Manufacturing incentive for the motoring industry: the one model of success
Introduction to the automotive landscape
South Africa’s automotive industry continues to follow a robust recovery despite the fact that 2022 was a year characterised by multinational and international economic headwinds.
According to the National Association of Automobile Manufacturers of South Africa (NAAMSA), South Africa’s new vehicle sales statistics, which are regarded as good indicators of the economy’s performance, show a year-on-year increase of 13.9% amid the despondency of global supply chain disruptions along with the impact of the devastating KwaZulu-Natal (KZN) floods, rising interest rates, elevated inflation, record-high fuel prices, as well as frequent load shedding.
Contribution of the automotive industry to the South African economy
According to NAAMSA’s latest media release, the automotive sector plays an instrumental role in South Africa’s economy by contributing 4.3% to South Africa’s gross domestic product (GDP) and it accounts for 17.3% of the country’s manufacturing output. South Africa has a well-established production base for products to be exported on a global scale with vehicle exports yielding an increase of 17,9% in 2022 compared to the previous year. The automotive manufacturing segment improves the country’s unemployment crisis and makes an essential contribution to the upliftment of society. NAAMSA also notes that the automotive sector currently employs approximately 110 000 people across various tiers of activity. In combination with its strong multiplier effect, it is responsible for 457 000 jobs across the economy’s formal sector.
The automotive sector has a key role to play in localisation which could lead to increased resilience of local supply chains by reducing their dependency on foreign suppliers, which makes these stakeholders less vulnerable to global supply chain challenges.
Need for incentives in this sector
The automotive industry continues to be a significant focus of industrialisation efforts; consequently, continued support is vital to help revitalise and restore supply chain disruptions. The automotive industry requires government assistance to meet the South African Automotive Masterplan (SAAM) objectives of doubling its annual production and increasing localisation from 39% to 60% by 2035. According to the 2021/2022 Department of Trade, Industry and Competition (dtic) annual report, the automotive master plan attracted an estimated R70 billion in investments and the dtic disbursed an allocated R4.4 billion to beneficiaries in the automotive, black industrialist and agro-processing sectors.
Incentives in the form of cash grants and import duty rebates are able to materially offset the large upfront investments required by manufacturing facilities to mitigate risks and/or to reduce future operating costs, thus lowering the cost of doing business. The automotive sector is one of the largest manufacturing sectors in the country’s economy and a key player in South Africa’s industrialisation landscape. Therefore, it is important for government to provide continued support to the industry and its broader value chain to ensure ongoing growth of this sector.
Overview of Automotive Investment Scheme (AIS)
The automotive sector is a coordinated effort between Government, industry bodies (such as NAAMSA and NAACAM), original equipment manufacturers (OEMs) and component manufacturers; it is the one manufacturing sector which still shows signs of life. This achievement is mainly supported by the success of the manufacturing incentive, Automotive Investment Scheme (AIS) administered by the dtic.
The South African government continues to provide support for an incentive programme aimed at achieving key industry objectives and targets outlined in SAAM. The AIS is one of South Africa’s long-term plans to grow and develop the automotive industry by 2035 by boosting local vehicle production output, local procurement, employment creation, transformation, value addition, and export promotion through investment into new, upgraded and expanded automotive production facilities in the country.
The AIS provides a non-taxable reimbursive cash grant between 20% to 30% in respect of qualifying investment in manufacturing assets; 20% towards OEMs; 25% towards component and tooling manufacturers; and 30% towards New Energy Vehicle (NEVs), energy efficient (EE) vehicles and component manufacturers. Component manufacturers and tooling companies can further receive a benefit of up to R1 million for costs incurred on activities to enhance its competitiveness. Examples include costs incurred to introduce new processes, improving product efficiency or production techniques, obtaining a certification or accreditation, skills development, energy or resource efficiency improvements and/or acquisition of IT systems. The incentive scheme incentivises manufacturers and, as a result, benefits smaller players in the supply chain by adding to the competitiveness of the automotive sector as a whole.
The incentive administration process is efficiently managed by the dtic AIS department. The effectiveness of the AIS administration process encourages investor confidence by providing more certainty to investors in comparison to some of the other programmes with stringent criteria and longer lead times. Project claims must be submitted according to the milestones specified in the approval letter issued by the dtic. Owing to the successful management of the programme, grant payments are disbursed up to three months after asset verifications have been conducted. Claims are disbursed over three years, subject to the project(s) having met the mandatory requirements and economic benefit criteria where applicable.
A key priority focus of the South African government in 2023 is to finalise the support framework for NEVs. This is also supported by the amended AIS guidelines published by the dtic. These guidelines have widened the scope of support to include NEV manufacturers and EE vehicle manufacturers in an effort to take major leaps towards green transportation in South Africa.
Other industry-specific support measures
Government provides other industry-specific support measures to incentivise local manufacture such as the revised Automotive Production Development Programme: Phase 2 (APDP2) regulations, which are legislated in Schedule No.3 of the Customs and Excise Act. The recently revised APDP2 was issued in 2021 and will run to 2035.
The programme provides import duty rebates for the duties raised by the South African Revenue Service (SARS) on the importation of vehicles and components for completely knock-down (CKD) assembly. The APDP2 forms part of South Africa’s masterplan to significantly grow automotive production volumes and to substantially grow value addition in the country.
The revised volume assembly localisation allowance (VALA) and the production incentive (PI) under the new APDP2 is, according to global standards, still strong with the support of a lucrative cash incentive, namely the AIS, to supplement the changes.
Conclusion
Ongoing support measures for the automotive industry is a necessary tool for the advancement of South Africa’s economic development strategy. It promotes current investments in the automotive industry and contributes to the growth of the entire motor vehicle value chain which, in turn, accelerates the economic growth of the country. The one model of success, AIS, has proven to encourage local investment, strengthen, and diversify the sector while increasing local production volumes and sustaining employment levels. Commitment from Government to reach 2035 targets demonstrates long-term support for the growth of the automotive industry. The incentives should help attract new entrants into the market and increase investor confidence despite the present economic conditions. The automotive support package in South Africa is a model that demonstrates success in attracting investment and increasing exports which have benefited the industry significantly. The model showcases the economic rewards of industry support measures and highlights the need for the South African Government to focus on offering targeted industry support measures. Our view is that the South African Government could learn from the implementation of industry-specific support measures for the automotive sector and consider implementing similar targeted support measures for other sectors in the economy.
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