Multinational strategy, industrial policy and local capability: A comparison of automotive

industry development in South Africa and Thailand

Justin Barnes, School of Development Studies, University of KwaZulu-Natal, and

Anthony Black, School of Economics, University of Cape Town

Faculty of Economics, Thammasat University, 28th May 2013

Presentation outline• Introduction: Global developments and their

impact on emerging markets• The development of the South African and

Thai industries• Micro level competitiveness factors:

– Factor costs– Operational capabilities

• Conclusions

Introduction • Importance of the automotive industry to

developing economies• Successful development policy (Humphrey and

Oeter, 2000; Lung and van Tulder, 2004) requires:– Viable “automotive space”– Firm-level competitiveness

• Paper explores interplay of these two dynamics in two competing middle income economies – SA and Thailand

• Perspective is in relation to SA’s development challenges

Global developments and their impact on emerging markets

• Share of emerging markets has grown enormously both with regard to global production and automotive exports

• Regionalism rather than globalism may be a more appropriate descriptor of the forces shaping the location of the industry internationally (Sturgeon and Van Biesebroeck, 2010)

• Growing concentration of developing country production locations in a relatively small number of favoured locations – “viable automotive spaces”

The development of the South African and Thai industries

Common features• Long history of government support: high levels of protection,

including tariffs and local content programmes led initially to proliferation of models being produced in low volumes

• Influx of FDI into both countries in the 1990s and 2000s, and shift to export orientation

• Toyota largest producer in both markets • Important competitors in relation to the assembly of light commercial

vehicles (LCVs)• Hold dominant positions within their respective regions

• Thailand centrally located in large dynamic market region• SA’s neighbours are poor and, even collectively, comprise a tiny market

Production volumes for car models, 1995

  Production volumes (000s)

Country 100+ 50-100 20-50 0-20

China 1 1 2 7

India 1 1 1 9

Malaysia 1 1 1 14

Mexico 3 3 5 1

Argentina 0 1 6 4

Brazil 5 3 4 3

Indonesia 0 0 1 13

Thailand 0 1 3 7

S. Africa 0 0 4 17

The development of the South African industry • Production dates back to the 1920s. From 1950 to early 1980s, sales increased

tenfold but the market then stagnated to the mid 1990s. Annual domestic sales reached a peak of 714,000 units in 2006, before declining to 395,000 units in 2009

• Problems of high protection were apparent by the late 1980s. SA’s automotive industry was inefficient and highly inward oriented. Major shift in 1995 – Motor Industry Development Programme (MIDP) - began a steady process of tariff reductions. Minimum local content levels were abolished and import duties on components and CBUs could be offset by auto exports

• Since 1995, auto imports and exports have increased rapidly. • This had major implications for ownership as OEM and component manufacturer

MNCs acquired local operations or established new plants • Seven light vehicle OEMs have a total production capacity of 700,000 units• Local content levels have been range bound between 50% and 60%, even in high

volume models

Source: NAAMSA

0

50,000

100,000

150,000

200,000

250,000

300,000

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

Units

Year

South African passenger and light commercial vehicle exports:1995 to 2010 actual, 2011 projections

Passenger

LCV

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10* 11*

Units

Year

South African passenger and light commercial vehicle imports:1995 to 2009 actual, plus 2010 and 2011 projection

LCV

Passenger

Source: NAAMSA

The development of the Thai industry • Significant industrialization in the early 1960s but by 2007 a total of 14

OEMs, predominantly Japanese and American owned, had installed capacity of 1.7 million units. Production of cars and commercial vehicles reached 1.4 million units in 2008, over double that of SA

• Like SA, Thailand has made use of high tariffs and local content requirements as well as trade balancing mechanisms to grow the sector

• Local content requirements were removed in 1998 by which time the large OEMs were initiating plans to increase local content beyond minimum requirements. Export support was also given in the form of tax and import duty exemptions

• Since the mid 1990s, the industry has become highly export oriented with exports increasing from 14,000 units in 1996 to 152,800 in 2000 and 838,600 units in 2008. Over the period 2000-2008 vehicle exports accounted for 41% of production

• Approximately 70% of Thai production comprises LCVs. Passenger vehicle production primarily consists of smaller vehicle types, as a result of lower taxes

Developing an ‘automotive space’: Managing demand and achieving scale

Excise tax structure and duty rates in Thailand and RSA - 2008

Thailand RSA

Type Excise Tax Import Duty Excise Tax Import Duty

Based on engine size

CKD CBU Based on value

CKD CBU

Passenger vehicles 30-50% 30% 80% 1-20% 24% 29%

Electric & Hybrid cars 10-30% 30% 80% 1-20% 24% 29%

Powered by blended fuels (>20% ethanol)

25% 30% 80% 1-20% 24% 29%

Eco-cars 17% 30% 80% 1-20% 24% 29%

Pickup trucks (LCVs) 3% 40% 40% 1-20% 24% 29%

Automotive demand side taxes in Thailand relative to South Africa – 2008 (all figures in South African Rands)

One ton LCV (private use) Passenger vehicle (2000-2500cc)

Thailand SA Thailand SA

OEM selling price 200,000 200,000 200,000 200,000

CBU import tariff 40% 29% 80% 29%

Excise tax 3% 5.39% import, 4.05% local

35% 5.39% import, 4.05% local

VAT 7% 14% 7% 14%

Interior tax 0.3% 0% 3.5% 0%

Local production vehicle market price (all taxes included)

221,081 237,234 299,012 237,234

Imported vehicle market price (tariff + taxes included)

309,514 309,973 538,221 309,973

Implications of trade policy differentials?

