Cabinet in November approved a new automotive support programme for the domestic automotive industry. The revised Automotive Production and Development Programme (APDP) will replace the current APDP in 2021, and will run to 2035. National Association of Automotive Component and Allied Manufacturers (Naacam) executive director Renai Moothilal explains to Engineering News senior deputy editor Irma Venter what the new, revised APDP will mean for the South African components sector.
Engineering News (EN): What does the current APDP look like? Why the need to change?
Renai Moothilal (RM): The current APDP runs on a number of interrelated mechanisms to incentivise local manufacture.
The Automotive Investment Scheme (AIS) is a cash grant for qualifying capital investment in plant and equipment.
Next up is a set tariff regime on vehicles and components imported into South Africa. Imported vehicles attract a 25% duty. Components imported for completely knock-down (CKD) assembly attract a 20% duty. This sees vehicle manufacturers and other automotive importers build up a duty account with the South African Revenue Service (SARS).
Linked to this are counteracting incentives to decrease this duty account for original-equipment manufacturers (OEMs), or vehicle manufacturers, and other automotive importers, as a quintessential import offset industrial support package. This means that as OEMs manufacture vehicles and procure components locally, they can use the manufacturing incentives they receive for doing this to offset the customs costs associated with the importation of vehicles not made locally and CKD packs used within their plants.
There are two duty-offset mechanisms.
The first one is known as the production incentive (PI), where a vehicle manufacturer calculates what we call manufacturing value-add (MVA). This is essentially any value added domestically to a raw material or subcomponent until the time it becomes a final domestic product, such as a vehicle, or a component that may be exported for assembly in foreign plants.
A higher MVA results in a higher PI valuation. A higher PI valuation allows for a greater duty account reduction.
Theoretically, this PI lever should have driven localisation and economic activity in the value chain. We should have seen increased local parts content on the vehicles made in South Africa, but this has not materialised as Naacam had hoped under the current APDP.
Local parts content on vehicles made in South Africa declined from an average of 46.6% in 2012 to 38.7% in 2016.
This decline happened to some extent because of how the secondary duty rebate mechanism – the volume assembly allowance (VAA) – has manifested itself since the current APDP has been implemented.
This VAA basically provides OEMs with another duty rebate, as long as they assemble a minimum volume of vehicles in South Africa. This incentive is not linked to anything else except the number of vehicles rolling off the production line.
At the beginning of the APDP, an OEM could build 50 000 vehicles a year and accumulate duty credits through the VAA, based on nothing but the wholesale selling price of the vehicle. It also means that the higher the selling price of a domestically assembled vehicle, the more lucrative the VAA will be in terms of a reduction in the OEM’s duty account.
What happened over time is that the VAA has dominated the PI – which means volume production has overtaken the importance of local value addition and sourcing.
It has also meant that some vehicle producers do not need to maximise their PI. They could even sell their excess production rebate credit certificates (PRCCs; an outcome of the PI) to any other automotive product importers, including competing vehicle importers, in a completely legal transaction.
Importers buy these PRCCs on the open market, discounting their customs accounts for the vehicles they import into South Africa.
There is nothing wrong with the concept of stimulating production volumes, as the VAA aims to do. It has maintained and grown a base of local assembly. The current APDP has been useful in that respect.
However, faced with a limited duty pool – especially in a lacklustre domestic new-vehicle sales environment – less need to import vehicles for domestic sale equals less duty to be offset.
The current APDP was designed and announced around 2009, but economic conditions have changed significantly since its implementation in 2013.
EN: How will the new APDP change this?
RM: The VAA has been adapted. It is now called the volume assembly localisation allowance (VALA). This simple ‘L’ makes a big difference.
The current VAA is based on the wholesale selling price of the vehicle produced in South Africa, irrespective of content source.
Now the formula has been tweaked, with the incentive no longer based solely on the wholesale selling price. OEMs must deduct the value of imported content from the vehicle’s wholesale selling price, get a number and then multiply this by whatever the applicable VALA percentage is.
The VALA will start at 40% in 2021 and eventually drop to 35%.
