Speaking at a briefing at the Union Buildings, Mpahlwa said that the new Automotive Production and Development Programme (APDP), which would run from 2013 until 2020, was designed to sustain and expand the automotive industry's material contribution to the South African economy, as well as to deepen its local manufacturing impact.

He said the Department of Trade and Industry (DTI) had been working on the successor scheme since 2005 in a bid to align the incentive to South Africa's World Trade Organisation commitments, as well as to government's National Industrial Policy Framework, which proposed a doubling in vehicle production to 1,2-million units by 2020.

The APDP would include four main components:

* Stable and moderate import tariffs from 2012 of 25% for completely built-up vehicles and 20% for components used in vehicle assembly;
* A local assembly allowance enabling vehicle manufacturers producing more than 50 000 vehicles a year to import 20% of its components duty free, reducing to 18% over three years;
* A production incentive in the form of a tradable duty credit of 55% on the value-added element of a component, measured from the selling price less the raw-material input. This would reduce to 50% over five years. However, an additional 5% would be available for vulnerable sub-sectors; and
* An automotive investment allowance, which would take the form of a direct grant to the value of 20% of the project over three years. This would be used to support investment into new plant and machinery.

The DTI's automotive director Mkhululi Mlota reported that the first three elements of the scheme would be introduced from 2013, but that the automotive investment allowance would be introduced from June 2009, together with company-specific support allowances to offset costs associated with training, technology transfer, localisation, research and development, and commissioning.

Mlota said the staggered model had been adopted to take account of the lag between the need to make investment decisions, the physical investment itself and first production from the investment.

The associated regulatory amendments for the entire APDP should also be completed by the middle of next year.

Also envisaged, Mlota revealed, was an improved monitoring and evaluation regime, which would reduce the review periods from the five-year cycles associated with the MIDP to three-year cycles under the new scheme.

STRIKING A BALANCE
Mpahlwa said that the DTI would also be working with the industry on a customised sector programme, which would deal with challenges not directly catered for under the APDP, such as the need to address issues associated with climate change through fuel specifications and the possible adoption of hybrid-vehicle technology.

He stressed that the new scheme, which is the result of three years of work and intense consultations with stakeholders, sought to strike the necessary balance between sustaining what was South Africa's lead manufacturing sector, while ensuring that it was not "overly generous" to the industry.

The scheme had also been benchmarked, via the United Nations Industrial Development Organisation, against support regimes for automotive industries in a range of other countries, such as Turkey, Thailand, Australia, and India. In addition, its crafters, which included government officials and industry experts, had taken into account global trends and support mechanisms in far larger markets, such as the US.

Both automotive assemblers and component manufacturers, through their respective associations, immediately welcomed the APDP, and congratulated the department for the way it had conducted its consultations. However, some reservations were also raised.

National Association of Automobile Manufacturers of South Africa (Naamsa) president Dr Johan van Zyl welcomed the conclusion of the review and described the announcement of the new support scheme as "a major breakthrough".

He added that the local assembly allowance would support the continued production of motor vehicles in South Africa, while the investment allowance, supplemented by the discretionary company specific allowance, would provide the necessary incentives to stimulate domestic vehicle production and to provide a strong catalyst for additional localisation.

Naamsa said the certainty created by the APDP would enable vehicle manufacturers and their suppliers to plan strategically for the future and to finalise investment decisions with confidence and certainty.

"It should also enable various manufacturers to tender for the production of new models in South Africa," Van Zyl added.

FAIR BUT CHALLENGING
In a similar vein, National Association of Automotive Component and Allied Manufacturers (Naacam) president Stewart Jennings, told Engineering News in a telephone interview that the final details were not only in line with expectations, but also represented a "fair deal" for both the original equipment manufacturers and most component manufacturers.

He said that it still needed to study government's precise definition for value-added, as this would determine whether the 55% duty credit would be sufficient, but he welcomed the fact that a 5% additional benefit might be available to "vulnerable" manufacturers. This benefit, he indicated, might be necessary to sustain those more export intensive manufacturers, which would be losing the export benefits currently enjoyed under the MIDP.

He also welcomed the shortened review cycles, but suggested that it would perhaps be wise to have the first review within 18 months of the start of the APDP in 2013, so that any unintended consequences could be dealt with early on. This, he argued, was important, as it might well have helped rebalance the MIDP when it became evident early on that it was leading to a proliferation of imports, which had never been the intention.

Jennings was, however, not entirely impressed with the 25% tariff freeze on vehicles imports from 2013 to 2020, arguing that it was simply too low to stem the tide of importation and was also lower than the protection levels enjoyed by a number of South Africa's auto-industry peers. It is understood, for instance, that Brazil has tariff protection of 35%.

However, the DTI was conscious of the need to pursue a regime that would also, ultimately, encourage lower vehicle prices, noting that some countries, such as Australia, had already reduced protection to 10%.

Also welcomed by Jennings was the announcement that a separate process would be set up to assess ways of sustaining the catalytic converter sector, which would lose material benefits under the new arrangement, as well as the decision to possibly include certain commercial vehicle components under the umbrella of the APDP.

WORTH THE COST
However, outside the industry, a number of critics remain.

They argue that the automotive sector is receiving disproportionate benefits from the State, relative to its economic contribution, and that consumers are simply not reaping the benefits of lower world vehicle prices.

Mpahlwa would not be drawn on the details of either the direct or indirect costs associated with both the grants, as well as with the revenue forfeited through the provision of tradable duty credits.

However, he stressed that it economic modelling, an exercise that had been conducted in association with Unido and the Industrial Development Corporation, indicated that the benefits did indeed outweigh the costs, especially once all the sectoral linkages were included.

He added that the precise costs and benefits would be made known both from the side of the National Treasury and as milestone reviews were completed.

In his response, chief director for industrial policy Nimrod Zalk underlined the strategic importance of the automotive industry to the South African economy, describing it as "our largest and leading manufacturing sector".

He said it had strong linkages with other industries, across the South African economic landscape, from raw-materials suppliers through to financial services, motor retail and advertising.

He said its direct contribution to gross domestic product has risen to 1,5%, while its indirect benefits is now close to 7%, including retail and other services. The sector also represented 10% of manufacturing investment, 16% of South Africa's total exports and employs 135 000 people directly.

"It has a very high positive multiplier effect on the rest of the economy in terms of value-added manufacturing, employment, investment, balance of payments and net revenue generation," Zalk asserted.