As South Africa seeks to widen export markets and trade relationships, to counter the impact of the US “Liberation Day” tariffs that have sparked upheaval in the global trading environment, we need to ensure that new agreements in fact protect local manufacturing and jobs – rather than further contributing to accelerating de-industrialisation.
Policy and tariffs reform, particularly in the key automotive manufacturing sector, is lagging behind the pace of change in the global manufacturing and trade environment.
These reforms could provide vital safeguards to protect SA’s industrial base, along with the jobs, localisation, skills and technology transfer, and value chain depth that comes with investments by global manufacturers in integrated local assembly operations.
Long called for, a review of the SA Automotive Industry Masterplan, in particular, is now urgent. This needs to include the long overdue finalising of policy to support new energy vehicle manufacturing and consumer adoption.
It should also address policy and tariff shortcomings that currently make semi knocked-down (SKD) vehicle assembly using imported components an attractive proposition, to the detriment of the local completely knocked-down (CKD) manufacturers who bring investment, job creation, localisation and supply chain depth to a far greater extent.
The outdated duties that local highly integrated Original Equipment Manufacturers face discourages investment from manufacturers who are committed to the country.
SA automakers are currently not competing on a level playing field with Asian competitors who have lower utility costs, access to highly trained and educated workforces, high levels of government support in terms of growth enabling policies and infrastructure, and easy export structures and large local consumption – the latter giving them vast economies of scale. Such economies of scale encourage investment that further increases efficiencies and increases the gap between us and them.
Deindustrialisation
The signals of the weakening of SA’s manufacturing base have been coming for some time, but they are now alarm bells.
The contribution of manufacturing to GDP has halved in the past 40 years, and has not necessarily been replaced by growth in other sectors, while manufacturing employment is declining. Growth in agriculture (one of the few sectors actually expanding) is welcome but indicates a regression in the economic mix.
More than a decade of load shedding and the continuing lack of energy security and quality of supply issues despite about 250 days without load shedding at last count, coupled with failing infrastructure at municipal levels and rising logistics inefficiencies and costs, have further eroded our manufacturing base and discouraged new investment.
While deindustrialisation is a natural trend as developed, post-industrial economies have shifted towards growth in services, technology and knowledge-driven sectors and manufacturing off-shored to developing countries, this is not a trend that SA is equipped or positioned for.
In an emerging economy with high unemployment, manufacturing remains vital as the bedrock of economic growth and employment, particularly because of the long value chains that it supports with deep knock-on impact in creating direct and indirect jobs. Growth in SA’s services, technology and knowledge-driven sectors tend to be for local consumption rather than exported.
The automotive predicament
As SA’s largest manufacturing sector, automotive manufacturing is at the vanguard of the rising deindustrialisation of the local economy.
To put the importance of automotive manufacturing to the SA economy briefly in numbers: vehicle and component production contributes 22% to domestic manufacturing output and 5.3% of GDP.
The sector accounts for 15% of SA’s export value and directly employs 115,000 people, with indirect employment through surrounding value and supply chains (services and consumables to manufacturers, transport and logistics, dealerships, service and fitment centres, aftermarket parts and accessories) conservatively estimated at more than 500,000 jobs.
Automotive manufacturing is particularly critical for economic activity and employment in the Eastern Cape and Nelson Mandela Bay.
In Nelson Mandela Bay, the manufacturing sector in general contributes a fifth (21%) of local GDP, specifically anchored in vehicle production by two major Original Equipment Manufacturers in Volkswagen Group Africa and Isuzu Motors South Africa.
Surrounding the Eastern Cape Original Equipment Manufacturers, including Mercedes Benz in East London, are approximately 150 component manufacturers that are based in the region, including the Ford engine plant.
These component manufacturers supply Original Equipment Manufacturers throughout the country as well as exporting globally.
Approximately 45% of vehicles made in SA are manufactured in the Eastern Cape, with VW as the country’s largest manufacturers, while Isuzu has maintained its position as SA’s leading truck brand for 13 years.
More than half of the country’s vehicle exports emanate from Eastern Cape manufacturers (predominantly Isuzu, Mercedes Benz and VW).
Critically, over 40% of the country’s automotive sector jobs are located in the Eastern Cape.
These numbers anchor a substantial knock-on impact into employment and income in the surrounding supply chains, rippling into other sectors such as retail, financial and professional services, healthcare, education and training, hospitality and tourism.
In short, the automotive sector, particularly in Nelson Mandela Bay and the Eastern Cape, supports a vast surrounding ecosystem with even sectors not directly related under threat by a decline in local manufacturing capacity.
The Chinese puzzle
Since both the masterplan and the conclusion of new trade agreements fall under the Department of Trade, Industry and Competition, it is to be hoped that these matters are being coordinated within that department.
A case in point is the China-South Africa trade framework agreement (or “Economic Partnership for Shared Prosperity”) signed earlier this month, aimed at facilitating Chinese investment into SA and providing duty-free access to the Chinese market for a wider range of SA products.
