50% tariff or 0% luxury tax on budget cars?
Why is Government considering a 50% Chinese tariff increase? Especially when there is an achievable tariff reduction that could make Chinese- or Indian-built budget cars cheaper…
Chinese cars offer amazing value. But they should be even cheaper. Each Chinese-built car that drives off a car carrier into a South African port triggers a 25% import duty. Imagine what they’d cost without that duty? Interesting, right? Now think of those same cars, with a 50% Chinese tariff.
It’s the same for Indian cars, although many South Africans don’t realise that. Why? Because South Africa imports a lot of Indian-built vehicles that are from brands that don’t originate from India. Almost all the Suzukis and Hyundais sold in South Africa are built there. And those budget cars, like Suzuki’s small-car range, are all price-inflated by the South African Government’s 25% import tariff.
South Africans might never know what the true lower-cost value of Chinese and Indian cars could be. And they could discover quite the opposite: an increase in the cost of Chinese- and Indian-built cars. During a briefing session this week, the Department of Trade, Industry and Competition said it was considering increasing the import duty on imported vehicles from 25 to 50%.
How did we get there, and why is it a bad idea? We unpack the issues surrounding a 50% Chinese tariff. And why the real debate should be about the luxury tax that many South African buyers pay on budget vehicles that are imported.
Why is there a 25% import duty?
The 25% import duty is to protect the entrenched South African car industry, which builds some of the world’s most popular luxury cars and double cabs. It also earns the country export revenue by exporting them.
Broadly, the local automotive industry supports manufacturing employment. There’s a deep technical supply chain – all small, local specialists who are very good at what they do, making specialised parts and components for the industry.
But there’s a problem. A big one. South Africa has both a new-car affordability crisis and a heavily subsidised automotive industry that’s failing its KPIs.
The Slovakian example
You know those KPIs you dread each year when you have to evaluate them with HR? Because Government provides the local car industry with billions of Rands in support and imposes a 25% import barrier to protect the domestic market and benefit locally built vehicles sold here, there are real KPIs the industry needs to meet. And it’s not making them.
The numbers are simple. South Africa’s automotive masterplan stated it was supposed to build 931 000 vehicles locally by 2025 for both local buyers and exports to international markets. Those 931 000 vehicles were supposed to have 60% local content.
What’s happened is that the industry built only 602 000 vehicles last year. It misses that 931 000 target by a huge margin. To make it worse, the component localisation was only 39% (but more on that later).
Instead of delivering the planned 224 000 primary automotive industry jobs by 2025, the industry created little more than half that: 115 000. It’s a KPI scorecard disaster despite South Africa having skilled technical people and a proven automotive supply chain. South Africa has an automotive industry more than a century old. It has delivered some of the world’s best automotive engineers (like Gordon Murray), yet the system just isn’t producing what it’s supposed to.
To frame how badly the automotive masterplan has gone awry, consider landlocked Slovakia. Last year, the small European country built 1 043 900 vehicles. It has a population of only 5.4 million people and no seaports. South Africa has a population of 63 million and 8 commercial seaports.
The localisation issue
If you score the South African automotive industry performance against its automotive masterplan KPIs, the numbers are terrible. It doesn’t exist in isolation, of course; South Africa has suffered a lot of economic stagnation over the past decade.
The local market just never grew enough to take its share of that planned 2025 automotive masterplan production of 931 000 units. And that’s not leadership in the automotive industry’s fault; that’s just broad economic weakness. Simultaneously, there’s been a lot of export risk in key destination markets.
The problem is that, even if South Africa did revive its early 2000s growth numbers and local demand for new vehicles grew, it wouldn’t solve a deep technical issue with the automotive masterplan: the 60% local content requirement.
Policy makers have shown poor understanding of the evolving technical requirements of vehicles. And that’s what’s making it so difficult to increase the localisation percentage of locally built vehicles.
