In Anticipation of a New South African Local Content Programme for Trucks and Buses
On January 1st, 2013, the Motor Industry Development Programme (MIDP), which was initiated by the South African Government in September, 1995 to improve the international competitiveness of the local vehicle manufacturing industry, was replaced by the Automotive Production and Development Programme (APDP), which introduced a greater focus on volume and employment growth. The APDP is a voluntary participation programme, made up of four main elements, viz. Import Duty, a Volume Assembly Allowance, a Production Incentive, and the Automotive Investment Scheme. The most important provisions include the fixing of import duties on vehicles and components at levels of 25% and 20% respectively, defined duty-free import credits for local assemblers of vehicles destined for both local consumption and export, additional duty-free import credits based on the margin of local value added, and a minimum qualification level of 50 000 units per annum for participation by registered vehicle manufacturers.
As it currently stands, however, the APDP is applicable only to light motor vehicles, effectively those with Gross Vehicle Mass ratings not exceeding 3 500 kg. The only provision that is specifically applicable to heavier vehicles with GVM ratings in excess of 3½ tons (i.e. Medium, Heavy and Extra-Heavy Commercial Vehicles and Buses) is that allowing component manufacturers to claim a production incentive on local parts manufactured for these vehicle categories. At the time of writing, discussions are continuing between interested parties and the Department of Trade and Industries to settle the provisions of the delayed medium/heavy programme. Even though the MIDP has been officially terminated, the applicable duty levels that prevailed under that regime for medium/heavy vehicles, i.e. 20% for Completely Built Up (CBU) vehicles, zero duty for Completely Knocked Down (CKD) components (including Semi-Knocked-Down vehicles) and 15% for Imported Medium/Heavy Commercial Vehicle tyres, is most likely to persist until the new MCV/HCV programme has been initiated.
It is not surprising that the process of developing new rules for medium and heavy vehicles since the programme was first mooted in 2010 has been long and difficult, given the country’s unfortunate experience under the earlier Local Content Programme (LCP) that was terminated in 1994, and which contained extremely stringent non-negotiable requirements for local Atlantis diesel engine and ASTAS transmission/axle fitment. That regime resulted in South Africa having some of the most expensive trucks in the world! In developing the new programme, the overall objectives of the APDP philosophy, i.e. volume and employment maximisation, need to be offset against the practicalities imposed by the relationships between the small South African market (only about 0,5% of the global total), and the overseas source plants from which critical components must continue to be drawn.
Employment maximisation would, in a perfect world, suggest implementing the greatest possible level of vehicle breakdown, which, in the case of heavier commercial vehicles, could also include disassembled chassis frames and cabs. Conventional logic also supports the notion that containerised shipment of individual components should be more space and cost-efficient than complete assemblies. However, the experience with earlier programmes has confirmed that the “inconvenience” factor, which enters the picture when the source plant’s production processes are unduly interfered with, can add considerable cost to the finished product. In the 1981-1994 scenario, source plants also tended to expect no significantly reduced absolute profit margin on their export products, even though they were shipping kits bereft of engines, gearboxes, axles, and related components to South Africa. The local component suppliers were also adding their own margins, with the result that the very expensive final product could only survive in an environment ring-fenced by harsh protective legislation.
Experience has also shown that, notwithstanding the small size of the local market in global terms, it is still highly diversified, and has requirements for a wide variety of product variations to suit its vocational requirements. The potential for component rationalisation, in the interests of commonality between different brands, or even models within the same product family, is therefore limited. This is not an easy scenario in which to develop a viable local content programme, and it leads to a direction that is more about finishing off the product, rather than getting too deeply involved with its fundamental manufacture. In reality, the dividing line between adding value and pushing up cost is very narrow indeed. The most appropriate modus operandi would capitalize the cost advantages of importing the more complicated components from the most appropriate global sources, while encouraging the cost-effective local manufacture of generic bulk-purchase items such as tyres, glass and batteries, and the specific “add-ons” required to fit the vehicle for its intended purpose (i.e. bodywork, ancillary equipment, aerodynamic devices, fleet management systems, etc.). Local added-value activities should also include the preparation of vehicles destined for export to other markets on the African continent.
The South African government recently introduced measures to encourage the purchasing of locally-built buses by public sector operators. This takes the form of tender preferences, and does not affect the dynamics of the open market for privately-owned bus operations. The potential for a high local content percentage in a bus is considerable, as the mechanical components make up a relatively small proportion of the complete vehicle. This should help local bodybuilders, in particular, to regain competitiveness against offshore competition, and protect a relatively small market segment from an undesirable level of over-proliferation. While free competition is generally desirable, it has been proved that there is a practical limit to the number of competitors who can run viable businesses in a small market, and that comment can equally be applied to the entire medium/heavy vehicle debate.