The South African Automotive Industry,

The South African Automotive Industry, the MIDP and the APDP Presentation by Roger Pitot NAACAM October 2011 1

SA Automotive Industry: Structure The vehicle manufacturers present in SA Mercedes Benz, BMW, Volkswagen, Nissan/Renault, Toyota, General Motors and Ford are all wholly owned subsidiaries. Other major brands are imported European (Peugeot/Citroen), Japanese (Daihatsu, Honda, Subaru, Suzuki), Korean (Hyundai, Kia), Indian (Tata, Mahindra), with Chinese brands also entering the market (Chery, Chana, GWM and others) There are approximately 400 auto component suppliers including diversified manufacturers. 16 of the 20 major global first tier suppliers are present in South Africa 2

Industry Performance Since 1995 New vehicle sales and projections 800000 New Vehicle Markets in South Africa History and Forecast - 1995 to 2012 Medium and Heavy Commercial Vehicle Market Light Commercial Vehicle Market Passenger Car Market 700000 Annual Sales Volume 600000 500000 400000 300000 200000 100000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 3

Industry Performance Since 1995 New vehicle Production 4

OEM capital expenditure (R millions) Total industry investment since 1995 over R40 billion 5

Annual Average Industry Capacity Utilisation 2005 2006 2007 2008 2009 2010 4 th Qtr 2010 Cars 81,1% 80,1% 67,7% 68,3% 59,4% 77,1% 87,2% LCV 79,9% 87,8% 82,7% 73,9% 56,5% 68,4% 76,4% MCV 84,4% 97,9% 91,7% 89,9% 64,6% 77,2% 82,6% HCV 95,9% 95,1% 95,3% 87,6% 66,1% 77,5% 81,1% 6

Vehicle Production Production (000s) 2008 2010 VW Polo (new) 94.0 Toyota Hilux/Fortuner 107.7 89.3 Merc C Class 51.6 51.7 BMW 3 Series 36.6 49.2 Toyota Corolla 74.7 33.9 Total Light Vehicles 515.2 448.4

The Motor Industry Development Programme (MIDP) Introduced 1995 Key Objectives: To improve SA automotive industry s international competitiveness To improve vehicle affordability in the domestic market To encourage growth in vehicle and component manufacturing, particularly through exports To stabilise employment levels in the industry To create a better industry foreign exchange balance

Industry Performance:1995 2010 International competitiveness Significant improvement in quality and productivity. Progressive economies of scale with local vehicle platforms down from 42 to 15 Average volume per model (cars/lcv s) produced increased from 9 000 units to 30 000 In 2010, 4 models > 40 000 units and 6 models > 20 000 units per annum. Increase in number of vehicles produced per employee from less than 10 vehicles per annum to 17 vehicles per annum in 2010. Significant rationalization and economies of scale production has reduced complexity for domestic component suppliers and enhanced efficiencies 9

Passenger Car Market Makes & Models : 1994 to April 2010 April 2010 60 Marques 1,187 models January 1994 17 Marques 192 Models

Motor Vehicle Export since 1995 (units) 300,000 284,211 291,000 250,000 239,465 Export units 200,000 150,000 108,293 125,306 126,661 110,507 139,912 179,859 171,237 174,947 100,000 59,716 68,031 50,000 15,764 11,553 19,569 25,896 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year

Major Vehicle Exports 2010 Volkswagen - Polo series to Europe BMW - 3-Series to Japan, Australia and USA Mercedes Benz - C-Class to USA Toyota - Hilux to Europe and Africa 12

Major Vehicle Exports 2010 (cont.) General Motors Isuzu KB to Africa Toyota - Corolla to Europe and Africa Nissan - Hardbody to Africa Ford - Focus to Australia 13

Global fuel standards 14

Profile of NAACAM Established 1980 to represent component and spare parts manufacturers Over 190 members with 260 plants Members comprise 70% of dedicated auto component manufacturing companies in SA Independently elected National Executive Committee, 5 Regions with Chairmen and Deputy Chairs The servicing, spares and retail sectors are represented by the RMI

30 25 20 15 10 5 0 Size of Component Companies 2007 Analysis NAACAM MEMBERSHIP ANALYSIS SURVEY 28 27 17 16 12 9 6 6 6 8 3 1 1 1 1 0 1 1 2 2 11 4 < 10 10 TO 50 50 TO 100 100 TO 150 150 TO 200 200 TO 250 250 TO 300 300 TO 350 350 TO 400 400 TO 450 450 TO 500 500 TO 550 550 to 600 600 TO 650 651 TO 700 700 TO 750 750 TO 800 800 TO 850 850 TO 900 900 TO 950 950 TO 1000 1000 PLUS # EMPLOYEES # MEMBER COMPANIES

Component Manufacturers Key 2010 Data The employment of the component manufacturers totals 65,000, down from the peak of 82,000 (NAACAM membership 44,000) Sales exceeded R65 billion ($9 bn), with 35% OE, 45% export, 20% aftermarket Capex was R2 billion Average local content of components exported was 75% Real Vehicle local content averages 35%

Service and Sales Outlets Workshops 2500 Petrol Stations >1800 New & Used vehicle Dealers 1200 Tyre workshops 600 Engine specialists 250 Panelbeating shops >1000 Spare parts dealers >700 Employment over 200,000 18

Current Breakdown of costs and Local Content 65%: % of total material cost 35%: true local material plus value add as % of total material cost Harnesses Starter motors Alternators Wiper systems HVAC Body 15% Electrical / Electronic 19% 5% Exterior Interior Cockpit Seats Door panels Carpets 10% 3% Glass Paint Bumpers Mirrors 23% 7% 6% Bonnets Bootlids Sideframes Doors Chassis and Drive train 33% 14% Axles Differentials Drive shafts Brakes

Why is Local Content so low? Volumes in SA much lower than elsewhere, except where component companies export The MIDP allows OEMs to offset duties through exports The Rand is overvalued, reducing the prices of imported components The SA component manufacturers are not yet globally cost competitive

The MIDP: Duty Credits A Duty Free Allowance for OEMs to import components to the value of 27% of selling price A Duty credit certificate system which incentivises component and vehicle exports, equivalent to 14% of the local content of the exports A Productive Asset Allowance for OEM and related component investments, equal to a duty credit of 20% All these encouraged more imports!