This means OEMs will still get an incentive for assembly, but they will no longer be incentivised for parts content that is imported and built into the wholesale price. Unlike the VAA, the VALA is not an assembly allowance, irrespective of the levels of local sourcing.
EN: Does the PI remain?
RM: The PI has, in fact, increased. At present, the PI nets out to 10% of value-add. It is set at 12.5% for post-2020.
EN: Will the changes to the APDP not scare off some OEMs?
RM: My own view is that the new APDP has been responsibly modelled. Remember, OEM stakeholders played a firm part in the consultation process.
The revised level of incentives when one combines the assembly and production incentives is still very strong by global [standards]. And there is still the lucrative cash incentive, the AIS, to supplement the PI and VALA mix.
I’m confident the package won’t scare off vehicle assemblers. If there happens to be any disinvestment, it will be for reasons other than the incentive package. Take the General Motors exit in 2017. It was not because of the APDP, but more in line with the company’s global strategy.
EN: There’s a lot of talk around 60% local parts content. What does this refer to?
RM: Let’s take a few steps back. The new APDP will, like its predecessor, be an incentive scheme. That means it aims to incentivise a set of outcomes. When the local automotive industry first started discussing the development of post-2020 industry policies with government, we didn’t have a long-term view of what we wanted the sector to look like.
Then government and industry role-players, including employers and labour, sat down and developed the South African Automotive Masterplan (SAAM), with a vision and set of objectives attached to it, before even talking about percentages and things like the VALA.
We mapped out six objectives, such as capturing 1% of global assembly volume, doubling employment across the value chain and increasing transformation.
Another one of these objectives is that the domestic automotive industry should have a localisation rate of 60% by 2035. That is the global norm for countries which have proved to be sustainable and competitive bases of vehicle production.
EN: So the 60% is a SAAM goal, not an imperative under the APDP?
RM: Yes, no OEM is being told that it must have 60% local content.
But, in developing the revised APDP against the background of the SAAM, any OEM that wants to continue receiving high levels of assembly benefits in South Africa after 2020 will need to eventually increase its local content rate, hopefully, bringing us to a 60% industry level by 2035.
This 60% will dramatically improve the competitiveness of the local industry as it will create less reliance on overseas suppliers, reduce dependence on long logistics chains and reduce currency exposure, while also increasing jobs and new business opportunities in the industry, introducing new technology and skills. In other words, effectively deepening the level of industrialisation in the country.
Under the revised APDP, 60% local content is the point where an OEM will be getting substantial incentives – maybe even more than is currently the case. But, importantly, if an OEM does not reach 60%, it will still receive benefits.
Maybe one OEM currently has 25% local content. In order to stay at a roughly net level of what they are currently getting, they may need to go to 32% or 33% local content. They don’t need to go to 60%.
In the end, it is the OEM’s choice: one manufacturer can produce 150 000 cars a year at 30% local content and get so much VALA, or one can produce 50 000 at higher local content and generate an equal VALA in rand terms.
EN: Can OEMs get to 60% if they do not have engine production in South Africa?
RM: One of the measures that has been tabled, and which must still be finalised by the National Treasury, is the potential for further tax-based investment incentives in two designated product streams.
The first is high-end telematics and electronics, such as infotainment systems, which we currently do not produce in South Africa. The other is what we call powertrain components, such as engine and transmission products.
These new incentives would be over and above the AIS – the AIS is set to remain – and are cash incentives. We are not sure when government will make an announcement on these additional incentives.
All of these incentives are intended to add to the business case for local OEMs that do not have this kind of production in South Africa.
But, to answer your question: no, in the absence of bringing in such high- value-added-type component projects, it’s unlikely that OEMs will reach 60% local content.
EN: What happens to the 50 000- unit-a-year assembly limit under the current APDP – the limit that allowed for maximum benefits under the current APDP?
RM: That 50 000 level has been dropped and is now at 10 000 units. This actually happened some time ago, with a revised scaled benefits implementation.
With the new APDP, there is no longer a dire need for the 50 000-unit-a-year volume push, as the VALA also makes sense at low volumes – if vehicles are assembled with high local content.
