South Africa's auto industry faces challenging times. Recently, there have been some encouraging signs that vehicle manufacturers are looking to further integrate South African assembly activities into their global and regional strategies. The South African government's Motor Industry Development Program (MIDP) is playing a key part in the development of the auto industry in the context of further trade liberalisation efforts. Alicia J. Robinson, of the US Department of Commerce, has reviewed the latest developments in the South African auto industry and summarises them in this paper.

I. EXECUTIVE SUMMARY

Throughout the world, the motor industry is a high value business that government tends to regulate, largely due to economic and trade-related reasons. In South Africa, the motor industry is approximately 14 percent of the GDP.* The sector is largely supported by the South African Government (SAG), with industry regulations established as part of the Customs Act. The legislation that is shaping the development of South Africa's automotive industry is the Motor Industry Development Program (MIDP), which is part of the Customs Act. The SAG created this program to grow the country's expertise in this key sector and to encourage global competitiveness. The MIDP is the most important factor affecting South Africa's motor industry. It is a program that gradually reduces import tariffs for completely built up and completely knocked down vehicles. South African motor vehicle and components exporters earn export credits which are used to off-set import duties.
*2000 Directory of the National Association of Automotive Component and Allied Manufacturers (NAACAM)

South Africa recently signed a bilateral agreement with the European Union that is designed to grant duty-free status for a number of products that South Africa and the EU trade. One concern with respect to this Free Trade Agreement (FTA) is the potential impact on American exports to South Africa in the transportation sector. Discussions with a number of automotive companies and vehicle component manufacturers reveal, however, only a limited negative effect - predominantly on completely built up trucks and buses weighing more than 3.5 tons. American companies do not have much of a presence in South Africa's passenger car market, and passenger cars are presently not included in the FTA. The discussions further revealed that a company's historical supply chain had more of an impact on sourcing decisions than the implementation of such an agreement.

In further analyzing South Africa's automotive industry, the continued growth, in terms of price, of the platinum group metals (PGMs) has given South Africa an edge with respect to the production of catalytic converters. The platinum and palladium content of the converters, which treat exhaust emissions and reduce certain toxic emissions, represents between 50 and 70 percent of the catalytic converters' value. Last year South Africa's Department of Trade and Industry decided to change the level of support given to the PGMs by gradually decreasing the value that exporters can claim under the MIDP. By 2003 manufacturers can only claim 40 percent of the value of PGMs as export credits, compared to 90 percent in 1999. While there was initially concern about this decrease in support, the industry seems to be fairing quite well. Catalytic converters, followed by stitched leather covers, tyres and exhaust pipes lead South Africa's components exports. The MIDP, as well as the rising demand for vehicles to meet increasingly stringent emissions standards, are strong reasons for such success (combined with the weakening Rand), with catalytic converter exports increasing from R484.8 million in 1996 to R2,569.1 million in 1999.* All of the automotive and component manufacturers, including American firms, are taking advantage of the local incentives that were designed to help South Africa's motor industry become internationally competitive.
* $/R average in 1996 = 4.29; $/R average in 1999 = 6.11

II. SOUTH AFRICAN POLICY INITIATIVES

A. Motor Industry Development Program (MIDP)

South Africa's Motor Industry Development Program (MIDP), promulgated in September 1995, is an incentive scheme created to help the local motor industry to become internationally competitive over a short period of time. The MIDP has made a significant impact on attempts to rationalize South Africa's over-protected motor industry. In the process, the MIDP has gradually reduced import duties on motor vehicle imports. South African exporters of motor vehicles or motor vehicle components earn export credits which can be used to off-set the current import duty of 50.5 percent, previously more than 100 percent, on similar imports. This program enables vehicle and component manufacturers to increase production runs and encourages efficiencies intended to lower costs.