Easy localisation has been done: steel body panels, trim, seats, door cards, headliners and some commodity fasteners and clips. The problem is going from 39% localisation to 60% requires difficult-to-make technical components, the kind of things not really produced in South Africa: injectors, ECUs, chipsets, advanced sensors, brake systems, gearboxes control units and lots of other small bits, which cost a lot.
Remember, the localisation percentage is not calculated based on the vehicle’s material components per weight. It’s about what they cost. Those advanced sensors in your car’s bumpers can be worth as much as a door stamping, despite weighing a fraction of it.
The uncomfortable truth is that sensors, chips, and all the digital components in a new car are sourced significantly outside the South African supply chain. Adding a 50% Chinese tariff on imports from the world’s biggest manufacturing zone isn’t going to magically create a South African sensor and microchip industry.
We have the tech & engineers
South Africa has incredible engineering companies. Some make sensors and advanced components for the aerospace industry. Nearly every new satellite launched into orbit has components that are proudly South African-designed and built. It proves that local engineers are world beaters.
But many talented engineers and tech specialists aren’t graduating into the automotive industry, or creating companies to supply it. That means most of the small components adding value to locally built cars are still imported. And will continue to be imported for the near future, making it almost impossible to increase the automotive content localisation from 39 to 60%.
Safety legislation and the demand for in-cabin tech are also making localisation difficult. The components needed to fulfil regulatory specs and customer preferences for digital in-car experiences are all things South Africa’s automotive supply chain doesn’t really specialise in. And they are imported from Europe and China.
Taxing entry-level imports isn’t smart
There’s irony in all of this. Most of the imported, Indian-built cars are Suzukis and budget Hyundais. These are cars for South Africans without an upper-middle-class budget.
When industry leaders protest about a lack of scale and growth in the domestic car market – which hasn’t really grown in real or absolute terms since its 714 440 peak in 2006 – they’re ignoring a pricing and product reality. When all the incentives and subsidies were being planned to protect the South African market from imports in the late 1990s to grow the local industry, nobody thought most of the OEMs would halt their small-car product lines in South Africa.
Many local OEMs built affordable compact hatchbacks and sedans in the 1990s and early 2000s. Over the years, they chose to cease production of those affordable models and build more lucrative vehicles for export. It seems bizarre to ask for a 50% tariff on Indian-built budget Suzukis and Hyundais when most of the locally built product portfolio is large luxury vehicles. And this without offering affordable, locally built alternatives?
Making entry-level cars 3% more affordable
There seem to be industry leaders recognising the risk that legacy taxes pose to entry-level new-car affordability. The lack of locally built, entry-level cars (beyond Vivo) is a real issue.
If your local auto-assembly business is double-cab bakkies or luxury cars, should you really be protected against A-segment budget cars built in India? That’s why, during this week’s parliamentary committee session about the automotive industry, a sensible suggestion was made by Toyota South Africa Motors’ CEO, Andrew Kirby: get rid of ad valorem tax.
This tax for vehicles currently starts at R250 000 and works on a sliding scale, adding about 0.75% on a R250 000 budget hatchback and rising to approximately 30% when you hit R1m.
The sector-wide ad valorem tax is out of date and illogical. Why are you paying luxury tax on a budget Suzuki with steel wheels, cheap interior plastics and cloth seats? Yet, you aren’t paying luxury tax on imported sunglasses (Government scrapped that in 2007). And why do imported class-8 trucks selling for millions at retail not trigger a luxury tax, but a R250 000 hatchback does?
Taxing a budget, Indian-built car like a luxury item is nonsensical and a disservice to the real affordability needs of South African new-car buyers.
A luxury-vehicle tax policy hurting entry-level family car buyers who are paying ad valorem tax does nothing to help the local automotive industry get close to its goal of 931 000 locally built units. More tariffs never benefit the people who are already paying to support the automotive masterplan: middle-class taxpayers who just want to buy an affordable car in the R250 000 to R300 000 segment.
The 50% Chinese/Indian tariff debate should be shut down. The real debate should be about the luxury car tax on entry-level vehicles. And it should be scrapped with urgency.