09 April 2013

SA's Motor Industry—Once Again

The release of the dti's latest Industrial Policy Action Plan (IPAP) has put the motor industry in the spotlight once again. The dti continues to claim the industry as its greatest industrial policy success. However a recent news report draws attention to IPAP data showing that this sector alone accounts for about 40 percent of the country's trade deficit, and asks what this means for the success of the dti's policies. If government support has created an internationally competitive motor industry, as claimed, why does it show such a large trade deficit?

The implicit answer, supported by a number of online reader comments, is that the industry is not internationally competitive. This is consistent with my own analysis over the years—the ability of MIDP and other government policies to attract investment and promote exports reflects, not the industry's competitiveness, but rather the value of government incentives. 

The MIDP was recently replaced by the APDP. This tweaked some of the details of public support for the industry—production subsidies are now given to domestic sales as well as exports; the dti can now hand out cash investment incentives on a more discretionary basis. But the magnitude of public support has not diminished; and it is determined largely in consultation with the major firms who tell the government how much support they require to overcome the high costs of investing and producing in SA. In other words, the type and magnitude of public support depend on how uncompetitive these firms are in SA.

The danger now is that the dti will seek to solve this sectoral trade deficit "problem" in ways that will  increase the burdens on consumers and taxpayers, and further diminish SA's manufacturing competitiveness. A simple "solution," for instance, would be to impose local content requirements on the industry and restrict imports through higher tariffs or other measures—in other words, return SA to the bizarre and highly costly policies of the Apartheid era.

The government could, and almost certainly will, employ more subtle subsidies and incentives to serve its motor industry clients. A tender document just released by the DPE, for instance, solicits advice on how Transnet and Eskom can be used to increase motor industry profitability. Reducing Transnet and Eskom costs would certainly be good for the entire economy. But to give special privileges to the motor industry (which already benefits from special Transnet pricing deals on its exports) would perpetuate the failures of the current policies that seek to improve competitiveness by subsidizing uncompetitive firms and industries.

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