South Africa’s revamped automotive industry framework places local content at the centre of any future support for the industry, with government having set a target of raising local content from less than 40% currently to 60% by 2035.

The local-content target is outlined in the newly released South African Automotive Masterplan (SAAM), adopted by Cabinet on November 22. The plan aims to double employment in the sector to 224 000 jobs by 2035, from 112 00 currently, and position South Africa to produce 1% of global vehicle production, or 1.4-million vehicles, by that date. At present, the South African industry accounts for around 0.6% of the global industry with yearly production of some 600 000 units.

The local-content thrust has also been integrated into amendments to the Automotive Production and Development Programme (APDP), which will provide the incentive framework for the industry for the period from 2021 to 2035.

The current APDP incentive programme expires at the end of 2020.

SHIFT IN SUPPORT
The amended APDP shifts support away from production sales value towards value addition through the introduction of a volume assembly localisation allowance, or Vala, which will replace the current volume assembly allowance.

However, the Vala formula will be phased in between 2021 and 2026 to ensure no disruption to existing original-equipment manufacturer (OEM) model investments. By 2026, the Vala is set at 35% of local value-add for OEM volumes above 10 000 units, but in 2021 it is set at 40%.

Outlining the changes at a briefing, in Pretoria, on Friday, Trade and Industry Minister Dr Rob Davies said the adjustment to the formula would align government’s support for the industry directly with a vehicle’s local content, by removing credit for imported content.

Flanked by officials from the Department of Trade and Industry, as well as representatives from the automotive sector, the component sector and labour, Davies described the 60% target as ambitious.

However, he said it was the outcome of a "robust and collaborative" engagement with the industry since 2016, which sought to ensure that government's ongoing support for the industry helped facilitate greater industrialisation in the sector.

It also sought to balance the distribution of benefits from government’s automotive incentives, which currently favoured the OEMs and vehicle importers, more fairly in a bid to support component manufacturers.

Besides the adjustment to the vehicle assembly formula, the new-look APDP also increases the production incentive benefit to 25% on components.

Critically, the contentious production rebate credit certificates (PRCCs) will be replaced by duty credits that are tied to local value addition. This is expected to help mop up the current surplus of PRCCs, which are used by OEMs and importers to bring new vehicles into South Africa duty-free.

The Automotive Investment Scheme (AIS) cash grant for capital investments has been retained, but will be reduced by 5% in those instances where non-South African tooling and machinery is employed.

TECHNOLOGY INCENTIVE
Davies also announced that the AIS would be augmented to include an incentive for investments in new technologies, including investments related to the introduction of electric or hybrid drive trains.

"There will be a technology AIS and this will be targeted at powertrain and telematics investments," Davies said, indicating that details of the corporate tax incentive would be shared once the National Treasury had approved the scheme.

The Minister also announced no changes were envisaged to the tariff regime in respect of vehicles, but South Africa would be pursuing negotiations with the European Union in a bid to address anomalies that exist in the Economic Partnership Agreement with regard to the duty-free treatment of vehicles with engines below 1 000 cc. The South African government will seek a single tariff regime across all light vehicles, including electric vehicles.

The APDP amendments also cover medium and heavy commercial vehicles, as well as motorcycles, but the Vala formula would not be applied in either category.

National Association of Automobile Manufacturers of South Africa president Andrew Kirby, meanwhile acknowledged that the new targets would be prove challenging to meet, but welcomed the certainty provided by both the masterplan and the amended APDP.

Kirby, who also leads Toyota South Africa Motors, said it was up to the OEMs to work with its suppliers to both adapt to the lower levels of future support, as well as the demand for higher levels of local content.

He said particular attention would be given to the development of tier two and three suppliers, where the greatest potential existed for the creation of black industrialists.

National Association of Automotive Component and Allied Manufacturers VP Ken Manners described the amendments to the APDP as “extremely exciting” for the local component industry and a logical “architectural progression” in government’s support for the sector.

He said the amendments recognised the benefits of having a deep and diverse supply chain, which should prove to be in the long-term interest of South Africa as a manufacturer of automotive products.

National Union of Metalworkers of South Africa general-secretary Irvin Jim also welcomed the changes, which he said signified a commitment to the reindustrialisation of the South African economy.

EMBEDDED ECOSYSTEM
Davies said an analysis of the global automotive industry showed that all countries with automotive sectors had support programmes similar to those in place in South Africa.

In addition, government had concluded that the opportunity cost of withdrawing support for the sector would be significant, not only for the sector itself, but also for manufacturing as a whole. The domestic automotive sector comprises nearly one-third of domestic manufacturing.

Nevertheless, research showed component manufacturing in South Africa to be less "embedded" than was the case in automotive industries in other jurisdictions. For this reason, government had decided to adjust its incentives to ensure greater support for the development of component suppliers.

"We have relatively low levels of local content . . . it is an issue, because other markets have more embedded ecosystems, which create a far more solid base for manufacturing. This is also the point of entry that can be established for small black-owed companies in the value chain," Davies explained.

Through the SAAM, government is insisting that OEMs obtain a level four rating under the broad-based black economic-empowerment codes to draw on the incentives.

Most OEM will be relying on the equity-equivalent components of the codes to secure such ratings, owing to the fact that their parent organisations are typically reluctant to sell equity. Supplier development is, thus, likely to emerge as a key focus for OEMs seeking to meet the transformation component of the masterplan.

In addition, the scheme had been adjusted to support the export of locally produced components into automotive supply-chains elsewhere in the world, including those emerging in the rest of Africa.

Davies said its research pointed to an economic return of R4 for every rand spent by government to support the industry.

The executive oversight committee established to oversee the development of the SAAM, as well as the amendments to the APDP,  would continue to exist and would now oversee the roll-out of the other, non-APDP, elements of the masterplan.

These include local market optimisation, regional market development, localisation, infrastructure development, industry transformation, and technology and associated skills development.

The SAAM vision is to create a globally competitive and transformed industry by 2035 that "actively contributes to the sustainable development of South Africa's productive economy".