Key Strategic Issues from dti, NAACAM, NAAMSA and NUMSA

Table of Contents

Group A – Administrative Issues..................................................................................................................................... 2

1. The Review Timing Should be extended 2

2. Certainty and stability of policy and the need to preserve the integrity of the APDP. 2

3. The need to analyse the direct and indirect impact of the prolonged 2013 auto industry strike 2

Group B – Supporting Localisation and Component Production.....................................................................................3

4. Supplier Competitiveness Improvement 3

5. The Production Incentive should be claimed by the tier-1 & tier-2 suppliers and not be ceded automatically to the OEMs. 4

6. The benefits relative to the Production Incentive should be frozen at the present level. 6

7. The benefits relative to Vulnerable Products should be frozen at the present level. 6

8. How suitable are the Vulnerable Products Concessions? 6

9. Under current APDP parameters OEMs are becoming duty neutral very rapidly thus disincentivizing OEMs to localise componentry. 7

10. The reduction of the Vehicle Assembly Allowance of 1 % p.a. should be continued beyond 2015 8

11. The Review must consider the likelihood of surplus credits 8

12. The Review should consider the appropriateness of the inclusion of Medium and Heavy Commercial Vehicle Components and their impact on the overall programme 9

13. The Review must reaffirm the objectives of the APDP – 1.2 million vehicle production by 2020, significantly higher levels of localisation, job retention and wider benefits to the economy. 9

14. Strengthen APDP conditionality’s 10

15. Targets should be set on increasing levels of employment for OEMs and component manufacturers 10

16. Orientation of the APDP towards labour intensive activities 10

17. The PRCCs to be converted from a FOB rebate value to an import duty value. 11

18. Is the duty rebate system the most suitable in terms of government support to sector? 11

19. Should all auto components be covered by APDP? 12

20. The Role of standard materials 12

21. The erosion of components manufacturing in South Africa due to the shifting of production by component manufacturers to other countries within SACU must be addressed 13

22. Impact of APDP and its structure on moving labour intensive jobs out of SA into SACU countries 13

Group C – Supporting Additional Vehicle Production....................................................................................................13

23. The import duty tariffs on imported built-ups & components are to be increased. 13

24. Increase tariffs to protect local manufacturing in the automotive value chain 14

25. The effects of the global financial crisis and the rapid growth in local sales by independent importers is jeop-ardising the 1.2 million production objective 14

26. Consideration should be given to a standard regulation in the event of OEMs not meeting the 50 000 thresh-old. 16

Group D – Additional Measures and Considerations....................................................................................................16

27. Strategic Interventions necessary for the realisation of APDP Objectives 16

28. Setting of clear targets on equity, transformation, skills and technological transfer conditional requirements.17

29. Stability of Industrial Relations is Critical to Future Investments 17

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Group A – Administrative Issues

1. The Review Timing Should be extended There is insufficient data, at this juncture, to draw meaningful conclusions due mainly to the impact of the 2013 3rd and 4th quarter industrial disruption which resulted in massive distortions in industry per-formance data, as well as the extended Mercedes Benz shutdown and the impact of domestic and global economic conditions. Comprehensive and accurate data is essential to enable the Review to be conducted on an informed basis. This is clearly not the case and therefore consideration should be given to extending the data gathering phase to the end of the second quarter or end of the third quar -ter of 2014 to enable meaningful analysis to take place.

The timelines announced for the substantive review process are over-ambitious and unrealistic. As pro-posed, the data gathering phase of the review should be extended later into 2014. Moreover we be-lieve the review of strategic issues should only commence once data (for at least a full year of normal APDP operations) has been collated, properly analysed and evaluated.

NAACAM

Should the Review wait until all the data is available, then the Review exercise would extend into 2015, which will impact negatively on the urgent application of certain proposals, such as concerning decreas-ing benefits for vulnerable products, etc.

