A shift in government policy has opened the door to vehicle manufacturers selling smaller volumes in the local market to set up assembly plants in South Africa.

The current incentive scheme favours volume manufacturers, such as Ford, BMW, Toyota and Volkswagen, producing more than 50 000 units a year for the local and export markets.

Smaller and newer brands, such as Peugeot, Hyundai and Mahindra, have in the past investigated assembling vehicles in South Africa. The threshold for incentives has proved prohibitive, however, with government’s Automotive Production and Development Programme (APDP) requiring production of 50 000 units a year.

Established manufacturers such as General Motors South Africa and Nissan South Africa have also been struggling to achieve these numbers, especially as domestic new-vehicle sales and economic growth have stalled.

Minister of Trade and Industry Dr Rob Davies this week announced a number of long-awaited changes to the APDP, in an effort “to grow and support” the local automotive industry.

Following a review of the incentive scheme, the volume threshold for vehicle production will be reduced from 50 000 units to 10 000 units a year in order to allow new entrants into the local industry from 2016, says the Department of Trade and Industry (DTI) in a statement.

The volume assembly allowance (VAA) will be offered on a sliding scale, starting at 10% for 10 000 units, to 18% for 50 000 units from January 2016. (The VAA currently allows for 18% of the wholesale price of local assembled vehicles to be rebated against the duty payable on imported components that are used in the production of vehicles, irrespective of where the production is sold, as long as yearly units per plant exceed 50 000.)

The DTI also says that a suitable capital incentive (using the Automotive Incentive Scheme [AIS] ) will be provided for new entrants at the less than 50 000-unit-a-year threshold.

The AIS returns up to 35% of qualifying investments to vehicle manufacturers as a cash grant, tax free.

The details of the new incentive will be captured in guidelines that should be finalised by April next year, says the DTI.

The DTI has also announced some relief for the shrinking catalytic converter industry.

Revisions to the APDP will freeze the production incentive (PI) for catalytic converters at the proposed 2017 phase-down level of 65%.

The PI, in the form of an import duty credit, serves to incentivise local value addition. The PI for catalytic converters was 80% in 2012 and was scheduled to drop to 50% by 2020.

Catalytic converters are South Africa’s biggest component exports.

In 2008, at its peak, the local industry earned R24.3-billion. Catalytic converter sales reached R21.3-billion in 2014, with the rand weakening sharply since 2008.

The DTI has also announced that the qualification for component suppliers to earn APDP benefits will be tightened in order to avoid these benefits being earned on noncore automotive products. Preference will, therefore, be given to those products that add value in the value chain.

The DTI adds that it will engage with National Treasury to secure improved investment support for tooling as a means of encouraging further component localisation.

Govt ‘Remains Committed’
Davies says government remains committed to the further development of the automotive industry, in line with the National Industrial Policy Framework and the Industrial Policy Action Plan.

He says the long-term development of the sector will be achieved through “high vehicle production volumes and associated local value addition”. 

The APDP was implemented in 2013, with a view to steer the automotive industry towards producing 1.2-million vehicles by 2020.

Production is expected to reach 622 000 units this year.

The APDP review reveals that government and the industry are unlikely to reach this target, owing “to a variety of reasons, such as the fact that the global economy is still recovering from the effects of the 2008 financial crisis.

“Secondly, it will also be extremely difficult to achieve significant expansion and deepening of the local supplier base under the prevailing economic conditions.”

Post-2020 Programme, Transformation
With Volkswagen and BMW ready to make investments in their local plants beyond the APDP, currently set to end in 2020, government has also been required to sooth worries over a post-APDP support programme.

The DTI notes that such a support framework will be developed during the course of next year, “in order to provide certainty in the policy environment for automotive manufacturing in South Africa after 2020”.

“As we develop a post-APDP automotive master plan, we will also actively engage industry to promote meaningful transformation through the inclusion of previously excluded groups along the entire automotive value chain,” adds Davies.

“The current situation is characterised by extremely low participation of blacks in the automotive industry. This is prevalent through all parts of the sector’s value chain, including distribution, retail and after-sales and service. The levels of support afforded to the industry in South Africa need to be reflected through an appropriately transformed sector.”

Naamsa Pleased, Naacam Wanted More
The National Association of Automobile Manufacturers of South Africa (Naamsa) says it is satisfied with the outcome of the APDP review. 

“An important feature of the APDP review outcome is the proposed higher investment support for automotive tooling which, if implemented, will drive additional localisation, particularly in respect of automotive components.”

Naamsa also notes that it will “continue to work with the DTI black economic empowerment desk, as well as with other industry stakeholders, in the formulation of initiatives to promote transformation throughout the automotive value chain”. 

The industry body adds that Davies assured industry chiefs in a meeting on November 6 that there is likely to be a high level of continuity between the APDP and any post-2020 programme. 

National Association of Automotive Component and Allied Manufacturers (Naacam) president Ken Manners says the changes to the APDP will ensure continued growth of the local automotive industry, “legitimising government’s continued support”.

However, he notes, Naacam is disappointed that the review did not yield more meaningful requirements for the local manufacture of components and sub-assemblies.

In spite of vehicle assembly growth, “real local content percentages have declined, most notably at tier-two level, where real employment, skills development and transformation opportunities lie.

“Naacam is cognisant and appreciative of significant [vehicle manufacturer] investments based on the principles of the APDP, but with no changes to the current parameters for another five years, we are concerned that component manufacturers will find it more challenging to compete on a sustainable basis.”