms investing in the South African automotive industry because of the attractiveness of government incentive schemes – the IEC scheme, DFA and PAA.

The South African automotive industry finds itself at the cutting edge of transformation and globalisation. Policy developments in the industry are currently in line with international auto policy developments; and falling tariffs and government support measures are increasingly exposing the local industry to international competition and globalisation, which has contributed to lower profitability levels. However, there have been substantial inflows of foreign investment, higher productivity and improved quality levels, growth in automotive exports and the importation of more low‐volume vehicles. Automotive employment and domestic production in the auto industry were adversely affected during the first phase of the MIDP period. This trend might continue given the present and projected prevalence of HIV/Aids in South Africa, which will contribute to higher absenteeism, lower productivity and quality levels, retraining and, in turn, may result in falling employment and lost domestic production. However, on a positive note, as long as the rise in imported CBUs is replacing locally produced low‐volume vehicles, resources would be freed up to increase local production of higher‐volume models. This will allow OEMs to specialise and reap greater benefits associated with scale economies and hence may lower vehicle prices. Furthermore, to maintain and raise overall production volumes in the face of the contracting domestic production base, as has been observed over the last decade, it is pertinent that OEMs sustain their export production levels and export markets.

Finally, the success of future automotive policy in South Africa will rely on a proactive government, suitable microeconomic reforms, a growing domestic economy and stable macroeconomic variables (Humphrey, 1998; Sidorenko & Sarfudin; 1998, Dijkstra, 2000; Tyndall, 2000). It is fundamental that the South African economy should grow expeditiously and experience stability in inflation, interest rates and the domestic exchange rate to stimulate consumer spending and domestic demand, and in turn induce domestic production for cars. Microeconomic reforms include human resource support and development programmes – education and training development (technical, engineering, information technology, HIV/Aids, etc.) – and other support (e.g. emotional). These are vital, especially for autoworkers facing job losses, hence providing them with opportunities to be placed in the broader manufacturing sector.

It is evident that as South Africa continues to phase out certain government support measures, new ones are introduced to replace them. These implicit forms of protection of the domestic industry have meant that vehicle buyers have increasingly been tolerating the costs associated with protection and have effectively been subsidising the local industry. Many industry researchers argue that the South African motor industry is one of the most successful manufacturing industries in South Africa (Black, 2002; Flatters, 2002). This might be true, but there is uncertainty about whether it will be able to sustain its export growth path in the absence of government incentive or support mechanisms and further tariff liberalisation over the long term.

Notes

Respectively, Lecturer, School of Business and Economics, Monash University South Africa Campus, Johannesburg, South Africa; and Senior Lecturer, Department of Organisational and Labour Studies, University of Western Australia, Perth, Australia. This article is based on Maylene Damoense's unpublished Master of Commerce thesis in Economics, awarded by the University of Durban‐Westville in 2001. The authors wish to thank the referees for their useful comments, which are greatly appreciated.

The figure in brackets represents a compound annual average growth rate in constant rand terms for the Phase VI period (1989–94).

A referee has pointed out that the year 1992 was a dire one for the South African economy at large, and also for the automotive industry. Real GDP contracted for the second year in a row, and at a rate that was, and remains, unsurpassed in post‐World War II history. Retail sales of new motor vehicles, as reported through NAAMSA, were at their second lowest level since the 1970s. This exaggerates the difference in profit and profitability within the industry between 1992 and the later year provided for comparison.

The figure in brackets represents a compound annual average growth rate in constant rand terms for the part of the MIDP period (1995–8).