Title: 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
1Multinational 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
2Presentation 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
3Introduction
- 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 SAs development
challenges
4Global 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
5The 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 - SAs neighbours are poor and, even collectively,
comprise a tiny market
6Production volumes for car models, 1995
Production volumes (000s) Production volumes (000s) Production volumes (000s) 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
7The 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. SAs 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
8Source NAAMSA
9Source NAAMSA
10The 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
11(No Transcript)
12Developing an automotive space Managing demand
and achieving scale
- Excise tax structure and duty rates in Thailand
and RSA - 2008
Thailand Thailand Thailand RSA RSA RSA
Type Excise Tax Import Duty Import Duty Excise Tax Import Duty Import Duty
Type 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 (gt20 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
13Automotive demand side taxes in Thailand relative
to South Africa 2008 (all figures in South
African Rands)
One ton LCV (private use) One ton LCV (private use) Passenger vehicle (2000-2500cc) 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
14Implications 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?
15Micro 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
16- Waste elements at the four pair-matched component
manufacturers (as of sales)
Thai Firms (n4) SA Firms (n4) 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
Source South African Automotive Benchmarking
Club Based 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,
17- Average profile of three South African-based auto
component manufacturers
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
Source SAABC database, accessed 2009
18- Labour and employment profile of 3 SA firms, and
a comparison of their costs in SA versus a model
of costs in Thailand
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
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
19- Modelling of Thailand and SA employee costs for
transplanted SA automotive component manufacturer
Employment category South African cost Thailand cost Thailand as SA cost Thailand 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 809 856
Employee cost total R 62 734 207 R 18 354 862 29.3 R 44 379 345
20Summary 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...................... .....................Held constant......................
Total labour/ overheads 41.0 33.1 13.49
21Re-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
22Conclusions
- Benefits of market concentration forced by
tariff and tax structure creates scale
economies and opportunities for localisation - 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 - 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)
23Conclusions
- 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). SAs regional location
and limited cost advantages have led to a pattern
of limited investment, hence lower volume
operations and limited supplier development - Thailand represents a genuine export platform SA
does not. BUT SAs 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
- 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
24Thank you