Revised Industrial Policy Action Plan: Public hearings Day 5

Meeting report

Revised Industrial Policy Action Plan (IPAP2): Public Hearings
National Association of Automotive Component and Allied Manufacturers (NAACAM) submission
Mr Steward Jennings, Chief Executive Officer, PG Group, gave the submission on behalf of the National Association of Automotive Component and Allied Manufacturers (NAACAM). He told the Committee that all local vehicle assemblers like BMW, Mercedes Benz, VW, Ford, General Motors, Nissan/Renault and Toyota were now 100% foreign-owned subsidiaries. All the other makes of vehicles were imported. The majority of the Tier 1 suppliers were multi-national companies or Joint Ventures. There were, however, a few locally owned suppliers. The majority of the upstream suppliers were locally owned. In the last twelve months the industry had retrenched 29 000 workers. However, it was projected that 176 000 people in assembly would be employed if production of vehicles reached R1 million.

He gave a summary of the motor industry performance from 1995 to 2009. Over these years, the industry recorded a 55% productivity increase. This meant a substantial increase in the number of vehicles produced per employee, from less than 10 vehicles per annum, to 15,5% vehicles per annum. There had been a significant improvement in quality and productivity. Progressive economies of scale with local platforms were down from 42 to 18. Significant rationalisation and economies of scale production had reduced complexity for domestic component suppliers, and achieved enhanced efficiencies.

Average volume per model produced increased from 9000 units to 29 300. New vehicle prices were below inflation for 11 out of 14 years, up to 2008. Above inflation increases in 2009 were related to a weaker currency. There was exceptional growth in industry exports, and until 2007 there was a significant growth in the domestic market. Over the past two years there was a massive drop in local sales and exports. The trade deficit narrowed substantially during 2008 and 2009, due to trade export programmes. It was also noted that the country had seen significant improvement in car production since 1998. This was because of stringent inspection processes that were better than those of Europe.

Mr Jennings set out the import duties and the Motor Industry Development Programme (MIDP). He noted that the total exports had increased by 15% since 1995. Vehicle assemblers could import components totaling 27% of the ex-works vehicle price, free of duty. The Original Equipment Manufacturers (OEMs) earned credits on vehicle and parts exports, which could only be used by offsetting duties on imported vehicles and components. The OEMs earned an investment incentive which was also in the form of a duty credit. As a result, in 2009 OEMs paid average duty of only 0,2% on components, and 1,1% on vehicles imported.

Challenges to the industry included the fact that economies of scale increased on vehicles and components. There was excess capacity of many global suppliers, and they controlled the industry from offshore. Electricity costs increased considerably for some component suppliers. The stronger currency had two negative effects: it encouraged imports, and restricted exports.

Opportunities were seen in the introduction of certain new suppliers through Joint Ventures, and acquisition of existing suppliers would be fast-tracked. New proposals would be forwarded to the government to enable increased local content. For example, investigations were being done into a preferential funding programme for tooling, development, and validation of testing costs, and more supplier-specific incentives. There was also a NAACAM supplier development initiative

In order for the South African Auto Manufacturing Industry to survive, Mr Jennings said that a number of points must be taken into consideration. The average production volumes per model should increase to 50 000 per annum. Local content needed to increase from 40% to 70%. Supplier competitiveness had to improve within the next two to three years. A massive investment was needed in training and skills development at all levels. He recommended that a skilled immigration programme should be set up. Competitive currency was required, and productivity had to improve dramatically from 20 cars to 30 cars per employee per annum. A major “industrialisation strategy” was required in the supply chain to increase manufacturing depth. The Policy Action Plan, and other entities, including the Industrial Development Corporation (IDC) would have to provide some support for the “industrialisation strategy”

Discussion
Prof B Turok (ANC) commented that the South Korean government supported the motor industry for five years, and now it was the world champion. He asked if the same had been comparatively done here in South Africa. He also wanted to know the view of the industry, if research and development should not be the long-term view, so that the country could produce its own cars.

