1. NAACAM’s response to APDP Key Strategic Issues raised by the automotive industry stakeholders (Naacam, Naamsa, Numsa & The dti)
19/06/2014
Naacam

2. From NAACAM’s viewpoint, understanding the key factor which prevents the achievement of the objectives of the APDP is an important starting point:
The main objectives of the APDP are:
Significantly grow vehicle production in South Africa (target 1.2 million vehicle production)
Increase local value addition in the automotive supply chain
Increase employment
The first important question is: why are these objectives not being met fully?
The main compelling reason mooted by the major players within the industry is lack of COMPETITIVENESS.
What are the causes of the automotive industry’s lack of competitiveness ?
19/06/2014
Naacam

3. Un-packing the lack of competitiveness in the automotive industry:
Why are OEMs un-competitive
High level of imported components
Limited number of units produced (lack of economies of scale)
Why can’t OEMs increase localisation of components
Lack of local supplier competitiveness
Why are the suppliers un-competitive ?
19/06/2014
Naacam

4. Un-packing competitiveness:
WHY ARE THEIR COSTS ARE LOWER?
SOUTH AFRICA’S SUPPLIER COST PERSPECTIVE
VS THAILAND:
Element
Reason
Effect on competitiveness
Imported Material
Lack of localisation due to economies of scale
On-cost caused by packaging, logistics and MU (25%)
12.5%
Local Material
Due to economies of scale
Due to import parity pricing 3%
Indirect & Direct Labour
Base cost vs other low cost countries (50% On-cost)
Productivity (80% of standard)
3.5%
Salaries
Economies of scale (70% of standard)
Base cost vs other low cost countries (50%) 4%
Depreciation
Facility utilisation (70% of standard)
Facility on-cost due to availability (15%) 2%
Utilities
On cost (50%)
0.5%
Royalties
Due to limited design of vehicles in RSA
Stock Holding
Due to low localisation 1%
Other
Profit requirements higher than international stds due to interest rates
19/06/2014
Naacam

5. NAACAM’S SET OF KEY PROPOSALS TO DRIVE COMPETITIVENESS proposals not based not by a top-down approach (awaiting for the production level to increase to the agreed objective of 1.2 million units per annum through the elimination of numerous stumbling blocks – see attachment) but from a bottom-up perspective (which increases the competitiveness of the automotive industry through the compensation of the negative impact of the local high ‘country costs’ and limited economies of scale)
19/06/2014
Naacam

6. DRIVING SUPPLIER COMPETITIVENESS IS KEY TO GROWTH:
APDP should drive competitiveness as its main objective. Only once vehicles and components can compete on an even keel with low cost countries can we drive the APDP growth objectives, thus creating employment.
This can only be achieved if the APDP aims, in some form or another, to offset the disadvantages associated with manufacturing in South Africa. These disadvantages include and are not limited to:
ROOT CAUSE OF UN-COMPETITIVENESS
IMPACT ON SELLING PRICE
Low level production & high complexity production leading to the importation of sub components and materials
+ 12,5%
High “country costs”, mixed in with “low economies of scale”, as compared to low cost countries which include:
Stock holding costs
Facility amortisation
Harbour costs
Electricity costs and availability
Piped gas costs and availability
Cost of un-skilled, semi-skilled and skilled workers
Cost of key personnel
Availability of technology
Limited utilisation of facilities
Importation costs of facilities
Availability of local raw materials
Financing costs
+ 15%
Productivity
+ 1,5%
19/06/2014
Naacam

7. ARE TO BE ACHIEVED THROUGH DRIVING COMPETITIVENESS
THE APDP OBJECTIVES:
Significantly grow vehicle production in South Africa (target 1.2 m vehicle production)
Increase local value addition in the automotive supply chain
Increase employment
THESE OBJECTIVES
ARE TO BE ACHIEVED THROUGH
DRIVING COMPETITIVENESS
19/06/2014
Naacam

