This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 PRETORIA 004515 
 
SIPDIS 
 
STATE PLEASE PASS USTR FOR PCOLEMAN 
COMMERCE FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
 
E.O. 12958: N/A 
TAGS: EINV EIND ETRD SF
SUBJECT: The South African Motor Industry 
 
 
     ¶1. (U) Summary: In 1995, the Department of Trade and Industry 
     (DTI) introduced the South African Motor Industry Development 
     Program (MIDP) to promote production and exports of locally 
     produced vehicles.  The DTI recently announced that between 
     2005-2006 it would review the MIDP as part of a long-term 
     strategy aimed at the continued growth of the industry.  Since 
     introduction of the MIDP, industry exports have grown at an 
     annual rate of 33%, South Africa has become known as a high- 
     quality niche producer, and a number of international companies 
     have expanded or located production plants here.  Nevertheless, 
     South Africa remains a fringe player in global markets. 
     Exports account for just 0.20% of global demand, and domestic 
     demand accounts for only 0.70% of global production.  South 
     Africa wants to increase its share of global production so as 
     to become a global player.  In December 2002, the government 
     extended the MIDP to 2012, but there are doubts about whether 
     it can or should retain its current form until then.   End 
     Summary. 
 
     The Motor Industry Development Program 
           -------------------------------------- 
     ¶2. (U) In 1995, the Department of Trade and Industry introduced 
     the MIDP to rejuvenate the industry by promoting the local 
     manufacture and export of vehicles.  At the heart of the MIDP 
     is an import-export formula that rewards exports with import 
     duty credits.  Companies get a rebate on import tariffs equal 
     to 100% of the local content value of their exports.  This is 
     supposed to be phased down to 70% in 2009.  Meanwhile, 
     protective import tariffs are supposed to be phased down from 
     40% to 30% in 2007, and 25% in 2012 (completely knocked down 
     components from 30% to 25% in 2007, and 20% in 2012).  Trade 
     rivals describe the MIDP as an export incentive, and question 
     whether it contravenes World Trade Organization rules. 
     Australia, whose own motor industry strategy was partly the 
     model for the MIDP, has been one of the strongest critics. 
     South African and Australian officials have held several rounds 
     of discussions on the MIDP.  Following the round held in 
     Canberra on August 27, 2004, both sides agreed to cooperate 
     during the upcoming review of the MIDP.  Australia will share 
     its experience. 
 
     ¶3. (U) Prior to the initiation of the MIDP, South Africa's 
     motor manufacturing industry was in the doldrums.  Vehicle 
     exports numbered only 15,760 units, or 4% of local production. 
     From 1996 to 2002, under the MIDP, exports grew at an average 
     of 33% a year.  In 2002, they represented 31% of total 
     production.  Exports have since leveled off at about 125,000 
     annual units because of the strength of the rand.  The National 
     Association of Automobile Manufacturers of South Africa 
     (NAAMSA) expects export growth to resume its 30% growth 
     trajectory in 2005. 
 
     The Motor Industry 
     ------------------ 
     ¶4. (U) The South African motor industry comprises manufacturers 
     of whole vehicles as well as parts, plus retailers and after- 
     sale maintenance service providers.  Of nineteen major 
     companies, eight are larger manufacturers that produce light 
     and heavy vehicles, and eight are smaller specialist 
     manufacturers that produce commercial/heavy vehicles and 
     components. 
 
     ¶5. (U) In 2003, total local vehicle production was 421,300 
     units, and imports were 87,900 units.  Exports totaled 126,000 
     units (not including sales to the SACU countries), consisting 
     of 114,900 cars and 12,000 light and heavy commercial vehicles, 
     and account for 0.2% of global demand.  NAAMSA projects 2004 
     domestic demand to increase by 13%, and Tony Twine, an 
     independent industry analyst from Econometrix, thinks that 
     total vehicle production could reach a 20-year high of 465,000 
     units for 2004, and grow by a further 13% in 2005. 
 
     ¶6. (U) The industry is important to South Africa as a revenue 
     generator, foreign exchange earner, investor, and employer.  On 
     the strength of exports, the industry has increased its 
     contribution to GDP from 4.9% in 1999 to 6.6% in 2003.  In 
     2003, the industry invested $350 million in the economy.  It 
     earned $22 billion in income from domestic activities, $3 
     billion from built-up vehicle exports, and $3.5 billion from 
     component exports.  Fuel industry income (net of taxes) added 
     another $14 billion.  Employment in the industry exceeded 
     300,000, with the manufacturing and retail sectors employing 
     112,000 and 194,000, respectively. 
 
