BUILDING A VALUE CHAIN FOR THE AUTOMOTIVE INDUSTRY IN AFRICA
The Nigerian Market for automobiles is substantial and can readily sustain an automobile industry. In 2012, the country imported about $4 billion worth of automobiles of which about two thirds were pre-owned. Estimated annualdemand for vehicles is over half a million made up of 100,000 new and 400,000 used. As at 2012, the population of the middle class was 38 million and growing, assuring a sustained market for the automotive industry. Opportunities exist for South African automotive Original Equipment Manufacturers (OEMs) to participate in this market and achieve economies of scale. Alec Erwin will share findings from a recently completed research project.
PRESENTER: Alec Erwin, Ubu Holdings
Alec Erwin was previously Minister of Public Enterprises (2004-2008), Minister of Trade and Industry (1996 -2004) and Deputy Minister of Finance (1994-1996). He has also been President of the United Nations Conference on Trade and Development (1996-2000). Alec was previously General Secretary of the Federation of South African Trade Unions (1979-1983) and the Education Officer for the Congress of South African Trade Unions (1986-1988). He was a member of the African National Congress National Executive from 1994 to 2007. Alec has an Honours degree in Economics from the University of Natal where he was a lecturer in the Economics Department. He has an Honorary Doctorate from the University of KwaZulu-Natal and is currently an Honorary Professor at the University of the Western Cape. He previously sat on the Honorary International Investment Council of President Jonathan in Nigeria and on the Togo Presidential Investment Advisory Council and is presently on the Board of Togo Invest.
PROMOTING LOCAL MANUFACTURING IN SOUTH AFRICA'S MOTORCYCLE INDUSTRY: THE CHALLENGES AND OPPORTUNITIES
The South African motorcycle industry is a small market in global terms and the registration figures of motorcycles in the country on an annual basis have been in progressive decline. There is currently no local manufacturing of motorcycles in South Africa and no policy in place to develop the industry. The industry is entirely reliant on imports and will require significant support to contribute to the country’s manufacturing value-addition. Is there scope to develop this industry and expand into the export market?
PRESENTER: Sithembiso Mtanga, TIPS
Sithembiso Mtanga is a senior researcher at Trade and Industrial Policy Strategies (TIPS). He joined TIPS in 2007 and completed a Master’s Degree in Economic Policy in 2012.
Business Day - 09 May 2016
Engineering News - 09 May 2016
Session 1: Regional manufacturing and industrial policy 1
In the era of globalisation, there is widespread recognition that knowledge-based industries have become a significant contributor to economic growth and development. To be internationally competitive in a global economy requires the creation of distinctive assets such as knowledge, skills, innovation and creativity.
Knowledge has become an internationally recognized factor of production with the new form of capital being the capacity to generate, assimilate, disseminate and effectively use knowledge. Because knowledge forms the basis of technological progress, innovation and the enhancement of human capital, knowledge is recognized as a significant contributor to economic growth and development.
In this report, the meaning of liberalisation in the air transport sector is discussed and the difference between deregulation and liberalisation is highlighted. Liberalisation entails a progressive opening up of a market with state control enacted over the process, while some amount of regulation may be required to ensure that market forces operate effectively and that some rules are followed in the process of air transport. The government has a key role to play in developing and implementing a transparent, non-discriminatory framework that facilitates competition, expands airport capacity and contains anti-trust laws.
The Motor Industry Development Program (MIDP) is widely regarded as a major success of South Africa's post-apartheid trade and industrial policies. The program was introduced in 1995, has been modified and/or extended several times, and is currently scheduled to continue until 2012. A DTI-funded review, the third since the programs inception, is now under way and is considering further adjustments to and possible extensions of the program after 2012. At the same time high-level discussions are under way in several ministries and agencies about future industrial policy strategies for South Africa. The MIDP's success makes it an obvious model for new approaches to industrial policy, and in particular for increased emphasis on sectoral strategies and interventions.
Improving commuter rail service delivery is a high-priority programme of the Department of Transport (DOT). Faced with a failing business, the DOT has launched a reform programme for commuter rail, foreseeing increased public investment and possibly an extended role for the private sector. The object of this working paper is to contribute to the emergence of a robust commuter rail reform programme that is built on sound transport principles. It presents a model for understanding the appropriate role and extent of public transport and the harnessing of the private sector to complement government-led reform.
