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Transfer of Technology for Successful Integration into the Global Economy - A case study of the South African automotive industry

Case study by Trudi Hartzenberg and Samson Muradzikwa, 2002

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What: This study discusses the factors that have shaped the formation of technological capability in the South African automotive industry. It then analyses the performance of the industry, both qualitatively and quantitatively. The quantitative assessment includes the investment behaviour of the assemblers, and the market and export performance. The qualitative assessment focuses on the inter-firms relationships, the learning processes and the levels of labour productivity. Finally it presents the stories of the successful integration into the global markets of two South African firms, Bosal Automotive and Volkswagen of South Africa. Who: Useful for teachers and students studying transfer of technology and its effect on development. How: Can be used as a background reading of a case study on transfer of technology.

UNCTAD/ITE/IPC/Misc. 21
















Transfer of Technology for Successful Integration into the
Global Economy





A case study of the South African automotive industry




Trudi Hartzenberg and Samson Muradzikwa















United Nations



New York and Geneva 2002




Transfer of Technology






Note






This paper is part of the series of case studies on Transfer of Technology for Successful


Integration into the Global Economy carried out by the Investment Policy and Capacity Building
Branch, DITE, under the UNCTAD/UNDP Global Programme on Globalization, Liberalization
and Sustainable Human Development: Best Practices in Transfer of Technology. The work has
been carried out under the direction of Assad Omer, assisted by Maria Susana Arano. Overall
guidance was provided by Khalil Hamdani.



The views expressed by the authors do not necessarily represent those of UNCTAD or


UNDP.









UNCTAD/ITE/IPC/Misc.21






















ii




Transfer of Technology


TABLE OF CONTENTS


Preface……………………………………………………………………….. v
Introduction.........................................................................................………. vii

Chapter I: Factors shaping technological capability in the automotive
industry…………………………………………………......…..




1


1. Origins of the automotive industry in South Africa………………….. 1
2. From import substitution to export orientation………………………. 1
3. Ownership patterns…………………………………………………… 3
4. Location of industry………………………………………………….. 3
5. Foreign direct investment…………………………………………….. 4
6. Attracting foreign automotive producers in the 1990s….……………. 4



Chapter II: Performance of the South African automotive industry.........….



7


1. Quantitative assessment.............................................................………
A. Investment………………………………………………….
B. Market performance……………………………………….
C. Export performance………………………………………..


7
7
9
9


2. Qualitative assessment....................................………………………..
A. Inter-firm relationships……………………………………
B. Learning processes………………………………………...
C. Labour productivity………………………………………..


14
14
17
18



Chapter III: Supporting the automotive industry: Policy and institutions...….



21


1. Motor Industry Development Programme (MIDP).......................…
A. Light Vehicle Programme………………………………….
B. Medium and Heavy Vehicle Programme………………..
C. A critique of the MIDP……………………………………


21
22
24
24


2. South Africa Bureau of Standards (SABS)....................................... 25



Chapter IV: Successful integration into global markets: Stories of two
firms…………………………………………………………………………..


1. Bosal Automotive: innovating for global integration……...
2. Volkswagen of South Africa: export-led skills development


and employment creation…………………………………..




27
27

28



Concluding remarks ..............................................................................……..



29



Appendices


Appendix 1: Productive asset allowances…………………………...
Appendix 2: Mid-term review: Amendments to the Medium and
Heavy Vehicle Programme…………………………………………...



31
31

32



References……………………………………………………………………



33




iii




Transfer of Technology


TABLES
Table 1.1 Light vehicle assemblers operating in South Africa……………... 2
Table 1.2 Automotive production and sales in South Africa (’000 units)…... 3
Table 2.1 Investment expenditure in plant and equipment by vehicle


manufacturers……………………………………………………..

8


Table 2.2 Aggregate profit performance of vehicle manufacturers………… 9
Table 2.3 Total component exports (US$ current)………………………….. 11
Table 2.4 Automotive exports (Fob values, US$ current)…………………... 12
Table 2.5 Destination of South African light vehicle exports by value


(percentage)………………………………………………………

13


Table 2.6 Destination of medium and heavy commercial vehicle exports
(percentage by value)……………………………………………..



14


Table 2.7 Purchases of original equipment components by vehicle
manufacturers …………………………………………………….



15


Table 2.8 Do you consult with your suppliers when designing new
products?………………………………………………………….


15


Table 2.9 Do your important customers assist you with quality control?…... 15
Table 2.10 A summary of the average competitiveness benchmark findings,


for firms in South Africa and Western Europe – including an
outline of the best performing firms (1997)………………………




19


Table 2.11 South African vs. European firms’ output/average remuneration
costs per employee……………………………………………….



19


Table 3.1 Import duty phase down for light vehicles and components under
the MIDP…………………………………………………………



22



BOXES


Box 1. Toyota’s production and exports ……………………………………... 11
Box 2. Expansion at BMW (South Africa)…………………………………… 17
Box 3. Learning German in South African assembly plants…………………. 18
Box 4. EuroType Test Centre ………………………………………………... 26







iv




Transfer of Technology


Preface


The main objective of the studies carried out under the UNCTAD/UNDP Global
Programme on Globalization, Liberalization and Sustainable Human Development: Best
Practices in Transfer of Technology is to identify factors that could enable firms in developing
countries to upgrade technologies or develop new technologies with a view to enhancing their
productivity. The case studies focus on successful cases of technology transfer and integration
into the world economy. They are thus expected to provide lessons, in terms of best practices, to
other developing countries in the context of technological capacity building.



The project consists of three case studies1 of sectors where the selected developing


countries have demonstrated their ability to create new productive capacities and successfully
participate in the world market. Each of the sectors represents an example of created comparative
advantage; that is, where a country's factor endowments were modified through investment in
physical capital, human resources and the building up of capacities to develop and use new
technologies. Central to an understanding of the catch-up process and the building of
technological capacity across countries is the identification of firm-level factors as well as
government policies and institutions that enable firms to thrive, grow and compete in the world
market. Therefore the case studies aim to identify conditions under which sectoral development,
integration into the global economy, and sustainable human developments are all linked together.








1 The three case studies are: A Case Study of the Pharmaceutical Industry in India; A Case Study of the South
African Automotive Industry; and A Case Study of Embraer in Brazil. These three studies will also be part of a
forthcoming publication under the UNCTAD/UNDP GLOBAL PROGRAMME ON GLOBALIZATION,
LIBERALIZATION AND SUSTAINABLE HUMAN DEVELOPMENT, which will include overview on the
studies and on the international dimension of the national policies adopted in these cases.


v




Transfer of Technology






INTRODUCTION






This paper reviews the development of the automotive industry in South Africa, from a
highly protected, inward-focused industry to one with a marked export orientation, able to
compete effectively in global markets. The Motor Industry Development Programme (MIDP),
which reversed the import-substitution programmes that had shaped the industry from the early
1960s, played a significant role in this turnaround. Institutional support also contributed
significantly to innovation and technological development to meet the high technical standards
necessary to compete in international markets. The extensive foreign ownership of both vehicle
and component manufacturers facilitated the transfer of skills and organizational development
and provided access to international markets.

