The automobile industry is often cited as the sector where government’s trade policy has worked wonders. Jeffrey Ndumo examines how true this is.
The Motor Industry Development Programme (MIDP) was introduced in September 1995. It was a policy, jointly developed by government, business and labour, that aimed to produce an internationally competitive and growing automotive industry. This would promote high quality, affordable vehicles and components to the domestic and international markets; provide sustainable employment through increased production and improve the balance of trade in the sector. The MIDP reduced tariffs on imported cars and components, abolished local content provisions that required assemblers to ‘buy local’, gave an incentive to manufacturers of small vehicles to encourage their production and granted credits to exporters which they could use to offset import costs.
Exports
Since the inception of the MIDP, completely built up (CBU) and completely knocked down (CKD) exports have expanded rapidly. This has led many to say that the MIDP is responsible for this success. Similarly component exports have also risen. But delving deeper, one finds that the export of components is highly concentrated in a few products. For example, in 2002, the export of catalytic converters accounted for 40,2% of exports and leather stitched covers 13,9%.
Table 1: major components exports –R million
Component Category
1998
1999
2000
2001
2002
% of total 2002
Catalytic converters
1520
2569
4683
8989
9204
40.2%
Stitched leather components
1854
1888
1926
2391
3184
13.9%
Tyres
498
639
682
781
1379
6.0%
Road wheels and parts
446
518
551
725
955
4.2%
Engine parts
390
383
409
520
771
3.4%
Engines
334
54
76
88
623
2.7%
Wiring Harness
207
304
319
391
457
2.0%
Automotive Tooling
256
264
362
441
363
1.6%
Silences/exhaust pipes
493
598
377
282
340
1.5%
Automotive glass
112
147
171
241
328
1.4%
Transmission shaft/cranks
62
85
127
149
236
1.0%
Ignition/starting equipment
47
94
128
195
231
1.0%
Brake parts
76
79
95
118
215
0.9%
Filters
72
85
118
114
184
0.8%
Car radios
47
73
89
115
171
0.7%
Batteries
79
68
100
116
150
0.7%
Body parts/panels
30
75
84
107
140
0.6%
Axles
7
13
63
81
129
0.6%
Gauges/instruments/parts
30
59
64
77
119
0.5%
Clutches/shaft couplings
51
54
59
92
110
0.5%
Radiators
108
111
72
70
199
0.9%
Other components
1176
1514
2085
2503
3395
14.9%
Total components
7895
9674
12640
18586
22883
100%
Source: TISA , 2003
One of the reasons for this concentration, says Justin Barnes, an automotive industry researcher, is that global marketing networks are controlled by multi-nationals. Multinationals choose their suppliers and independent component companies are extremely unlikely to find a market. For example, the leather car seat manufacturers in South Africa are all multinationals – Bader (German), SA Trim – this explains why they are one of the more successful component exporters. More troubling is the fact that these exports are like an island, they contribute far less than expected to the overall growth of the automotive industry and the broader economy. The MIDP’s stick of declining tariff protection in return for greater freedom to source completely knocked down kits abroad, has caused a substantial decline in the use of locally sourced components in vehicles produced in this country. In 1999, import tariffs on a light vehicle were 50,5%. By January 1, 2004 they were 36%. Likewise import duties on components have gone down from 37,5% in 1999 to 28% in 2004. The results of this are a striking decline in the share of locally sourced components in total components usage. In 1996 it was 40.1%. By 2001, it had reduced to 35.8%. Virtually all the decline occurred between 1999 and 2001. Exports by car assemblers were supposed to generate economies of scale for automotive component suppliers. Instead because assemblers are using less locally sourced components, the reverse is occurring.
Balance of payments
As one would expect, although exports of CBU have grown rapidly, the large and rising imports of components used in these products, have offset the positive effect of CBU exports on the balance of payments. The estimated net contribution of the MIDP to the balance of trade of the industry in 1998-2001 was R4.2 billion compared to R4.1 billion in the period 1996-2001.
Employment
Since MIDP promotes competitiveness, it was hoped that increased production would yield higher employment levels or at least maintain current employment levels. Yet, from 1996 until to date the industry has lost approximately 9900 jobs. With the appreciation of the rand last year more jobs are anticipated to be lost (see table 4).
Table 4: Employment trends in the Automotive Industry
Sub-sectors
1996
1997
1998
1999
2000
2001
2002
2003
Assemblers
38 600
37 100
33 000
32 000
32300
32700
32370
31700
components
45 000
44 000
40 000
39 000
38500
39000
41000
42000
Tyre &rubber
10 000
9 100
9 100
9 000
8600
8700
6000
6000
Motor trade
180 000
170 000
170 000
175 000
175000
175000
178000
184000
Total
273600
260200
252100
256000
254400
225400
257370
263700
Source: DTI, NAAMSA, NAACAM, 2003
The rise of imports together with the rationalisation of the industry, the introduction of capital intensive technology have all contributed to job losses. These figures exclude casual and outsourced workers that rely on contracts. But often these jobs are not permanent. “At Daimler Chrysler, the truck plant was outsourced four years ago,” says Numsa President, Mtutuzeli Tom. “Those workers who formed part of the outsourcing process are not represented in the Auto National Bargaining Forum. Agreements signed there that involve wages and working conditions do not cover them. Numsa is forced to negotiate on behalf of these workers directly with the new employer. But the bargaining power of those workers is weak because they are no longer part of the mainstream bargaining process and this also contributes to the weakening of the union’s bargaining power.”
Vehicle affordability
Even on vehicle affordability, the MIDP has failed. 10 years are gone, and the price of vehicles is continuing to increase, reaching above inflation levels with little sign of abating (see graph). Compared with developed and other developing countries, vehicles in South Africa are expensive and continuously rising. In the US it costs an average of 19 weeks salary to pay off a new vehicle compared with an average of 208 weeks in South Africa . Vehicle assemblers are planning to abandon assembling entry level vehicles, which would further deprive low earners of the ability to purchase a vehicle. Assemblers cite the low profit margins as the main reason for abandoning entry level vehicles. According to Wesbank research, 95% of consumers in South Africa are unable to afford new vehicles.
Graph 1: Vehicle prices and Consumer Price Index, 1971-2003
Source: Wes bank, 2003
While the automotive sector may claim success in a few areas (i.e. rise of exports, increased output, competitiveness, etc.), nonetheless it remains a poor performer in many key areas in which the policy was constructed to address. The overall story of the MIDP remains depressing, despite the positive rhetoric emanating from government and other intellectual quarters. The MIDP has been found deficient, not only in terms of employment, but also in other areas such as vehicle affordability, local content and balance of trade.
Jeffrey Ndumo is Numsa’s researcher