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With global competition for foreign direct investment (FDI) growing, the ongoing review of South Africa’s Motor Industry Development Programme (MIDP) will likely see a new import substitution scheme put in place, with car manufacturing proving too important for the government to risk losing.

Like so many of the major sectors that comprise the South African economy, the motor industry sits at critical juncture regarding its future development. The government set out to attract foreign car manufacturers a decade ago with an ambitious plan to win over the major European producers. The MIDP allowed the automotive industry to circumnavigate costly import tariffs for parts sourced from outside South Africa, and reduced import duties on cars and light commercial vehicles according to values exported.

"They [the government] have done a good job of attracting foreign investment and I would say that this has been done on the back of MIDP," Robert Graziano, CEO of Ford South Africa, told OBG. "It has been a very successful programme in terms of moving the motor industry forwards in South Africa over the last 10 years."

Ford currently exports 40,000 vehicles from South Africa annually, and this is set to double with the expansion of its Silverton plant in Pretoria.

The industry has been genuine manufacturing success story for the country over the last decade, with many of the major original equipment manufacturers (OEMs) setting up shop in South Africa. Currently South Africa is the 10th-largest producer of cars in the world, with the industry contributing nearly 7% of the country's total GDP and responsible for 33% of total industrial output. Wages from the sector support more than 500,000 dependants and brings badly needed jobs to depressed regions like the Eastern Cape and Kwa-Zulu Natal.

South Africa has also become a major manufacturer of catalytic converters and is set to take advantage of the growing demand for diesel engine cars spurred by current high petrol prices. South Africa is the world’s largest producer of platinum – a vital component in catalytic converters – and so the industry has been held up as a shinning example of a successful downstream industry and of benefaction in mining sector.

Unfortunately for South Africa, the MIDP has come under fire from the World Trade Organisation (WTO) as an inhibitor to free trade, with Australia lodging an official complaint. The programme has also been criticised for being a drain on the country’s tax revenues.

Meanwhile, the considerable economic success that South Africa has enjoyed of late has served to bring into focus how vulnerable the industry would be without government help. While South Africa is reaping the benefits of the combined effects of sound macro economic management and favourable world economic conditions, high commodity prices and inward investment have served to raise the value of the rand. This has squeezed margins for South African exporters.

However, the major OEMs in the motor industry continue to invest in South Africa, despite the uncertainty over the review. To make such investments during a review of the very export substitution programme that helps sustain them could be seen as a questionable policy unless the OEMs were confident as to its final outcome.

Volkswagen, DaimlerChrysler, General Motors, BMW, Nissan, Fiat and Ford have all made significant investments in South Africa. These investments are centred on three motor industry hubs in the Eastern Cape, Guateng and Kwa-Zulu Natal.

Paulo Fernandes, from the government-funded Automotive Industrial Development Centre (AIDC), told OBG that while he believed the MIDP was unlikely to be extended past 2009 it would be replaced by other incentives, arguing that a balance could be struck that satisfied the WTO and the major OEMs.

Some analysts argue that the government needs to speed up the reduction of import tariffs; a move they say would increase inward investment and secure the future of the motor industry. The government has chosen instead to decrease tariffs gradually as part of its WTO obligations, giving the South African economy a period of grace in which to prepare for the harsh winds of global competition.

Debbie McIntosh, the general manager of corporate planning at BMW South Africa, told OBG that globally acceptable incentives are currently being offered by both developed and developing countries. According to McIntosh, some of South Africa’s immediate competitors operate in the Eastern European market in countries offering around 35% on capital investment, as well as other taxation incentives.

“With the huge logistical cost to the northern hemisphere, where all the major markets are, it would not be viable. The minister [of trade and industry] has openly said that the same level of support will continue until 2012. When he visited our plant last year, he indicated that there was a need to look at a vision for 2020,” McIntosh said.

The MIDP review, headed by automotive industry consultant Johan
Cloete, is expected to be finalised in April. Cloete declined to be interviewed by OBG until the report is complete.

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