The study is organized in the following way. Chapter I discusses the factors that have shaped the
formation of technological capability in the South African automotive industry. The chapter
reviews the origins of the industry; the evolution from import-substitution polices to those more
export oriented, including the ownership patterns, the location of the industry, and the importance
of foreign direct investment (FDI); and finally, the aspects that attracted foreign automotive
producers during the 1990s. Chapter II analyses the performance of the South African automotive
industry, both qualitatively and quantitatively. The quantitative assessment includes the
investment behaviour of the assemblers, and the market and export performance. The qualitative
assessment focuses on the inter-firms relationships, the learning processes and the levels of
labour productivity of the automotive industry. Chapter III concentrates in policies and
institutions supporting the automotive industry in South Africa. It reviews the Motor Industry
Development Programme and its recent modifications, and provides a critique of the programme.
With respect to institutional support, the chapter discusses the role played by the South African
Bureau of Standards in reaching international standards and enhancing quality. Chapter IV
presents the stories of the successful integration into the global markets of two South African
firms, Bosal Automotive and Volkswagen of South Africa. The concluding remarks highlight the
characteristics of the South African automotive industry and the key policy aspects that have
helped integrate the industry into global networks.


vii




Transfer of Technology



CHAPTER I


FACTORS SHAPING TECHNOLOGICAL CAPABILITY
IN THE AUTOMOTIVE INDUSTRY





1. Origins of the automotive industry in South Africa



The South African automotive industry dates back to the 1920s when Ford and General
Motors established assembly plants in the country, in 1924 and 1926 respectively. The result was
acceleration in new car sales from about 13,500 units to 20,500 units between 1925 and 1929.
The onset of the Great Depression in the 1930s halted the expansion of the industry until 1938/39
after which car sales picked up. A third assembly firm, the National Motor Assembly of
Johannesburg, entered the market in 1939.


In the aftermath of the Second World War, the South African automotive industry grew
further and even faster. In 1945, the assembly plants, Motor Assemblers and Car Distributors
Assembly, were established in Durban and East London respectively. The Chrysler Corporation
established a plant in Cape Town, closely followed by South African Motor Assemblers and
Distributors in Uitenhage in 1948 and later by the British Motor Corporation in Cape Town in
1955 (Onyango, 2000). All these assembly plants assembled completely knocked down (CKD)
imported kits.


The domestic market expanded rapidly and the production of cars reached 87,000 units in
1960, a level higher than in any other developing country at the time. Currently, the automotive
industry in South Africa consists of 8 light vehicle assemblers (see table 1.1) and 11 producers of
medium and heavy commercial vehicles. Toyota is the major producer (in terms of market share)
of both cars and light commercial vehicles.



2. From import substitution to export orientation



From the early 1960s South Africa adopted import-substitution policies.2 For the
automotive industry these took the form of local content programmes (either by mass or value),
augmented by high tariff barriers and direct import controls. These policies effectively built an
anti-export bias into the automotive industry. Coupled with the small domestic market, this
protection resulted in high dependence on local inputs and a proliferation of vehicle models.
Short, high-cost production runs were the result.



2 These policies were geared towards an attempt to build local industries behind protectionist walls to replace
imports. Essentially, the Government sought to gradually replace imported manufactures by indigenous output.
Tariffs were key to providing protective barriers so that local industries could grow and develop.


1




Transfer of Technology



Table 1.1. Light vehicle assemblers operating in South Africa





Assembler Ownership Makes Capacity
(units)


Domestic market
share 1999
(per cent)


Automakers Nissan
Fiat


Sankorp


Nissan
Fiat


75 000 9


BMW (SA) BMW AG BMW 40 000 8.4
Delta GM


Domestic
Opel
Isuzu


75 000 11


SAMCOR Ford Motor (90
per cent)


Ford
Mazda


70 000 13.3


Land rover BMW AG Landrover 10 000 1
Daimler
Chrysler


Daimler Chrysler Mercedes
Honda #


Mitsubishi


40 000 9.9


Toyota TMC
Wesco


Toyota 120 000 23.6


VW (SA) VW AG VW
Audi


100 000 22.6



Source: Onyango (2000)






In the late 1980s, the development model based on industrial import substitution was


beginning to show considerable limitations. In 1989 there was a shift in policy to address the
problems of an inward-focused industry that had low-volume production and associated high
costs, through the introduction of Phase VI of the local content programme. It allowed firms to
include exports as part of their local content requirement. The MIDP was introduced in 1995 to
improve competitiveness through the adoption of market-based policies, and this was
instrumental in bringing about the process of industrial restructuring necessary for successful
integration into global markets. It introduced a more rapid rate of reduction in tariffs than that
required by South Africa’s World Trade Organization (WTO) obligations.


In 1998, a recession year, the eight light-vehicle producers assembled 301,000 units, of
which 8.4 per cent were exported. With falling protection in the 1990s, import levels began
rising: they accounted for 18.2 per cent of locally produced vehicles in 1998, as shown in table
1.2.





2




Transfer of Technology


Table 1.2. Automotive production and sales in South Africa
(’000 units)



Production Sales (domestic) Exports


1990 343 335 10
1991 315 308 10
1992 293 284 13
1993 308 298 16
1994 313 308 15
1995 389 387 16
1996 394 421 12
1997 364 399 20
1998 313 351 26



Source: Black (1998)





3. Ownership patterns



A distinctive feature of the South African auto industry is its particular ownership
structure. All assemblers are now wholly or partly owned by their respective parent companies in
Japan, the United States or Europe. The associated corporate governance structures have
significant implications for technology transfer and integration of the industry into global
markets. For instance, local producers, through the networks and supply chains of their “parent”
companies, are able to access new technologies and tap into existing markets.


Ford and General Motors (United States firms) entered the South African market in the
1920s, but they disinvested during the period of sanctions in the 1980s. However they
subsequently reinvested in South Africa and established close links with local firms (Samcor –
now renamed Ford Motor Company – and Delta). Daimler Chrysler, Volkswagen (VW) and
BMW (German firms) wholly own their South African subsidiaries and the local firms are well
integrated into the global automotive network. Volkswagen (South Africa) is the country’s major
exporter of vehicles. It has benefited from the lack of capacity in the global group, and, as a
result, has obtained large export orders (e.g. 60,000 VW Golf 4 vehicles a year to Europe). In the
case of United States firms (such as Ford and General Motors), Nissan of Japan and the German-
based firms, the links with South African firms are through franchise partnerships.



4. Location of the industry



The South African automotive industry is located in three geographic clusters: Port
Elizabeth/East London, Durban/Pinetown and Pretoria/Johannesburg.


3




Transfer of Technology


Geographic proximity facilitates inter-firm interaction, in this case specifically between
vehicle assemblers and components manufacturers. Local firms produce a range of components,
from leather car seats to tyres and catalytic converters, which are used by the local auto industry
and are also exported mainly to Germany and the United Kingdom (Galloway, 2000). Located
close to the Port Elizabeth/East London cluster is the major test facility of the South African
Bureau of Standards (SABS). This is one of the key support institutions for the automotive
industry, providing testing facilities for the industry’s products. Indeed a symbiotic relationship
has developed between the industry and the SABS that supports technological developments in
the industry. The SABS has cooperated with individual firms in the development of the test
facility and of technical standards, which are necessary for local vehicles and components to meet
the demands of international markets.



5. Foreign direct investment



The South African automotive industry has attracted substantial foreign direct investment
(FDI) in both automotive assembly and component production. FDI has often involved greater
commitment by a parent company to the local company. This has led to associated positive
spillovers such as technology transfer, human capital development, learning processes in
organizational development and access to export markets. Human capital development has
included, for example, transfer of managerial skills, which in turn has led to organizational
development. The supply linkages between the auto and components producers have been
instrumental in supporting the improvements in quality standards required for a successful
integration into the world market. Moreover, links into the global automotive chains of the parent
companies have underpinned the good export performance of the 1990s; they have assisted in the
development of internationally competitive vehicle assemblers and components producers.



6. Attracting foreign automotive producers in the 1990s



The Japanese and the American auto producers, buoyed by the collapse of the apartheid
regime in 1994, have invested quite substantially in the South African automotive industry. Since
1996 Toyota (Japan) and Nissan (Japan) have invested over US$74.6 million and US$77.6
million respectively, in the purchase of shares in the local subsidiaries, which in turn has allowed
the local subsidiaries room for upgrading plant and equipment that generates further production
capacity. Prior to 1996, the Japanese were restricted from entering the South African market due
to the latter’s apartheid policies. The American auto producers, Ford and General Motors, have
also recently invested in the South African industry: up to US$62.68 million and US$77.6 million
respectively, since 1995. These investments were more a case of reinvesting in the country since
both these companies had disinvested during the height of the apartheid regime. Now the
attraction is to develop the production capacity in South Africa and use that as a launching pad
into the rest of the African region.


