South Africa close to deal on autos support plan linked to jobs

South Africa’s government is close to agreeing to new tax breaks for international carmakers including Toyota, Ford and BMW in return for initiatives such as higher levels of employment, according to Trade and Industry Minister Rob Davies.

A deal on a 15-year incentive program to replace one that expires in 2020 should be reached this year, Davies said in an interview Tuesday. Some elements of the arrangement are still to be finalised but a failure to reach a compromise could lead to companies closing plants and building vehicles elsewhere, he said.

“We will be spending probably R2 billion or R3 billion ($136 million-$204 million) a year on support for the auto program,” the minister said at Bloomberg’s Johannesburg office. “This is it. You either do it or you don’t have a motor industry.”

At stake is an industry that accounts for about 7% of South Africa’s gross domestic product, according to the minister, with car makers building a combined 600 000 vehicles in the country in 2017. BMW has spent more than R6 billion on a plant in Rosslyn, north of Pretoria, and in April started production of the X3 sports-utility vehicle at the site, the first time it’s been made outside the US Volkswagen and Nissan  have both been expanding in the country in recent years.

The National Association of Automobile Manufacturers of South Africa has said two sticking points in the deal negotiations were overambitious government targets for production and employment. The industry employs more than 150 000 people, Davies said. The Department of Trade and Industry had asked for that to be increased to about 225 000 by 2035, Naamsa Director Nico Vermeulen said in May.

That’s hard to achieve as the global car industry shifts toward robotics and automation, he said at the time. However, South Africa has an unemployment rate of 27.2% and the ruling African National Congress is desperate to reduce that figure ahead of elections planned for 2019.

“The trick is to calibrate it so the incentive is attractive enough on the one hand, but also that when we do provide support, we get value for it,” Davies said.

Vermeulen declined to comment when contacted by phone Wednesday.

Read: Carmakers in battle with South Africa over support plan

The government has told carmakers it wants to see increased levels of black empowerment, with manufacturers starting to source their components from local black-owned companies, Davis said. The proposal is part of South Africa’s efforts to redress economic imbalances caused by apartheid.

“We’re providing an incentive and I think our quid-pro-quo is investment and employment, which is pretty significant,” he said. “Already some of the programs are being designed around getting a better investment incentive if you employ more.”

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