• Market demand profile narrower in Thailand than in SA due to differential tariff and excise tax structure

• Thai market more open to trade in areas where local scale economies realised – SA no differentiation

• SA tariffs lower with much higher import penetration in vehicle market

• Thailand more likely to secure investment based on trade conditions than SA– Based on creation of viable automotive space

• But what of firm-level competitiveness factors?– “Waste” levels?– Factor costs?

Micro level competitiveness factors: factor costs and operational capabilities

Cost of sales profile of four matching Thai and SA automotive component manufacturers – when holding materials costs consistent between both

sets of firms

Waste elements at the four pair-matched component manufacturers (as % of sales)

Source: South African Automotive Benchmarking ClubBased on comparative (1) inventory levels, (2) customer return rates and materials scrap levels, (3) production downtime due to machine/line changeovers, (4) production downtime due to machine/tool breakdowns, and (5) attendance levels,

Thai Firms (n=4) SA Firms (n=4) Additional SA costs

Inventory Costs (1) 2.31% 3.89% 1.58%Quality Costs (2) 1.28% 1.46% 0.18%Flexibility Costs (3) 2.38% 9.00% 6.62%Reliability Costs (4) 0.86% 4.69% 3.83%HRD Costs (5) 0.05% 0.40% 0.35%Total Costs 6.88% 19.43% 12.56%

Average profile of three South African-based auto component manufacturers

Source: SAABC database, accessed 2009

Average

Sales R214.8 million

% Exports 11.0%

Value added as % sales 45.0%

Materials purchased R116.5 million

- Local materials R44.3 million

- Imported materials R77.2 million

Employment 769

Labour and employment profile of 3 SA firms, and a comparison of their costs in SA versus a model of costs in Thailand

Source: SAABC database, 2009; DAC Remuneration and Retention Survey, 2009. Annual median Total TCTC wage data from the MIBCO database http://www.mibco.org.za/forms/MI_Wages2008_3.pdf; Thailand Board of Investment (BOI): www.boi.go.th/english/how/labor_costs.asp

Employment category

Avg. number of employees

Avg. cost per employee in South

Africa

Avg. cost per employee in

Thailand

Management 18 R 428 500 R 158 148

Professional 17 R 275 500 R 47 520

Supervisors 44 R 122 000 R 29 946

Artisan 40 R 267 000 R 22 080

Production 613 R 53 334 R 19 320

Apprentices 37 R 38 448 R 16 560

Total 769

Modelling of Thailand and SA employee costs for transplanted SA automotive component manufacturer

Employment category

South African cost

Thailand costThailand as %

SA costThailand cost

advantage

Management R 7 855 833 R 2 899 380 36.9 R 4 956 453

Professional R 4 683 500 R 807 840 17.2 R 3 875 660

Supervisors R 5 327 333 R 1 307 642 24.5 R 4 019 691

Artisan R 10 769 000 R 890 560 8.3 R 9 878 440

Production R 32 675 964 R 11 836 720 36.2 R 20 839 244

Apprentices R 1 422 576 R 612 720 43.1 R 809 856Employee cost total R 62 734 207 R 18 354 862 29.3 R 44 379 345

Summary of labour and overhead input cost differentials

SA avg. COS breakdown

Thailand avg. is cheaper by...

Thailand advantage (% COS)

Overheads 22.7 8.0% 1.81- electricity 1.0 3.0% 0.03

- water 0.2 66.0% 0.16- management 4.3 63.1% 2.71

- factory rentals 3.2 (34.0%) (1.09)Labour 18.3 63.8% 11.68

Materials 59.0.....................Held

constant......................Total labour/ overheads 41.0 33.1% 13.49

Re-cap of our evidence• Thailand has a significant competitiveness advantage

over SA:– Concentrated light vehicle ownership - major incentive for the local

assembly of such vehicles– Supported localization of production through a suite of Greenfield

investment incentives– Low cost infrastructure– Supply of low cost skilled and semi-skilled employees– Implementation of advanced lean production methodologies

• SA competitive advantage relates only to government export/production incentives

Conclusions1. Benefits of market concentration – forced by tariff and tax structure – creates

scale economies and opportunities for localisation2. Liberal tariff structures work against the more open economy when investment

decisions are free of political economy factors and based on production benefits in the two economies, e.g. for an average R200,000 LCV, the tariff and tax benefit of Thailand over SA was 2.9% in 2008, whilst for a 2,000-2,500cc passenger vehicle, the advantage was calculated at a far more substantial 21.5%

3. High input costs into manufacturing, particularly for (skilled) labour and management, are potentially crippling to competitiveness, whilst also ensuring that operational performance is impaired. Cost disadvantage in SA is severe, with operational waste factors suggestive of a 12.6% cost differential with Thai producers, and factor cost comparisons a 13.5% disadvantage (but figures not cumulative)

Conclusions4. SA auto industry leans heavily on tariff rebates support equivalent to ±8% of

OEM sales. This is more generous than the highest support levels possible for Greenfield investments in Thailand (5.4% of sales). BUT such support measures do not effectively compensate for lower tariffs and basic competitiveness attributes (e.g. cost, skills, infrastructure). SA’s regional location and limited cost advantages have led to a pattern of limited investment, hence lower volume operations and limited supplier development

5. Thailand represents a genuine export platform; SA does not. BUT SA’s growing market, combined with a fast growing SSA, will constitute a significant regional market in the medium term. If the SA industry can reduce its manufacturing costs, it will be well positioned to take advantage of this

6. Thailand has established itself as the regional hub within ASEAN, although it is likely to face much greater competition in the future - from other members of ASEAN in its domestic market – and from China and others in third country markets

Thank you