2. Certainty and stability of policy and the need to preserve the integrity of the APDP.

Following the announcement in 2008 – both vehicle manufacturers and suppliers implemented strate-gic plans and announced major long term investment decisions based on the proclamation. The APDP structure and provisions should therefore be regarded as a given and not subject to change, however we accept that this does not preclude additional support or enhancements to facilitate the achieve -ment of the APDP objectives. Past automotive development programmes created a high level of credi -bility and stability with foreign stakeholders and in turn assisted in long term investment planning. The APDP is in its infancy and a decision to review the APDP, at this stage, creates the possibility of under -mining confidence levels.

Government should therefore guard against any fundamental structural changes to the APDP and changes to the programme and the Automotive Investment Scheme should be designed to enhance support rather than to undermine confidence in automotive Industry policy incentives.

NAACAM

Indeed the Review should not undermine the APDP structure. However, the proposed ‘fine tuning’ changes to the system should promote much needed deeper localisation and increased employment.

3. The need to analyse the direct and indirect impact of the prolonged 2013 auto industry strike

Industrial relations stability is critically important if the objectives of the APDP are to be realised.

The prolonged strike in the South African automotive industry from the middle of August, 2013 through to the end of the first week in October, 2013 had a devastating impact on the automotive Industry and

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specifically on the performance of the industry in terms of the APDP.

We believe it is important that the work plan of the Dti should include a scientific analysis of the impact – direct and indirect – of the 2013 strike on the industry and on the APDP.

NAACAM

It is important that this analysis will also involve all the stakeholders, including the unions, in order to ensure their buy-in with any conclusions.

Group B – Supporting Localisation and Component Production

4. Supplier Competitiveness Improvement The progressive and sustained improvement in supplier competitiveness is an essential pre-condition for additional localisation/value addition by vehicle manufacturers over the course of the APDP. The re -cently implemented automotive supply chain competitiveness improvement (ASCCI) project, jointly funded and administered by the Dti, NAAMSA, NAACAM and the unions – is relevant in this regard.

NAACAM

The lack of competitiveness of the OEMs and the component manufacturers must be addressed.

It is believed that high “country costs” coupled with “low economies of scale” as compared to low cost countries have a 15% negative impact on the selling price of our locally produced components.

These country costs include:

• Stock holding costs• Facility amortisation• Harbour costs• Electricity costs and availability• Piped gas costs and availability• Cost of unskilled, 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

In order to drive our competitiveness, it is proposed:

A. To off-set high ”country costs” & low economies of scale:

- Increase the supplier “Production Incentive” as a percentage of selling price from6.5% currently to 15%;

- The Production Incentive is to be paid to the tier-n suppliers in the form of a cash grant.

B. To 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 the benefit of the AIS to facility & technology upgrades (to-date only linked to an OEM contract).

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C. To increase protection and increase gap between CBU and CKD:- Increase import duty rates and increase the GAP between CBU and CKD import du -

ties, OR

- NAACAM preference is to implement a new Levy applicable to imported vehicles of 10% and components of 5%. Use this new levy to fund a “Competitiveness Fund” to pay the cash grants for the PRCCs and “AIS” claims. Use this levy to fund also the training of the personnel through the Automotive Supplier Chain Competitiveness Initiative (ASCCI).

D. Increase protection for the industry by reducing the ability to rebate duties by:

The VAA to continue to be reduced by 1% per annum beyond 2015;Changing the PRCC’s from a FOB rebate to an Import Duty Rebate;

Allowing the suppliers to claim the “PI” directly;

Paying the supplier “PI” as a cash grant and not a PRCC;

Ring-fencing the PRCCs earned by each OEM.

E. Reduce the administration burden of the APDP through a reduction in the reporting by:

Allowing the component suppliers to claim their own “PI”; Only declaring the imported values on a DA 190 (as per MIDP).

5. The Production Incentive should be claimed by the tier-1 & tier-2 suppliers and not be ceded automatically to the OEMs.

Advantages:

a. Under the present system, as the benefit is automatically passed to the OEM, the component man -ufacturer is not motivated to increase the local content of its components, as it does not perceive a real, immediate and transparent benefit for itself.

b. The component manufacturer will be able to integrate the benefit of the PRCC in the cost/pricing calculations and thus be better armed in meeting OEMs’ target prices.

c. The possibility of reverting to this proposal was specified when the APDP was set into place.

