Multinational strategy, industrial policy and local capability: A comparison of automotive industry development in South Africa and Thailand Justin Barnes, School of Development Studies, University of KwaZulu-Natal, and Anthony Black, School of Economics, University of Cape Town Faculty of Economics, Thammasat University, 28 th May 2013

Presentation outline Introduction: Global developments and their impact on emerging markets The development of the South African and Thai industries Micro level competitiveness factors: – Factor costs – Operational capabilities Conclusions

Introduction Importance of the automotive industry to developing economies Successful development policy (Humphrey and Oeter, 2000; Lung and van Tulder, 2004) requires: – Viable “automotive space” – Firm-level competitiveness Paper explores interplay of these two dynamics in two competing middle income economies – SA and Thailand Perspective is in relation to SA’s development challenges

Global developments and their impact on emerging markets Share of emerging markets has grown enormously both with regard to global production and automotive exports Regionalism rather than globalism may be a more appropriate descriptor of the forces shaping the location of the industry internationally (Sturgeon and Van Biesebroeck, 2010) Growing concentration of developing country production locations in a relatively small number of favoured locations – “viable automotive spaces”

The development of the South African and Thai industries Common features Long history of government support: high levels of protection, including tariffs and local content programmes led initially to proliferation of models being produced in low volumes Influx of FDI into both countries in the 1990s and 2000s, and shift to export orientation Toyota largest producer in both markets Important competitors in relation to the assembly of light commercial vehicles (LCVs) Hold dominant positions within their respective regions Thailand centrally located in large dynamic market region SA’s neighbours are poor and, even collectively, comprise a tiny market

Production volumes for car models, 1995 Production volumes (000s) Country China1127 India1119 Malaysia11114 Mexico3351 Argentina0164 Brazil5343 Indonesia00113 Thailand0137 S. Africa00417

The development of the South African industry Production dates back to the 1920s. From 1950 to early 1980s, sales increased tenfold but the market then stagnated to the mid 1990s. Annual domestic sales reached a peak of 714,000 units in 2006, before declining to 395,000 units in 2009 Problems of high protection were apparent by the late 1980s. SA’s automotive industry was inefficient and highly inward oriented. Major shift in 1995 – Motor Industry Development Programme (MIDP) - began a steady process of tariff reductions. Minimum local content levels were abolished and import duties on components and CBUs could be offset by auto exports Since 1995, auto imports and exports have increased rapidly. This had major implications for ownership as OEM and component manufacturer MNCs acquired local operations or established new plants Seven light vehicle OEMs have a total production capacity of 700,000 units Local content levels have been range bound between 50% and 60%, even in high volume models

Source: NAAMSA

The development of the Thai industry Significant industrialization in the early 1960s but by 2007 a total of 14 OEMs, predominantly Japanese and American owned, had installed capacity of 1.7 million units. Production of cars and commercial vehicles reached 1.4 million units in 2008, over double that of SA Like SA, Thailand has made use of high tariffs and local content requirements as well as trade balancing mechanisms to grow the sector Local content requirements were removed in 1998 by which time the large OEMs were initiating plans to increase local content beyond minimum requirements. Export support was also given in the form of tax and import duty exemptions Since the mid 1990s, the industry has become highly export oriented with exports increasing from 14,000 units in 1996 to 152,800 in 2000 and 838,600 units in Over the period vehicle exports accounted for 41% of production Approximately 70% of Thai production comprises LCVs. Passenger vehicle production primarily consists of smaller vehicle types, as a result of lower taxes

Developing an ‘automotive space’: Managing demand and achieving scale Excise tax structure and duty rates in Thailand and RSA ThailandRSA TypeExcise TaxImport DutyExcise TaxImport Duty Based on engine size CKDCBU Based on value CKDCBU Passenger vehicles30-50%30%80%1-20% 24% 29% Electric & Hybrid cars10-30%30%80%1-20% 24% 29% Powered by blended fuels (>20% ethanol) 25%30%80%1-20% 24% 29% Eco-cars17%30%80%1-20% 24% 29% Pickup trucks (LCVs)3%40% 1-20% 24% 29%

Automotive demand side taxes in Thailand relative to South Africa – 2008 (all figures in South African Rands) One ton LCV (private use)Passenger vehicle ( cc) ThailandSAThailandSA OEM selling price200,000 CBU import tariff40%29%80%29% Excise tax3% 5.39% import, 4.05% local 35% 5.39% import, 4.05% local VAT7%14%7%14% Interior tax0.3%0%3.5%0% Local production vehicle market price (all taxes included) 221,081237,234299,012237,234 Imported vehicle market price (tariff + taxes included) 309,514309,973538,221309,973

Implications of trade policy differentials? Market demand profile narrower in Thailand than in SA due to differential tariff and excise tax structure Thai market more open to trade in areas where local scale economies realised – SA no differentiation SA tariffs lower with much higher import penetration in vehicle market Thailand more likely to secure investment based on trade conditions than SA – Based on creation of viable automotive space But what of firm-level competitiveness factors? – “Waste” levels? – Factor costs?

