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Cablegate: South African Motor Industry Development Program Will Be

VZCZCXRO0634
PP RUEHDU RUEHJO
DE RUEHSA #3203/01 2161208
ZNR UUUUU ZZH
P 041208Z AUG 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC PRIORITY 4926
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHTN/AMCONSUL CAPE TOWN 3183
RUEHDU/AMCONSUL DURBAN 8020
RUEHJO/AMCONSUL JOHANNESBURG 5004

UNCLAS SECTION 01 OF 03 PRETORIA 003203

SIPDIS

DEPT FOR AF/S; AF/EPS; EB/TPP/MTA
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
TREASURY FOR CUSHMAN
DEPT PASS USTR FOR PCOLEMAN

SIPDIS

E.O. 12958: N/A
TAGS: ETRD ECON EINV AGOA USTR SF
SUBJECT: SOUTH AFRICAN MOTOR INDUSTRY DEVELOPMENT PROGRAM WILL BE
EXTENDED BEYOND 2012


1. (U) Summary. The Department of Trade and Industry (DTI)
announced that the Motor Industry Development Program (MIDP) will be
sustained beyond 2012. According to Tshediso Matona, Director
General for the Department of Trade and Industry, a post-2012 MIDP
would take into account WTO rules with respect to government support
for industries, address vehicle affordability and the extent to
which tariff protection impacts on affordability, as well as improve
employment in the vehicle manufacturing industry. Although widely
regarded as one of the most successful pieces of post-apartheid
trade and industrial policy, the MIDP has been criticized for high
domestic car prices, poor job creation, and weakness in its global
trade rules. Yet, the local automotive industry called for
continued support after 2012 to ensure international
competitiveness. End Summary.

Review Process
--------------

2. (U) On July 24, 2006, Tshediso Matona announced that the MIDP
will be sustained beyond 2012. This came after local industry
voiced concern over ongoing uncertainties in the regulatory
environment while the MIDP review process was in progress. The DTI
has been studying a report on the review of the MIDP produces by
independent consultants, Blue-print International, for some months
now. According to Matona, the DTI is close to finalizing its
thoughts on how the program should progress. He indicated that a
post-2012 MIDP would take on an entirely new form.

3. (U) Matona explained that government will seek to build on the
successes of the MIDP, while modifying it to bring it more into line
with policy interventions in other parts of the world. Matona
emphasized that the post-2012 adjustments will take into account the
WTO rules regarding government support for industries. He mentioned
that the review will definitely address legitimate concerns about
vehicle affordability and the extent to which tariff protection
impacts on affordability. Moreover, government will look at a way
to improve employment in the motor industry during the current
review.

Background
----------

4. (U) The Department of Trade and Industry (DTI) implemented the
Motor Industry Development Programme (MIDP) with effect from
September 1, 1995. Since then the program has been extended twice
and was scheduled to expire in 2012. The MIDP is an import/export
complementation arrangement, whereby the local-content value of
components or built-up vehicles exported, earns credits that can be
used to rebate import duties on components and vehicles. The program
also made provision for a gradual reduction in import duties on both
vehicles and components. Import duties on vehicles and components
are currently at 32% and 26% respectively to reach 25% and 20%
respectively in 2012. The MIDP has as key objectives the
improvement of international competitiveness, vehicle affordability
in the domestic market as well as export and employment growth.

Successes
---------

5. (U) The MIDP is widely regarded as one of the most successful
pieces of post-apartheid trade and industrial policy introduced into
the South African economy. Moreover, government praised the MIDP
for pushing the vehicle sector into becoming a major contributor to
the economy and transforming a small, protected industry into a
competitive global player. The National Association of Automobile
Manufacturers of South Africa (Naamsa) supports the MIDP for its
successfully contribution towards the industry's integration into
global markets and making it a global source of high technology,
high quality automotive products at internationally competitive
prices.

Statistics
----------

6. (U) Statistics South Africa (StatsSA) data for 2005 shows that
the automotive industry is South Africa accounted for 30% of the
country's manufacturing output. According to Naamsa data, vehicle
exports grew from 15,764 units in 1995 to 139,912 units in 2005.
Vehicle exports as a percentage of total domestic production
increased from 4% in 1995 to 27% in 2005. Imports grew from about
27,289 units in 1995 to over 233,489 units in 2005. Component
exports have also grown from a negligible amount to more than R25
billion in 2005. Moreover, investment in the vehicle manufacturing

PRETORIA 00003203 002 OF 003


sector has grown from less than R1bn annually in 1995 to R3.6
billion in 2005, exceeding R2.0 billion in every year since 2001.