The MIDP scheme has resulted in reinforcing South Africa as a production location of certain right-hand drive platform models for a global, yet limited, market, as well as the production of components requiring raw material inputs, such as leather seats or catalytic converters. One such example is the alliance of DaimlerChrysler AG. The Mercedes-Benz division has a South African passenger vehicle production facility coupled with a nationwide product and service delivery infrastructure. The objective of this strategy is to expand DaimlerChrysler's market share in South Africa, while allowing Mercedes-Benz to take advantage of export opportunities incentives from the local production of the right-hand drive C-Class vehicles.

B. EU-South Africa Free Trade Agreement (FTA)

The European Union and South Africa signed a Free Trade Agreement (FTA) in March 1999 that went into force on January 1, 2000. Under the terms of the FTA, South Africa will grant duty-free status to 86 percent of its EU imports, while the EU will give duty-free status to 95 percent of South Africa's exports. The EU will implement its tariff reductions by 2002, whereas South Africa's tariff cuts will phase down during the second half of the twelve year transition period, between 2006 and 2012. Numerous sectors are included, such as food products and transportation equipment. However, passenger cars are not included in the FTA.

Preliminary research by the U.S. International Trade Commission shows that the value of U.S. exports to South Africa for a number of sectors is expected to decline due to the FTA. As evidenced in current trade patterns, European and American products are very competitive in terms of trade with developing nations. Transportation equipment is expected to be hardest hit, both in terms of sales volume with an estimated decline ranging from $42 million to $142 million and as a percentage of revenue with a decline of nine to thirty-one percent. Imports in this sector are normally subject to high tariffs. EU imports, however, will receive a preference, eventually culminating in a 50 percent reduction in duties relative to WTO rates.

III. SECTORAL BACKGROUND - INPUTS AND COMPETITIVE ADVANTAGES

A. The Rise of the Platinum Group Metals (PGMs) The prices of platinum and its sister metal, palladium, have risen exponentially over the past year, causing an unprecedented expansion in the platinum sector. This phenomenon has been a boon for South Africa, since it produces approximately 72 percent of the world's platinum compared to Russia's 20 percent, while Russia produces 66 percent of the world's supply of palladium compared to South Africa's 25 percent. The platinum group metals -platinum, palladium and rhodium - led South Africa's exports to the United States in 2000, accounting for 33 percent of all exports.* The catalytic converter industry largely determines demand requirements for platinum group metals.
*Source: U.S. Department of Commerce

B. Catalytic Converter Industry

The catalytic converter industry, with platinum group metals as the primary input, has shown a great deal of growth over the past few years and is one of South Africa's fastest growing industries. The country produces seven percent of the world's total catalytic converter materials and is expected to become the world's third largest catalytic converter supplier within three years. Consequently, South Africa's Department of Trade and Industry (DTI) announced changes to the MIDP due to the belief that the autocatalyst industry had earned adequate penetration of global markets. The DTI adjusted the level of support given to the platinum group metals by initiating a phased reduction to 40 percent by 2003. This means that exporters can claim 70 percent of the PGM content of each auto catalyst as export credits, which vehicle manufacturers can use to off-set import duties on completely built vehicles and parts. This percentage will decrease by ten percent a year until it reaches 40 percent in 2003.

Figure 1 - Catalytic Converter Substrate

As prices fluctuate around $600/oz for platinum and $1,000/oz for palladium, catalytic converter manufacturers take into account the relation of one metal to another and substitute more platinum and rhodium for palladium in their auto catalyst mix to control vehicle emissions. To counteract such exorbitant prices, Corning has developed a ceramic catalytic converter substrate (900 cells per inch / 2 mm wall thickness) that uses an estimated 25 percent less precious metals. {see Figure 1}

Corning projects a sizeable shift in the substrate product mix over the next five years as a result of the rising costs of the platinum group metals. Thirteen percent of Corning's total substrate production in 1999 was thinwall {a substrate's wall thickness} at 2-4 mm, while in 2002 the expected production will be 30 percent. By 2004 thinwall is expected to climb to 43 percent of the company's substrate production.