     Niche Player 
           ------------ 
     ¶7. (U) According to Twine, speaking to a breakfast meeting in 
     Johannesburg on September 9, the South African motor industry 
     is not a mass producer of vehicles or components.  Rather, it 
     is a competitive niche producer of certain vehicle models and 
     specialized components.  There is growing international 
     reliance on South Africa to produce cars and commercial 
     vehicles for right-hand-drive countries, engines and components 
     for specific cars such as the VW Golf, and specific models such 
     as the BMW 300 series and the C-class Mercedes Benz for export. 
 
     ¶8. (U) Twine said that he did not believe that the South 
     African motor industry could establish a "home-grown" industry. 
     There was too much global competition and excess capacity for 
     such a strategy to succeed.  However, he felt that South Africa 
     was on the way to becoming a more important niche player. 
     Future success depended on the ability of local industry to 
     navigate a competitive course by capitalizing on new niche 
     markets (such as hybrid vehicles) and new technology (such as 
     fuel cells), which offered opportunities for growth through 
     innovation.  Twine reckoned that South Africa would have to 
     produce over 2 million vehicles annually (roughly 4% of world 
     production) to become a global player -- even as a niche 
     producer.  He estimated that South Africa was more than 10% of 
     the way to reaching this goal. 
 
     South Africa as an Investment Location 
     -------------------------------------- 
     ¶9. (U) Twine believes that international motor companies were 
     attracted to South Africa for a number of reasons: 1) South 
     Africa's relatively advanced economy and infrastructure were 
     conducive to supporting a sophisticated, mature industry; 2) 
     the availability of a sufficiently skilled work force; 3) an 
     existing local supply and support services industry 4) a 
     comparative advantage in raw material supply; 5) an emerging 
     market and the potential to grow with the black middle class in 
     South Africa and elsewhere in sub-Saharan Africa.  He noted 
     that while the black middle class market-share had increased to 
     31% in South Africa, other sub-Saharan markets had not yet 
     materialized.  Currently, the Southern African Customs Union 
     (SACU) countries (which include South Africa, Botswana, 
     Namibia, Lesotho, and Swaziland) account for more than 70% of 
     the sub-Saharan market. 
 
     ¶10. (U) On potential threats to the South African motor 
     industry, Twine thought that an economic slow-down in either 
     India or China would cause companies there to export excess 
     production to places like South Africa, where production costs 
     were twice as high.  He pointed out that although local 
     industry was partially integrated into global manufacturing 
     networks, it was still a minor player, with most decisions made 
     in boardrooms overseas.  This meant that South Africa was 
     especially vulnerable to a variety of external events. 
 
     ¶11. (U) Twine cited possible government intervention in the 
     areas of Black Economic Empowerment (BEE) and pricing as a risk 
     factor for the industry that would negatively affect foreign 
     investors.  For example, if BEE policies were to require 
     foreign-owned firms to sell equity to local BEE partners, those 
     local partners might have difficulty ponying up $30-50 million 
     for model retooling every five to seven years.  This could mean 
     that foreign auto manufacturers might have to constantly search 
     for new BEE investors to maintain a minimum BEE share ratio. 
     To date, however, there is no BEE charter for the motor 
     industry, but it is in the works.  Another sensitive point 
     would be if parent companies had to share the profits with 
     their new BEE partners, even after having incurred most of the 
     investment risks up front.  Twine also noted labor hostility to 
     the industry as a negative factor, based as it is on union 
     misperception that the South African auto industry is vital to 
     multinational parent companies. 
 
     ¶12. (U) DTI Director of BEE Partnerships Jeffrey Ndumo has 
     indicated that auto manufacturers will have latitude in 
     pursuing either enterprise charters or a sectoral charter.  DTI 
     does not have a preference of either way.  Ndumo said that if 
     the auto manufactures pursue a sectoral charter, DTI is 
     encouraging them to frame it as a set of broad guidelines that 
     would include the components market as well.  Ndumo said DTI 
     was sensitive to the issue of selling equity for auto 
     manufactures and was encouraging them to find a "creative" 
     solution to satisfy equity requirements. 
 
FRAZER