Right of Reply on Donald MacKay (and his response)

Key topics:Henry Pretorius disputes Donald Mackay’s claims on the cost and benefits of the APDP.Debate over whether APDP subsidies boost the economy or raise car prices.Mackay calls for an independent cost-benefit review of the APDP..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Henry Pretorius and Donald Mackay.Right of reply from Henry Pretorius.The comments by Don MacKay at BNC#8 on the cost of the auto industry policy in SA is utterly misinformed and displays a total lack on understand as to how the policy works. The content below provides a balanced cost/benefit analysis of the programme.What Is the Real Cost–Benefit of APDP?To provide a balanced perspective, it is important to clarify that the Automotive Production and Development Programme (APDP) is not a subsidy that burdens taxpayers. Rather, it is a powerful economic engine that delivers substantial Local Value Addition (LVA) at a multiplier rate most governments would envy.Key facts:• Actual Local Value Addition was R172 billion by the seven OEMs operating in South Africa and their Tier 1 suppliers, as measured by National Treasury and ITAC, the same institutions that administer the incentive system.• The true cost of the APDP is in the region of R17 billion• The multiplier is over 10 times the cost• Few, if any sectors in South Africa can demonstrate this level of return on a government policy..What is Local Value Added (LVA)?It is the difference between the ex-works value of auto products, less all the imported content in the supply chain. It excludes the retail side of automotive activity and is the economic contribution difference between importing a vehicle or assembling it locally.What constitutes LVA?The substantive constituents of LVA lie in the Income Statements of the seven Original Equipment Manufacturers (OEMs) who are registered with ITAC as APDP CKD compliant assemblers. They include, but are not limited to:• The LVA in components purchased from the local supplier chain that is close to 60% of invoice value.• Local logistics costs.• Payroll and related employee benefits; training, pensions, medical aid, UIF, SDL, subsidised meals.• All municipal and property costs; rates and utilities, insurance.• Factory costs such as building and plant maintenance, security (mostly outsourced).• Office costs covering; stationery, equipment rentals, IT, building maintenance, subscriptions.• Banking costs and interest.• OEM profit Consider the key local factory-based jobs for a minute: Factory workers, Engineers, Finance staff, IT specialists, Logistics specialists, HR personnel..Read more:.South Africa considers 50% tariffs to protect local car industry.All these locally incurred costs constitute economic activity that would be lost if the APDP was discontinued, yet the discussions always center on APDP costs – never the economic contribution.Is R38 Billion (2024 base) the Correct APDP Cost?The accurate cost of the APDP is R17 billion for 2024, not R38 billion, as per the table below..The R21 billion difference (to R38 billion) largely comes from “forfeited” duties on imported components that are subsequently exported in built-up vehicles. These components are not consumed in South Africa and therefore do not attract duties. Counting this as a cost (duty forfeited) is a misrepresentation that Treasury has yet to correct.Using the true APDP cost of R17 billion against LVA of R172 billion produces a 10-times multiplier—a far more accurate reflection of APDP’s economic value.Is APDP Funded by the Taxpayer?The design of the APDP is widely misunderstood.The APDP exists to secure investment from OEMs through tariff protection, while enabling these same OEMs to earn duty rebates based on the Local Value Addition they create.Key clarifications:• Rebates are earned through measurable (and audited) LVA.• The duty pool on which rebates are applied is created by the OEMs themselves through their own importing activities. (Duty on imported CKD parts and CBU vehicles not assembled locally).• If an OEM total duty pool is less than the duty rebates earned, the OEM can monetise this surplus by selling it to other industry participants who pay duty and do not have enough credits.• In this sense, APDP is self-funding.• The “cost to taxpayers” comes from OEMs that choose not to invest locally. These importers pay higher import duties and then blame the APDP for high vehicle prices..The primary contributors to higher vehicle prices in South Africa are actually government taxes and levies unrelated to the APDP:• Ad Valorem Tax of up to 30%• Tyre and emissions levies (≈3%)• VAT at 15%.The APDP is not the culprit, it is the local value generator.What Would South Africa Look Like Without APDP?If the APDP was abolished:• There is no guarantee that the 25% import tariff would be reduced and if it was, what the lower value would be.• The automotive sector’s balance of payments (BoP) would skyrocket.• The country would immediately face the question of how to replace the massive economic contribution of the local automotive manufacturing supply chain.