NAACAM

NAACAM supports this proposal.

It appears that even the OEMs do not have a system to monitor continuously the local content of com -ponents purchased. Thus eventually neither the OEMs nor the Tier-n suppliers drive localisation on a daily basis.

In fact, the actual APDP has become more of an administrative system for the benefit of OEMs, thus practically losing the very reason of its existence: to deepen localisation in order to create employment.

NAACAM proposes that not only must the suppliers claim the “PI” directly, but this “PI” should not be re-ceived in the form of a PRCC, as this encourages further importation and contradicts the objectives of

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the APDP. The “PI” should rather be given in the form of a cash grant to improve supplier competitive-ness and offset “Country Costs.”

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6. The benefits relative to the Production Incentive should be frozen at the present level.

Under the present system, the benefit relative to the local value added starts at 55 %, reducing by 1 % annually to 50 %. It is proposed to freeze the benefit at the 55 % level.

For Standard Materials, the local value added benefit (PI) is at 25 %, reducing by 1 % annually from Jan -uary 2015 to 20 % in 2017. It is proposed to freeze the benefit at the 25 % level.

Advantage: This proposal will reinforce the benefits of increased local content.

NAACAM

For component manufacturers, the Production Incentive should be re-evaluated so that the approximate current PI benefit, amounting to about 6,5% of the component’s selling price, is to be increased to about 15%, in order to compensate the high “Country Costs” & low economies of scale, thus driving the com-petitiveness of the component manufacturers.

The level of this benefit should be frozen and not be decreasing over time.

7. The benefits relative to Vulnerable Products should be frozen at the present level.

Under the present system, the PI for Vulnerable Products starts at 80 %, reducing by 5 % annually to 50 % in 2020. It is proposed to freeze the benefit at the 80 % level.

For Standard Materials relative to Vulnerable Products, the PI is at 40 %, reducing by 5 % annually from January 2015 to 25 % in 2017. It is proposed to freeze the benefit at the 40 % level.

Advantage: This proposal will reinforce the benefits of increased local content.

NAACAM

All components should benefit from the ‘vulnerable‘ status; the Production Incentive should be re-evalu-ated so that the approximate current PI benefit, amounting to about 6,5% of the component ’s selling price, is to be increased to about 15%, in order to compensate the high “Country Costs” & low economies of scale, thus driving the competitiveness of the component manufacturers.

The level of this benefit should be frozen and not be decreasing over time.

8. How suitable are the Vulnerable Products Concessions? • What is their impact on localisation levels

• We need a cost benefit analysis of the impact of:

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o Maintaining them at current high levels

o Stabilising them at 2017 levels through to 2020

o Continuing with phase down approach per initial transitional support agreement

A related question is whether all components should be subject to the same reward levels.

NAACAM

The Production Incentive is part of the package of incentives to drive the competitiveness of the auto-motive sector.

Following a cost benefit analysis, in order to increase localisation, it is thus proposed:

- The concept of differences between vulnerable / non-vulnerable products should disappear;

- The level of the benefits is to be increased for all components from the current le-vel of about 6,5% of the component’s selling price to about 15% of the compo -nent’s selling price, in order to compensate for the high “Country Costs” and lower production levels which lead to reduced economies of scale when compared to other competing countries (Thailand as an example).

- The level of the new PI benefit should be frozen and not be decreasing over time.

9. Under current APDP parameters OEMs are becoming duty neutral very rapidly thus disincentivizing OEMs to localise componentry.

A large, diversified and competitive component supply base is essential and a key consideration when OEM parent companies decide where to produce new platforms. However the combination of high rel -ative levels of support to assemblers combined with the form this support takes – an incentive to im -port components and vehicles – undermines this objective.

Therefore the Review should consider:

- Whether to impose a cap on the quantum of the total PRCCs available at a point in time and how this could be calculated and enforced

- Whether to introduce a stronger phase down of the VAA support

In the longer term government should reconsider import credits as the core mechanism for industry support. The greater the level of local production the more import credits are generated and the more vehicles and components will necessarily be imported.