Mr Jennings explained that any new entrant into the South African market had to relinquish 50% of ownership to the local company, as opposed to the situation in China, where their government required the new entrant to partner with a local company. Research and development should run the country when there was a significant vehicle demand. The industry could not produce when demand was declining. Part of the partnership initiative was that new entry-level vehicles were done in partnership. 50% shareholding went to the local company and it came with a crossover of the design. Part of the design was developed from the foreign country.

Mr S Marais (DA) asked what the core business of the industry was, because the country was not producing its own cars, but rather was assembling and selling. He enquired if the industry should not find a niche market. In relation to the comments about efficiency, where an employee would produce 30 cars per annum, he asked how much of that would be due to high efficiency of labour or high production of machinery, and what would its impact on employment would be.

Mr Jennings explained that in 1995 the country had exceeded the targets for vehicle export sales. This was the result of the motor vehicle development programme and the incentives derived from it. The benefit of that was that it brought component manufacturing in the industry to the country. The industry slipped on local content because of prerequisites when a new vehicle was launched. The government had to put a stamp of approval on local content. It was supposed to be 70%, but there was no monitoring on a continuous basis. Therefore, the industry would like to have assurance on a quarterly basis, so that the slip-up could be avoided. Furthermore, the converter industry – such as PMG Metal Group – had found a niche for this industry in precious metal. This had resulted in 30% of world markets now produced in South Africa. It was noted that South Africa had much of the raw material that went into the making of a car, and that was where the strength of component manufacturing lay. South Africa could not afford to lose component manufacturing. The industry needed to spend more time on beneficiation.  Specific niches could be produced but it was important to leverage the available raw material.

Mr B Radebe (ANC) wanted to know how the motor industry was going to narrow the gap between the highest paid worker and the floor worker. He noted that wages and salary rates in Thailand were 64% below average in South Africa.

Mr Jennings replied that the industry took a conscious decision to erode the wage gap. However, he noted there were structural issues that made people poor. These must be investigated. In South Africa, workers spent 30% of their wages on transport. In Thailand, wages were lower, but workers lived in hostels that were government-owned, and were transported to work by the government. Those were the kinds of structural issues the industry needed to address. The industry had also lost a good opportunity on the taxi recapitalisation programme where it could have focused on passenger carriers.

The Chairperson asked NAACAM to respond in writing to some issues it could not answer because of time constraints.

EThekwini Submission
Mr Malcolm Joshua, Head of City Fleet: EThekwini Municipality, maintained that the provision of vehicles and plant played a vital role in all municipal activities, and without a reliable and cost effective fleet, service delivery would be compromised. The EThekwini Municipality had embarked on a standardisation policy on their vehicle, bus and plant fleets.

The process of standardisation had had major benefits for the municipality. The municipality vehicle availability averaged 96%. Manufacturers trained artisans, and where necessary, the municipality had purchased specialised tool requirements. This meant the vehicles were maintained to the correct standards and that the downtime of the vehicle was minimised.

Vehicle prices had been significantly lower than previously experienced. Spare parts contracts had been negotiated through the vehicle manufacturers. This resulted in significant cost savings on spare parts. Manufacturers had assisted in training drivers and that reduced repairs from misuse. This was achieved because of the large number of vehicles purchased regularly from the same suppliers.

This standardisation policy dictated that all vehicles purchased would be manufactured in South Africa, and approximately 98% of the municipality’s fleet was made in South Africa. The last tender for buses was awarded in March 2009. 66 buses were purchased, and they were assembled locally. In terms of the municipality score-card, which included aspects such as equity ownership, management control, employment equity and skills development, the municipality requested that a participation goal of a minimum of 10% of the contract value must be South African content.

Mr Joshua summarized that the Fleet Standardisation Policy, replacement policy and five-year replacement model all interlinked with each other.

Discussion
Ms C Kotsi (COPE) commended the EThekwini Municipality for being IPAP compliant, but she wanted to know how green its buses were, because that was the emphasis of IPAP.

