VZCZCXRO0634
PP RUEHDU RUEHJO
DE RUEHSA #3203/01 2161208
ZNR UUUUU ZZH
P 041208Z AUG 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC PRIORITY 4926
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHTN/AMCONSUL CAPE TOWN 3183
RUEHDU/AMCONSUL DURBAN 8020
RUEHJO/AMCONSUL JOHANNESBURG 5004

UNCLAS SECTION 01 OF 03 PRETORIA 003203 
 
SIPDIS 
 
DEPT FOR AF/S; AF/EPS; EB/TPP/MTA 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
TREASURY FOR CUSHMAN 
DEPT PASS USTR FOR PCOLEMAN 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EINV AGOA USTR SF
SUBJECT: SOUTH AFRICAN MOTOR INDUSTRY DEVELOPMENT PROGRAM WILL BE 
EXTENDED BEYOND 2012 
 
 
¶1. (U) Summary.  The Department of Trade and Industry (DTI) 
announced that the Motor Industry Development Program (MIDP) will be 
sustained beyond 2012.  According to Tshediso Matona, Director 
General for the Department of Trade and Industry, a post-2012 MIDP 
would take into account WTO rules with respect to government support 
for industries, address vehicle affordability and the extent to 
which tariff protection impacts on affordability, as well as improve 
employment in the vehicle manufacturing industry.  Although widely 
regarded as one of the most successful pieces of post-apartheid 
trade and industrial policy, the MIDP has been criticized for high 
domestic car prices, poor job creation, and weakness in its global 
trade rules.  Yet, the local automotive industry called for 
continued support after 2012 to ensure international 
competitiveness.  End Summary. 
 
Review Process 
-------------- 
 
¶2. (U) On July 24, 2006, Tshediso Matona announced that the MIDP 
will be sustained beyond 2012.  This came after local industry 
voiced concern over ongoing uncertainties in the regulatory 
environment while the MIDP review process was in progress.  The DTI 
has been studying a report on the review of the MIDP produces by 
independent consultants, Blue-print International, for some months 
now.  According to Matona, the DTI is close to finalizing its 
thoughts on how the program should progress. He indicated that a 
post-2012 MIDP would take on an entirely new form. 
 
¶3. (U) Matona explained that government will seek to build on the 
successes of the MIDP, while modifying it to bring it more into line 
with policy interventions in other parts of the world.  Matona 
emphasized that the post-2012 adjustments will take into account the 
WTO rules regarding government support for industries.  He mentioned 
that the review will definitely address legitimate concerns about 
vehicle affordability and the extent to which tariff protection 
impacts on affordability.  Moreover, government will look at a way 
to improve employment in the motor industry during the current 
review. 
 
Background 
---------- 
 
¶4. (U) The Department of Trade and Industry (DTI) implemented the 
Motor Industry Development Programme (MIDP) with effect from 
September 1, 1995.  Since then the program has been extended twice 
and was scheduled to expire in 2012.  The MIDP is an import/export 
complementation arrangement, whereby the local-content value of 
components or built-up vehicles exported, earns credits that can be 
used to rebate import duties on components and vehicles. The program 
also made provision for a gradual reduction in import duties on both 
vehicles and components.  Import duties on vehicles and components 
are currently at 32% and 26% respectively to reach 25% and 20% 
respectively in 2012.  The MIDP has as key objectives the 
improvement of international competitiveness, vehicle affordability 
in the domestic market as well as export and employment growth. 
 
Successes 
--------- 
 
¶5. (U) The MIDP is widely regarded as one of the most successful 
pieces of post-apartheid trade and industrial policy introduced into 
the South African economy.  Moreover, government praised the MIDP 
for pushing the vehicle sector into becoming a major contributor to 
the economy and transforming a small, protected industry into a 
competitive global player.  The National Association of Automobile 
Manufacturers of South Africa (Naamsa) supports the MIDP for its 
successfully contribution towards the industry's integration into 
global markets and making it a global source of high technology, 
high quality automotive products at internationally competitive 
prices. 
 
Statistics 
---------- 
 
¶6. (U) Statistics South Africa (StatsSA) data for 2005 shows that 
the automotive industry is South Africa accounted for 30% of the 
country's manufacturing output. According to Naamsa data, vehicle 
exports grew from 15,764 units in 1995 to 139,912 units in 2005. 
Vehicle exports as a percentage of total domestic production 
increased from 4% in 1995 to 27% in 2005.  Imports grew from about 
27,289 units in 1995 to over 233,489 units in 2005.  Component 
exports have also grown from a negligible amount to more than R25 
billion in 2005.  Moreover, investment in the vehicle manufacturing 
 
PRETORIA 00003203  002 OF 003 
 
 
sector has grown from less than R1bn annually in 1995 to R3.6 
billion in 2005, exceeding R2.0 billion in every year since 2001. 
 