Criticisms
----------

7. (U) While most popular discussions focus on the MIDP's successes,
questions have been raised about some of its unintended impacts.
Critics argued that investment success has come on the back of
domestic consumers paying excessive prices for cars, neglecting a
stated objective of the MIDP. Canadian expert and professor at
Queen's University, Frank Flatters, in his study of the MIDP which
was funded by USAID and DFID, estimated that motor companies had
received almost R100 billion in duty rebates during the almost
eleven years the program has been running. According to his
analysis, this subsidy was paid for by domestic consumers of
vehicles in the form of restricted choice and higher prices.
Moreover, consumers subsidized not only vehicles produced for the
domestic market, but also those produced for export. Flatters said
the subsidy program was possible because of import duties of more
than 30% and a virtual ban on used car imports, which made car
prices much higher than necessary. Flatters recommended that the
review of the MIDP should include an economic cost-benefit analysis
conducted by an independent third party.

8. (U) A Competition Commission investigation into excessive pricing
in the South African new vehicle market, found that South African
car prices were on average 14% more expensive than in Europe. The
14% difference cost buyers of new cars an additional R17.5 billion
annually. The commission said it believed the high level of South
African car prices was mainly due to the MIDP, particularly high
tariffs on imported cars and components. Moreover, the report
stated that prices are to an extent based on import parity as prices
of locally manufactured vehicles were aligned with prices of
imported vehicles, adding that local manufacturers knew they could
not price above imported substitutes. The commission recommended a
decline in the tariff component of the MIDP. The motor industry,
supported by a study by industry specialists, has disputed these
claims.

9. (U) In addition, critics questioned if the benefits of the MIDP
have been spread wide enough. Flatters pointed out that in spite of
investment of more than R14 billion since 2000, the program has been
unsuccessful in creating job growth in vehicle assembly. Naamsa
data indicates that employment in motor vehicle manufacturing
declined by 17% during the first five years the MIDP was in
operation, after which it stabilized for the period 2000 to 2004,
and showed growth for the first time in 2005. Employment in the
components production has grown by a modest 12% since 2000.
According to Flatters the MIDP is an expensive scheme that boosts
the profits of the automotive manufacturers without stimulating job
creation. Moreover, automotive production in South Africa is biased
towards capital intensive sectors, and not towards using lesser
skilled labor.

10. (U) Furthermore, analysts regard the MIDP as unsustainable in
terms of global trade rules. Dr Justin Barnes, Managing Director of
Benchmarking and Manufacturing Analysts, pointed out that the
current export subsidies provided by the MIDP are not WTO compliant.
According to Barnes, South Africa could consider a program similar
to the WTO-compliant Australian Automotive competitiveness and
Investment Scheme (ACIS), which was implemented in 2000. According
to this program, duty rebates are still on offer, but tied to
production volumes and development criteria, such as skills
development and environmental aspects. Flatters noted that WTO
compliance is an issue that should be addressed in the current MIDP
review.

11. (U) The International Monetary Fund (IMF) in its latest annual
review of the SA economy, criticized the MIDP as a complicated
incentive scheme, with unclear costs, designed only to make the
local motor industry internationally competitive. Furthermore, the
IMF argued that local content programs in the motor industry tend to
raise cost and prices, reduce competition and generate few, if any
benefits for employment. Senior Financial Officers of major motor
manufacturing firms have in the past complained about the MIDP's
highly complex and costly administration.

MIDP Support
------------

12. (U) Nevertheless, the local automotive industry has stated that
it requires continued support after 2012 to ensure international

PRETORIA 00003203 003 OF 003


competitiveness. Manufacturers not only want the MIDP to be
extended beyond 2012 but also for it to be WTO compliant. Brand
Pretorious, chairman of McCarthy holding, said the motor industry is
far too valuable for South Africa as a job creator and earner of
foreign reserves, not to be supported by government. Furthermore,
manufacturers have already made long-term investments in South
Africa.

BOST

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