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

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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
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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

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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 SAs development
  challenges

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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

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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
• SAs neighbours are poor and, even collectively,
  comprise a tiny market

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Production 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
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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. 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

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Source NAAMSA
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Source NAAMSA
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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

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Developing 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
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Automotive 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
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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?

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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

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• 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,
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• 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
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• 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
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• 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
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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...................... .....................Held constant......................
Total labour/ overheads 41.0 33.1 13.49
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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

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Conclusions

1. Benefits of market concentration forced by
   tariff and tax structure creates scale
   economies and opportunities for localisation
2. 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)

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Conclusions

• 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

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Thank you