However, a massive trade imbalance swings significantly in China’s favour. The Chinese market has no need of most of the goods manufactured in SA, while we are one of many markets for Chinese-made goods – thus reciprocal duty-free access holds little benefit for local manufacturers and exporters, and in fact threatens their competitiveness.
Costs are likely to become even higher for SA manufacturers as a lot more imports will now arrive duty-free in SA, dampening local manufacturing volumes and reducing their economies of scale.
The agreement may benefit some SA sectors such as agriculture and agro-processing with duty-free access to the Chinese market, which is one of the world’s leading importers of agricultural products (i.e. food). With a growing and increasingly wealthy middle class in China, demand for luxury goods is rising, including the demand for fine wines, currently dominated by French and American companies.
China’s manufacturing-heavy economy requires raw materials and resources. It is unlikely that China will import anything they don’t already manufacture themselves. While there will be some niche opportunities for SA producers like luxury goods, and some agri-based products (like wines), there will be a displacement of imports from other places (like the EU, Japan, etc), and a displacement of locally manufactured products.
This agreement will not encourage beneficiation of resources, nor manufacturing development since we cannot compete with the economies of scale of China.
The bottom line is that, unless the right safeguards are in place, this agreement further threatens local deindustrialisation.
While the acquisition by Chinese brand Chery of Nissan’s plant in Rosslyn has been welcomed, questions still remain over retention of employment in the plant, which of its vehicle models Chery plans to produce here and the nature of assembly it plans, and the sustainability of the Nissan value chain of local component manufacturers.
Semi knocked-down assembly that requires minimum local labour and local content is the most likely option. Completely knocked-down manufacturing on the other hand requires maximum local labour and gives the greatest opportunity for component localisation – this must be the end game, which requires that semi knocked-down only be temporary and the transition to completely knocked-down start soon. There is little clarity on what incentives there are for this transition.
To Agoa or not to Agoa?
The extension of the US’ Africa Growth and Opportunity Act (Agoa), with SA included (for now), is a moot point, aside from the few exclusions such as citrus.
The agreement’s benefits of duty-free access to US markets for goods from the participating African countries, is rendered irrelevant by the 30% “Liberation Day” tariffs and 25% tariffs on automotive imports, which override the benefits of Agoa.
Urgent need for policy reform
From a policy perspective, it is urgent and vital to reverse the current position that incentivises semi knocked-down assembly over completely knocked-down manufacturing. It must put localisation and local job creation at the forefront to improve the economies of scale for the entire value chain so we can complete internationally.
Key areas of focus for automotive policy reform:
- Dealing with the loopholes which currently incentivise semi knocked-down assembly over completely knocked-down manufacturing.
We need to incentivise, to make investment in completely knocked-down manufacturing a more attractive option; and to reward localisation of components through mechanisms such as subsidies or rebates, in order to strengthen local manufacturing capacity, encourage investment, incentivise efficiency improvements, and skills and technology transfer – thereby strengthening the ecosystem around manufacturing and its impact on employment.
- Strengthen localisation levels by both incentivising and applying pressure for these targets to be met.
Policy needs to provide greater incentive for incoming investors to localise their component supply chains and incentivise investment in localising components for new needs such as battery assembly, fuel cells and hydrolysers.
Alongside this, the policy should be looking to the future and be stimulating conditions to promote the assembly of hydrogen (or other new energy) vehicles and components, so we are ready when the world transitions.
Component manufacturers should be supported to produce components for export to “mother plants” in other countries, to generate volumes and economies of scale. This would enable global competitiveness for component manufacturers while assisting local assemblers using SA-made components to offset import duties, secure better local pricing and stability of supply.
- Close the loopholes which make it easy for importers to acquire Production Rebate Certificate Incentives. These incentives should rather be used by the manufacturers to further promote enhanced localisation and exports.
- Urgently reduce the outdated ad valorem taxes, so as to enable local completely knocked-down manufacturers to be placed in a stronger position in order to compete with cheap imports flooding the market.
- Incentivise exports to help manufacturers achieve sustainable economies of scale.
New energy vehicles need consumer incentives
In terms of new energy vehicles, automotive policy should take a flexible, pragmatic, technology-agnostic approach, rather than focusing on a single option such as battery electric, in order to leverage existing strengths and enable manufacturers to diversify the mobility technologies they pursue.
While the uptake in SA of new energy vehicles is still relatively low, due to high costs, it is also important to incentivise the consumer side of the equation to stimulate local demand. Stimulating local demand would also improve economies of scale, which would make us more competitive globally.
With the right policy support and export agreements in place, this could be the moment for SA’s automotive manufacturing to regain lost ground and leapfrog into an emerging, diversified mobility future.
If the right moves are made by the government and industry now, with urgency and strategic intent, the automotive industry can back away from the edge of the precipice and move onto a more positive path to a sustainable future for South African manufacturing and employment. DM
Kelvin Naidoo is the President of the Nelson Mandela Bay Business Chamber.