11 December 2009

Making a Mockery of Competitiveness

One of the few genuine innovations in South Africa's APDP, the motor industry support program that will replace the MIDP, is a requirement of a minimum scale of operations in order to qualify for the program's very generous financial benefits. Although the details of the program still have not been gazetted, we understand that in order to qualify vehicle assemblers will have to produce a minimum of 50,000 vehicles per year. The idea is to encourage international competitiveness by achieving some economies of scale in production.

The scheme does raise some questions.

1. Why is it necessary for the government to instruct global auto firms on efficient scales of production? (It is not; but under MIDP and APDP it is not necessary to be competitive in order to make big profits by producing in South Africa.)

2. Will production of 50,000 vehicles per year provide sufficient scale to compete with true international major league plants? (Generally not; competitive plants elsewhere produce at least 100,000 per year.)

3. And of course one might wonder how firms will try to get around the new requirement in order to continue to take advantage of the large subsidies made available by the government (and paid for through the "generosity" of South African vehicle consumers and taxpayers) without ramping up production.

But at least the new requirement appears to be a feint in the direction of encouraging some competitiveness on the part of the local industry.

An announcement by the government-operated East London Industrial Development Zone (ELIDZ) provides an answer to the third question. ELIDZ has told the press that it will soon announce the signing of several tenants in a new "multi-OEM assembly plant" it will build in the zone. What is the purpose of such a plant? To enable companies sharing the facility to produce at volumes of 10,000 vehicles per year, or even as low as just a few thousand and still qualify for the APDP benefits that are contingent on meeting the 50,000 per year volume target. It apparently will "work" as long as the total of all vehicles produced by all tenants reaches 50,000 per year.

How will this encourage increased competitiveness, the stated goal of the new policy? It will not. In fact it will simply replicate the highly inefficient pattern of small scale production of multiple models and other automotive products under one roof that was encouraged by protection in pre-MIDP days and by continued protection and MIDP benefits since then.