New energy vehicles are the future

The global shift from Internal Combustion Engines (ICE) to New Energy Vehicles (NEVs), which is now well under way, presents South Africa with many new, exciting possibilities - but also poses potentially significant threats to the local industry’s survival in its current form. South Africa is home to the abundance of minerals needed to power vehicles of the future. And this means the opportunity to carve a new and expanded role for the country in the auto value chain. On the other hand, retaining and expanding the existing productive capacity is going to require new fiscal outlays from the government, which appears to have limited balance sheet headroom, from the recent mid-term budget update.Some argue that government policy has had significant influence on the size and growth of the automotive industry, since 1924, when the first automotive assembly plant in South Africa, the Ford Model T factory, commenced production in the city which is now call Gqeberha. The policy is set to play an equally crucial role in assisting the industry navigate the change to NEVs. The transition from ICE to NEV is taking place in a fluid international policy environment, with long-term implications for the distribution of manufacturing capacity around the globe. Major western countries are rethinking the hyper globalisation paradigm which dominated policy perspectives in the 1990s and early 2000s. Within the uber globalisation paradigm, the location manufacturing capacity was best determined by market forces based on the comparative advantages of each jurisdiction. International trade liberalisation and global financial integration were the key enabling policies of these production arrangements. Governments were encouraged by multilateral organisations and bound by treaties such as the World Trade Organisation (WTO) agreements from engaging in policy-based competition for foreign direct investment and exports. A series of major events have since cumulatively acted to undermine and question the increased interdependence of major economies forged by the globalisation paradigm such as the 2008 global financial crisis, the Covid-19 pandemic, trade tensions between China and the US and the current war in Ukraine. RecessionThe prolonged recession in developed countries, following the global financial crisis, led to a backlash against companies offshoring production to developing countries. In response, policymakers in some developed countries promoted reshoring or nearshoring of offshored activities to their home countries to promote local employment. The Covid-19 pandemic exposed the extreme fragility of complex global supply chains which resulted in supply bottlenecks of manufactured goods and the build-up of inflationary pressures across the world. Lastly, trade and geo-political tensions with China and Russia on the one hand and western countries and their allies on the other, have given rise to sentiments to reduce interdependence with rival economies. Companies have been encouraged to instead practice what Janet Yellen, the USA treasury secretary calls “friend-shoring” which is ostensibly less restrictive than reshoring or nearshoring but will limit supply chain network interdependence to a bloc comprising of allies and friendly countries.Automotive assembly in South Africa is almost entirely dependent on continued foreign direct investment by six multinational firms from Germany, Japan, and the US. Production, engineering, technology, and trade patterns of the industry depend on decisions made at the corporate headquarters of these multinationals and not by local management and therefore to be effective national policy must be attuned to global trends and industry dynamics. Investment decisions in new local factory capacity and upgrading is decided by global corporate headquarters as an outcome of internal competitive processes between manufacturing subsidiaries of the same multinational based in different countries. Decisions on capacity allocation consider various factors such as the cost competitiveness of each location, trade policy, size and the growth potential of the domestic and regional markets, and ultimately government incentives. PolicySouth African policymakers have in the recent past been quite successful in using policy to restructure and guide the industry to a long-term sustainable future. The post 1994 government inherited a highly protected, inefficient, and inward-looking industry. Successive iterations of the automotive policies of the Department of Trade, Industry and Competition (DTIC) have led to growing investment, output growth, production efficiency and exports. Today the industry is an important economic contributor accounting for a sizeable proportion of manufacturing output and a significant percentage of the country’s export basket. More importantly it is a net foreign exchange earner with a positive balance of trade. The mixture of policies that it took to achieve this success sometimes went against the dominant globalisation paradigm and were reluctantly supported by the South African National Treasury.Unlike the situation 10 or 15 years ago, outside of the automotive sector, the DTIC has no significant fiscal incentive programmes to attract or promote manufacturing investment.Comparison with the Australian automotive industry is quite instructive on the ability of industrial policy to alter outcomes. Like South Africa, Australia also had a foreign owned automotive industry built in the last 100 or so years behind protective tariffs. Starting in the mid 1980’s Australia decided on an auto sector reform programme that was more attuned to the prevailing policy trends. It made deep cuts to protective tariffs and availed time bound fiscal incentive programmes to assist industry to adjust to increased competition. Imports increased into Australia and the industry did not experience sufficient compensating export growth. –Fin24

New energy vehicles are the future

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Republikein 2025-06-16

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New energy vehicles are the future

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