NAACAM

Following the growth of the automotive sector in South Africa to 1.2 million vehicles by 2020:

- the local market would absorb at the very most about 400,000 locally produced units

- the remaining 800,000 units would then have to be exported.

As exported vehicles earn VAA benefits although no duty is payable on the components used to assem-ble these exported vehicles, the sustainability of the duty pool will be threatened, thus necessitating that the VAA should continue to diminish beyond 2015.

Moreover, it is proposed that each OEM should be ring-fenced in order to prevent the sale of PRCCs from one OEM assembler to an OEM importer.

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In order to sustain further the duty pool, it is proposed that the PRCC should be converted from a FOB rebate to an import duty rebate. It is also proposed that the supplier ”PI” be payable in the form of a cash grant to the component supplier. In this way, the component supplier will have an immediate, eas -ily determined benefit which may then be used to become price competitive.

The disadvantages of the existing system, whereby the PRCCS are ceded automatically to the OEMs or sold on the open market, are eliminated. The advantages are:

- The component supplier may determine a competitive price which is then communicated to the buyer, whether local or overseas, without having to explain the arcades of the APDP system;

- The component supplier, by obtaining the PI in the form of a cash grant, will not have to cede its PRCC on the market, thus eliminating price fluctuations / benefits of the PRCCs.

- The proposed system will not favour the importers of high import duty products.

10.The reduction of the Vehicle Assembly Allowance of 1 % p.a. should be con - tinued beyond 2015

The present levels of VAA are very generous to OEMs. Moreover, VAA is also earned on exported vehi -cles, although the assembled components are duty free. There is a strong risk that several OEMs which have high exports may rapidly become duty neutral. Thus there will be little ‘stretch’ for these OEMs to increase localisation of components.

Advantage: By continuing to reduce the VAA percentage, OEMs, in order to stay duty neutral, will need to increase the localisation of components.

NAACAM

Under the new proposals, should an OEM become duty neutral, it will still be motivated to buy locally produced components as they will be price competitive.

In other words, the new proposals drive the competitiveness of the automotive sector, so that even if an OEM becomes duty neutral it will still be in its interest to buy competitively priced local components.

The competitiveness of the locally produced components are no longer dependent on:

- Whether the OEM is duty neutral or not

- The vagaries of the market through which the PRCCs are ceded to importers of high import duty components (the very products which need to be prevented from entering the local market).

11.The Review must consider the likelihood of surplus credits Whether generated by the VAA or by PRCCs, a surplus of credits could eliminate incentives for more lo-cal production and result in lower local component production. The Review should carefully model po-tential outcomes to test these. Additionally, information on changes in localisation of components al-ready experienced, as well as changes in component exports, in particular lost contracts, should be evaluated.

NAACAM

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In order to reduce surplus credits, the following measures are proposed:

- Reducing the VAA by 1% per annum beyond 2015;

- Changing the PRCC from a FOB rebate to an import duty rebate;

- Ring-fencing the PRCCs earned by each OEM, so that if an OEM becomes duty neutral, it may not cede its PRCC to an importer.

- Changing the Supplier “PI” to a cash grant rather than a PRCC certificate.

12.The Review should consider the appropriateness of the inclusion of Medium and Heavy Commercial Vehicle Components and their impact on the overall programme

The PRCCs earned by M and HCV components can be used to rebate duties on imports of Light Vehicles and their components, and by nature of their relatively high value may result in substantial imports. The Review should consider whether restrictions should be placed on the usage of these PRCCs.

NAACAM

As the PRCC is converted from a FOB rebate to an import duty rebate and by allowing the suppliers to claim the “PI” directly and obtain the “PI” in the form of a cash grant (and not as a PRCC), these mea-sures will eliminate the risk of substantial imports being ‘subsidized’ through rebates obtained by M and HCV component (manufacturers?) s.

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13.The Review must reaffirm the objectives of the APDP – 1.2 million vehicle production by 2020, significantly higher levels of localisation, job retention and wider benefits to the economy.

The dti should reach agreement with stakeholders on the need for stronger conditionality’s and terms to achieve these objectives.

