26 November 2009

Another Industrial Policy "Success" Story

Volkswagen South Africa (VWSA) has won a contract worth about R30 billion to export South African-made VW Polos over the next 6 years. The company's Managing Director, David Powels, says that 685 new jobs will created. This will be viewed in many quarters as an early success of the latest incarnation of South African government support for the motor industry (APDP, formerly known as MIDP).

Powels has been reported separately as saying that producing cars in SA is up to 40 percent more costly than in competitor locations in Asia and Europe. If that is the case, how did VWSA win this contract? The answer -- subsidies under MIDP, APDP and other government programs are expected to compensate for this cost differential.

Suppose that the cars to be exported under the contract are only 35 percent more costly to produce than in the next best location. If this is so, VWSA must be counting on government subsidies of at least R10.5 billion (35 percent of R30 billion, the value of the contract). Otherwise it would make no sense for VW to source the vehicles in South Africa.

What is the size of the subsidy per job? Based on the VWSA estimate of 685 new jobs, the expected subsidy is R15.3 million per job over the 6 years of the contract, or R2.55 million per job per year. This is 25 times higher than the average annual wage in manufacturing in South Africa (about R100,000). Quite a success!!