4




Transfer of Technology


The three big German auto manufacturers, BMW, Volkswagen and Daimler-Chrysler,
have always maintained a presence in South Africa. Huge investments by these companies over
the past five to six years have been motivated largely by their desire to capitalize on the
opportunities presented within the framework of the Motor Industry Development Programme
(MIDP) (discussed in detail later in the paper). Daimler-Chrysler invested US$163.6 million in
1998 for the expansion of the existing Eastern Cape plant where top-of-the-range Mercedes Benz
vehicles are produced. BMW has invested US$149 million since 1996 for the expansion of
production capacity at its plant near Pretoria where the 3-Series vehicles are now being produced.
Since BMW had an existing plant in South Africa, and since the BMW market share in South
Africa is larger than its share in Germany, it made business sense to invest in its existing facility
as opposed to opening a new plant in a new location. Volkswagen, with the aim of using the
incentives provided by the MIDP to tap into overseas markets, launched a US$149 million
investment in 1998 to increase production capacity and upgrade its workshop facilities.
Volkswagen in South Africa is now currently exporting Golf 4 cars to Europe.







5




Transfer of Technology





CHAPTER II
PERFORMANCE OF THE SOUTH AFRICAN AUTOMOTIVE INDUSTRY






This chapter reviews, both qualitatively and quantitatively, the performance of the
automotive industry in South Africa. The review is based on a number of surveys and other data
sources (Black, 2000 and 1998; Onyango, 2000; Barnes, 1998; Department of Trade and
Industry, 2000).



1. Quantitative assessment



With respect to the quantitative assessment, the focus is on investment in plant and
equipment, R&D, human capital development, and other related expenditures. Furthermore, the
assessment deals with issues related to market research, marketing activities as well as export
performance in terms of products exported, export earnings and export markets.


A. Investment


The investment behaviour of assemblers is influenced by a number of industry-specific
factors. The importance of economies of scale in automotive production means that the
increasingly competitive environment exerts some pressure on firms to increase production as a
way of reducing unit costs (Black, 1998). Given the small size of the domestic market, such a
scenario may require that the parent company create export opportunities for the South African
subsidiary, and invest accordingly. Key investment decisions are made outside South Africa by
the global parent, and therefore short-term profitability in a minor South African subsidiary is
likely to be of much less concern than medium-term market prospects and strategic
considerations related to market share and the location logic of global production networks.


Investment has been rising in both the assembly (table 2.1) and component industries.
Some firms such as BMW and Volkswagen have embarked on major expansion, with new
investment and export plans. While FDI inflows into the South African economy totalled a
moderate US$6.57 billion during the period 1995-1997, the automotive industry was the third
largest recipient (after telecommunications and food and beverages). In the assembly industry,
apart from plant upgrades and expansions that have created new production capacity, a
significant trend has been the purchase of majority or minority stakes by the parent company,
such as the purchase by Toyota Motor Corporation (TMC) of Toyota SA. The investments made
in plants have not, however, reached the level of the massive investments that have been made in
emerging market economies such as Brazil, Thailand, Argentina and Eastern Europe (Black,
1998).


7




Transfer of Technology


Table 2.1. Investments in plant and equipment by vehicle manufacturers


Vehicle assembly (US$ current)
1990 330 million
1991 332 million
1992 390 million
1993 181 million
1994 214 million
1995 338 million
1996 354 million
1997 324 million
1998 516 million



Note: The data in this table is presented in US$; the exchange rate is approximately US$1=
8.30 rand.
Source: National Association of Automobile Manufactures of South Africa (NAAMSA), 1999






South African firms, historically benefited with a protected trade regime, have been slow
in adopting modern techniques and more flexible forms of production that have become standard
practice amongst the major players in the international automotive industry. This is unsurprising
if one looks at patterns of R&D expenditures that show a very small, albeit growing, commitment
to R&D investment.



Average R&D expenditure as a percentage of sales amongst the sampled firms is


differentiated between exporting firms and non-exporting firms. Exporting firms tend to spend
significantly large amounts on R&D (2.55 per cent of total sales) as compared to the 0.95 per cent
of the non-exporting firms. Collaboration between motor assembly firms and the South African
Bureau of Standards, as well as the engineering faculties of academic institutions such as the
Universities of Cape Town and Stellenbosch, have been of particular significance in, for
example, the development and testing of engines and catalytic converters.


Transfer of technology and other spillovers have been significant features associated with
the investment in local subsidiaries by parent companies. Investment in Toyota SA by TMC
(Japan) has resulted in the upgrading of plant and equipment to meet internationally competitive
standards. Technologies previously unavailable in South Africa have now spread across the
automotive industry; this has brought benefits such as superior product design, transfer of skills
(know-how) and relevant machinery. These developments, although progressing slowly, are
geared towards reducing average lead times and average throughput time (measured in days). A
number of manufacturers have adopted multi-shift or double-shift production (especially for
export), thereby introducing greater flexibility into production organization (Cape Times, 23
March 2001).



8




Transfer of Technology




B. Market performance


Net profits before tax of the light vehicle assemblers increased from a rather low base of
US$ 113.10 million in 1992 to a record level of US$ 561.94 million in 1995 (table 2.2). Since
then, profits have dipped precipitously, and the industry incurred large aggregate losses in 1997
and 1998. Indeed the significant volumes of imported vehicles led to much greater price
competition and lower margins, which added to the pressures of stagnating sales volumes (Black,
1998).




Table 2.2. Aggregate profit performance of vehicle manufacturers


Net profit before tax (US$ current)
1992 113.10
1993 185.45
1994 321.66
1995 561.94
1996 120.93
1997 (118.91)
1998 (59.81)



Source: Department of Trade and Industry, 1999






Economic performance and profitability in the component industry have also fallen
sharply. This is highlighted by the fact that average employment levels per sampled firm declined
14 per cent between 1995 and 1997, and turnover in real terms stagnated over the same period
(Barnes, 1998). In a subsequent survey of 21 component firms, conducted by the Department of
Trade and Industry in 1997, Black (1998) reported that the sampled firms' profits fell by 74.6 per
cent during 1996 from their record levels of 1995. The prominent contributing factors were
falling margins, resulting from pressure applied by vehicle manufacturers, and the increasing
desire of the vehicle manufacturers to use imported components (see table 2.7).


C. Export Performance


Automotive exports from South Africa expanded dramatically from just US$ 121.15
million in 1988 to approximately US$ 2.45 billion in 1999, of which just over US$ 0.81 billion
was accounted for by vehicles. In unit terms, light vehicle exports increased from 11,400 units in
1992 to approximately 58,000 units in 1999. The main destination for vehicle exports is to
Africa. However exports to non-African markets are likely to be the fastest growing in the short
term, and will consist mainly of passenger cars. Volkswagen has a large contract to export Golf 4


9




Transfer of Technology


vehicles to the United Kingdom and BMW exports its 3-Series vehicles to Australia and a
number of Asian markets. As table 2.3 indicates, there has been a major expansion in production
of a wide range of components, especially of products such as leather seating material, catalytic
converters, wheels, tyres and exhaust pipes.


The prime objective of the import-export complementation scheme is to assist component
suppliers to generate high volumes, which make them more efficient and able to compete in the
domestic market against imports. Under this scheme, import duty on components and vehicles
may be offset by import rebate credit certificates derived from the export of vehicles and
components.3 This is expected to support the development of more volume-based products for
global consumption. While this objective has been achieved in part, it is clear that the bulk of
export expansion has not been by “traditional” component suppliers, but by a rapidly emerging
new group of mainly foreign-owned firms, frequently with links to vehicle manufacturers. The
major links of these firms are with the global networks of the parent companies.