Commuter rail services provide mass transport for the poorest category of commuters, providing 458-million passenger journeys in 2003. However, the effectiveness of the R2.5-billon spent on the service currently is in doubt. The state of the assets and the quality and extent of services are in decline, approaching a critical state. Dissatisfaction, accompanied by outbursts of public anger, is rising because of slow delivery by government on promised improvements in living and economic conditions of the poor who constitute the majority of our population.
Government has to find sustainable ways to improve performance and increase capital spending on infrastructure and rolling stock. It has recognised the urgent need to replace the current dysfunctional industry structure and has acted by launching a process to merge commuter and passenger rail assets into a single entity, PAXCo, under the control of the DOT.
A technical planning team has begun to develop a business plan for PAXCo. It envisages three phases managed retreat and stabilisation, recovery, and service development and growth. The structures of government, management and supporting institutions have to be equipped to manage the fallout of a situation that will worsen before it gets better. This paper provides an analysis of the situation and proposes a basic model for the successful and sustainable delivery of commuter rail services.
The study applies an augmented gravity equation to South Africa's exports of motor vehicles, parts & accessories (SIC 381-383) to 76 countries over the period 1994 to 2003. The study employs a dynamic panel data model to estimate long-run and short-run coefficients. First, it is shown that it takes about 16 months for exports to adjust. Second, a number of variables, namely, importer income, population, exchange rate, distance, free trade agreements are important determinants of bilateral trade flows for motor vehicles, parts & accessories. Third, the gravity model is solved stochastically to determine South Africa's optimistic, pessimistic and average potential exports to the 76 countries. Finally, estimates of the degree of variability of average potential exports are provided, which show that South Africa's trade with Germany, the United Kingdom and the United States have low variability.
This strategy document endeavours to analyse the South African automotive assembly and components industry's major market and production trends and dynamics as a mechanism for identifying current industry constraints and opportunities/challenges. It is comprised of six sections.
Section 1 provides an overview of the sector's major trends as gleaned from TIPS data, whilst Section 2 reviews the sector's structure in respect of numerous criteria. In Section 3 market trends and competitiveness related issues are examined, with Section 4 then exploring the government policy framework in which the industry operates. Section 5 attempts to synthesise the constraints and opportunities/challenges confronting the sector. Finally Section 6 considers the policy implications arising from the analysis presented.
Draft report: Please do not quote or reference
Please Note: The views expressed in this paper represent those of the author, and not necessarily those of The Presidency or ComMark.
Mainstream economics and the Washington Consensus caution against industrial policies that target sectors, firms and regions. At the most they favour cross-sectoral policies which address generalised market failures. This paper analyses the success of an industry-specific policy, South Africa's Motor Industry Development Programme. It documents significant learning processes and shows the impact of the sector's growth on macroeconomic performance. It also addresses the "costs" of industrial policy and shows how well-designed scale-enhancing selective policies can provide domestic consumers with global-quality products at global-price levels, without subsidy from the exchequer. The Conclusion addresses the relevance of such selective policies to other developing economies, arguing the case for intelligent and appropriately crafted industrial policy.
The paper first outlines the history of industrial and trade policy in the industry. It highlights the significance of the transition from import-substitution policies to export promotion policies. It then provides an analytic exposition of the welfare costs and benefits of the current export complementation programme. We find that:
The study provides a general overview of current issues in the South African Distribution Sector. It is restricted to focussing on three industries namely, pharmaceutical distribution, distribution in the food industry and distribution in the automotive industry. In examining the behaviour of SA retail pharmacies it becomes apparent that retailers have attempted to obtain political support for regulations that bolster cartel structures and behaviour, and which discourages innovation in distribution. The outcome is perverse. Retailers do not achieve economies of scale, while consumers do not receive lower prices. In the SA food sector it was found that retail and wholesale industries are highly concentrated. The result is that retail and wholesale chains largely compete with one another on price and operate with low margins. Manufactures distribute direct to retail chains at the discretion of the chains. In examining the SA automotive industry it was found that the industry has developed from a highly protected, inward-focused industry to one with a marked export orientation. All South African light vehicle assemblers are either affiliates or licensees of foreign MNEs. The key factors that have assisted in integrating the industry into global networks have been the incentives provided under the motor industry development programme (MIDP), falling tariff protection that has increased import competition, and access to international markets through the parent company. The study also notes the increasing importance of E-commerce in the retail chain. The Internet mode of retail is used extensively in the South African distribution channel, however South Africa's lack of bandwidth development may be constraining South African retailers from effectively competing with foreign retailers.