Mr Joshua responded the buses were green friendly. The Municipality had bought hybrid vehicles. A truck show for all the municipalities was held, so that those interested could see how the buses functioned.

Prof Turok asked how the municipality managed to stop hidden fraud.

Mr Joshua said the municipality had not yet experienced tender fraud.

Mr Radebe enquired as to the number of artisans the municipality had trained, and if it had the National Industrial Participation Programme.

Mr Joshua explained that the municipality trained 120 artisans. It also had a programme that focused on recognition of prior learning. There were 20 learnership programmes in place. The only policy they did not have was the National Industrial Participation Programme.

Mr Marais enquired if the fleet was manufactured and assembled in South Africa, and why the percentage for local content was 10%.

Mr Joshua replied that the fleet was bought through South African manufacturing companies like Toyota, Isuzu, and VW. The 10% issue was beyond their employment equity. 70% of the chassis were assembled locally, and 80% of the bodywork was done in South Africa.

City of Cape Town Presentation
Mr John Martheze, Project Manager: Integrated Rapid Transit Project Office, City of Cape Town said that the City of Cape Town (CCT) was responding to its Integrated Rapid Transport project with respect to the IPAP Transport Equipment and Metal Fabrication and Automotives and Components Sectors. The estimated cost of Phase 1A of the City of Cape Town Integrated Rapid Transport (IRT) project was R4, 2 billion. Capital works amounted to some R3, 5 billion.

The current implementation programme was scheduled to run from October 2008 to September 2013. The implementation programme was, however, to be accelerated, given the increased funding allocations as published in terms of the Division of Revenue Act (DORA). This programme adjustment was currently under way.

In respect of the IRT vehicles, the Phase 1A estimated costs were standing at R509 million, excluding VAT. This would include 92 trunk service vehicles of 18 and 12 metres respectively, and 198 feeder service vehicles of 8.8 metres. The Station Top Structures were estimated to cost, in Phase 1A, R291 million, excluding VAT. They comprised 69 station structures constructed of steel, aluminium and glass. These were to be manufactured locally and assembled onsite, using local materials. It was envisaged this might include a limited quantity of imported components. The City of Cape Town had awarded a contract for the manufacture and supply of IRT Station structures to the value of R101, 5 million.

The cost of the Phase 1A IRT Stops amounted to R165 million, excluding VAT. 551 steel structures were to be manufactured locally using locally supplied materials. The contracts for the Stops were still to be awarded.

The balance of the works included roadways, structures, lighting, and sidewalks. The majority of the trunk line busway was constructed using a continuously reinforced concrete (CRC) pavement. The value of the reinforcing steel in the CRC pavements amounted to approximately 1% of total contract value.

Mr Martheze outlined the progress. CCT had awarded a contract for the supply of 43 trunk service vehicles to the value of R101, 5 million. The tendering process was undertaken in terms of the Supply Chain Management Policy of CCT. A call for tenders was advertised publicly. The tender documents included notice to tenderers regarding the requirements of the national Industrial Participation Programme. Supporting documentation was provided in the tender documents. Furthermore, the award of the tender was based on a total score made up of a number of factors, including points for local content.

In terms of the contractors, historically disadvantaged individuals were attending to 10% of the contracts. The successful contractors had commenced with manufacturing, and prototypes of the 18m and 12m vehicles were complete. With regard to chassis fabrication and assembly, the components would be imported, and the local assembly of the 12m vehicle chassis was under way. Importation was felt to be necessary due to timeframes not permitting local assembly before the 2010 World Cup event for which these vehicles were needed. Body fabrication and assembly was being undertaken in South Africa, with steel, fibreglass and glass components being sourced locally. The value of content manufactured locally was approximately 60%.

Discussion
Prof Turok wanted to know if all local government agencies talked to each other, and how the City of Cape Town had dealt with corruption.