In June 2000, the changes to the MIDP included a productive asset allowance (PAA),
which became effective as of 1 July 2000 (see appendix 1 for further detail). This involves a non-
tradable duty credit, calculated at 20 per cent of qualifying investments, which is made available
to manufacturers for five years. Assemblers are able to use this duty credit to import vehicles,
maintaining the range of imported products offered to the consumer. Assemblers are encouraged
to assemble vehicles for the local market through an allowance of up to 27 per cent of the
components of locally produced cars to be imported duty free (Business Day, 2 June 2000).



Table 2.4 shows the rise in total automotive exports over an 11-year period. The industry


supplying leather seat covers supplies the bulk of BMW’s global requirements, and it is an
important supplier to a significant number of other foreign vehicle manufacturers. The industry is
labour-intensive, and a sizeable tanning industry has developed to support it. The catalytic
converter industry, which is capital-intensive, currently supplies more than 10 per cent of the
total world supply, and is set to expand even further.4 It has reached the critical mass, requiring
investment in inputs such as the ceramic substrate, where the required investment is much larger
than for the relatively simple coating and canning process. A major advantage of the industry is
that 90 per cent of the precious metal content in the catalytic converter is included in the
valuation of exports that are eligible for import rebate.





3 The significance is that it enables exporters to earn import credits, which they can then use to source components at
close to international prices.
4 See case study of Bosal later in the paper.


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Transfer of Technology



Box 1. Toyota’s production and exports



The largest vehicle producer in the country, Toyota SA, has responded to the need for


closer integration into global production networks by expanding its export programme. For the
first time, the South African company will embark on large-scale production of components to
feed into the Toyota Motor Corporation (TMC) global production network.


Under this new programme, Toyota SA is entering into a joint venture with TMC and
Cataler Corporation of Japan to produce catalytic converters for use in TMC's products. This
new venture aims to become the fourth source of exhaust catalysts for the Toyota global
manufacturing network. Production of exhaust catalysts started in the latter half of 2001, and
annual production is geared to rise to more than one million units per year. The new facility will
make use of Toyota's patented advanced catalytic converter technologies, therefore involving
quite significant technology transfers, where previously there were none.




Source: Toyota (SA)



Table 2.3. Total component exports
(US$ current)



1995 1996 1997 1998 1999 Per cent of


1999 total
Catalytic converters 107.77 134.72 181.52 276.36 421.14 26.6
Stitched leather covers 283.05 292.79 225.00 337.09 309.50 19.5
Tyres 60.8 68.82 74.34 90.54 104.75 6.6
Silencers/exhaust pipes 21.11 39.53 32.82 89.63 98.03 6.2
Road wheels/parts 48.61 52.79 70.65 81.09 84.92 5.4
Engine parts 31.11 31.86 61.95 70.91 62.78 4.0
Wiring harnesses 11.38 21.39 29.56 37.64 49.83 3.1
Automotive tooling 71.94 64.88 67.17 46.55 43.28 2.7
Glass 13.61 16.51 22.83 20.36 24.09 1.5
Radiators 21.38 24.88 20.22 19.64 18.20 1.1
Ignition/starting equipment 1.11 3.72 6.52 8.54 15.41 1.0
Filters 3.61 9.76 11.96 13.09 13.94 0.9
Transmission shafts, cranks 8.05 8.83 1.52 11.27 13.93 0.9
Brake parts 6.38 6.74 8.48 13.82 12.95 0.8
Shock absorbers 10.55 12.33 12.17 11.45 12.62 0.8
Batteries 14.72 13.95 19.13 14.36 11.14 0.7
Car radios 1.94 0.93 6.30 8.54 11.96 0.7
Clutches/shaft couplings 4.44 4.88 7.17 9.27 8.85 0.6
Other components 195.00 154.41 122.82 203.45 268.52 16.9
TOTAL 916.66 941.86 1 031.96 1 363.6 1 585.90 100


Source: Department of Trade and Industry (1999).


11




Transfer of Technology






Table 2.4. Automotive exports
(Fob values, US$ current)



1988



1989



1990



1991



1992 1993 1994 1995 1996 1997 1998 1999


Compone
nts


53.5 115.4 153.8 269.2 379.3 515.2 583.3 916.7 941.9 1 032.0 1 363.6 1 585.9


Vehicles 67.7 88.1 146.5 150.8 144.5 176.1 193.1 250 174.4 314.6 420.9 840.3


TOTAL 121.2 203.5 300.3 420 523.8 691.3 76.4 4 200 116.3 1 346.6 1 784.5 2 426.2



Source: Department of Trade and Industry, 1999 and 2000




While South African automotive exports into the Southern African Development
Community (SADC)5 have increased rapidly, this has been at a slower rate than total automotive
exports. For example, light vehicle exports to SADC accounted for 12 per cent of the total in
1999, a sharp decline from the 64 per cent share in 1996. For medium and heavy commercial
vehicle exports, which have not grown significantly in volume terms, Africa remains the
dominant market, although the SADC share declined from 89 per cent in 1996 to 60 per cent in
1999. Two reasons account for this. First, the collapse of the Zimbabwean market and the raising
of tariff barriers in response to economic problems have slowed sales into South Africa’s major
regional market. Secondly, light vehicle exports from South Africa have been increasing at a very
rapid pace to markets such as Australia and Europe, reflecting the increasingly important role
played by South African operations of firms such as BMW and VW in the global strategy of their
parent companies


The growth in exports to Europe (see table 2.5) is a direct result of local subsidiary firms
accessing the traditional markets of the parent companies. The investments of global automotive
producers in local operations have facilitated the inclusion of these local firms into the “parent”
company’s global supply networks and markets.

The export performance of the South African auto industry has improved significantly in the
1990s for two reasons:

(i) The import-export complementation arrangements6 of Phase VI of the local content


programme and the MIDP have powerfully assisted export expansion, in particular by
facilitating the integration of South Africa as a supplier of selected components into the



5 SADC is a regional economic bloc consisting of 14 countries in southern and eastern Africa. South Africa is by far
the largest member country with the most diversified industrial base.
6 This is a scheme that allows import duty rebates based on exports. Essentially, this enables assemblers to use
import credits to source components at close to international prices, therefore providing a strong incentive to
assemble locally.


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Transfer of Technology


global networks of the major vehicle producers. Ford’s Port Elizabeth engine plant has
been designated the sole supplier of 1.3-litre engines to Europe and Asia, with the first
shipment at the end of 2001, and SA Trim has a contract to produce all leather car seats
for BMW (Cape Times, 17 May and box 2 later in this paper). In this sense, integration is
happening more rapidly with the major producing countries, especially Germany, than
within the southern African region itself.






Table 2.5. Destination of South African light vehicle exports by value
(Percentage)



Country/region 1996 1997 1998 1999


Germany - 5 25 57
United Kingdom 3 2 15 13
Australia 11 19 15 10
Mozambique 9 9 7 4
Taiwan Province of
China


- 5 4 3


Zimbabwe 36 18 8 2
Zambia 7 6 6 2
Malawi 9 7 4 2
Kenya 9 5 3 1
Mauritius 1 1 1 1
Ghana - - 1 1
Other 15 13 4 3

European Union
(EU)


4 7 41 70


SADC 64 46 27 12


Source: Department of Trade and Industry (2000)



(ii) A second driver of export expansion has been falling protection and limited domestic


market growth possibilities, which have forced firms into the export market. A
significant share of this export expansion has been destined for SADC, a process that
has accelerated since the advent of democracy in South Africa and the dropping of
sanctions. Although recently the rate of growth in the SADC market has been
declining for reasons mentioned earlier.






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Table 2.6. Destination of medium and heavy commercial vehicle exports


(percentage by value)


COUNTRY/REGION 1996 1997 1998 1999
Mozambique 14 19 23 28
United States - - 4 27
Malawi 19 19 12 16
Zambia 12 12 7 6
Zimbabwe 36 25 17 4
United Kingdom - 3 - 4
Belgium - - 1 3
United Rep. of Tanzania 6 3 4 2
Angola - 4 1 2
Dem. Rep. of the Congo - 1 1 1
Kenya 6 3 7 1
Other 9 11 24 5
SADC 89 82 66 60
North America - 1 8 30
EU - 3 2 8



Source: Department of Trade and Industry (2000)





2. Qualitative Assessment



A qualitative assessment of the performance of the automotive industry requires focusing
on the nature of inter-firm relationships in the industry, learning processes within firms, and
increasing labour productivity, among other factors.


