Defenders of the Motor Industry Development Programme (MIDP), which has transformed the SA motor sector since its introduction in 1995, have a ready-made answer to critics who say it has distorted the market: imagine where we'd be without it.
They have a point. For all its weaknesses, the MIDP has rescued the industry from almost certain death. Before the programme was introduced, the sector was a model of how not to manage an industry.
Protected behind tariff barriers as high as 115% during the anti-apartheid sanctions era, the industry was outdated, underfunded, overmanned, inefficient and riddled with labour disputes. It had little hope of survival in a modern, competitive environment.
The 2004 version of the SA motor industry is almost unrecognisable. Despite complaints about affordability, car sales are heading for a record. The previous peak was in 1981, when 301 000 cars were sold. This year, manufacturers and importers belonging to the National Association of Automobile Manufacturers of SA (Naamsa) are on target to sell 284 000. But not all importers that have entered the local market in recent years belong to Naamsa. Add the 28 000 cars they expect to sell, and the final total is about 312 000.
It's the same for pick-ups, trucks and buses. Encouraged by stable prices, low interest rates, economic confidence and the growing activity of black buyers, sales are booming.
But it is exports that show the degree of revival. In 1995, the SA motor industry exported less than 16 000 vehicles, mainly to Africa. That dropped to 11 000 the following year. Since then, growth has been meteoric. In 2003, 127 000 vehicles - including 115 000 cars - were exported around the world.
Multinational motor companies have turned SA into a niche production centre. Local plants can never match those in Europe, Japan and the US that produce hundreds of thousands of vehicles a year. But they cater mainly to markets where the steering-wheel is on the left-hand side of the vehicle. Most SA plants concentrate on the smaller, right-hand-drive market. Low, uneconomic numbers for mass-market plants are thoroughly cost-effective for smaller SA operations. Quality, costs and reliability have improved to such an extent in recent years that the SA industry's products are sent confidently to Europe, Asia, Australia, the US and even Japan.
Exports this year will fall to about 121 000 because the strong rand has made SA prices less competitive. Toyota, for example, is exporting less than half the number of Corollas to Australia than it had planned.
Even so, from 3% eight years ago exports now account for 26,3% of total domestic vehicle production. Industry analysts are confident that as recently announced export programmes are added to the mix, that share will grow.
By coincidence, the present figure is matched this year by the share of the SA vehicle market held by imports. When the MIDP began, imports accounted for 6,5% of SA sales. In 2004, it is 26,3%.
It is no accident that annual imports have risen, from 26 000 when the MIDP started to 120 000 in 2004.
The programme's aims were to boost exports and encourage local companies to abandon low-volume manufacture. For most producers that has meant shifting production to vehicles suitable for both domestic and export markets. But they still need to meet SA consumer demand for other vehicles, so the MIDP allows them to claim duty rebates on imported vehicles.
At first, companies could claim rebates equal to the value of exported vehicles and components: if the local content value of exports was R100m, they could claim R100m duty rebates. But that is being whittled away to make companies work progressively harder.
In 2004, companies can claim only 90% of the value for rebate. That will fall to 86% from January, and then to its base of 70% by 2009.
Even so, import-export complementation is not universally popular. To some foreign competitors, the system smacks of export subsidies, which are contrary to World Trade Organisation (WTO) rules. At one stage, Australian trade officials warned they might complain officially.
So there's a strong likelihood the system might be tweaked to make it WTO-compliant. Planners say that is not a problem. They say it's possible to provide the same level of support without breaching rules, simply by changing the way it is offered.
Duty rebates make it financially viable for SA companies to import cars they no longer produce. Even so, MIDP planners could not have expected the variety of products that would flood the SA market. If we combine local models and imports, buyers can choose from nearly 1 000 car models and variants, ranging from sub-R50 000 entry-level cars to R6m high-performance models. The variety of commercial vehicles has also ballooned. Planners say there's nothing to worry about as long as imports don't exceed 30% market share.
Nearly all the world's big brands are represented here. The latest to join the fray is the Indian company Mahindra.
Despite domestic market and export growth, SA remains a small player by international standards. It ranks 20th in the world production table: the 459 000 vehicles that will be built here in 2004 represent 0,7% of global production.
Nevertheless, it's important enough for the automotive multinationals to invest billions of rand here every year. Since General Motors (GM) bought back the remaining 51% of Delta Motor Corp this year to complete its return after disinvesting in 1987, all seven of SA's main vehicle producers are foreign controlled. In recent years, Ford, Toyota and Nissan have all taken over local operations. The three German subsidiary companies - BMW, Volkswagen and DaimlerChrysler - have been wholly owned by their parents for many years.
At this stage, there appears to be no likelihood of these companies changing their SA shareholding to accommodate black economic empowerment (BEE). Instead, they are encouraging BEE activity at dealer and supplier level.
According to Naamsa, these seven companies will invest a record combined R3,6bn in capital expenditure during 2004. Nearly all that will go towards new-vehicle and export production facilities. Another R15bn is due to be spent over the next five years.
Revenue is also rising. In 2003, industry revenue from domestic sales of new vehicles rose from R52bn to R59bn, and exported vehicles from R17,2bn to R19,5bn. Components exports, despite slipping from R22,9bn to R21,3bn, have grown nearly 600% since 1995.
The result is that the industry enjoyed record profits of R4,8bn in 2003, up from R4,6bn the previous year. This year's figure is likely to be about the same. That's a healthy performance.
But two factors must be borne in mind. Most of that money is required for direct reinvestment in new capital expenditure. And the profits were not shared evenly among motor companies. Though companies won't divulge individual financial performances, it is clear that a couple were very profitable, while others continued to struggle.
What is also positive is that labour levels remain stable. Despite early MIDP fears that the industry's quest for efficiency and competitiveness would result in job losses, overall numbers have remained stable. In the past five years, employment in the vehicle manufacturing industry has slipped from 32 000 to 31 500. In the auto components sector, overall employment has grown from 67 000 to 74 500 since 1999. About 670 jobs have been lost in the tyre sector.
Encouraging though progress has been under the MIDP, it is only a start. Over the remaining eight years of the MIDP, until 2012, protection for the industry will continue to be stripped away. Import duties on built-up light vehicles, 36% at present, will fall to 25%; and on components, from 28% to 20%. A 27% duty-free allowance is expected to remain unchanged, as is a 20% production asset allowance.
But what happens after 2012? Despite making great strides in costs and efficiency, few SA vehicle producers could survive today without the support provided by the MIDP, particularly the import-export complementation scheme. Even in eight years' time, they would struggle.
SA does not want to follow Australia's example, where a too-rapid cut in protection caused several vehicle manufacturers to disinvest. Only four remain, and all are under severe financial pressure in a market where 78% of new cars are imported.
A two-year review of the MIDP will start early in 2005 to map out the future for the motor industry beyond 2012. If that seems to be looking a long way ahead, it's not. Motor companies generally work on six-year investment and product cycles.
What is decided in the next two years will determine their commitment to SA beyond 2012.
