David Powels will have been relieved to hear trade & industry minister Rob Davies express confidence in the efficacy of government's motor industry policy. The Volkswagen SA (VWSA) MD announced last week that the Eastern Cape car maker had been named the exclusive international supplier of right-hand drive, four-door VW Polos.
VWSA expects to export about 300 000 units of the new Polo over the next six years in a deal reckoned to be worth up to R30bn in export earnings.
David Powels - Discussions with government almost complete
The company has invested R4bn in the programme, which will source 74% of components locally.Critics of government's automotive policy will no doubt question the maths, but Davies says the Industrial Development Corp (IDC) has estimated that economic benefits of the existing motor industry development programme, and of the automotive production & development programme (APDP) which will replace it in 2013, are considerable.
Without incentive and support structures, it is generally accepted that multinational motor companies would disinvest from SA.
According to the IDC, by the time the APDP expires in 2020 there will be 320 000 more jobs than if there had been no support programmes; investment will have been boosted by R152bn; and gross domestic product will be R103bn higher.
The IDC also argues that the industry's ballooning trade deficit will be in positive territory by then. Whether this will satisfy those who say consumers are subsidising the industry remains to be seen. Davies appears convinced.
Powels, who is also president of the National Association of Automobile Manufacturers of SA, is further encouraged by progress in fleshing out the APDP. Details of the new programme, which affects investment decisions being taken now, should have been announced months ago. A new automotive incentive scheme, which will allow vehicle and components manufacturers to claim back 20% of investments, should have come into effect on July 1. Powels says discussions between the industry and government are almost complete.
Certainty can't come soon enough. BMW SA recently committed to a R3,2bn investment in local production of the next 3-Series from 2012, but Mercedes-Benz SA is locked in discussions with its German parent over the next C-Class, due in 2014. Given long investment lead times, a decision can't be delayed much longer.
Mercedes-Benz in Germany will no doubt be considering SA's relatively high production costs and whether they outweigh the duty-rebate advantages of free-trade agreements between SA and the US, the main market for C-Class exports.
If VWSA's experience is anything to go by, many of the SA costs are potentially manageable. This year the company will export about 28 000 vehicles, including 19 000 new Polos. Powels says VWSA will export 55 000 Polos in 2010 from total assembly capacity of 74 000. A new entry-level vehicle to replace the recently discontinued Citi Golf will be announced early next year.
The two vehicles will share some components that will give the company the economies of scale required for cost-effective local components production. Four multinational suppliers last week officially opened production facilities at a new supplier park managed by the Coega Development Corp near VWSA's Uitenhage assembly plant. A fifth has started construction at the park.
Increasing local content from 39% in the old Polo to 74% in the new one, says Powels, will take many of the import-cost variables out of the assembly equation. Until recently, a locally made dashboard cost 74% more than one from Europe. Now, because volumes bring down unit costs, it is 10% cheaper.
To begin with, the new suppliers will service VWSA exclusively. Eventually, Powels says, he will be happy for them to supply competitors as well. These could include General Motors in Port Elizabeth, Mercedes-Benz in East London or even some of the Chinese and Indian companies planning a combined assembly operation in East London. There is also the prospect of exports if costs come down far enough.
Powels says: "That we are making all these investments, and doubling exports, during a recession, speaks volumes for our confidence in the local industry and shows what can be done."
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