A. Inter-firm relationships


It is interesting to note the blend of cooperation and competition that exists among firms
in the automotive industry. Vehicle assemblers compete with one another, sometimes through
fierce price competition, while cooperative relationships are found between vehicle assemblers
and components producers. Table 2.7 shows the extent of support provided by vehicle
manufacturers to local components manufacturers. It appears as if such linkages (or support) are
declining. This is possibly explained by increased import competition, as tariff barriers have
fallen.



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Table 2.7. Purchases of original equipment components by vehicle manufacturers

Local purchases


(US$ current)
Imports


(US$ current)
Total purchases
(US$ current)


Local content (per
cent)


1994 1 525 2 100 3 625 42
1995 1 863 2 575 4 438 42
1996 1 546 2 332 3 879 40
1997 6 641 10 380 3 958 39



Source: DTI Survey, 1998




Another interesting perspective regarding inter-firm relationships is provided by a survey
of components producers (Barnes, 1998). Barnes asked firms whether they consulted with their
suppliers when designing new products, and whether their customers assisted them to improve
quality. Tables 2.8 and 2.9 suggest that there is a great deal of inter-firm cooperation, to the
extent that most firms in the sample seem to cooperate with their suppliers and customers on
matters of product development and quality. Barnes suggests that this cooperation involves
collaboration on design and product specifications. Also involved in this collaboration are the
SABS and testing facilities at various universities (e.g. Stellenbosch).




Table 2.8. Do you consult with your suppliers when designing new products?

Exporters Non-exporters
YES 7 21
NO 1 3



Source: Barnes (1998)



Table 2.9. Do your important customers assist you with quality control?

Exporters Non-exporters
YES 8 22
NO 0 2



Source: Barnes (1998)


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Transfer of Technology




The relationships between parent (foreign) and local firms are particularly important, both


for assemblers and components manufacturers. Through the franchise modality of involvement
with South African firms, the parent companies are engaged in technical support, training
programmes and financial commitment in terms of investment. Barnes (1999) found that these
links were fostered by the following factors:


• Levels of foreign ownership and investment have been increasing and trade, especially
exports, expanding. Direct equity stakes by Nissan and Toyota could be the forerunner of
direct Japanese investments in the component industry.



• Until the early 1990s, with the exception of the German companies (Mercedes, BMW and


Volkswagen), all local assembly operations were domestically owned and operated under
licence. This has changed substantially, and much closer links have developed between
the local firm and the overseas parent (box 2).



• Ford and General Motors have taken substantial equity stakes, with Ford recently


increasing its stake to 90 per cent in Samcor (now renamed Ford) that produces Ford and
Mazda vehicles.



• Political acceptability (of South Africa) and an automotive policy that encourages exports


and, therefore, specialization, have given strong encouragement to parent companies to
increasingly incorporate their South African interests into their global networks.



• There has also been significant foreign investment, particularly by German firms, in the


component industry in areas such as tyres, catalytic converters, engines, seating and axle
assemblies.



• Certain South African automotive firms have subsidiaries in the region and South Africa


tends to act as regional headquarters to foreign firms with interests in southern Africa.
Examples include South Africa’s US$ 33 million investment in the Afinta Motor
Corporation of Swaziland for the assembly of medium to heavy commercial vehicles, and
a US$1.04 million investment by Nissan (SA) in the Quest assembly plant in Zimbabwe
for the manufacture of a range of Nissan vehicles (BusinessMap, 2000, unpublished data).






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Transfer of Technology



Box 2. Expansion at BMW (SA)



BMW (SA) has benefited greatly from its close association with the parent company in


Germany. Substantial amounts of investment in plant and equipment, technology transfer and
improved access to international markets of the parent company have been some of the factors
associated with its rise in production and exports. The South African manufacturer is currently
fulfilling a US$ 652 million export order of the 3-Series BMW vehicles to BMW markets all over
the world that were traditionally served by the BMW parent company in Germany. These markets
include the United Kingdom, Japan, Australia, the United States, Hong Kong (China), New
Zealand, Taiwan Province of China and Germany. Each of the exported vehicles has a domestic
component percentage of at least 60 per cent. In addition to the export of cars, SA Trim, a BMW-
owned producer of leather seating, has an export contract worth 1 billion rand to supply leather
seat covers to all BMW markets around the world. It is these kinds of “parent-subsidiary”
linkages that are very important for providing access to international markets.




Source: BMW (SA)


B. Learning Processes


Work organization – the manner in which production/assembly is structured – is
important for achieving and maintaining a competitive edge in the automotive industry. South
African automotive producers have been relatively slow in adopting the “lean production”
methods that have contributed to the expansion of the Japanese automotive industry and to the
success of Japanese transplants in the United States and the United Kingdom (Black, 1994).
Broadly defined, “lean production” not only includes production, but also linkages to suppliers
and to the distribution system.7 In the South African industry, low education levels of the labour
force and a legacy of shopfloor conflict seem to impose constraints on the introduction of a
production system which is essentially dependent on a much more motivated workforce. South
African firms appreciate the need to introduce more automation but are again constrained by the
absence of policies that would create both high levels of training (multi-skilling) and
commitment from the workforce. Therefore, marginal gains from the introduction of more
automation are limited as they depend on a workforce that is committed and sufficiently skilled
to handle the automation. Although automation is a significant method for improving labour
productivity, in lower-wage countries such as South Africa and Brazil, it is indeed likely that
automation may be introduced more for reasons of improving quality than to lower costs (see
Krafcik J, 1989).




7 “Lean production” is a system that was pioneered by Toyota in the early 1980s, which has as its main elements:
continuous improvement, teamwork, flexibility and close relationships between producers, suppliers and the
distribution network.


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Transfer of Technology



C. Labour productivity


In general, the automotive industry in South Africa suffers from low levels of labour
productivity. South African firms are on average not as competitive in terms of their operational
dynamics as their more aggressive European counterparts (see table 2.10); they nevertheless still
possess a labour-cost advantage (see table 2.11), which suggests that there is potential for South
African firms to improve their competitiveness and expand production. However, there are some
firms that are very competitive and have been able to achieve high levels of labour productivity.
This point is supported by table 2.10, which shows that regarding quality (customer returns and
internal defects) and human resource development, in particular, some individual South African
firms are more competitive than their European counterparts, but perform much worse on an
industry average.


A low skill base, both at the managerial and at the shop floor level, is a key constraint in
the automotive industry. Almost all surveyed firms (94 per cent) agreed that the lack of sufficient
skills and/or the high cost of the available small pool of skills had affected productivity and
competitiveness levels. Surprisingly though, average levels of expenditure on training in the
industry are quite low (compared with other industries in South Africa). On average, firms spend
1.4 per cent of their total remuneration costs on training. This is a factor that also contributes to
the low labour productivity in the industry.


South African firms actually have a labour cost advantage over their European
counterparts that to some extent compensates for the lower average output per employee.
Although this may suggest that operational competitiveness is lacking in the South African
automotive industry, it does not rule out the potential for future improvements.




Box 3. Learning German in South African assembly plants


An interesting learning process that is currently in practice at the BMW and Daimler-
Chrysler plants in South Africa is language instruction. Local managers and shop floor workers
are benefiting from lessons in the German language from hired experts who have been
instrumental in improving the literacy levels at these plants. Since there is an increasing German
involvement in the operations of the local subsidiaries, and since local managers and workers
now deal more often with German supply networks and markets, providing German lessons
improves coordination and flexibility within the individual firms, and between the firm and its
supply networks and markets.