NAACAM

The proposals mentioned above eliminate the negative impact of high ‘Country Costs’ and low economies of scale on the competitiveness of locally produced components. Thus the OEMs, whether they are duty neutral or not, will be motivated to buy the locally produced components because of their competitiveness.

Thus there is no need to put further constraints of conditionalities to achieve the 1.2 million vehicle units, to drive localisation of more components and increase employment.

14.Strengthen APDP conditionality ’ s The APDP conditionality’s should be strengthened and the Review should explore other mechanisms and instruments like withdrawal of support in the event of non- compliance and lack of reciprocity from the industry.

NAACAM

The new proposals mentioned above, by driving the competitiveness of the automotive industry, will act as an ‘invisible hand’ which will promote the objectives of the APDP, thus eliminating the need to in-crease the APDP’s conditionalities.

15.Targets should be set on increasing levels of employment for OEMs and com - ponent manufacturers

The review must come up with practical mechanisms and targets to encourage industry to increase the creation of employment.

NAACAM

It widely accepted that high employment increases will not be generated by OEMs (which are robotized) and overseas owned component manufacturers (which are robotized / highly mechanized – tendency for same assembly process in all the subsidiaries worldwide).

The high increases in employment will most probably will be generated by:- The locally-owned component manufacturers

- The tier-2 and tier-3 component manufacturers

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The new benefits proposed should thus be made available to tier-2 and tier-n suppliers, so that they, at last, will feel part of the APDP system, they will have the possibility of sharing the benefits, they will thus be motivated on a daily basis to drive localisation and the resulting employment.

It is proposed that should the tier-2 / tier-n suppliers refuse to claim the PI generated by their value added, the tier-1 supplier may then take the full benefit.

It is proposed to reduce the conditionalities for tier-n suppliers to join the APDP as follows:- From the actual 25% or R 10 million turnover in the OEM supply chain to

- A minimum turnover of 10% or R 50 million turnover in the OEM supply chain

16.Orientation of the APDP towards labour intensive activities Currently the APDP is biased towards OEMs which are capital intensive, this review must come up with a mechanism to increase support to component manufacturers and other subsectors of the automotive industry and increase localisation requirements as the basis for deepening the auto value chain.

NAACAM

The above mentioned proposals provide a mechanism which:- Increases support to component manufacturers through:

o Increased “Production Incentive” as a % of selling price from 6.5% currently to 15%;o The Production Incentive to be paid to the Tier-n suppliers in the form of a cash grant;o A Competitiveness Levy on imported vehicles and components which effectively in-

creases the gap between CBU and CKD importation costs;o Increased AIS support;

- Increases support to the Tier-n suppliers through:o Allowing them to benefit from the APDP system;o Reducing the thresh holds for joining the APDP system (see item 15 above).

These new proposals will drive the competitiveness of the automotive sector by eliminating the negative impact of high ”Country Costs” and low economies of scale on our component prices, thus permitting our industry to compete on an even keel with the automotive industry in Thailand, as an example .

17.The PRCCs to be converted from a FOB rebate value to an import duty value. The existing system favours the importation of product with high import duties, the very products which Government wish to discourage through the duty barrier.

By using a PRCC with a duty value, the import duty rate maintains its significance, as the highest import duty component requires more PRCCs to offset the duty.

Advantage: The proposed system provides transparency & facilitates understanding as the PRCC has the same value whatever the level of import duty. This proposal will redress distortions of the benefits linked to the PRCCs.

NAACAM

This proposal will provide support to the need to sustain the duty pool.

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Moreover, the component manufacturer will be able to calculate exactly the benefit derived from his PI, as the PRCCS earned will not have to be sold on the open market, with the resulting fluctuations in the benefit obtained. Thus the component manufacturer will be able to determine a competitive price, sup-ported by the value of the PI earned. There will be no need for the component manufacturer:

- To ensure that the OEM integrates the benefit of the PI / PRCC in his price proposal;

- To continuously explain to the clients overseas (OEMs, holding company, clients, etc.) the intri -cacies of the APDP system.