Mr Martheze elaborated that consultants worked across cities, but cooperation was not close enough. As stakeholders CCT was trying hard to improve on it. He said the City of Cape Town had a robust policy on corruption.

Ms Kotsi asked why there was no local content on the passenger carriers. She asked how many jobs the municipality had created from this project, pointing out that IPAP was about sustainable jobs.

Mr Martheze replied that in terms of smaller passenger carriers the municipality did not have local content, but for the larger ones there was. Further, in order to create jobs, CCT first hade to transform the taxi industry to conform to the Bus Rapid Transit system.

Mr Marais commented that tender documents would have to look at local content. He asked what the requirements would be for trucks and buses in years to come.

Mr Martheze stated that measures were in place to develop a robust procurement system and processes that would look at the production of local content.

Mr Radebe enquired about the mechanisms that were in place to fight import fronting.

Mr Martheze said the tender documents had terms and conditions, and that the tender committee evaluated submissions.

Dr Edward Wessels submission
Dr Edward Wessels, making a private submission, explained that the high unemployment rate in South Africa was no accident. It was a consequence of the industrial and monetary policies maintained in the apartheid era. Although some of the continuing consequences of these policies had been recognised and addressed in IPAP2, they had not yet been fully reversed.

During the second half of the 20^th century, the Industrial Development Corporation (IDC) systematically invested in first-stage mineral processing industries that manufactured industrial raw materials such as steel, aluminium, industrial chemicals, paper, as well as chemicals for the manufacture of fertilizers. The investments were dominated by export oriented resources projects.

To make its investments profitable, and to subsidise the exports of the companies in which it had invested, the IDC used its influence with government to impose import tariffs and, for a time, direct import controls on its products. These allowed the IDC to raise the South African domestic prices above international levels, and above the price levels at which they themselves were exporting. As the IDC was raising the domestic cost of industrial raw materials, the South African Reserve Bank (SARB) followed a strong rand policy which squeezed the revenues of companies that exported or competed with imports. As a result, the SARB used all the foreign currency that South Africa earned to keep the rand as strong as it could.

Squeezed between the high domestic prices of industrial raw materials, resulting from the industrial policies of the apartheid government, and low rand export prices as a result of the monetary policies of the SARB, entire South African industries had disappeared. The South African clothing industry had been decimated and the South African defence industry was under pressure.

Dr Wessels said that it was often stated that the poor performance of South Africa in the export of manufactured goods, together with the resultant unemployment and poverty, was the result of a lack of technology combined with poor productivity and work ethic. However, the success of South Africa in the defence industry illustrated that the country did not lack technological skills. During the 1980s and 1990s South Africa not only developed the best artillery systems in the world, but also a combat helicopter that was globally competitive.

Industrial learning required not only the training of individual employees, at every level from factory floor to management, but a process in which the entire company learned to function effectively as a unit. Each company required a culture that made it competitive in the market. This depended on the nature of the product and may involve a culture in which quality of workmanship was valued or in which new ways of doing things were encouraged. Suppliers often learned from their customers, by employing staff trained by their competitors or by forming alliances with established partners.

Developed economies possessed an established legacy of such skills and knowledge. Developing countries had to create conditions in which both companies and individuals could acquire industrial skills. Asian countries had done this. As their companies had established themselves and workers had acquired skills, wages in Asian companies had risen and poverty levels had decreased. South Africa was fortunate enough to have a valuable mineral endowment. There were trade-offs involved in the use of this endowment. It could be used to grow labour-intensive industries in which companies and individuals could acquire industrial skills, or it could be used by means of a strong currency to boost imports that were consumed by people with a reliable rand income. South Africa could not use low wages as a developmental path, nor could it avoid social grants as a means of dealing with the consequences of the apartheid economic and monetary policies. However, the country could deploy the fruits of its mineral endowment more effectively, and it could employ a policy of export encouragement through undervaluation of the currency.