Micro level competitiveness factors: factor costs and operational capabilities Cost of sales profile of four matching Thai and SA automotive component manufacturers – when holding materials costs consistent between both sets of firms

Waste elements at the four pair-matched component manufacturers (as % of sales) Source: South African Automotive Benchmarking Club Based on comparative (1) inventory levels, (2) customer return rates and materials scrap levels, (3) production downtime due to machine/line changeovers, (4) production downtime due to machine/tool breakdowns, and (5) attendance levels, Thai Firms (n=4)SA Firms (n=4) Additional SA costs Inventory Costs (1)2.31%3.89%1.58% Quality Costs (2)1.28%1.46%0.18% Flexibility Costs (3)2.38%9.00%6.62% Reliability Costs (4)0.86%4.69%3.83% HRD Costs (5)0.05%0.40%0.35% Total Costs6.88%19.43%12.56%

Average profile of three South African-based auto component manufacturers Source: SAABC database, accessed 2009 Average SalesR214.8 million % Exports11.0% Value added as % sales45.0% Materials purchasedR116.5 million - Local materialsR44.3 million - Imported materialsR77.2 million Employment769

Labour and employment profile of 3 SA firms, and a comparison of their costs in SA versus a model of costs in Thailand Source: SAABC database, 2009; DAC Remuneration and Retention Survey, Annual median Total TCTC wage data from the MIBCO database Thailand Board of Investment (BOI): Employment category Avg. number of employees Avg. cost per employee in South Africa Avg. cost per employee in Thailand Management18R R Professional17R R Supervisors44R R Artisan40R R Production613R R Apprentices37R R Total769

Modelling of Thailand and SA employee costs for transplanted SA automotive component manufacturer Employment category South African cost Thailand cost Thailand as % SA cost Thailand cost advantage ManagementR R R ProfessionalR R R SupervisorsR R R ArtisanR R R ProductionR R R ApprenticesR R R Employee cost totalR R R

Summary of labour and overhead input cost differentials SA avg. COS breakdown Thailand avg. is cheaper by... Thailand advantage (% COS) Overheads % electricity1.03.0% water % management % factory rentals3.2(34.0%)(1.09) Labour %11.68 Materials Held constant Total labour/ overheads %13.49

Re-cap of our evidence Thailand has a significant competitiveness advantage over SA: – Concentrated light vehicle ownership - major incentive for the local assembly of such vehicles – Supported localization of production through a suite of Greenfield investment incentives – Low cost infrastructure – Supply of low cost skilled and semi-skilled employees – Implementation of advanced lean production methodologies SA competitive advantage relates only to government export/production incentives

Conclusions 1.Benefits of market concentration – forced by tariff and tax structure – creates scale economies and opportunities for localisation 2.Liberal tariff structures work against the more open economy when investment decisions are free of political economy factors and based on production benefits in the two economies, e.g. for an average R200,000 LCV, the tariff and tax benefit of Thailand over SA was 2.9% in 2008, whilst for a 2,000-2,500cc passenger vehicle, the advantage was calculated at a far more substantial 21.5% 3.High input costs into manufacturing, particularly for (skilled) labour and management, are potentially crippling to competitiveness, whilst also ensuring that operational performance is impaired. Cost disadvantage in SA is severe, with operational waste factors suggestive of a 12.6% cost differential with Thai producers, and factor cost comparisons a 13.5% disadvantage (but figures not cumulative)

Conclusions 4.SA auto industry leans heavily on tariff rebates support equivalent to ±8% of OEM sales. This is more generous than the highest support levels possible for Greenfield investments in Thailand (5.4% of sales). BUT such support measures do not effectively compensate for lower tariffs and basic competitiveness attributes (e.g. cost, skills, infrastructure). SA’s regional location and limited cost advantages have led to a pattern of limited investment, hence lower volume operations and limited supplier development 5.Thailand represents a genuine export platform; SA does not. BUT SA’s growing market, combined with a fast growing SSA, will constitute a significant regional market in the medium term. If the SA industry can reduce its manufacturing costs, it will be well positioned to take advantage of this 6.Thailand has established itself as the regional hub within ASEAN, although it is likely to face much greater competition in the future - from other members of ASEAN in its domestic market – and from China and others in third country markets

Thank you