Automotive transformation fund likely to exceed its decade lifespan

The R6 billion Automotive Industry Transformation Fund (AITF), officially launched last week by South Africa’s seven vehicle original equipment manufacturers (OEMs), has a 10-year lifespan – but it appears likely its activities will extend beyond this period.

However, it is unclear what will happen to the broad-based black economic empowerment (B-BBEE) ratings of the automotive companies that invest in the fund if it closes after 10 years and whether the ‘once empowered, always empowered’ principle will apply.

Tim Abbott, chief executive of BMW Group South Africa and sub- Saharan Africa and vice president of the National Association of Automobile Manufacturers of South Africa (Naamsa), said this week the seven OEMs had to put a time limit on AITF to get approval from their parent companies for investments into the fund.

Reviews

Abbott believes the seven OEMs will review the fund’s progress every few years, but will be surprised if the fund is closed at the end of the 10-year period.

“I would envisage, if it is successful and we managed to get some return out of some of the companies and money back into the pot, we will just keep on reinvesting.

“But who knows? At the end of 10 years we may say enough is enough and just withdraw whatever money is in there and divide it up by the seven OEMs, or by then it could be a 100 companies because it may have the suppliers and importers involved,” he said.

As to what will happen to the B-BBEE ratings of companies that invest in the fund if it closed after 10 years, Abbott said a lot could happen within that time and he’s certain the B-BBEE codes will change again – as they have in the five years since his arrival in South Africa.

He confirmed there have not been any discussions with the Department of Trade and Industry (dti) about what happens after the 10-year period and if the fund closes because “we are both going in with our eyes open and in good faith with the intention that we would want it to continue long after the 10 years”.

Abbott added that the OEMs must ensure they have a fund or a programme in place that supports what they are trying to do.

He said the SA Automotive Masterplan is effective until 2035 and all the OEMs support the foundation of the plan, which is for South Africa to account for 1% of global production and increase jobs and local content while selling more cars locally.

The fund’s mission is to accelerate the empowerment of black South Africans within the automotive sector.

Its launch follows extensive consultations and discussions with the dti, to agree on the provision for the recognition of contributions in lieu of a direct sale of equity through equity equivalent contributions.

South Africa’s automotive manufacturing industry is dominated by multinational companies that are not prepared to give up any equity.

Equity equivalent investments, a facility available under the B-BBEE Act, is a way around this impasse while also enabling multinationals to achieve the required Level 4 B-BBEE grading that allows them to benefit from the Automotive Production and Development Programme (APDP) and new SA Automotive Masterplan.

Abbott said it has taken the seven OEMs two years to get where they are now and the next stage is to get the smaller manufacturers, component manufacturers and importers on board.

“Everybody is keen to come on board. We will obviously have to then work out a formula on how they will come on board and how they will contribute to the fund,” he said.

Creative solution

Renai Moothilal, executive director of the National Association of Automotive Components and Allied Manufacturers (Naacam), said it is very supportive of the initiative, because it is a very creative and positive solution to the ownership dynamics in the automotive sector and how multinationals can get to a Level 4 qualification.

“We have been consulting very closely with the OEMs and now that they have settled on a fund structure with the dti, we will look to engage the dti and the fund led by the OEMs to ensure similar access for multinational component manufacturers,” he said.

At last week’s investment conference eight automotive component manufacturers pledged to collectively invest R2.4 billion in South Africa.

Moothilal said these and other companies will be interested in investing in the fund.

“Whether they are multinationals or not, just like the OEMs, component manufacturers would need to find a way of complying with whatever the applicable regulation is at the time. I suppose the fund is one way of multinationals dealing with that particular dynamic,” he said.

The OEMs participating in the fund are BMW, Ford, Isuzu, Nissan, Toyota, Mercedes-Benz and Volkswagen.

Abbott said in terms of the agreement between the OEMs and the dti, OEMs producing more than 30 000 vehicles a year will each pay R38 million a year to the fund.

Nissan and Isuzu, which annually produce less than this threshold, will pay R19 million each but will have to pay R38 million a year if their annual production increases above the threshold.

The fund will be independently incorporated and registered as a non-profit company, with its own board of directors and executive management team.

Abbott said the next step is to appoint a CEO for AITF, to manage the fund’s registering and to get the board constituted, which will probably comprise the CEOs of the seven OEMs, dti representatives and the fund’s CEO.