• The ecosystem surrounding OEMs is vast. The contractors, caterers, security staff, logistics partners, and service providers entering a plant daily far exceed the direct OEM headcount. These jobs are part of the LVA that APDP enables..The commonly quoted figure of 115,000 direct jobs barely scratches the surface. It ignores the total economic network and significantly understates the impact of the APDP.If the 115,000 direct manufacturing jobs are used as a measure of programme success, then consider that they generate R1.3m in Local Value Addition per employee per annum—a fact rarely highlighted..Cost of Mercedes Benz in SA and America:Don MaKay claims that a C200 in SA in R300k more expensive that a C300 in Michigan and infers that this cost difference is due to the APDP government policy. A simple analysis will show that the difference has nothing to do with the APDP but rather the following domestic costs:1. VAT at 15% (in the USA many States have no sales tax on vehicles and where applicable, is around 7%)Local Value Addition R1 495 652Cost of APP R143 765Net LVA benefit R1 351 887Cost of APDP 10%Per direct employee2. Ad valorem tax – SA levies this duty on a sliding scale for all vehicles entering SA,whether locally manufactured or fully imported. This duty has nothing to do with theAPDP and scales up to 30% on the ex-factory value. (about 14.4% on a local C200)3. There are also environmental duties on tyres and CO2 emissions.A cost comparison between a C200 in SA and a C300 in Michigan shows a difference at retail price level of about R150 000 (Google search at USD 17). The SA retail price includes ad valorem of R145 000 and VAT of around R130 000. The total is R275 000 and has nothing to do with the auto programme in SA.Doesn’t take much effort to get accurate information.Why is the above not the narrative being shared with the BizNews Tribe? Why only the cost?Next time please get an industry expert to talk on the Auto Industry like Andrew Kirby or Prof Justin Barnes..Donald Mackay's response.I have never suggested we eliminate the APDP. Rather, given that National Treasury says R43 billion was spent on automotive subsidies in 2025, we should at least conduct an independent cost - benefit analysis of the programme before simply continuing it in perpetuity. While adding R172 billion in local value is good, comparing this to the money spent on the programme as a multiplier is incorrect. At best you could compare the taxpayer money spent against the tax revenue received, which would not be generated if all the cars were imported.Companies invest when they receive an adequate return on investment. Because manufacturing cars in South Africa is relatively unattractive (we are far from the markets and have a small internal market with little movement to the surrounding region), a substantial subsidy must be provided to keep them invested. We certainly want companies to manufacture cars here, but we also want them to produce many other goods. But does subsidising car production generate the best returns for the country (what economists call opportunity cost)? The answer is we don't know and I think we should know.The APDP is definitely not self-funding. Companies who make cars locally earn production rebate certificates (PRCs). They can use these to import cars without paying the 25% duty, yet these cars, along with locally made ones, are not sold any cheaper than fully imported cars. The holder of the PRC can sell the certificate to an importer; these certificates regularly trade at 80 to 90% of their face value on the PRC. In other words, rather than paying 100% of the tariff to Sars, the importer pays 90% to the local producer. Treasury does not count this trade of PRCs in their subsidy value because they only see the forfeited revenue, not the payment made to the local producer. This results in imported cars paying around 90% of the tariff, allowing the local producer to sell at import parity. The consumer pays more because of the tariff, as even President Trump is learning.These subsidies will need to be paid as long as cars are made in South Africa. As our infrastructure deteriorates, the pressure to increase these subsidies will rise. Professors Dani Rodrick and Joseph Stiglitz caution that subsidising any sector in perpetuity is bad industrial policy because it dulls that sharp edge required to be globally competitive. I am open to the possibility that we should all pay more for our cars to keep manufacturing them here, but this requires empirical determination, not assumption. I agree with Mr Pretorious on the ad valorem excise duties which are decades overdue for an update. However, when he compared prices and found the Mercedes C-Class in Michigan was R150,000 cheaper than the local alternative, this included a tariff of 25% under President Trump's Section 232 duties. When I did the comparison there was no tariff on cars imported from South Africa.I have great respect for Andrew Kirby and Justin Barnes, but Mr Kirby is the Managing Director of Toyota and Professor Barnes is the architect of the programme. In the words of Upton Sinclair, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Right of Reply on Donald MacKay (and his response)

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