The Automotive Production and Development Programme (APDP) that was implemented in January will be more effective in increasing local-vehicle-component content than the previous Motor Industry Development Programme (MIDP), as it is drafted in such a way as to diversify, deepen and increase the components supply chain in South Africa, diver- sified enterprise incentive advisory firm Cova Advisory & Associates MD Duane Newman tells Engineering News.

The APDP is also set to increase the total number of vehicles produced in South Africa. The Department of Trade and Industry (DTI) aims to increase the country’s vehicle production to 1.2-million vehi- cles a year by 2020, from the about 525 000 cars and light commercial vehicles produced last year, to ensure that vehicles are quality and price competitive worldwide.

In light of this, Newman notes that the incentive scheme outlined in the APDP is important for the plan’s success, as, without the incentive programme, there would be limited automotive manufacturing or assembly in South Africa.

“Owing to the significantly globalised automotive industry, South Africa – with its newly introduced APDP – is conti- nually competing to keep automotive investment in the country,” he says.

Countries are willing to provide lucrative incentives for investors when there is an automotive indus- try in a country, as it is perceived by investors as an attractive invest- ment destination and a successful and sophisticated country.

There are significant differences between the two government development plans with regard to tariff regimes, a local original-equipment manufacturer (OEM) vehicle allowance and industry and capital investment incentives.

The local assembly allowance, 27% of which was the duty-free allowance under the MIDP, resulted in a significantly lower effective level of protection than offered by the nominal tariffs which were reduced from over 100% on completely built up (CBU) vehicles in 1995, when the MIDP was introduced, to the current duty-level of 25% on CBUs and 20% on completely knocked down vehicles under the APDP.

This value-added allowance under the APDP effectively provides local manufacturers who import a 30% reduction in their component duty liability.

While the current tariff is regarded as high by some observers, Newman believes it is fair, considering that the industry needs ongoing protection from imports. “We cannot rely solely on our distance from manufacturing sites to act as a natural barrier to entry for imports.”

Another difference is the MIDP’s import-export complementation, under which firms accumulated benefits that were derived from exports, compared with the APDP’s production incentive (PI), which will be calculated on actual production.

The PI is expected to start at 55% in 2013 and will reduce steadily until it reaches 50% in 2018. It provides tradeable credits for companies that manufacture a minimum of 50 000 vehicles and components in South Africa. The PI will be an effective benefit of 11% of value added, says Newman.

Further, the productive assistance allowance under the MIDP enabled OEMs and first-tier suppliers whose investments were linked to local OEMs to claim back 20% of the investment over a five-year period. The new auto- motive 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. This benefit is payable over three years to vehicle assemblers and automotive component manufacturers.

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

Meanwhile, Newman believes the major objective of the APDP is, firstly, to protect existing jobs in South Africa’s automotive sector and, secondly, to develop the areas in which the country is becoming more competitive.

“The section of the AIA which provides an extra 10% incentive for high-technology investments and investment-linked training will result in skills upliftment in South Africa,” he says.

However, Newman adds that areas of concern that South Africa needs to monitor are possible unexpected cost increases in labour and electricity, as these could significantly impact on the next round of automotive investment decisions by manu- facturers if budgeting for either is less than substantially predictable.

Government and automotive-industry leaders are required to work in partnership to secure more export orders and promote local buying to achieve the DTI and the South African motor industry’s target of producing 1.2-million vehicles a year by 2020, concludes Newman.