Catalytic converter companies in the Port Elizabeth Uitenhage region play a major role in the country. Corning, one of 14 companies engaged in catalytic converter production in Port Elizabeth, supplies ceramic substrates to all of the world's major auto manufacturers, including Ford, General Motors, BMW, Toyota and Volkswagen to name a few. Because South Africa does not require its vehicles to be emissions compliant, the entire catalytic converter production is exported, except for Corning's supply of catalytic converters to Ford's domestic Volvo division. There are 25 multi-national companies engaged in catalytic converter production in South Africa.

IV. VEHICLE SALES AND PRODUCTION

South Africa's motor vehicle sales have shown impressive growth in 2001. The February 2001 year-on-year growth in car sales was 17.1 percent, while the figure for light commercial vehicles (LCV) topped this figure at 17.6 percent. Although the level of car sales was down from January's 25.5 percent growth rate, the double digit growth rate is still impressive. Heavy commercial vehicle sales grew more than double that of LCVs with February 2001 year-on-year growth sales of 36 percent.* Government purchases made a significant contribution to passenger car and light commercial vehicles. Passenger and commercial vehicle sales are indicators of both consumer and business confidence in South Africa, and current figures reveal a continued level of optimism.
*Source: Nedcor Economic Unit

A number of vehicle manufacturers are producing in South Africa. They include a host of European manufacturers, as well as a couple of Asian and a rising number of American producers. Prior to 2000 South Africa's domestic sales fell while vehicle sales for export increased. In 1999 Volkswagen sold the greatest number of passenger cars in South Africa, followed by Toyota, Samcor (45 percent owned by Ford), Delta (49 percent owned by GM), DaimlerChrysler and BMW respectively. Toyota had the lead in light truck sales in South Africa for the same year, followed by Delta (GM), Samcor (Ford), Nissan, and Mercedes respectively. DaimlerChrysler sold the most number of heavy trucks in 1999, and the company's number one truck seller American Freightliner recently released a statement in Business Day encouraging its suppliers to invest in South Africa. (Business Day, May 14, 2001) Heavy truck producers Nissan, MAN, Toyota, Delta and Tyco (South African), respectively, followed DaimlerChrysler with the greatest sales in 1999.
Source: Ward's World Motor Vehicle Data 2000

While South Africa's sales of passenger cars and commercial vehicles have decreased from 1996 to 1999, the country's world exports have steadily increased.* This phenomenon can be explained by noting the shift towards a more global market for the country's vehicle industry in light of falling domestic vehicle sales. Domestic vehicle manufacturers are also taking advantage of the weaker currency and the increased competitiveness of local industry to increase exports.
*Source - World Trade Atlas

V. POLICY IMPLICATIONS OF SOUTH AFRICAN INITIATIVES

A. Impact on PGMs and Catalytic Converters

By 2003 exporters will only be able to claim 40 percent of the platinum group metal content of each auto catalyst as export credits under the MIDP. However, current market indications reveal that South Africa's catalytic converter industry will continue its momentum of strong growth despite the government's withdrawal of support for the PGMs. This growth will stem from more demanding emissions requirements, and will result in increased demand for platinum over the next several years. While almost all of South Africa's catalytic converter production is currently exported, as the country becomes more environmentally conscious, the converter industry will also be used in the domestic market as well. The EU-South Africa Free Trade Agreement will not have much of an impact on South Africa's catalytic converter industry since duties on catalysts are currently less than two percent.

B. Impact on Passenger Vehicles and Light Commercial Vehicles

By taking advantage of the MIDP, the duties highlighted below may be reduced or even erased by using any or all of the following methods: a) Duty Free Allowance (DFA) - 27 percent of the wholesale value of the vehicle may be imported duty free; b) Small Vehicle Incentive (SVI) - the reduction is based on a formula - reduction = (0.002% x amount by which the wholesale price is below R40,000*) x wholesale price. The South African Government will reduce this percentage to zero, in even amounts by 2003, and will increase the R40,000 level by inflation. c) Import/Export Complementation Scheme - allows for reductions on import duties according to values exported. For every Rand of local content of CBU exported, a Rand of CBU or components can be imported free of duty. For every Rand of local content of components exported , either 0.75 Rand of CBU or one Rand of components may be imported duty free. Import Rebate Credit Certificates (IRCCs) are issued to registered exporters once the foreign funds have been repatriated.**
* $/R (average) for 2000 = 6.92
**Source 2000 NAACAM Directory