Developments in the automotive industry have received considerable positive publicity over the last few years. Firstly, and most importantly, this is a consequence of rapid export expansion, initially of components, but latterly also of vehicles. Recently, for example, Toyota announced a R3.5 billion investment programme partly to provide for the export of Corollas to Australia. In April, Ford announced that they had invested R1 billion in their Eastern Cape engine plant and would be massively expanding production as the sole world supplier of the 1.3 litre RoCam engine.
A second positive development is that the automotive sector has been the recipient of considerable foreign investment including substantial fixed investment in assembly plants and component production. This has been at a time of weak market demand, falling import duties and the abolition of local content requirements. Thirdly, productivity has improved rapidly and there is substantial evidence of improvement in a range of benchmarks such as quality and operational shopfloor efficiency (Barnes and Kaplinsky, 2001). In June, for instance, the Pretoria BMW plant received the highest quality rating of any plant in the BMW group. Fourthly, employment has remained relatively stable under difficult circumstances. Relative to the rest of the manufacturing sector, the automotive industry's share of sales, value added and investment have all increased over the period 1993-2001. On the whole it appears that the industry has weathered import liberalisation rather well.
The above developments have been strongly influenced by the Motor Industry Development Programme (MIDP). As a result, the MIDP is frequently cited as a successful example of trade and industrial policy and even as an example for other sectors to follow. But rapid export growth does not, in itself, signify success as exports have been strongly supported by sector specific policy measures. The objective of this paper is to probe these developments in greater depth by examining the process of international integration under the MIDP in some detail, focusing on the export experience and its effects at the sub-sector and firm level. The paper also attempts to draw some conclusions as to the broader implications for trade and industrial policy.
The 'new economy'Â remains an ambiguous concept which means different things to different people (see, for example, Cohen et al. 2000; OECD, 2000a, b; Shapiro and Varian, 1999). We argue that the notion of a 'new economy'Â is closely tied to the economic transformations which are powered by the development and diffusion of information and communication technologies (ICTs), the rise of knowledge-based productivity and competitiveness, and the increasing dominance of global value chains incorporating global networks of capital, production and trade. The major factors spearheading the new information economy are modern microelectronics-based information technology, deregulation, privatisation, and liberalisation of trade and investment (Dicken, 1998; Gereffi, 2001). The notion of the new economy is thus firmly anchored in the new ideological environment that resulted from the collapse of statism, the crisis of welfarism and the contradictions of the developmental state (Held et al., 1999). The new economy originated mainly in the United States, but is spreading rapidly into Europe, Japan, Asia Pacific and in selected developing countries (Schiller, 1999).
The key point that needs to be emphasised is that organisational learning, knowledge management, digital networking and information processing are critical elements for firms operating in the new economy (Tuomi, 1999). According to Castells (2000: 77), the productivity and competitiveness of firms 'fundamentally depend on their capacity to generate, process, and apply efficiently knowledge-based information'Â. Ecommerce and the global networked business model are the archetypical expressions of the new economy (Castells, 2000; Hartman, Sifonis and Kador, 2000). It is important to remember, however, that the growth and development of the new economy has been highly uneven both within and between countries. The networking logic is based on asymmetrical interdependency, and is exclusionary locking out those individuals, groups, regions, sectors and countries lacking the required knowledge intensive skills and capacities. Moreover, the new economy is not about soft landings and smooth growth, rather it is about a structural shift in the global economy heralding transformation, risk and disruption for developing economies.
In South Africa, the critical importance of e-commerce and online electronic linkages in shaping the performance of domestic enterprises in the global, networked economy has recently come under the policymaking spotlight (Department of Communication, 2000; Department of Trade and Industry, 2001; Kaplan, 2000). This is not surprising since, in the new economy, ICTs play an increasingly important role in innovation, profit margins, output performance, value-added, employment creation and investment (Baily and Lawrence, 2001; ILO, 2001; OECD, 2000a, b). The South African development challenge is indeed a formidable one: high structural unemployment (39.5%); a sluggish economic growth rate (an average of only 2.1% annually between 1996-99; well below the population growth rate); large scale brain drain with the flight of knowledge intensive skills for Australasia, North America and Europe; high levels of poverty in the black population (53% of individuals fall below the poverty line of R301.70 per adult equivalent);2 and high inequality (a Gini coefficient of 0.593) (Harsch, 2001; www.statssa.gov.za; Woolard and Leibbrandt, 1999; World Bank, 2000).3 The challenge is one of how to promote and sustain development in such an environment. The DTI (2001), for example, argues that South Africa needs to follow an ICT-enabled, knowledge-based industrial development trajectory in order to achieve steady high rates of economic growth and structural change in the domestic economic system.