Source: Authors


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Transfer of Technology


Table 2.10. Average competitiveness benchmark findings for firms in South Africa
and Western Europe, including an outline of the best performing firms, 1997


Market driver Measure South Africa
average


South Africa
best


W. Europe
average


W. Europe
best


Cost control Raw material stock:
days


44 4.2 15.1 7.5


Work in progress:
days


9.9 3 7.6 1.8


Finished goods
stock: days


15.2 0.2 6.7 3.2


Quality Internal defects:
percentage


4.4 0.4 3.4 0.9


Customer returns:
(parts per million)


20 285 38 265 50


Human resource
development


Absenteeism:
percentage


6.8 2.5 5.4 4.1


Labour turnover:
percentage


9.9 2.0 9.5 4.0


Expenditure on
training as a
percentage of
remuneration


1.4 2.7 2.0 2.6


Innovation R&D expenditure as
a percentage of
turnover


0.8 2.0 5.4 12.5



Source: Barnes (1999)



Table 2.11. South African vs. European firms’ output/average
remuneration costs per employee



Output per employee


(US$)
Average
remuneration costs
per employee (US$)


Remuneration costs
as a percentage of
employee output


South African firms


34 426 6 149 17.9


European firms


136 393 25 559 18.7


South African as a
percentage of
European figures


25.2 24.1 95.7



Source: Barnes (1999)





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Transfer of Technology



CHAPTER III


SUPPORTING THE AUTOMOTIVE INDUSTRY:
POLICY AND INSTITUTIONS






Institutional support and selective policy interventions have played an important role in
the development of an internationally competitive industry in South Africa. In this chapter we
focus on the role of the Department of Industry and the South African Bureau of Standards. The
former was responsible for the local content programmes, and at present it is responsible for the
Motor Industry Development Programme (MIDP), which involves formulating, implementing
and monitoring the MIDP. The South African Bureau of Standards has been instrumental in
substantively influencing the restructuring of the automotive industry and its integration into the
global economy. It is a statutory organization responsible for the development and publication of
standards, certification and testing of standards. As such, it is important for technology transfer
and innovation in terms of both product and process development.



1. Motor Industry Development Programme (MIDP)



From a policy perspective, the automotive industry in South Africa has been driven by a
series of local content programmes, very high tariff protection, and, more recently, the Motor
Industry Development Programme that runs until 2007. The MIDP has marked a shift from
import substitution to export orientation.


In 1960, the domestic content of a locally assembled vehicle was only 20 per cent. This
prompted the introduction of the first of a series of local content programmes in 1961, resulting
in a rapid rise of local content to 52 per cent on a mass basis by 1971. Later phases of the
programmes increased local content requirements to 66 per cent for all light vehicles.8 The main
objective behind these programmes was to minimize the use of scarce foreign currency. Phase VI
of the local content programme, introduced in 1989, marked a substantial change of direction. It
was the first attempt to address the problems of an inward-oriented, severely fragmented industry
with low volume output and associated high unit costs. Under this programme, local content was
to be measured not just by the value of domestically produced components fitted to locally
assembled vehicles, but also on a net foreign exchange usage basis. In other words, exports by an
assembler counted as local content and enabled it to reduce actual local content (to a minimum of
50 per cent) in domestically produced vehicles. Exports, especially of components, grew
extremely rapidly and gave assemblers greater flexibility in their sourcing arrangements.


In 1995, Phase VI of the local content programme was replaced by the Motor Industry
Development Programme. It was introduced after a comprehensive consultative process



8 This requirement was introduced under Phase III of the local content programme in 1971 and was extended to light
commercial vehicles in Phase V, introduced in 1980.


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Transfer of Technology


involving all industry stakeholders. This consultative process continues through the Motor
Industry Development Council. The MIDP continued the direction taken by Phase VI and
entrenched the principle of export complementation. However, it went a step further by
abolishing local content requirements and introducing a tariff phase-down at a more rapid rate
than was required by South Africa’s WTO obligations.

The MIDP consists of two parts:
• Light Vehicle Programme; and
• Medium and Heavy Vehicle Programme.


A. Light Vehicle Programme


The Light Vehicle Programme covers passenger vehicles, mini buses and light commercial
vehicles. To participate in the Programme, assemblers have to be registered vehicle assemblers
and have to undertake completely knocked down (CKD) assembly of vehicles. The key elements
of the programme are as follows:


• The excise-duty-based local content system, which applied under Phase VI, has been
replaced by a tariff-driven programme;9



• There is no minimum local content requirement;



• Tariffs are being phased down to 40 per cent for light vehicles and to 30 per cent for


components by 2002 (see table 3.1);




Table 3.1. Import duty phase-down for light vehicles and components under the MIDP


Vehicles Components
1995 65.0 49.0
1996 61.0 46.0
1997 57.5 43.0
1998 54.0 40.0
1999 50.5 37.5
2000 47.0 35.0
2001 43.5 32.5
2002 40.0 30.0



Note: Tariffs for each year are applicable from 1 January.
Source: DTI, 2000



9 This implies that a single tariff will apply to all components as opposed to the previous system under which each
component had its own excise duty.


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Transfer of Technology



• Manufacturers of light vehicles are entitled to a duty free allowance (amounting to 27 per


cent of the wholesale value of the vehicle) for the import of original equipment
components;



• Import duty on components and vehicles may be offset by import rebate credit certificates


derived from the export of vehicles and components.10 The value of the certificates is
equal to the net foreign currency earnings of the exports, that is the FOB export value less
foreign currency usage in the manufacture of exported products. The prevailing duty on
components (table 3.1) applies to the balance.



• The programme also contains a provision for additional duty free allowance, which is a


facility granted to vehicle manufacturers assembling vehicles for the domestic market.
The facility allows for up to 27 per cent of the components of locally produced cars to be
imported duty free.



The Department of Trade and Industry conducted a mid-term review of the MIDP


recently. While the MIDP is perceived by the South African Government as having had a
generally positive effect in terms of increasing exports and improving productivity, a number of
changes were introduced, effective from July 2000, as follows:


a) The MIDP has been extended to 2007 in order to provide a long-term planning
environment;



b) Tariffs on imported light vehicles will be reduced from 2003 by 2 percentage points per


annum, to 30 per cent in 2007. Tariffs on original equipment (OE) components will be
reduced from 2003 by 1 percentage point per annum, to 25 per cent in 2007;



c) The small-vehicle incentive is being phased out as it is seen as having served its purpose;



d) The duty free allowance on imported components is being maintained at 27 per cent;



e) The import rebate credit facility for component exports is being reduced from the current


1:1 ratio to 1:0.6 by 2007;


f) The ratio of exports of components exported versus CBU (Completely Built Up) light
motor vehicle imports is being adjusted from 1:0.75 to 1:0.6 by 2003 to encourage
component manufacture; and



g) A productive asset allowance (PAA) has been introduced to encourage investment (see


appendix 1 for details).




10 The significance is that it enables exporters to earn import credits, which they can then use to source components
at close to international prices.


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Transfer of Technology





B. Medium and Heavy Vehicle Programme


At the introduction of the MIDP in 1995, the South African Government adopted the view
that medium and heavy vehicles were key items of capital equipment and should be available at
competitive prices. Protection was therefore sharply reduced. Although this industry was not
subjected to a formal mid-term review, it was decided to investigate the rebate provision for drive
train components (automatic diesel engines, gearboxes and drive axles) and the duty for
assembled vehicles. Amendments, which came into effect in July 2000, include the following
(see appendix 2 for further details):


a) The rate of duty on medium and heavy motor vehicles is to remain at 20 per cent;


b) The rebate on drive train components is to be amended to provide a full duty rebate;


c) The duty protection afforded to tyres is to remain at 15 per cent; and


d) The rate of duty on original equipment components is to be reduced from 30 per cent to
25 per cent from 2002 to 2007, by 1 percentage point per annum, as in the case of light
vehicles. OE components can, however, be imported with a full duty rebate.



