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Cablegate: The South African Motor Industry

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 PRETORIA 004515

SIPDIS

STATE PLEASE PASS USTR FOR PCOLEMAN
COMMERCE FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND

E.O. 12958: N/A
TAGS: EINV EIND ETRD SF
SUBJECT: The South African Motor Industry


1. (U) Summary: In 1995, the Department of Trade and Industry
(DTI) introduced the South African Motor Industry Development
Program (MIDP) to promote production and exports of locally
produced vehicles. The DTI recently announced that between
2005-2006 it would review the MIDP as part of a long-term
strategy aimed at the continued growth of the industry. Since
introduction of the MIDP, industry exports have grown at an
annual rate of 33%, South Africa has become known as a high-
quality niche producer, and a number of international companies
have expanded or located production plants here. Nevertheless,
South Africa remains a fringe player in global markets.
Exports account for just 0.20% of global demand, and domestic
demand accounts for only 0.70% of global production. South
Africa wants to increase its share of global production so as
to become a global player. In December 2002, the government
extended the MIDP to 2012, but there are doubts about whether
it can or should retain its current form until then. End
Summary.

The Motor Industry Development Program
--------------------------------------
2. (U) In 1995, the Department of Trade and Industry introduced
the MIDP to rejuvenate the industry by promoting the local
manufacture and export of vehicles. At the heart of the MIDP
is an import-export formula that rewards exports with import
duty credits. Companies get a rebate on import tariffs equal
to 100% of the local content value of their exports. This is
supposed to be phased down to 70% in 2009. Meanwhile,
protective import tariffs are supposed to be phased down from
40% to 30% in 2007, and 25% in 2012 (completely knocked down
components from 30% to 25% in 2007, and 20% in 2012). Trade
rivals describe the MIDP as an export incentive, and question
whether it contravenes World Trade Organization rules.
Australia, whose own motor industry strategy was partly the
model for the MIDP, has been one of the strongest critics.
South African and Australian officials have held several rounds
of discussions on the MIDP. Following the round held in
Canberra on August 27, 2004, both sides agreed to cooperate
during the upcoming review of the MIDP. Australia will share
its experience.

3. (U) Prior to the initiation of the MIDP, South Africa's
motor manufacturing industry was in the doldrums. Vehicle
exports numbered only 15,760 units, or 4% of local production.
From 1996 to 2002, under the MIDP, exports grew at an average
of 33% a year. In 2002, they represented 31% of total
production. Exports have since leveled off at about 125,000
annual units because of the strength of the rand. The National
Association of Automobile Manufacturers of South Africa
(NAAMSA) expects export growth to resume its 30% growth
trajectory in 2005.

The Motor Industry
------------------
4. (U) The South African motor industry comprises manufacturers
of whole vehicles as well as parts, plus retailers and after-
sale maintenance service providers. Of nineteen major
companies, eight are larger manufacturers that produce light
and heavy vehicles, and eight are smaller specialist
manufacturers that produce commercial/heavy vehicles and
components.

5. (U) In 2003, total local vehicle production was 421,300
units, and imports were 87,900 units. Exports totaled 126,000
units (not including sales to the SACU countries), consisting
of 114,900 cars and 12,000 light and heavy commercial vehicles,
and account for 0.2% of global demand. NAAMSA projects 2004
domestic demand to increase by 13%, and Tony Twine, an
independent industry analyst from Econometrix, thinks that
total vehicle production could reach a 20-year high of 465,000
units for 2004, and grow by a further 13% in 2005.

6. (U) The industry is important to South Africa as a revenue
generator, foreign exchange earner, investor, and employer. On
the strength of exports, the industry has increased its
contribution to GDP from 4.9% in 1999 to 6.6% in 2003. In
2003, the industry invested $350 million in the economy. It
earned $22 billion in income from domestic activities, $3
billion from built-up vehicle exports, and $3.5 billion from
component exports. Fuel industry income (net of taxes) added
another $14 billion. Employment in the industry exceeded
300,000, with the manufacturing and retail sectors employing
112,000 and 194,000, respectively.

Niche Player
------------
7. (U) According to Twine, speaking to a breakfast meeting in
Johannesburg on September 9, the South African motor industry
is not a mass producer of vehicles or components. Rather, it
is a competitive niche producer of certain vehicle models and
specialized components. There is growing international
reliance on South Africa to produce cars and commercial
vehicles for right-hand-drive countries, engines and components
for specific cars such as the VW Golf, and specific models such
as the BMW 300 series and the C-class Mercedes Benz for export.

8. (U) Twine said that he did not believe that the South
African motor industry could establish a "home-grown" industry.
There was too much global competition and excess capacity for
such a strategy to succeed. However, he felt that South Africa
was on the way to becoming a more important niche player.
Future success depended on the ability of local industry to
navigate a competitive course by capitalizing on new niche
markets (such as hybrid vehicles) and new technology (such as
fuel cells), which offered opportunities for growth through
innovation. Twine reckoned that South Africa would have to
produce over 2 million vehicles annually (roughly 4% of world
production) to become a global player -- even as a niche
producer. He estimated that South Africa was more than 10% of
the way to reaching this goal.

South Africa as an Investment Location
--------------------------------------
9. (U) Twine believes that international motor companies were
attracted to South Africa for a number of reasons: 1) South
Africa's relatively advanced economy and infrastructure were
conducive to supporting a sophisticated, mature industry; 2)
the availability of a sufficiently skilled work force; 3) an
existing local supply and support services industry 4) a
comparative advantage in raw material supply; 5) an emerging
market and the potential to grow with the black middle class in
South Africa and elsewhere in sub-Saharan Africa. He noted
that while the black middle class market-share had increased to
31% in South Africa, other sub-Saharan markets had not yet
materialized. Currently, the Southern African Customs Union
(SACU) countries (which include South Africa, Botswana,
Namibia, Lesotho, and Swaziland) account for more than 70% of
the sub-Saharan market.

10. (U) On potential threats to the South African motor
industry, Twine thought that an economic slow-down in either
India or China would cause companies there to export excess
production to places like South Africa, where production costs
were twice as high. He pointed out that although local
industry was partially integrated into global manufacturing
networks, it was still a minor player, with most decisions made
in boardrooms overseas. This meant that South Africa was
especially vulnerable to a variety of external events.

11. (U) Twine cited possible government intervention in the
areas of Black Economic Empowerment (BEE) and pricing as a risk
factor for the industry that would negatively affect foreign
investors. For example, if BEE policies were to require
foreign-owned firms to sell equity to local BEE partners, those
local partners might have difficulty ponying up $30-50 million
for model retooling every five to seven years. This could mean
that foreign auto manufacturers might have to constantly search
for new BEE investors to maintain a minimum BEE share ratio.
To date, however, there is no BEE charter for the motor
industry, but it is in the works. Another sensitive point
would be if parent companies had to share the profits with
their new BEE partners, even after having incurred most of the
investment risks up front. Twine also noted labor hostility to
the industry as a negative factor, based as it is on union
misperception that the South African auto industry is vital to
multinational parent companies.

12. (U) DTI Director of BEE Partnerships Jeffrey Ndumo has
indicated that auto manufacturers will have latitude in
pursuing either enterprise charters or a sectoral charter. DTI
does not have a preference of either way. Ndumo said that if
the auto manufactures pursue a sectoral charter, DTI is
encouraging them to frame it as a set of broad guidelines that
would include the components market as well. Ndumo said DTI
was sensitive to the issue of selling equity for auto
manufactures and was encouraging them to find a "creative"
solution to satisfy equity requirements.

FRAZER

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