The transition from ICE to NEV takes place in a fluid international policy environment, with long term implications for the distribution of manufacturing capacity.

Executive summary

• The transition to New Energy Vehicles is supported in the developed world through measures aimed at increasing demand as well as supply.
• Supply side measures includes investment tax allowances and tax credits. 

South Africa is home to the abundance of minerals needed to power vehicles of the future. And this means the opportunity to carve a new and expanded role for the country in the auto value chain. On the other hand, retaining and expanding the existing productive capacity is going to require new fiscal outlays from the government, which appears to have limited balance sheet headroom, from the recent mid-term budget update. Therein lies the threat.

Some argue that Government policy has had significant influence on the size and growth of the automotive industry, since 1924, when the first automotive assembly plant in South Africa, the Ford Model T factory, commenced production in the city which we now call Gqeberha. The policy is set to play an equally crucial role in assisting the industry navigate the change to NEVs.

The transition from ICE to NEV is taking place in a fluid international policy environment, with long term implications for the distribution of manufacturing capacity around the globe.

Major western countries are rethinking the hyper globalisation paradigm which dominated policy perspectives in the 1990’s and early 2000’s. Within the uber globalisation paradigm, the location manufacturing capacity was best determined by market forces based on the comparative advantages of each jurisdiction. International trade liberalisation and global financial integration were the key enabling policies of these production arrangements.

Governments were encouraged by multilateral organisations and bound by treaties such as the World Trade Organisation (WTO) agreements from engaging in policy-based competition for foreign direct investment and exports.  

A series of major events have since cumulatively acted to undermine and question the increased interdependence of major economies forged by the globalisation paradigm such as the 2008 global financial crisis, the COVID-19 pandemic, trade tensions between China and the US and the current war in Ukraine.

The prolonged recession in developed countries, following the global financial crisis, led to a backlash against companies offshoring production to developing countries. In response, policy makers in some developed countries promoted reshoring or nearshoring of offshored activities to their home countries to promote local employment.

The COVID-19 pandemic exposed the extreme fragility of complex global supply chains which resulted in supply bottlenecks of manufactured goods and the build-up of inflationary pressures across the world.

Lastly, trade and geo-political tensions with China and Russia on the one hand and western countries and their allies on the other, have given rise to sentiments to reduce interdependence with rival economies. Companies have been encouraged to instead practice what Janet Yellen, the USA treasury secretary calls “friend-shoring” which is ostensibly less restrictive than reshoring or nearshoring but will limit supply chain network interdependence to a bloc comprising of allies and friendly countries.

Automotive assembly in South Africa is almost entirely dependent on continued foreign direct investment by six multinationals firms from Germany, Japan, and the USA. Production, engineering, technology, and trade patterns of the industry depend on decisions made at the corporate headquarters of these multinationals and not by local management and thus to be effective national policy must be attuned to global trends and industry dynamics. Investment decisions in new local factory capacity and upgrading is decided by global corporate headquarters as an outcome of internal competitive processes between manufacturing subsidiaries of the same multinational based in different countries.

Decisions on capacity allocation consider various factors such as the cost competitiveness of each location, trade policy, size of the and the growth potential of the domestic and regional markets, and ultimately government incentives. 

South African policy makers have in the recent past been quite successful in using policy to restructure and guide the industry to a long-term sustainable future.

The post 1994 government inherited a highly protected, inefficient, and inward-looking industry. Successive iterations of the automotive policies of the Department of Trade, Industry and Competition (DTIC) have led to growing investment, output growth, production efficiency and exports. Today the industry is an important economic contributor accounting for a sizeable proportion of manufacturing output and a significant percentage of the country’s export basket. More importantly it is a net foreign exchange earner with a positive balance of trade. 

South African policy makers have in the recent past been quite successful in using policy to restructure and guide the industry to a long-term sustainable future.

Tumelo Chipfupa, EY Cova Partner

The mixture of policies that it took to achieve this success sometimes went against the dominant globalisation paradigm and were reluctantly supported by the South African National Treasury. The National Treasury is quite sceptical about the benefits of fiscal investment incentives, and these have been slowly but surely whittled down. Unlike the situation 10 or 15 years ago, outside of the automotive sector, the DTIC has no significant fiscal incentive programmes to attract or promote manufacturing investment.

Comparison with the Australian automotive industry is quite instructive on the ability of industrial policy to alter outcomes. Like South Africa, Australia also had a foreign owned automotive industry built in the last 100 or so years behind protective tariffs. Starting in the mid 1980’s Australia decided on an auto sector reform programme that was more attuned to the prevailing policy trends. It made deep cuts to protective tariffs and availed time bound fiscal incentive programmes to assist industry to adjust to increased competition. Imports increased into Australia and the industry did not experience sufficient compensating export growth.

In late 2013 Australia had a change in the Federal Government. The new government decided to reduce government funding for industry just as key investment decisions were being made in foreign headquarters of the multinationals. This provided the last straw to an industry faced with an increasingly uncompetitive operating environment and sceptical of government commitment to continued support. In September 2017 the last Australian assembly plant in the city of Adelaide closed its doors. 

The South African government supports investment in the auto industry through the Automotive Industry Support Programme, a cost sharing grant programme that matches industry investment with a 20% government contribution. Additional support is in the form of a tariff set at a nominally high percentage for importers, but which can be completely offset by auto companies that assemble locally.

In the past decade, auto industry investment rates have soared as local assemblers have expanded and upgraded their factories to increase automation and incorporate robotic technologies. The DTIC overall investment incentive budget on the other hand has been flat. This has obviously created pressures in the DTIC budget which have been met with decreased support to other manufacturing sub-sectors. There has been no replacement of past DTIC grant programmes to support small and medium sized manufacturers such as the Manufacturing Investment Programme and the Manufacturing Competitiveness Enhancement Programme. The tax incentive programme intended to stimulate manufacturing investment in the Special Economic Zones (SEZ’s) have been put on an accelerated sunset programme.