Opinionista Ivo Vegter 7 May 2013

Taking from the poor to give to the rich

Fresh off the glorious vanguard duty that brought us the Business Licensing Bill, Red Rob Davies has hatched a new communist plot. This time, he wants to subsidise investment in electric cars. Those who don’t learn from history are doomed to repeat it, clearly.

Our glorious government is at it again. It has the traditional government view of the economy, summed up by Ronald Reagan in these splendid words: “If it moves, tax it. If it still moves, regulate it. And if it stops moving, subsidise it.”

Despite the Joule-shaped hole in the government’s coffers, there is clearly more where that dosh came from. After all, individual incomes, the profits of successful businesses, the sales of vehicles, fuel and most other goods and services, are heavily taxed for exactly this purpose: to collect money to hand to rich people who make useless toys for other rich people.

Or, to put the government’s well-meaning spin on it: the Department of Trade and Industry will offer a 35% “investment incentive” to support the development of electric vehicles in South Africa.

No matter which way you turn this turd, however, it’s still a turd.

Let’s start with some history. The Joule electric vehicle was a much-ballyhooed project that cost about R250-million in tax funding to develop. Showcasing a much-delayed prototype at the NetProphet conference in March 2011, the marketing director of Optimal Energy, the recipient of government’s largesse, declared: “We aim to create an industry in electric vehicles in SA and expand globally. Our goal is to create a product that is sustainable, attractive to the mass market, affordable to the mainstream, makes business sense now, and makes use of legislation and incentives.”

It was already clear, however, that despite those grand, ambitious words, the firm was fighting a rear-guard action. Its product was late to market, too expensive, and was set to compete against second- and third-generation vehicles made by automotive giants with far larger subsidies behind them. And even they were struggling, as I documented in a CAR magazine column later that same year.

By the end of 2011, its release date had been pushed out to 2015, seven years after the prototype first won awards from the politically-correct crowd at the Paris motor show in 2008. The company’s need for production funding had soared from a whopping R1.5-billion to an astronomical R9-billion. Only a spectacular mass-market success could possibly justify such an insane amount of investment, with or without subsidies. I confidently dismissed it as vaporware.

Upset they were, the marketing geniuses behind the Joule. I was a grouch, readers protested, or an ideologue. Not six months later, I got to gloat annoyingly in a told-you-so column.

Here’s another bit of history. The Motor Industry Development Plan (MIDP) was introduced in 1995 as a once-off, seven-year intervention to help the local vehicle assembly industry, which once produced vehicles for a domestic market isolated by sanctions, to adjust to global market forces. It was meant to stimulate exports and create local jobs.

It failed. It is still active, 18 years later. It was recently renamed the Automotive Production and Development Programme, under which tariff protection was extended until 2020. Perversely, while South Africans paid to subsidise luxury German automobiles for wealthy foreign buyers, the subsidies did not create local jobs. Instead, the MIDP destroyed jobs.

Today, the South African motor industry employs 25% fewer people than it did when the MIDP was first launched. Go figure. Meanwhile, local motor vehicles sell at a premium, raising both the cost of living and the cost of doing business in South Africa. The poor and middle-class consumer, as well as the small- and medium-sized enterprise, got hammered by the MIDP. The sole beneficiaries of the programme were the large motor manufacturers.

It stands to reason that unreconstructed communists would like redistribution, but I always thought they meant to cast the state in the noble role of a Robin Hood character, stealing from the idle rich to give to the deserving poor. The reality is more often that they favour a particularly nasty, regressive brand of redistribution: taking from ordinary consumers to give to wealthy investors and political cronies. And it doesn’t even work. (For a detailed economic analysis of the MIDP, see the work of Frank Flatters, professor emeritus of economics at Queen’s University in Ontario, Canada.)

So, we have as historical examples the Joule, an electric car whose makers received lavish subsidies, and despite the aid (or perhaps because of it) crashed and burned. And we have ordinary cars that were subsidised, only to find that this destroyed jobs and benefited nobody other than multinational car manufacturers.

