How sustainable is SA’s automotive support model?

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JIMMY MOYAHA: South Africa remains on a very clear path to industrialising its economy and achieving economic growth. Part of that includes attracting more investment into the country. Most recently we know that the likes of the Chery group confirmed that they would be moving some of their production into South Africa, and we know how important local manufacturing and production is for South Africa’s automotive sector.

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We’re going to look at some interesting incentives that are being offered by the government of South Africa to the automotive industry, and try to make sense of those.

I’m joined on the line by the chief executive officer at XA Global Trade Advisors, Donald MacKay, to look at this and see what we make of it. Donald, lovely having you on the show. Thanks so much for taking the time.

Give us an understanding of the incentive structure that we have as a country. Why did we, as a country, decide to put in place these incentives to attract the automotive sector into South Africa?

DONALD MACKAY: The objectives were certainly good at the time. We felt that making cars would create very deep supply chains, which of course they do, because cars are very complicated things.

The thinking at the time was that over time more and more of the car would be made locally, and less and less of it would be imported. This would do two things. It would create jobs; it would increase our investment.

And I guess a third thing is it would create a force of highly skilled people because making a car is quite complicated. And then, as those people would move around the economy into different jobs, the thinking was that they would take those skills with them.

So we would kind of create a very interesting entrepreneurial class, or a highly skilled labour class. That was the original thinking. But this was never meant to be a permanent arrangement.

The idea was not that you would create a permanent subsidy, but that is kind of where we ended up.

JIMMY MOYAHA: Donald, when you say that this was the initial thinking and that that’s not where we’ve kind of ended up now,  in terms of where we find ourselves today, what does that difference mean for our budget? Primarily because I imagine the incentives need to be financed in some way, shape or form, and that means some money needs to be outlayed.

What does that mean for that? And beyond that, what does that mean for what it has been able to achieve [in terms of] this initial plan that we had in place?

DONALD MACKAY: Yes, there is a cost and, according to National Treasury, I think about R42 billion was last year spent in support. That takes a couple of different forms.

In some cases you get import duty relief; in other cases you get a direct transfer when you make an investment.

And so there are a couple of different ways that the money ends up in the pockets of these companies – of which there are seven significant producers in South Africa.

They employ, including the supply chain of component producers, about 120 000 people, which is certainly a lot of people. We wouldn’t want to lose those jobs. And then those people and those companies pay income tax, et cetera.

So it’s not as if the net value is R40 billion. It is offset by other taxes that go back in. And of course you have these people who have jobs and spend their money in the economy.

The question is, however, does the benefit to the economy exceed the cost? That’s a question nobody has really ever answered by looking at the data.

I think that’s an important question to answer – so perhaps it is.

But this is not a scalable model. We can’t say well, we also want to produce X, Y and Z, and just keep throwing money at it.

So it becomes problematic if the way you industrialise is by paying companies to manufacture here.

JIMMY MOYAHA: Let’s look at that in a bit more detail, Donald. What then becomes a long-term impact here when we look at sustainability of this sort of course of action, if we in some instances give these incentives over, as you said, as direct payments – and companies are then not incentivised to go beyond what the bare minimum requirements are, or we could be repurposing those funds into other areas that could yield more benefit?

DONALD MACKAY: The question of the opportunity cost of the money has never really been properly analysed.

This has also become an intensely political issue.

Which politician is going to put up their hand and say we should cut the support for the automotive industry, which is kind of our flagship manufacturing sector?

So I think it’s going to be very hard to get those answers because it’s in nobody’s interest to have those answers be out there.

The question then is what happens with this sector? If support were to be pulled – again, I’m not suggesting it should be – but if the support were to be withdrawn my view is that the collapse would be quite rapid.

And in fact, on the flip side, my suspicion is that there will have to be a push for the support to be increased because, remember, at the time these programmes were started we had well-functioning infrastructure, our ports worked, our rail worked.

All of those things were functioning really well. Our municipalities were not all in the state that they are now in.

This means that in addition to creating an incentive to produce here, you now also need to compensate for all the other problems that have developed in the last couple of years.

So the problem starts to become really, really serious.

The automotive industry is heavily export-focused, which means when your port and rail infrastructure doesn’t work, you can think of it like a tax on the exports of cars. The companies are going to need compensation for that.

So the model over time, as the structures in South Africa keep collapsing, will be under growing pressure to increase that support if we are going to remain as a car producer.

JIMMY MOYAHA: Donald, how then do we strike the balance between providing a sustainable incentive – one that doesn’t put South Africa in a precarious position as a country and as an economy – and building our own level of resilience such that even without the incentives we’re still attractive enough for investment from a global perspective.

DONALD MACKAY: South Africa has in some very strange way almost replaced building the fundamentals of a sound economy – safety and security, good education, good infrastructure, et cetera – and we’ve replaced them a with a toolset of industrial policies.

So if we’re going to build a thriving and vibrant manufacturing sector, we have to address the basics. You can’t tariff your way or subsidise your way to being a competitive manufacturer.

That, of course, is a much longer-term project.

It’s a project no politician is really interested in, because it doesn’t yield anything for a long time.

But if we don’t fix those basics, I fear that the subsidies and tariffs – which we’ve fallen quite in love with now – are not going to solve anything.

The situation will just deteriorate.

JIMMY MOYAHA: Ensuring that we become sustainable as an economy goes beyond just offering attractive incentives. It rests in the underlying fundamentals of how we structure those incentives, and how we position South Africa’s value proposition to the global community.

We’ll have to leave the conversation on that note. Donald MacKay, chief executive officer at XA Global Trade Advisors, joined us to take a look at South Africa’s current incentive structure with regard to sectors like the automotive sector, and how we make it more sustainable.