Automotive Investment Scheme Migration to APDP 2 looming

By Grant Whittaker, National Business Development Manager, COVA Advisory.

The views expressed herein remain exclusively those of Cova Advisory

A revision to the Automotive Production Development Programme (APDP), known as APDP 2, is scheduled to come into effect on the 1st of January 2021. The APDP2 draft guidelines, based upon the SA Automotive Masterplan 2035 recommendation, were released in July 2020 for public comment.

These published guidelines did not include any reference to the Automotive Investment Scheme (AIS), the capital investment incentive component of the APDP, nor whether there would be amendments to the AIS into an AIS2.

Does this indicate that the Department of Trade, Industry and Competition (DTIC) is satisfied that the current AIS programme guidelines will achieve the Masterplan’s objectives? Does this indicate that there will be no further alignment to the Automotive Masterplan similar to the way in which we have seen changes to the APDP in the draft APDP2 guidelines?

The migration to the APDP 2 Masterplan-aligned objectives indicates the DTIC could seek better alignment with a shift from AIS to AIS2. The Masterplan was developed in economic conditions which were pre-Covid-19 and the global outlook was very different, which shall make the implementation and achievement of the Masterplan objectives challenging. The Masterplan represents a shift away from a total volume-focused programme – to a blend of volume mixed with increased localisation, through either local content or local value-addition.

The DTIC could consider introducing a balanced scorecard to provide different levels of the grant percentage to participants based upon the number and level of contributions toward achievement of the Masterplan objectives by manufacturers. The purpose would be to measure the individual manufacturers’ contribution toward overall achievement of the Masterplan objectives.

It is important to note that the Masterplan was developed prior to the onset of Covid-19. To address the differences between the Masterplan economics and the post-Covid-19 economics by bridging the gap between the differing set of circumstances, the DTIC could provide for a transitional period by easing the quantified measurement targets for each individual Masterplan objective. This easing of individual objective contribution measurements is temporary and a limited time offer. The intention would be to enable individual participants to recover from the impact of Covid-19 before the economy “normalises”.

The measurement of each Masterplan objective should be measured in intervals of achievement. For example, the current measured localised content is approximately 38%, as stated in the Automotive Masterplan; the DTIC should have as a mandatory requirement that manufacturers achieve 40% local content. Points should then be awarded in incremental intervals for higher levels of localised content achieved. This will enable the DTIC to award each manufacturer a score of its contribution to the achievement of a Masterplan objective. By so doing, participants can benefit from their ability to contribute to individual Masterplan objectives.

The AIS in its current form has two Economic Benefit Criteria tables that outline the requirements to access a higher grant percentage. The DTIC could consider amending and or expanding the existing AIS Economic Benefit Criteria to cater for the Masterplan objectives.

There is a gap within the current Economic Benefit Criteria to accommodate and measure OEMs at different production volumes. Therefore, it is proposed the DTIC have a system for awarding points based upon production volumes i.e. less than 50 000 units per annum = no points; greater than 120 000 units per annum = 4 points.

There needs to be an incentive for the OEMs to locate sustainable vehicle platforms in South Africa, as opposed to low volume marginal vehicle platforms. OEMs should be rewarded for locating sustainable higher volume vehicle platforms in South Africa.

The DTIC should also consider having separate Economic Benefit Criteria for OEMs and component manufacturers, with elements of the criteria based upon their ability of each grouping of manufacturers to influence the overall achievement of the Masterplan. For example, component manufacturers cannot influence the achievement of increased annual production volume of assembled vehicles, whereas OEMs can by deciding to locate more production in South Africa. Similarly, many OEMs cannot in all instances influence upstream supply chain sources selected by the component manufacturers.

The current AIS has successfully deployed a tiered benefit system; entry-, intermediate- and ceiling level benefit. This includes a separate tiering of benefits for OEMs and component manufacturers. The difference in benefit percentages is no doubt a function of the difference in scale (magnitude) of investment undertaken by the OEMs and what is not possible at the component manufacturer level. This structure should not be amended.

The introduction of a tiered benefit would be positive for the automotive sector, with the grant percentage being linked to the level of contribution towards the Masterplan objectives which has been demonstrated and achieved. Let’s hope there is an amendment to the AIS guidelines to achieve closer alignment to overall Masterplan objectives. It would make perfect sense, but we can only wait and see.

CONTACT

Company: COVA Advisory

Contact: Grant Whittaker

Email: [email protected]

Website: www.cova-advisory.co.za