A survey of components producers (Barnes, 1998) shows that firms are well aware of the


demands placed upon them, both in terms of the Phase VI Programme and the MIDP. They
highlighted the need to significantly improve plant efficiency, expand investment and exports,
and enhance technological capabilities. Firms indicated that customer demands drove the
innovation process at the firm level. In particular, they mentioned the role of domestic customers
in this process, while exporting firms emphasized the key role of international customers.


C. A critique of the MIDP


The MIDP is widely regarded as being successful, especially with respect to increasing
investment and exports. This is consistent with the overall macroeconomic framework of Growth,
Equity and Redistribution (GEAR) in South Africa that seeks to encourage renewed growth and
sustainable development through investment and exports. Although the MIDP is sector-specific,
the rationale behind it is not confined to the automotive sector.



Although the incentives that form part of the MIDP have been successful in encouraging


exports, there have been complaints from other automotive producers in the southern African
region (especially Zimbabwe), who find it difficult to compete with South African automotive
products because the import-export complementation programme virtually subsidizes South
African exports into the region. A study of the automotive industry in Zimbabwe by Muradzikwa
(1999) revealed for the first time that Zimbabwe components producers view the MIDP as an
obstructive framework that runs against the concept of fair trade.


24




Transfer of Technology





Incentives, whether they are MIDP related or not, are almost always problematic. Firms


are willing and sometimes able to abuse incentive facilities to their best advantage but to the
detriment of the other more needy firms in the industry/economy. For instance, firms utilize
incentives under the pretext of wanting to expand exports although they would have exported
anyway even without the incentives. In this case, the incentives have not really achieved their
objective. However, there is no evidence to suggest that such practices are happening with the
MIDP pack of incentives.



2. South African Bureau of Standards



The role of institutional support has been very important in South Africa, especially in
terms of ensuring standards for the international market and enhancing quality competition.
Institutions such as the South African Bureau of Standards (SABS), Department of Trade and
Industry (DTI), and various research and academic institutes, all have a part to play in enhancing
the competitiveness of the automotive industry.


The SABS plays a critical role, especially for firms wanting access to international
markets. Goods are inspected, tested and analysed in terms of compulsory specifications, and are
tested in accordance with numerous international test methods. Individual firms may also set
standards against which products can be tested by the SABS. Commodities that do not meet the
specified requirements are rejected, or even destroyed. For instance, the SABS destroyed a
consignment of some 3,000 sets of brake pads that did not comply with compulsory
specifications. Testing and certification facilities at the SABS are increasingly being considered
as a passport to export opportunities for South African companies, and collaboration between the
SABS and various automotive firms has been an encouraging feature in the industry's quest for
international competitiveness.


Collaboration between the SABS and automotive firms has led to the establishment of
various testing and certification facilities. One such example is the EuroType Test Centre (Pty)
Ltd, a state-of-the-art laboratory that can perform vehicle emissions testing to the most exacting
European, American and Japanese environmental requirements. Although South Africa
manufactures and exports more than 1.5 billion rand worth of catalytic converters each year, it is
the only major country in the world that does not require any control over the poisonous gases
emitted by motor vehicles. Vehicles manufactured in South Africa for export to countries with
strict air pollution requirements therefore need to be tested before leaving the country; hence the
strategic importance of the EuroType Test Centre (see box 4).




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Transfer of Technology



Box 4. EuroType Test Centre



The EuroType Test Centre is a 30-million-rand investment in the Eastern Cape located


near the Port Elizabeth/East London automotive cluster. It is critical for the export programmes
of firms wanting to make inroads in international markets. The specifications of the facility
include fuel temperature control, oil temperature control, combustion and transition control. The
Centre has already secured contracts from Daimler-Chrysler and BMW to perform vehicle
emission testing for all their export vehicles so as to be competitive in international markets. As
the Managing Director of BMW, Ian Robertson has correctly asserted, "The EuroType Centre is
invaluable in our efforts to penetrate additional overseas markets where international emission
testing is a legal requirement".




Source: SABS






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Transfer of Technology


CHAPTER IV
SUCCESSFUL INTEGRATION INTO GLOBAL MARKETS:


THE STORIES OF TWO FIRMS




In addition to the snapshots of firm experiences documented in the boxes in the paper thus
far, the experiences of two firms are examined here in greater detail with a view to highlighting
their success in integrating into global markets.



1. Bosal Automotive: innovating for global integration



Bosal Automotive produces a range of products from precision tubing, including exhaust
systems, catalytic converters, tow bars, roof racks, jacks and warehouse racking systems. The
Belgian parent company has 30 manufacturing plants in countries including the Netherlands,
Canada, Mexico, the United States, and the Czech Republic, in addition to its South African
plant. It also has 50 distribution plants around the world. Bosal’s South African plant has been
operating for more than 40 years.


Bosal has its group Research and Engineering Centre at Lummen, Belgium, with satellite
centres at Ann Arbor, Michigan (United States), and Pretoria, South Africa. The key areas of
activity include research, advanced engineering, product development, manufacturing and
industrial development to cover the whole spectrum, from new product development to pilot
production. These activities are aimed at developing new product models striving for leaner
production, lower cost and shorter lead-time targets. Research into product innovation includes
lightweight exhaust systems, weight reduction programmes for existing product lines and
development of innovative technology. The company’s exhaust plant in South Africa was
awarded the QS 9000 Achievement Quality Award by the SABS in September 2000. Ford,
General Motors and Chrysler determined the international quality standard, which is based on
criteria of cost reduction, reduction of inspections required and consistency of quality. Bosal was
the first South African exhaust manufacturer in South Africa to achieve this standard.



Also in September, 300,000 Daewoo cars of the Republic of Korea were fitted with South


African manufactured catalytic converters. An agreement between Daewoo and Catalytic
Converter Industries, a subsidiary of Bosal Automotive, for these converters followed an earlier
order of 17,000 converters, indicating that Daewoo was convinced of the quality of the South
African product. Bosal automotive engineers worked closely with their counterparts in Daewoo
to develop a catalytic converter to meet the specific requirements of the Korean car manufacturer.
This transfer of knowledge and cooperation in this venture has seen the development of a
relationship of trust between the two firms in that the contract will continue for the duration of
the model’s life.


The South African firm has demonstrated its ability to meet the high technical standards
of the international market place. This has involved adoption of manufacturing technology,


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Transfer of Technology


organization and systems, which meet international best practice, with the assistance of Daewoo.
Skills development programmes were also undertaken and additional jobs created in a region of
South Africa, which faces a daunting unemployment problem.



2. Volkswagen of South Africa: export-led skills development and employment creation



Volkswagen of South Africa (VWSA) is the largest foreign employer in South Africa,
directly employing 6,500 workers. Employees receive extensive education and training
opportunities, ranging from basic literacy and skills training to assistance with tertiary education.


Exports of VW vehicles have grown rapidly over the past six years. In 1994, VWSA
began a three-year contract to export its Jetta models to China in a deal worth over US$ 208.33
million in foreign exchange earnings. In 1997, 6,000 VW vehicles were exported to Europe,
Australia and Africa, and in 1998, VW (SA) exported 5,000 "generation three" Golf Gti vehicles
to the United Kingdom in a deal worth US$ 72.7 million. The South African manufacturer
currently has an export order for 68,000 Golf 4 vehicles to Europe, making VW the biggest
vehicle exporter in Africa. This Golf 4 deal is worth US$ 746 million, and a total of US$ 22.39
million in capital expenditure has been undertaken to upgrade plant, tooling and equipment at the
VW Uitenhage plant within the Port Elizabeth/East London cluster. Over 1,000 new jobs have
been created to meet this large export order and more than US$1.49 million has been invested in
training for employees working in the export programme. Such skills development has the
potential to improve labour productivity and competitiveness, and this in turn provides a sound
base for further export expansion and integration into the global markets.


