Government risks 8% of GDP

Financial Mail reported that South Africa is running the risk of its automotive sector, worth 8% of GDP, missing out on the electric vehicle transition, with the government dragging its feet on adopting new policies to keep the sector globally competitive. 

The local automotive industry is one of the few success stories of government-led industrial policy in South Africa, generating vital export revenue and providing tens of thousands of jobs. 

However, it is at risk of becoming redundant in an age of electric vehicles, with the government failing to act quickly to incentivise the local industry to adapt to the global transition. 

Nearly all vehicles manufactured in South Africa are built with internal combustion engines (ICE). Only Toyota and Mercedes produce hybrid vehicles locally.

However, the industry’s export markets are going electric within the next decade, with the United Kingdom banning new ICE vehicles from 2030 and the European Union banning them from 2035. 

To maintain South Africa’s two largest export markets, the industry must begin producing electric vehicles as soon as possible. 

The electric vehicle market is expected to see sales between 14 to 17 million vehicles in 2023 – a growth of over 20% from 2022. 

South Africa effectively does not participate in this significant and growing market. 

Ebrahim Patel, the trade and industry minister, introduced a green paper in early 2021 with potential policies to support the transition to manufacturing electric vehicles in South Africa. 

Patel promised that by the end of 2021, there would be a white paper with a concrete policy for driving the transition. However, a white paper is still yet to be introduced in Parliament. 

He assured the local industry that the policy would be introduced by the end of this financial year, March 2024. 

South Africa currently has the Automotive Production and Development Program, which contains generous incentives and is not specific to a particular energy technology. 

Effectively, manufacturers receive the same incentives if they produce an ICE or electric vehicle under this program.

Manufacturers, however, said they need more support to invest the capital required to transition to producing electric vehicles. 

In particular, they called for buyer incentive schemes to create a local market for electric vehicles. The government has rejected such schemes saying that they cannot afford it. 

Instead, the government is offering additional manufacturing incentives. 

Another issue for the local industry is the lack of charging infrastructure and the unreliability of electricity supply which stifles demand for electric vehicles in the country. 

It is estimated that building out charging infrastructure across South Africa would cost between R30 billion and R90 billion. 

Threat of sanctions

South Africa’s automotive industry is also threatened by potential sanctions from the United States, which would be swiftly followed by sanctions from the European Union. 

This is according to political scientist RW Johnson who outlined the potential impact of US sanctions on the country. 

South Africa would likely lose its favourable status under the United States African Growth and Opportunity Act (AGOA). This allows South Africa to export products to the US duty-free.

A clause in the AGOA states the US can end the agreement with a participant if it acts against US national security interests, which South Africa has broken if it supplied Russia with arms.

Being excluded from AGOA by the US will be followed by sanctions from the EU, said Johnson, as they tend to follow America’s example.

This will end South Africa’s automotive industry, which exports most of its production to the US and EU, costing thousands of jobs and roughly 8% of the country’s GDP.

According to Johnson, the automotive industry will be only one of many casualties.