Criticisms 
---------- 
 
¶7. (U) While most popular discussions focus on the MIDP's successes, 
questions have been raised about some of its unintended impacts. 
Critics argued that investment success has come on the back of 
domestic consumers paying excessive prices for cars, neglecting a 
stated objective of the MIDP.  Canadian expert and professor at 
Queen's University, Frank Flatters, in his study of the MIDP which 
was funded by USAID and DFID, estimated that motor companies had 
received almost R100 billion in duty rebates during the almost 
eleven years the program has been running.  According to his 
analysis, this subsidy was paid for by domestic consumers of 
vehicles in the form of restricted choice and higher prices. 
Moreover, consumers subsidized not only vehicles produced for the 
domestic market, but also those produced for export.  Flatters said 
the subsidy program was possible because of import duties of more 
than 30% and a virtual ban on used car imports, which made car 
prices much higher than necessary.  Flatters recommended that the 
review of the MIDP should include an economic cost-benefit analysis 
conducted by an independent third party. 
 
¶8. (U) A Competition Commission investigation into excessive pricing 
in the South African new vehicle market, found that South African 
car prices were on average 14% more expensive than in Europe.  The 
14% difference cost buyers of new cars an additional R17.5 billion 
annually.  The commission said it believed the high level of South 
African car prices was mainly due to the MIDP, particularly high 
tariffs on imported cars and components.  Moreover, the report 
stated that prices are to an extent based on import parity as prices 
of locally manufactured vehicles were aligned with prices of 
imported vehicles, adding that local manufacturers knew they could 
not price above imported substitutes.  The commission recommended a 
decline in the tariff component of the MIDP.  The motor industry, 
supported by a study by industry specialists, has disputed these 
claims. 
 
¶9. (U) In addition, critics questioned if the benefits of the MIDP 
have been spread wide enough.  Flatters pointed out that in spite of 
investment of more than R14 billion since 2000, the program has been 
unsuccessful in creating job growth in vehicle assembly.  Naamsa 
data indicates that employment in motor vehicle manufacturing 
declined by 17% during the first five years the MIDP was in 
operation, after which it stabilized for the period 2000 to 2004, 
and showed growth for the first time in 2005.  Employment in the 
components production has grown by a modest 12% since 2000. 
According to Flatters the MIDP is an expensive scheme that boosts 
the profits of the automotive manufacturers without stimulating job 
creation.  Moreover, automotive production in South Africa is biased 
towards capital intensive sectors, and not towards using lesser 
skilled labor. 
 
¶10. (U) Furthermore, analysts regard the MIDP as unsustainable in 
terms of global trade rules.  Dr Justin Barnes, Managing Director of 
Benchmarking and Manufacturing Analysts, pointed out that the 
current export subsidies provided by the MIDP are not WTO compliant. 
 According to Barnes, South Africa could consider a program similar 
to the WTO-compliant Australian Automotive competitiveness and 
Investment Scheme (ACIS), which was implemented in 2000.  According 
to this program, duty rebates are still on offer, but tied to 
production volumes and development criteria, such as skills 
development and environmental aspects.  Flatters noted that WTO 
compliance is an issue that should be addressed in the current MIDP 
review. 
 
¶11. (U) The International Monetary Fund (IMF) in its latest annual 
review of the SA economy, criticized the MIDP as a complicated 
incentive scheme, with unclear costs, designed only to make the 
local motor industry internationally competitive.  Furthermore, the 
IMF argued that local content programs in the motor industry tend to 
raise cost and prices, reduce competition and generate few, if any 
benefits for employment.  Senior Financial Officers of major motor 
manufacturing firms have in the past complained about the MIDP's 
highly complex and costly administration. 
 
MIDP Support 
------------ 
 
¶12. (U) Nevertheless, the local automotive industry has stated that 
it requires continued support after 2012 to ensure international 
 
PRETORIA 00003203  003 OF 003 
 
 
competitiveness.  Manufacturers not only want the MIDP to be 
extended beyond 2012 but also for it to be WTO compliant.  Brand 
Pretorious, chairman of McCarthy holding, said the motor industry is 
far too valuable for South Africa as a job creator and earner of 
foreign reserves, not to be supported by government.  Furthermore, 
manufacturers have already made long-term investments in South 
Africa. 
 
BOST