Component Exports (R mil) Component 1995 2000 2008 2010 Catalytic Converters 389 4 683 24 245 14 761 Seats, Stitched Leather 1 019 1 915 3 282 2 898 Engines and Parts 111 485 2 938 2 470 Tyres 213 682 1 670 1 133 Silencers/Exhausts 76 377 1 900 1 696 Transmission shafts/cranks 55 127 782 415 Automotive tooling 153 362 518 447 Automotive glass 43 146 314 305 Total Components 3318 12 640 44 055 30 802

Car Imports - Share of market 80.00% 70.00% 60.00% 50.00% 40.00% 2005 2006 2007 2008 2009 2010 Car Imports % of market Source : NAACAM

FBU Import Duty MIDP introduced 1 September 1995 EU preferential duty rate introduced end 2006 2006: minus 2% 2007: minus 4% 2008: minus 5% 2009: minus 6%

Background and Objectives of the 2013 Automotive Production and Development Program (APDP) Production increase to 1.2 million vehicles per annum by 2020 with associated deepening of the components industry. Provide appropriate levels of support for these ambitious targets. Achieve better balance between domestic and export sales to supply growing domestic demand. Ensure consistency with WTO rules.

Background and Objectives of the APDP The APDP consists out of 4 pillars that will drive the programme: Import Duty. Vehicle Assembly Allowance (VAA). Production Incentive (PI). Automotive Investment Scheme (AIS). APDP Import Duty taxation Vehicle Assembly Allowance Production Incentive Automotive Investment Scheme 26 Duty Rebates

Background and Objectives of the APDP Import Duty and Assembly Allowance The New APDP will have stable, moderate import tariffs from 2013: 25% for Completely Built Up Vehicles (CBUs). 18% for CBU s out of Europe via the EU preferential rate. 20% for CKD components used by vehicle assemblers. The Vehicle Assembly Allowance (VAA) will allow vehicle manufacturers with a plant volume of at least 50,000 units per annum to import a percentage of their components duty free. 20% of the ex factory price reducing to 18% over 3 years. This equates to approximately 30% of the components.

Background and Objectives of the APDP The Production Incentive (PI) The Production Incentive will be in the form of an allowance for duty free importation of vehicles or components: 55% of value added in the South African supply chain, reducing to 50% over 5 years. Additional 5% for vulnerable sub sectors. = Net benefit of 11% of Value added, reducing to 10% It is expected to increase the depth of localisation by encouraging OEMs and suppliers to source sub components locally

Automotive Incentive Scheme (AIS) AIS is part of the APDP which is to replace the MIDP in 2013 Launched in July 2009 Targets companies that are: Automotive assemblers (OEM s) Automotive component suppliers Objectives: To stimulate investment and job creation in SA s automotive sector Investment in technologically advanced automotive production & new and replacement models/ components Increased plant production volumes & strengthen the automotive value chain

AIS Incentive Benefits A taxable cash grant paid over 3 years Base benefit calculated at 20%; An additional 5% and 10% benefit subject to Economic Benefit Requirements The base benefit is calculated on the investment in the following Qualifying assets that includes: Plant, Machinery, Equipment and Tooling; for example Jigs, dies, moulds; In plant logistics (software and hardware); Material handling equipment; Production testing and design equipment; IT equipment and supporting software. Owned land and buildings limited to the value of investment in plant, machinery and equipment

AIS Incentive Benefits (cont) An additional taxable cash grant of 5 or 10 percent can be granted to projects that contribute to the following economic benefits: Substantial support for the local tooling industry Significant Research and Development in South Africa related to the project Maintain employment levels throughout the incentive period and or result in the creation of new jobs Strengthening the automotive supply chain through backward and forward linkages Substantial increase in local value addition Increase in unit production per plant for OEM s in line w ith vision 2020 Increase in turnover for component manufacturers

Other dti Incentives Incentive Benefit Main Conditions The Enterprise Investment Program (EIP) Foreign Investment Grant The EIP (manufacturing) is a cash grant for locally based manufacturers who wish to establish a new production facility, expand an existing facility or upgrade an existing facility in the clothing and textiles sectors To compensate qualifying foreign investors for the cost of moving qualifying new machinery and equipment from abroad to SA. the EIP will be used to stimulate investment within manufacturing and tourism, it will also be used to deliver on some of the IPAP's key performance areas, as well as priority sectors. Foreign investors only Industrial Development Zone Exemption from VAT when sourcing goods and services from South African customs territory and duty-free imports of raw materials and inputs for export Prospective IDZ operator companies must apply for permits to develop and operate an IDZ

In Conclusion Many European OEMs and Suppliers already buy components from South Africa more than 2 billion annually The automotive sector is expanding its capabilities and gearing up for the higher production and localisation levels of the APDP Ten new large multinational suppliers have started production in South Africa in past 3 years

Thank You! Roger Pitot Executive Director NAACAM roger@naacam.co.za 011 3924060