If, despite this sordid history of failed government support for the automotive industry, Red Rob still thinks it’s a good idea to dole out new and lavish cash gifts to electric car investors, let’s consider a few other points against electric cars.

South Africa is not exactly swimming in electricity. In fact, last I checked, we had a bit of a crisis on our hands, and we’re nowhere near out of the woods. Electricity prices are going through the roof, except for some big business special interests whose only concern is how long their cosy cut-rate deals at the expense of the rest of us ought to last. Many large electricity consumers are operating under a strict rationing regime, curtailing their production and profitability at a time when South Africa can ill afford sluggish industrial activity and dampers on potential employment.

To propose to stimulate an industry such as electric vehicles, which will place significant pressure on electricity demand, in the face of such electricity scarcity, seems daft.

The green credentials of electric vehicles are also highly questionable. From cradle to grave, their environmental cost is actually higher than that of conventional cars. The emissions that they produce are merely shifted to the source of electricity generation, which in South Africa’s case means the skies over Witbank, famed as the dirtiest air in the world. Although much depends on the source of electricity generation, a recent study found electric vehicles could not claim to be substantially more green than efficient petrol or diesel vehicles.

So, even if you’re convinced that carbon emissions must urgently be curbed lest we all die an awful death at the hands of the four horsemen of the apocalypse – war, conquest, disease and hunger – subsidising electric cars is hardly the way to do it. Rather build infrastructure that will enable South Africa to exploit the potential of nuclear power or natural gas. In the energy sector, unlike in the automotive sector, government action is actually required, because it controls most of it either directly or by virtue of exclusive licences, permitting regulations, sole buyer power, and mineral rights ownership.

How about the electric cars that are already on the market, and thus already have a massive head start on anything South Africa might produce?

Most are good only for high-end urban mobility. They are fashionable transport for the rich. South Africa, with its sprawling cities and long highways, isn’t exactly top of the list of markets for compact urban transport vehicles suitable for the streets of New York, Paris or Tokyo.

Even in developed markets, government-subsidised toys for the rich such as Tesla’s electric sport cars have long been coy about sales figures. It recently announced that its new model S sedan sold 4,750 units, and the company had reached profitability, in no small measure thanks to the half a billion dollars the US government pumped into it.

However, it also announced it had to discontinue the cheapie version of the model S for lack of demand. After Uncle Sam picks up a whopping 12.5% of the price tag, that model only costs as much as a BMW 5-series. For now, only Tesla’s more expensive models will remain on sale.

While the high end of the electric car market may be doing okay, much like the private jet market and luxury yacht market, the broader picture for electric cars is gloomy. From an already disappointing base, sales volumes are pointing in the wrong direction, and even some of the most prominent green car boosters, such as Nissan’s chief executive, Carlos Ghosn and the father of the Toyota Prius, Takeshi Uchiyamada, appear skeptical that all-electric vehicles will be a viable alternative to conventional or at least hybrid propulsion any time soon.

Still, the big boys can throw lots of financial muscle behind their cars, as Nissan recently demonstrated by slashing prices to capture market share in Australia.

In a market more like our own, India, Mahindra recently launched a less expensive electric vehicle, aimed at less wealthy customers. Even in cities like Delhi, where it receives lavish government support, however, the result is a car that is unaffordable and makes no economic sense. It is expected to be between 30% and 60% more expensive than comparable conventional cars, and the lower running costs will take four or five years to make up the difference, by which time an expensive new battery (or an entirely new car) is already on the cards.

So, Red Rob is proposing to subsidise South African manufacturers, after dramatic historic failures of similar policies, in order to compete with global giants that can afford loss-leaders and are themselves subsidised by much wealthier governments, to make cars that even in the best conditions are hardly very green, and are economically unpromising, except as mere toys for the wealthy urban elite.

Unless I was a communist, or a putative investor wishing to profit by sucking on the government teat, I would not call this policy “smart”. DM


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