These two success stories of firms illustrate that from being isolated in a South African
market by high protection barriers, it is possible within a relatively short period of time (just over
a decade) to become integrated into global markets and to be able to compete on the basis of the
exacting standards of these markets. This has been achieved through the policy support of the
MIDP and through greater market access that is related to the global auto producers investing in
local subsidiaries.




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Transfer of Technology


CONCLUDING REMARKS




The automotive industry in South Africa has evolved from a highly protected, inward-
focused industry to one with a marked export orientation, able to compete effectively in global
markets. A number of specific characteristics of the South African automotive industry have
contributed to its integration into international markets. Those characteristics include extensive
foreign ownership of both vehicle assemblers and components manufacturers; close links with
parent companies; and effective linkages between assemblers and component manufacturers.
Links with parent companies have facilitated technology and skill transfers, as well as
organizational development, and they have provided access to international markets; at the same
time linkages between assemblers and components manufacturers have been instrumental in
driving technological development and setting industry standards.


At present the South African automotive industry is facing the challenges of competitive
international markets. Given the history of tariff protection, this is not easy. Current
developments in the industry suggest an increasing trend towards integration into global
production networks and this has already resulted in various benefits for the local industry in
terms of technology transfer and related spillovers.


Guided by the MIDP, which is an industry-specific policy approach, the automotive
industry is striving to develop a competitive advantage. As has been indicated by firm-specific
experience, different routes to integration into the global markets are possible. Competitive
advantage may be built on technological development (either in terms of product or process),
productive and organizational efficiency and quality standards.


The key factors that have assisted in integrating the industry into global networks have
been the incentives provided under the MIDP, falling tariff protection that has increased import
competition, the supportive role of institutions such as the SABS, and access to international
markets through the parent company. Supported by these factors, the vehicle assemblers have
positioned themselves to compete globally by embarking on intense export-driven manufacture
of vehicles and components.


The components producers, however, have enjoyed relatively fewer benefits. The rapid
decline in protection that has left the industry exposed to surging import competition, and the fact
that vehicle assemblers are able to source components from overseas directly under the
import/export complementation scheme of the MIDP, have worsened their situation.


South Africa has been gradually adjusting its automotive industry support programmes,
which have powerfully assisted export expansion, to make them compatible with WTO rules. For
example, the import-export complementation scheme of the local content programmes would
have been found inconsistent with the WTO Agreements that entered into force in 1995. In
particular, local content programmes are included in the illustrative list of the Trade-Related
Investment Measures (TRIMs) Agreement, as measures that are inconsistent with the obligation
of national treatment provided for in paragraph 4 of Article III of GATT 1994. Therefore the
South African authorities eliminated local content requirements in 1995.


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Moreover, the excise-duty-based local content system would have qualified as a subsidy.


The excise duty is a financial contribution by the Government in the form of fiscal incentives,
which confers a benefit to the recipient and is specific to an industry. Thus it fits the definition of
an actionable subsidy under the WTO Agreement on Subsidies and Countervailing Measures.
Furthermore, for a subsidy to be actionable, the Subsidies Agreement requires the determination
of adverse effects on the interests of another Member. Adverse effects include injury to the
domestic industry of another Member, nullification or impairment of benefits accruing directly
and indirectly to another Member under GATT 1994 – in particular the benefits of concessions
bound under Article II of GATT 1994 – and serious prejudice to the interests of another Member.


Because of the high integration of the South African automotive industry with parent
companies, it is unlikely that adverse effects may have occurred, at least in the form of injury to
the domestic production of another Member or by way of nullification or impairment of benefits
accruing directly and indirectly to another Member under GATT 1994. In this case, those adverse
effects may have arisen from the displacement or impediment of imports of a like product of
another Member into the market of the subsidizing Member. However, other automotive
producers in the southern African region have seen their ability to compete with South African
automotive products undermined by the fact that the import complementation programme
virtually subsidizes South Africa's exports into the region. In this case, adverse effects may take
the form of injury to the domestic production.


Export-import complementation schemes are used by other developing countries in the
context of regional integration processes, such as in the cases of the Southern Common Market
(MERCOSUR)11 and the Andean Community12 in Latin America. These automotive regimes
include, in addition to the aim of establishing a competitive sector integrated into the global
market, the objectives of regional free trade and regional integration.13





11 See website: www.mercosur.org.uy: MERCOSUR/CMC/DEC N° 04/01, Política Automotriz del Mercosur
12 See www.comunidadandina.org: Convenio de Complementación en el Sector Automotor
13 For details on exports, see United Nations/CEPAL (2001), La Inversión Extranjera en América Latina y el Caribe.
Chile, 2002.


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APPENDICES



Appendix 1: Productive Asset Allowance



To encourage investment in plant modernization a new support package has been
introduced in the form of a productive asset allowance (PAA), effective from 1 July 2000.


Government policy has sought to encourage greater scale economies, and, in line with
world trends, certain South African-based manufacturers are moving towards common platform
engineering14 with a reduced number of component suppliers.


The PAA is a non-tradable duty credit calculated at 20 per cent for the qualifying
investment in productive assets, which will be spread equally over five years. Assemblers can
utilize this duty credit against CBU imports only, which will sustain the range of products being
offered to the consumer but not necessarily locally produced. Marginal low volume products
could therefore be discontinued and production capacity focused on higher volume products for
global consumption.


Components manufacturers who are being encouraged by these assemblers to invest in
new plants and tooling to support their own expansions will be awarded the same PAA as noted
above, with the provision that 80 per cent of the duty saved be passed on to the component
manufacturer. The 20 per cent remaining duty saved by the assemblers on such investments will
serve as encouragement for strategic investments in components to supply local assembly plants.
What this means for the components manufacturers is that they have access to duty free imports
(either of machinery and equipment, or of components that are produced in low and unprofitable
volumes in South Africa) measured as 20 per cent of the value of productive investments made
by the manufacturers. This would enable the components manufacturers to access inputs and
technologies at world prices, thereby increasing their potential competitiveness. To qualify,
assemblers must submit a detailed business plan to the Director General of the Department of
Trade and Industry, which is considered according to strict criteria on a case-by-case basis for the
most recent investments in the industry. Companies, which received support through the now
discontinued Tax Holiday Scheme, or any other investment support, will not be considered.






14 A situation whereby a single chassis (platform) is used to produce different makes of the same model of vehicle.
For instance, BMW uses a single chassis (platform) to produce the 3-Series that has six models: 316i, 318i, 320i,
323i, 325i, and the 328i.


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Transfer of Technology


Appendix 2: Mid-Term Review: Amendments to the Medium and Heavy Vehicle
Programme



Duty Extent of rebate



OE


Components
Drive-train
components


Tyres Cabs/bodies Other
components


1 Jan 2000 35 % Full duty
less 15 per
cent


Full duty less
15 %


Full duty Full duty


1 Jul 2000 35 % Full duty Full duty less
15 %


Full duty Full duty


1 Jan 2001 32.5 % Full duty Full duty less
15 %


Full duty Full duty


1 Jan 2002 30 % Full duty Full duty less
15 %


Full duty Full duty


1 Jan 2003 29 % Full duty Full duty less
15 %


Full duty Full duty


1 Jan 2004 28 % Full duty Full duty less
15 %


Full duty Full duty


1 Jan 2005 27 % Full duty Full duty less
15 %


Full duty Full duty


1 Jan 2006 26 % Full duty Full duty less
15 %


Full duty Full duty


1 Jan 2007 25 % Full duty Full duty less
15 %


Full duty Full duty


Note: The extent of the rebate on cabs of an integrated load-body design and panel vans/buses under
rebate item 317.07 as well as the CKD definition for these vehicles as set out in Chapter 98 is to
be further investigated to ensure that these vehicles comply with the CKD definition applicable to
light motor vehicles.



Source: DTI Press release, 2000


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REFERENCES




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Barnes, J (1999). Competing in the Global Economy: The competitiveness of the South African


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Black A (1994). An Industrial Strategy for the Motor Vehicle Assembly and Component Industry.


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