The new proposals brings transparency and simplicity to the APDP system (the PRCC has the same value whatever the level of import duty).

18.Is the duty rebate system the most suitable in terms of government support to sector?

Since the VAA and PRCC benefits can only be used to increase imports, should an alternative mecha-nism be considered?

NAACAM

The new proposals which include the conversion of the PRCC from a FOB rebate to an Import Duty Re-bate do not encourage the increase in imports.

The VAA will still be used to rebate imports. However, in order to sustain the duty pool, each OEM will have its VAA & PRCCs ring-fenced, thus reducing the impact on the duty pool should an OEM reach duty neutrality.

Under the new proposals, even if an OEM becomes duty neutral, it will still be motivated to purchase lo -cally manufactured components which will now become price competitive (as the Revised APDP will compensate the high “Country Costs” and low economies of scale.

19.Should all auto components be covered by APDP? Some components may have already matured as industries and can survive without APDP, or alterna -tively, will be better placed in other government support spaces. This could alleviate pressure on the duty pool.

NAACAM

The new proposals eliminates the distinction between non-vulnerable & vulnerable products in order to:

- simplify the APDP system;

- make the system more transparent as the distinction between the two types of products may be somewhat blurred;

- provide support to all products, so that even the more matured industries could benefit & fur-ther enabling them to provide more competitive prices in order to capture more markets world-wide.

On the other hand, it is proposed that a beneficiation strategy should be implemented by Government as soon as possible concerning the Platinum Group Metals (PGM). Concerning the PGMs, South Africa & Zimbabwe derive a practical monopolistic supply situation and it is high time that these two countries

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should benefit from this once in a lifetime opportunity. The beneficiation strategy could consist of a pro-duction levy on all PGMs produced locally. Locally beneficiated PGMs would benefit from a Production Incentive. This Production Incentive should be high enough so that South Africa would become the sought after country to produce catalytic converters.

This proposal will make it possible for catalytic converters to leave the APDP system and benefit from this beneficiation strategy. In this way, as catalytic converters represent about 45% of automotive ex-ports, the sustainability of the duty pool and of the proposed Competitiveness Fund will be improved.

20.The Role of standard materials Given the often erratic nature of supply of strategic materials, for example steel and aluminium, should there be consideration given to having a standard materials allowance to any product that does not qualify as an auto component.

Should there be a need to continue applying a selective standard material allowance, a scientific for-mula needs to be derived that determines whether a material qualifies as standard or not

A high level survey of materials needed by OEMs in the coming 5 years should be conducted, t deter-mine which should be added onto the list to support component sub-sector growth e.g. natural fibres.

NAACAM

Standard materials allowance should not be provided to any product that does not qualify as an auto component as the APDP system has been put into place for the benefit of the automotive sector.

It is proposed that there should be no distinction for benefits on standard materials for non-vulnerable components and those on standard materials for vulnerable products, because there is a need to:

- improve the competitiveness of the whole automotive industry;

- simplify the APDP system;

- make the system more transparent as the distinction between the two types of products may be somewhat blurred.

21.The erosion of components manufacturing in South Africa due to the shifting of production by component manufacturers to other countries within SACU must be addressed

In the recent past, the industry has been severely impacted by restructuring and retrenchments espe-cially in the components industry due to the shifting of production to neighbouring countries. This is as a result of the harsh conditions that OEMs are imposing on component manufacturers in securing pro-curement contracts.

NAACAM

The APDP is based on a duty pool rebate system and as there is a common duty pool within SACU, a so -lution must be found in order to ring-fence the APDP benefits for South Africa.

Indeed, it is proposed to set up a Competitiveness Fund:- To be funded by a new levy applicable to imported vehicles of 10% and components of 5%;

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- To be used for compensating the high “Country Costs” and limited economies of scale in South Africa by increasing the supplier “Production Incentive” as a percentage of selling price from 6.5% currently to 15%;

- To pay for the PRCCs and “AIS” claims in the form of cash grants;

- To fund the training of the personnel through the ASCCI.