TARIFFS: Passenger Cars and Light Commercial Vehicles

Year CBU% CKD%
2000 47 35
2001 43.5 32.5
2002 40 30
CBU = completely built up / CKD = completely knocked down

Passenger vehicles and light commercial vehicles are currently not included in the EU-South Africa Free Trade Agreement; however, this could change with the EU's recent push for such an inclusion. All of the players in South Africa's automobile industry held their first discussions regarding this issue in March 2001. The Japanese and the Europeans dominate the passenger vehicle market in South Africa, even with the local presence of Ford and Delta Motor Corporation (GM). As of 2001 Toyota is the largest auto manufacturer in the country, both in terms of sales volume and production capacity. European links in the South African auto sector are particularly strong, and they have developed significantly in the last four to five years. Because passenger vehicles are not included in the FTA, and in light of American car manufacturers' low level of production and market share in South Africa, the FTA will not have a significant impact on U.S. auto companies operating in the country. In fact, if at some point cars are included in the FTA, then U.S. automakers' EU operations will likely benefit from the Agreement because, like the Europeans, they will be able to export their cars and components to South Africa duty free.

C. Impact on Completely Built Up (CBU) Trucks and Buses

Exports of vehicles over 3.5 tons and their components qualify for consideration under the import/export complementation program. For medium and heavy vehicle exports, an Import Rebate Credit Certificate (IRCC) can be issued to 75 percent of the local content value. An IRCC for the full local content value of medium and heavy component exports will be issued.

NET RATES OF DUTY (CBU vehicle components > 3.5 tons)

Date Engines Transmissions Drive Axles Tyres Bodies Other
01/01/2000 15.00% 15.00% 15.00% 15.00% Free Free

Discussions with several American auto manufacturers and auto component manufacturers operating in South Africa reveal that primarily completely built up (CBU) trucks and buses weighing more than 3.5 tons will be negatively affected as a result of the EU-South Africa Free Trade Agreement. Duties on catalytic converters, shock absorbers, bearings and other after market components are less than two percent and in some cases zero, therefore the zero duty offered by the FTA will have little impact. However, there is a five percent duty rebate for CBU components sourced from the EU, which affects American exports of engines, transmissions, drive axles and tires. Completely built up trucks and buses above 3.5 tons incur an import duty of 20 percent; however, if the CBU comes from the EU, then the import duty is reduced to 15 percent because of the five percent rebate. American truck manufacturers exporting to South Africa, such as International Truck and Engine Corporation, face competition primarily from European manufacturers Mercedes-Benz, Volvo and Renault.


VI. CONCLUSIONS

Even South African truck producers such as Tyco International assert that the EU-SA Free Trade Agreement will not affect its supply chain, which entails importing vehicles from International Truck and Engine Corporation, an American company, and assembling them in South Africa. The trucks are then sold locally in South Africa as well as throughout Southern Africa. Because of the duty rebate offered to European exporters, American truck manufacturers will, however, face a disadvantage in terms of revenue as compared to their European counterparts.

In many ways the Motor Industry Development Program has changed and will continue to alter South Africa's automotive industry more than any other incentive scheme, including the EU-South Africa Free Trade Agreement. The MIDP reduces import tariffs for completely built up and completely knocked down vehicles. After discussions with an array of auto and auto component companies, the primary reason stated for operating in South Africa was because of the benefits reaped from the MIDP. While the numbers may show that U.S. exporters of certain vehicles and components to South Africa may be at a disadvantage with respect to their European counterparts, historical relationships play a critical role in determining the supply chain. Consequently, importers who currently import these items will likely continue this pattern, and all competitors in South Africa's automotive industry will profit from the MIDP until 2007, when the program ends, at least in its current form.

Written by: Alicia J. Robinson
International Economist
U.S. Department of Commerce
May 2001


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