Dr Wessels felt that the problem of restructuring the economy could be solved more effectively by using competition policy to prohibit the systematic discrimination that was practiced by companies who exported at lower prices than the prices they charged to South African customers. Where manufacturers of semi-processed inputs to labour-intensive industries did not export, the import tariffs on the inputs should be removed, so that these inputs could be imported at internationally competitive prices. This was relevant to the clothing industry, which was one of the most labour-intensive industries of all. A problem that would have to be faced, if such a policy was adopted, was that some of the large capital-intensive South African suppliers of industrial raw materials might not survive. An additional measure that could assist in the use of mineral endowment of South Africa, to create a more labour-absorbing growth path, would be either to convert a part of the existing tax burden on the mining industry into an export tax or a beneficiation rebate on minerals utilised within the South African industry.

Many of the countries against whom South Africa was competing in the world market used export taxes to lower the cost of input to their labour intensive industries. All of these suggestions could be implemented without reducing wages or social grants.

The reason why the volume of trade in the rand was so high and volatile was that, subsequent to the freeing of the capital account, South Africa had become a paradise of currency speculators. The South African authorities should admit that the freeing of the capital account was premature and that measures should be taken to curb speculation in the rand. There were many countries that introduced measures to curb currency speculation. These should be studied with a view to introducing similar measures in South Africa. A transition to a competitive exchange rate regime would require an adjustment of relative prices in the domestic economy, to a level where domestic production and exports of manufactured goods were encouraged. This may require so-called “sterilised intervention” by the Reserve Bank through its open market activities, such as the sale of bonds. An alternative was to limit the ability of private banks, to increase the money supply by raising the reserve ratio that they were required to maintain.

Discussion
Prof B Turok (ANC) commented that the role of the State prior to 1994 was puzzling, because it looked as if the National Party government had deliberate moves to use all kinds of resources to raise taxes and to make sure that money was available. He wanted to know what could be done now so that the State could achieve the same result. Further, he asked why local economists had not introduced social benefit costs, and had failed to do a total analysis of costs. Lastly, he wanted to know what weighting should be given to exports and domestic economy, because the country needed to do both.

Dr Wessels responded that the State, prior to 1994, had spent a lot of money in developing nuclear power and weapons. At the same time it managed to micro-manage the economy effectively in order to achieve its goals, such as the establishment of State Owned Enterprises like SASOL.  High import duties on cotton, for example, were imposed. But in some instances it wasted money. The focus at that time was on resource-oriented exports. Those industries were highly capital intensive.

On the issue of social benefit analysis, South African economists were not technically-oriented, but macro-economic oriented and the field was dominated by bank economists. There was little communication between business and professional economists. As a result, little attention had been focused on social cost benefit analysis.

On the issue of exports versus domestic economies, he elaborated that exports gave access to large markets. But if confined to the local market, it would be difficult for a country to achieve high volumes. Therefore, it was difficult to predict what might be successful or not. The emphasis, rather, should be on creating conditions in which entrepreneurs could succeed.

Mr P van der Westhuizen (DA) wanted to know comments from Dr Wessels about the benefits of imports that benefited the wider community of the country, as against exports that benefited those in the export manufacturing sector.

Dr Wessels replied that it was a question of a number of people employed against the costs of goods they bought.

The Chairperson asked for the opinion of Dr Wessels on the issue of capital finance. She wanted to know if Development Finance Institutions might be able to effectively serve capital finance, with the right leveraging from government, that supplied guaranteed support in the differential between affordable interest rates and what was charged commercially.

Prof B Turok asked if the private sector was broadly willing to invest.

To both questions, Dr Wessels explained the private sector was not willing to invest. Part of the reason was that the banks, many years ago, took a deliberate decision they would loan on the basis of a document. In the United Kingdom there was the concept of a loan officer who would evaluate a business on its merit, by evaluating the viability of an investment. In South Africa, banks required an individual to mortgage his assets. The IDC operated on that basis. South African banks and development finance institutions did not have the capacity as evaluators.

The meeting was adjourned.