Historically, the backbone of the South African economy was gold. Arguably, these days it is the automotive sector. Despite the poor domestic sales environment for vehicles, investment by automotive assemblers, driven largely by export sales, is at record levels.
Certainly, the government has placed a lot of faith in the vehicle manufacturers as the engine of our manufacturing sector, to drive its growth and exports, which helps to explain why the bulk of government incentives to industry currently go to the car makers.
The Department of Trade and Industry (dti) has a specific programme to support the automotive sector, known as the Automotive Production and Development Programme (APDP), which was recently updated.
I share the view that not all of our economic difficulties can be blamed on external factors beyond our control, but the slowdown in the global economy, especially in China, with the resulting fall in demand for our commodities, remains an important part of the explanation of our present circumstances. It says something for our industrial policy that one bit of good news has been the automotive sector – and that we continue to enjoy record investment and rising export sales.
This should be enough to convince people who are sceptical that it will pay to follow on from this, to develop other industrial capabilities and to diversify the economy. In this way, we can help to iron out the volatility of growth, which has resulted from our reliance on the global commodity cycle.
Last year, the dti finished a mid-term review of the APDP programme within a time frame that was well in line with expectations from most stakeholders. It is not always an easy feat for a government department programme to complete a review of such a complex programme in time, given the many and conflicting stakeholder interests.
However, no review is ever perfect, and there are still concerns that the tens of billions of rands of government support paid out each year to the automotive sector could be better focused. The biggest concern, which has been raised by automotive component suppliers, is that we are giving a lot of assistance to global vehicle manufacturers, without seeing sufficient localisation and value addition. The vehicles may be assembled in South Africa, but a lot of the cars we export will have been assembled mainly using imported components.
Government subsidies
It is a cause for worry that companies in the automotive component sector, which by and large are SMEs (small and medium enterprises), did not get the boost they needed in the latest APDP review.
Although the component makers were given enough space to voice their concerns, these concerns have still not been properly resolved. It appears that the government is still not putting sufficient pressure on the manufacturers to import fewer components and to source more locally.
Why have the component producers not been adequately attended to?
Part of the reason can be attributed to how globalisation has strengthened the role of multinational businesses in certain value chains, giving them disproportionate power in relation to governments and smaller local businesses. That is the reason automotive multinationals are able to extract huge government subsidies in South Africa and other emerging market economies. The small size of the domestic market gives the automotive manufacturers added leverage in bargaining with the government.
The component sector is vital for job creation in an industry where there is a lot of mechanisation in the assembly plants, and therefore limited opportunities to boost employment. It concerns me that while most job-creation opportunities in the automotive sector occur in components, upstream in the value chain, the component makers don’t receive the recognition and support that they should.
It was quite concerning also that as an outcome of the review, the dti intends to discriminate between what it terms “core” and “non-core” component makers, and will reduce support to the latter.
Although it is not yet clear which component makers will attract the “non-core” classification, I expect them to be found on the periphery of the industry supply chain – and this runs counter to what one would have expected. The dti ought to assist these “non-core” suppliers to integrate into the industry’s value chain, rather than locking them out.
My conclusion is that the dti needs to think more seriously about how to address the problems of the component makers, to underline its commitment to localisation and job creation in South Africa.
Another thing we can learn from this whole review of support for the automotive sector is that we should be careful about how we talk of beneficiation, which is traditionally seen as adding value locally to raw materials instead of just exporting them.
True beneficiation should mean moving away from dependence on commodities and the minerals value chain. So it is surely daft to further entrench South Africa’s commodity dependence, for instance, by browbeating platinum and gold producers into becoming jewellery manufacturers.
We now have the mid-term review of the APDP behind us. In 2020, the dti needs to bring in a completely revised automotive sector programme, and the component makers have called for a total rethink from top to bottom. It is certainly not too early to look at the recent changes, to see what more needs to be done, and to have an open and effective dialogue between the government and all tiers of the automotive sector.
* Tumelo Chipfupa is a former dti official and a director of Cova Advisory and Associates.
** The views expressed here do not necessarily reflect those of Independent Media.
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