If government decides to enforce stringent black economic empowerment requirements on local automotive manufacturers in order to qualify for incentives in future, it could have dire consequences for the industry, an executive has warned.
Thomas Schaefer, chairman and managing director of Volkswagen Group South Africa, says “onerous requests” – for example that original equipment manufacturers need to reach a Level 4 Broad-Based Black Economic Empowerment score – are not achievable for a multinational corporation operating in South Africa.
Schaefer says most local original equipment manufacturers (OEMs) barely make it to Level 8 on the new score card, despite spending millions on various initiatives.
He says the issue is part of South Africa’s economic challenge – getting more people working by developing small business, encouraging trade and invigorating the economy. While there are great initiatives to achieve this, the problem is that some of the transformation targets set for automotive companies are unattainable.
Schaefer says the department of trade and industry previously accused the company of dragging its feet and not doing enough to develop black-owned businesses.
Volkswagen contacted BEE certification agencies, Chambers of Business and various black-owned companies throughout South Africa in an effort to identify black-owned businesses that can do “anything vaguely automotive”. Forty-one companies were identified. According to the rules, Volkswagen needs around 500.
There is a scarcity of black-owned suppliers in the local industry.
While it understands the importance of buying from black-owned suppliers, supports transformation efforts and has been “pushing this on all fronts”, it won’t be able to reach Level 4.
There is considerable disharmony between certain sections of government about supporting automotive manufacturing and whether this money couldn’t be better spent elsewhere. The issue is likely to be raised again in the next months as the department of trade and industry prepares to lift the veil on its plans for incentivising automotive manufacturing in the years to come.
Government’s tax revenue is increasingly coming under pressure as economic growth falters. At the same time, there are growing calls to improve service delivery, which will place an additional burden on an already constrained fiscal position.
The Automotive Production and Development Plan (APDP) comes to an end in 2020. Working groups are debating the structure of a new plan going forward.
Schaefer says local OEMs have different business models. Some barely use any local content or mainly concentrate on export markets while others produce for the local as well as export markets.
This makes it challenging to draft policy. While Volkswagen would like the incentive programme to stay the way it is, other OEMs might prefer to reduce local content requirements or for the annual production target of 50 000 vehicles to be reduced to 30 000.
Schaefer says South Africa is responsible for only 0.6% of global automotive production. A cost comparison with countries such as Portugal, the Czech Republic, Mexico and Thailand shows that South Africa is not really cost competitive – wage increases are higher, the sector has been plagued by strikes in the past, logistics costs are high and there is limited manufacturing of parts locally.
He says a lot of these disadvantages are offset by the APDP, but if the programme were to end, it would immediately spell the end for automotive manufacturing in South Africa as per unit cost would go “through the roof”.
Government has assured the industry of its commitment.
Schaefer says the only advantage South African automotive manufacturers have is the country’s proximity to Africa.
In October Volkswagen signed an agreement to start production of the Polo Vivo in Kenya in December.
Currently, around 19 000 new cars are sold in Kenya annually of which about 3 000 are passenger vehicles. The rest are bakkies.
Schaefer says it plans to take it slowly with production of around 1 000 cars expected during the first year.
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