EN: Can the local components sector meet increasing demand from OEMs?
RM: I think there will be significant pressure on local components manufacturers to invest and ramp up for increased demand.
A ‘positive’ is that declining localisation rates in recent years mean that there remains significant enough capacity within the domestic components sector.
We have already seen a much higher level of interest from OEMs’ local purchasing managers to identify new sources of localisation.
EN: Are there big pockets of untapped localisation opportunities within the local components industry?
RM: There isn’t a straight answer to this. Every OEM’s global purchasing needs are different. For some OEMs, it may be pressed aluminium skin panels and, for another, it may be drive shaft production.
But it’s clear that components that are at a logistical disadvantage – those parts that are expensive to ship and take up lots of space in containers – are the quickest wins for localisation, if any OEM has not localised them already.
Importantly, whatever component it is, it should have the necessary value-add levels that make it attractive to OEMs.
EN: What are the current weak points in the local supply chain?
RM: Raw materials could be a challenge. Some grades of materials are not available locally because they are simply not worth producing at low volume.
But, let us not forget that we want to double vehicle production in South Africa by 2035. We want to create volume demand down to raw material level.
EN: Will it be possible for an OEM to say that certain grades of steel and aluminium are not available locally, so my VALA must be calculated differently?
RM: No. Manufacturers, both OEMs and large Tier 1 components suppliers, have to work with their various suppliers to make it happen. The aim of a long-term policy is to change that availability outlook.
EN: What is the outlook for electric vehicles (EVs) under the new APDP? The new programme runs to 2035 and the global auto industry should see significant growth in EV production by then. An EV’s most valuable part is the battery. What happens if South Africa’s auto industry does not produce batteries – does 60% local content remain a feasible target?
RM: None of the OEM plants based in South Africa have EVs planned within their current and next-generation vehicle platforms. Neither is the incentive programme set out in a way that disadvantages any particular technology used for vehicle power generation.
If this changes in future, remember that any government programme goes through a number of reviews during its life cycle. If there is a need to tweak, I’m sure it will happen.
More importantly, we have the kind of large components manufacturers in South Africa who can supply those kinds of technologies. Metair is a case in point of a company making global strides in this regard.
Again, it comes down to [this]: irrespective of what is assembled, the assembly incentive will be better served having higher local content. If EVs are assembled, then the relevant OEM should look to migrate whatever technology or components production is necessary to make local assembly viable.
EN: Are there any empowerment imperatives built into the new APDP?
RM: There has not been an announcement around exactly what level would be needed for incentive qualification, but stakeholders have for a long time been aware of a preference for a Level 4 empowerment requirement, up from the current Level 7 average.
We do expect some kind of formal announcement on minimum empowerment levels in the industry. We do not know when.
The sooner we get a formal announcement, the easier it will be to respond. From a Naacam perspective, we are actively advising our members that it is on the horizon and that they should plan accordingly. We are also putting in place several measures of support to help our members achieve greater compliance.
Getting to Level 4 does not happen overnight. It could take up to three years, if you include planning, implementation and verification timelines.
The sooner there is a formal announcement, the quicker we can respond and put in place a reasonable timeframe to get there.
EN: What does Naacam hope the local auto industry will look like by 2035?
RM: We would like to see a greater basket of components produced in South Africa.
We would like to see greater use of South African components manufacturers in the design and development of global vehicle technology – [which means] they are involved in the early phases of the vehicle development. We want to move away from just being a build-to-print destination.
We would also like to see more South African-owned companies supplying OEMs globally.
Importantly, we would want a higher volume of vehicles assembled competitively in South Africa, and it would be good to see more domestically assembled vehicles on our roads. As important would be the growth in a skilled and productive workforce.
Naacam would also want a significant increase in Tier 2 components producers, both investing from abroad and companies developed within South Africa. It is at this level that we are going to see true business opportunities that will impact on the transformation landscape. This will also mean increased parts localisation within large Tier 1 components suppliers.
In short, we want a sustainable, productive and competitive vehicle manufacturing sector that gives optimal benefits to all participants.