8. Through a self funding model
OBJECTIVES ACHIEVED THROUGH DRIVING COMPETITIVENESS
ACTION
EXPLANATION
PROPOSED CHANGES
Drive competitiveness and localisation
Through a self funding model
Offset “high country costs” and “low economies of scale”
Increase supplier “PI” (increase PI as a % of selling price from 6.5% currently to 15%) and pay as cash grant.
Offset “low economies of scale” and drive localisation
Increase AIS on tooling to 75% from the current 20% - 30%
Increase “AIS” on facilities to 45% from the current 20%-35% and include facility & technology upgrades (to-day only linked to an OEM contract).
Increase protection and increase gap between CBU and CKD
New Levy Recommended
Increase import duty rates and increase the GAP between CBU and CKD import duty, OR
NAACAM preference is to implement a new levy applicable to imported vehicles of 10% and imported components of 5%. Use this additional levy to fund a “competitiveness fund” from which to pay cash grants for the PRCCs and “AIS” claims.
19/06/2014
Naacam

9. ACHIEVED THROUGH DRIVING COMPETITIVENESS
ACTION
EXPLANATION
PROPOSED CHANGES
Increase protection for the industry
Reduce the ability to rebate duties
Accelerate the reduction in the VAA (1% per annum);
Change the PRCC’s from a FOB rebate to an import duty rebate;
Allow the suppliers to claim the “PI” directly and not via the OEM;
Pay the supplier “PI” as a cash grant and not a PRCC;
Ring-fence PRCC by each OEM
Reduce the administration burden of the APDP
Reduce the reporting criteria
Allow suppliers to claim their own “PI”;
Only declare imported value on a DA190 (as per MIDP)
Industry strategic understanding and direction
Focus on industry strategy rather than individual players’ strategy is key to driving APDP objectives;
ASCCI does not drive strategic discussions and objectives
Reinforce the role of the MIDC
19/06/2014
Naacam

10. Summary of NAACAM proposals: “Competitiveness is key”:
Doing business in South Africa comes with a “Cost Penalty” which can be classified as “Country Costs”. Further to this, the low economies of scale directly impact on the ability to be competitive. The majority of these factors are outside the control of the South African organisations.
In order to increase localisation and thereby increase employment, ways of offsetting this “Cost Penalty/Country Costs” have been considered. These include:
Increasing the Supplier “PI”, on average, from 6.5% of turnover to the level of the “Cost Penalty / Country Cost” which is estimated at 15% of turnover.
Within the current APDP system, increasing the “PI” would just increase the ability to offset duties, which works in direct contradiction to the objectives of the APDP. We therefore strongly suggest that the supplier “PI” be a cash grant, rather than a PRCC certificate.
The other hindrance to increasing localisation is the low economies of scale. Ways to level the playing field with respect to volume produced have been considered. The following proposals are suggested:
Increase the Tooling AIS to 75% (Objective: same tooling amortisation per part as competing countries)
Increase the Facility AIS to 45% (Objective: offset low efficiency caused by low economies of scale & offset the cost of importing facilities)
The above proposals require funding and it is understood that increasing the burden on the Fiscus is not an option to be considered. It is therefore proposed to increase the ‘penalty’ for importation and increase the GAP between CBU and CKD imports. We do not however support just increasing duty rates. A better solution would be to create a new Levy that will fund the above initiatives. This new levy of 10% on CBU and 5% on CKD should be sufficient to fund the initiatives to offset the “Cost Penalty/Country Costs” and fund the increased requirement for AIS to offset the low economies of scale. This levy can also be used to fund employee training in the industry.
The above proposals will drive robust competitiveness, which in turn will deepen localisation, leading to increased volumes, and will result in driving increased employment. Most importantly, this proposal is self funding and will not cost the Fiscus more in support.
Further to the above, NAACAM also proposes ways of sustaining the duty pool, of reducing the ability of the OEMs to become duty neutral, and ways to stop cross subsidisation.
19/06/2014
Naacam

11. Thank you for your attention.
19/06/2014
Naacam