22.Impact of APDP and its structure on moving labour intensive jobs out of SA into SACU countries

Already we have seen that some wiring harness production has moved from SA because of the signifi-cantly lower labour costs and the higher labour stability in some other SACU countries. The review should consider whether any measures can be introduced to prevent this.

NAACAM

Please see response to item 21 above.

Group C – Supporting Additional Vehicle Production

23.The import duty tariffs on imported built-ups & components are to be in - creased.

The import duties on vehicles and components are frozen at 2012 levels: 25 % on light vehicles and 20 % on components, up to 2020. It is proposed to increase these tariff levels from 25% to 35% and from 20% to 30%.

Advantages:

a. This proposal will bring further duty protection to the cars which are locally assembled.b. CBU importing companies which do not make efforts to limit their import duty liability through local

production of components will be impacted the most.

NAACAM

The new proposals include the following measures:- To increase import duty rates and increase the GAP between CBU and CKD import

duties, OR

- Implement a new levy applicable to imported vehicles of 10% and components of 5%;

- Use this new levy to fund a “Competitiveness Fund” to pay cash grants for the PRCCs and “AIS” claims.

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The advantages as already mentioned above are:

a. This proposal will bring further duty protection to the cars which are locally assembled.

b. CBU importing companies which do not make efforts to limit their import duty liability through local production of components will be impacted the most. This duty liability will increase following the conversion of the PRCC from a FOB rebate to an import duty re-bate. Moreover, the Ad Valorem duty will not be able to be rebated at all.

24.Increase tariffs to protect local manufacturing in the automotive value chain There is a need to increase tariffs and non-tariff barriers as a basis for defending South Africa’s manu-facturing base and to review some trade agreements that hinder South Africa’s industrialisation growth.

NAACAM

It is understood that the possibility to review some trade agreements that hinder South Africa’s indus-trial growth will be difficult as our trading partners will, in return, demand some compensations follow -ing our request to increase tariffs and non-tariff barriers.

However, it is proposed to create a new levy on imported vehicles and components which will sustain a Competitiveness Fund, from which the cash grants relative to PRCCs and AIS claims will be paid. These PRCCs and AIS claims will drive the competitiveness of the South African automotive industry, thus en-abling it to increase the level of cars manufactured locally, to deepen the localisation of components and indirectly result in increased employment. The Competitiveness Fund will also be used to fund the training of personnel through projects emanating from the Automotive Supply Chain Competitiveness Initiative (ASCCI).

25.The effects of the global financial crisis and the rapid growth in local sales by independent importers is jeopardising the 1.2 million production objective

The effects of the global financial crisis on the local and export markets together with the rapid growth in local sales by importers who have no production facilities, even for components, is impeding achieve -ment of the 1,2 million production objective

Therefore the Review should consider:

- Whether to introduce periodic increases in the minimum volume requirement of 50,000

- Whether to introduce limits on the tradability and use of PRCCs to importers who have no pro -duction facilities in SA, or to apply a discount factor for PRCCs used to import vehicles

- Boosting demand through designation of vehicles for public sector purchase

- A campaign to promote awareness and purchase of domestically produced vehicles

- Further targeted investment recruitment to increase the number of OEMs.

NAACAM

The objective of reaching 1.2 million vehicles manufactured locally by 2020 will not be reached unless the un-competitiveness of the automotive industry is tackled.

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The high ”Country Costs” as well as the limited production volumes (creating limited economies of scale) will have to be compensated through a Competitiveness Drive which does not take a top-down ap-proach as is the case to-day (await the level of 1.2 million units to be reached in order to reduce produc -tion costs, through the elimination of numerous stumbling blocks), but by a bottom-up approach (in -crease the competitiveness of our components immediately through the Revised APDP) which will result in increased production volumes and exports of components.

There is no need “to introduce periodic increases in the minimum volume requirement of 50,000 units”, as quite a few OEMs have already largely exceeded this level. And if further constraints are imposed on those OEMs struggling to reach the increasing thresh holds, these may create a reason for them closing shop in South Africa and moving to friendlier shores.

