South Africa needs to tackle its uncompetitive investment incentives to help its auto industry, Roger Pitot, boss of NAAMSA, the national motor industry association, told the South Africa Automotive Conference.

The country was working towards completion of preferential trade agreements with the Mercosur region and with India. These could both be a win-win situation for SA, said Pitot.

He highlighted the great success of the components industry which had seen exports increase by 29.5% between 2002 and 2004. But he warned that SA was over-reliant on the EU for its exports, both of cars and components.

And he also said that SA is facing a small car threat. While sales and production hit 450,000 and 470,000 respectively last year, they mask a growing trade imbalance.

Production of small vehicles in SA has fallen while imports of vehicles priced under €14,000 has increased.

Local car makers are building and exporting larger vehicles, enabling them to gain export credits to bring in higher volumes of smaller models - imports hit a record 45% of total sales in 2004.

Small car platforms in SA had dropped from 11 in 2002 to five - two of them, the Toyota Tazz and VW CitiGolf are based on old generation models. "We are facing a situation similar to Australia where there could be no entry-level vehicles produced in the country.

"How long can Toyota and VW continue to produce old-generation models? There will come a time when it is no longer feasible to continue making these cars and it could be that it will not be economically viable to produce small cars any longer because it is cheaper to import them."

Pitot called for the South African government to address this situation when it reviews the country's Motor Industry Development Plan (MIDP) this year.

The small car threat is one of a number of challenges faced by the industry, including the strength of the rand and its effect on exports and increased competition for investment from China and India.

"It's not all bad, however," he told delegates. "The market and production are at an all-time high, there are record investments, the consumer choice is larger and vehicle prices are stable. We want to make sure that the review of the MIDP addresses the problem areas while allowing the positives to continue."