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Vehicle production more important than sales

LOCAL PRODUCTION
As a result of the investments attracted by the APDP, there was a 3.2% production increase in 2013 in the automotive industry

LOCAL PRODUCTION As a result of the investments attracted by the APDP, there was a 3.2% production increase in 2013 in the automotive industry

Photo by Duane Daws

21st February 2014

By: Jonathan Rodin

  

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The automotive industry accounts for about 6% of South Africa’s gross domestic product (GDP) and the local production of vehicles is of paramount importance, as it facilitates job creation, says professional services company KPMG automotive sector leader Gavin Maile.

Maile says the company’s forecast for 2014 is that a record number of vehicles will be manufactured, ahead of the figure of 2006, during which about 590 000 were manufactured.

Programmes, such as the South African Automotive Production and Development Programme (APDP), which replaced the South African Motor Industry Development Programme (MIDP) on January 1, 2013, aim to increase local-vehicle-component content – among other objectives – and will increase the total number of vehicles produced in South Africa, owing to the significant investment that has already been made for additional capacity.

The productive assistance allowance under the previous MIDP enabled origi- nal-equipment manufacturers (OEMs) and first-tier suppliers whose investments were linked to local OEMs to claim back 20% of the investment value over a five-year period. The new automotive investment allowance (AIA) under the APDP will also provide a 20% benefit on the capital costs of the manufacturer’s assets, subject to meeting mandatory production conditions of producing 50 000 units a year. This benefit is payable over three years to vehicle assemblers and automotive component manufacturers.

To attract capital investment to South Africa and reduce the capital cost to the investor, the AIA also offers extra benefits to companies that invest in research, development and training.

This section of the AIA allows for an extra 10% incentive for high-technology investments and investment-linked training that will result in skills upliftment in South Africa.

Engineering News reported in September that the APDP was a voluntary participation programme, comprising four main elements – import duty incentives, a volume assembly allowance, a production incentive (PI), and the AIA.

The most important provisions include fixing import duties on vehicles and components at levels of 25% and 20% respectively, defined duty-free import credits for local assemblers of vehicles destined for local consumption and export, additional duty-free import credits based on the margin of local value added and a minimum qualification level of 50 000 units a year for participation by registered vehicle manufacturers.

The APDP’s PI provides tradable credits for companies that manufacture a minimum of 50 000 vehicles a year and/or components in South Africa, says Maile.

The PI was expected to start at 55% in 2013 and would reduce steadily until it reached 50% in 2018. The PI will be an effective benefit of 11% of value added, reported Engineering News in February last year.

Further, as a result of the investments attracted by the APDP, there was a 3.2% production increase in 2013 in the automotive industry. Despite this percentage being below the expected growth of 7%, it was still positive. The seven week strike during 2013 had a large impact on the production volumes.

Maile says the South African automotive industry is fairly small, as it accounts for less than 1% of global production. “Owing to South Africa’s small economy of scale, its automotive industry relies heavily on the export market. “For example, about 81-million units were produced worldwide in 2012, of which 540 000 were produced in South Africa,” he notes.

The biggest challenge, adds Maile, is not so much skills development, but education. “A large percentage of the South African population is unemployable because of the education system, meaning many people do not have a disposable income and, therefore, cannot aspire to own a vehicle and join the automotive market,” he adds.

Further, owing to increases in fuel prices, e-tolling and general price increases in commodities, disposable income is also declining, resulting in fewer cars being bought.

The APDP has an objective to increase the total number of vehicles produced in South Africa. The Department of Trade and Industry aims to increase the country’s vehicle production from about 552 000 cars and light commercial vehicles produced in 2012 to 1.2-million vehicles a year by 2020 – to ensure that certain economies of scale can be reached, which would increase price competitiveness worldwide.

“The automotive industry is one of the biggest contributors to South Africa’s GDP and although the road to 2020 – which is when the APDP comes to an end – holds several challenges, the future looks positive for the sector,” says Maile, noting that in terms of 2020 and beyond, the future is uncertain.

Edited by Megan van Wyngaardt
Creamer Media Contributing Editor Online

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