The tradability and use of PRCCS to importers will be constrained under the new proposals which include the following measures:

- Changing the PRCC’s from a FOB rebate to an Import Duty Rebate;

- Allowing the suppliers to claim the “PI” directly;

- Paying the supplier “PI” as a cash grant and not a PRCC;

- Ring-fencing the PRCCs earned by each OEM.

Concerning the further targeted investment recruitment to increase the number of OEMs, it is pro-posed to

To 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% ;

To increase protection and increase gap between CBU and CKD:- Increase import duty rates and increase the GAP between CBU and CKD import du -

ties, OR- Implement a new levy applicable to imported vehicles of 10% and components of

5%.

Moreover, NAACAM would support measures which:

- Boost demand through designation of vehicles for public sector purchase;

- Promote awareness and purchase of domestically produced vehicles.

26.Consideration should be given to a standard regulation in the event of OEMs not meeting the 50 000 threshold.

This would be along the lines of: if assembly is at a level of 40000 to 50000 then benefits reduce to x for period y and so on for lower levels.

This would allow for some period of stabilisation as OEMs attempt to get back to 50000, but should definitely be for a temporary period only.

NAACAM

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Any measure which would strengthen the presence of OEMs in South Africa would be supported by NAACAM.

The reductions in assembly levels should be allowed in order for the newcomers to benefit from the APDP. However, these concessions should be accompanied by counter measures should the production level not reach the 50,000 units level within a predetermined period.

Group D – Additional Measures and Considerations

27.Strategic Interventions necessary for the realisation of APDP Objectives The following additional building blocks or strategic interventions are needed to deliver on the APDP objectives towards 1.2 million vehicles by 2020 and the achievement of international competitiveness.

• APDP – Strategic “vulnerable” sector support

• Development finance at preferential rates, e.g. from the IDC

• Tooling initiative research on the viability of a tooling industry cluster

• Preferential procurement – designated products

• Extension of existing international trade agreements (EU and AGOA) and steps to curb second hand vehicle imports into SACU

• Finalisation of an effective beneficiation strategy

• Infrastructure, logistics and electricity costs must be benchmarked and reduced through collab -orative support

• New international trade agreements (with particular focus on BRIC and Africa)

• Fuel quality – early introduction of Euro V fuel

• Promotion of low emission and zero emission vehicles through demand side incentives and sup-ply side assistance

• Review of vehicle taxes and related fiscal contributions, and their impact on affordability and market growth

We recommend the more active participation by all auto sector stakeholders in these interventions and particularly the dti which we believe should champion a number of these building blocks.

NAACAM

The main objectives of the APDP are:

- Significantly grow vehicle production in South Africa (target 1.2 M vehicle produc-tion)

- Increase local value addition in the automotive supply chain

- Increase employment.

The important question is why these objectives are not being met fully. The main compelling reason mooted by the major players within the industry is COMPETITIVENESS.

The proposed above mentioned measures endeavour to drive the competitiveness of our automotive in -dustry. Moreover, it is proposed to offset “low economies of scale” and drive localisation:

- By increasing AIS on tooling to 75% from the current 20% - 30%;- By increasing “AIS” on facilities to 45% from the current 20%-35% ; and

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- By including the benefit of the AIS to facility & technology upgrades (to-day only linked to an OEM contract).

28.Setting of clear targets on equity, transformation, skills and technological transfer conditional requirements.

NAACAM

Further conditional requirements / constraints on the automotive industry relating to these important issues of equity, transformation, skills and technology transfer might be counterproductive.

The above mentioned proposals would act as an ‘invisible hand’ to create a competitive automotive in-dustry through competitive component prices, increased localisation and increased assembly of vehicles. The end result would be an increased and better trained labour force.

29.Stability of Industrial Relations is Critical to Future Investments The labour movement should provide a greater commitment to stability, without which increased pro -duction and localisation and consequent employment is unlikely.

NAACAM

Indeed, a prerequisite for the achievement of a competitive and growing automotive sector is the stabil -ity of industrial relations between employees and employers. Any instability will be exploited by the competing countries to draw more assembly of vehicles to their shores and to capture our export mar -kets at the expense of South Africa.

NAACAM

16.06.2014

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