How Botswana and Namibia Subsidize the South African Auto Industry by Rand 5 billion each

Botswana’s Rand 5.2 billion subsidy to the  South African Automobile Industry

…if one accepts President Masire’s version of what happened to Hyundai, South Africa in effect set out to destroy the motor vehicle industry in Botswana in the 1990’s and now Botswana is expected to pay Rand 5.2 billion in 2012 in lost customs revenues for the privilege of subsidizing the South African industry.

For years economists have said that Botswana cannot diversify, especially into the manufacturing of industrial products. They have argued that we should export services instead and put the nation’s youth into call centres as the Indians have done. But if you look at the figures  there was a point in the late 1990’s when manufactured (and other) exports made up almost 20% of our total exports. Since then manufactured exports  have never made any impact and with the demise of exports of garments to both the US and the EU manufactured exports fell to about 10% of total exports. It is only with the serious introduction of diamond polishing since the 2011 agreement with De Beers that manufactured exports have once again taken off.  But ironically because of this beneficiation Botswana is now more dependent on diamonds than ever before and while cut and polished diamonds may be manufactured products but they are still diamonds.

Killing Hyundai

The reason why manufacturing exports took off in the 1990’s in a serious way was because there had been a Hyundai assembly plant opened in Gaborone which started to export cars in a big way to South Africa from around 1994/5. Exports of automobiles became very substantial and, using the free trade access available under SACU, Hyundai was making major inroads into the South African market and giving Toyota and other South Africa based  producers a very hard time.   But in 2000 the factory was shut down and automobile exports came to an end.

There are really two explanations for why the company collapsed. The first explanation is that Mr Billy Rautenbach, the man who owned the Motor Company of Botswana (MCB), the owner of the Hyundai franchise was, in the words of the UN Conference on Trade and Development report running a  ‘a fly-by-night’ operation. The evidence from the period suggests that Mr Rautenbach was involved in all sorts of activities, many of questionable morality, if not legality. In other words the explanation rests on the fact that MCB was both badly managed and run by someone who was less than salubrious and thoroughly scrupulous.

But there is another explanation which is slightly more subtle. The South Africans, had, after the end of apartheid started to restructure their own automobile industry by massively lowering tariffs on imported cars from 115% in 1995 to about 25% now. In order to stop the complete implosion of their automobile industry the South Africans had started to provide massive subsidies for exports and thereby restructure their industry.  There was no way they were going to allow some small ‘screw-driver operation’, as their industry commonly calls the Hyundai factory in Botswana, to undermine their industrialization plans. So if one believes the views of Botswana’s leaders South Africa undertook a concerted campaign to shut down Botswana’s Hyundai factory. In his memoir former President Quett Masire said (pp179-180):

In the 1990’s, we established the Hyundai motor vehicle assembly plant to take advantage of the Customs Union provisions but it was also sabotaged by South Africa.  The South African motor industry was heavily protected by the external tariff , and we in Botswana paid very high prices when we purchased vehicles assembled in South Africa. Producers in South Africa were strongly opposed  to doing any assembly in Botswana…….Once the Hyundai plant was established, the South Africans alleged we were not assembling the vehicles, just uncrating them. Therefore, they said we should pay the full tariff on assembled vehicles, not the lower tariff that was levied on components. So, we brought the South African officials to Botswana  to show them that assembly was indeed taking place. Then they said we were not collecting the appropriate customs and excise duties. Again, we brought them here so our customs people could show that all the relevant duties had been paid.

South African authorities then accused the Hyundai dealers in South Africa of some illegality. We helped them fight the charge, and again we won. Finally, Hyundai’s South African partner apparently siphoned off money, so eventually Hyundai gave up, and our plant was closed.’

The full details of what the South Africans did to close Hyundai are still not public but they should be. In a recent interview Mr Kitso Mokaila, the former GM of the Hyundai plant in Gaborone said that it was ‘South African quotas which limited our exports to 1,000 units per month when our minimum profitable scale was about 1,800 per month which destroyed the business model’

There is no doubt that the Hyundai plant had originally begun its life as what is called in the industry as ‘semi-knock down’ factory and was alleged by the South African to not comply with the SACU rules of origin which were of course written by South Africa alone. But with the help of BDC and several banks MCB built a modern facility for $60 million in 1997/8 which was based on completely full knock down basis. This employed some 600 workers and really did help to develop skills in the industry. This plant was supposed to comply with SACU rules.     

Adding insult to injury

What South Africa did from the very outset of its own post-apartheid trade liberalization policy in 1995 was to set up the Motor Industry Development Plan (MIDP) which provided customs rebates for every rand of automobile exports outside the SACU region. So who paid these export subsidies? If you open up the annual budget documents of the South African treasurer you will find an annex which gives you the impression that it was somehow the South African taxpayer who pays for this. In total over the last four years for which there was data (2008-2012)  some ZAR 57 billion was handed out in subsidies to the SA automobile industry under the MIDP. The reality is that this was money that would otherwise have been paid to SACU members. Based on the distribution of the customs pool in 2012 about 32% would have gone to the government of Botswana.  Thus if one accepts President Masire’s version of what happened to Hyundai, South Africa in effect set out to destroy the motor vehicle industry in Botswana in the 1990’s and now Botswana is expected to pay Rand 5.2 billion in 2012 in lost customs revenues for the privilege of subsidizing the South African industry. If Namibia, which also received 32% of the customs pool in 2012,  and Botswana had not been these paying  subsidies since 1995, they could almost certainly have paid for the building of the trans-Kalahari railroad. 

A final bitter twist in this sad Hyundai saga is that Hyundai South Africa confirmed that they will be opening a Hyundai assembly factory in September this year in Benoni to assemble trucks for the SACU market. The factory will be using, according to Cramer media,  ‘completely knock down’ kits as was the case with the post 1997 factory in Botswana.

Sovereign Rights

As long as it does not cause injury to others or is based on exports then international trade law allows every sovereign state the right to subsidize its industry. The MIDP has now been replaced by Automobile Production and Development Program (APDP) which is not based on export subsidies which are illegal under WTO law, but is now based on value addition. Despite requests, SARS refused to release data on the costs of this APDP program in 2103 saying that the cost will only be available in the next South African budget but those in the industry do not expect lower subsidies than in 2012/13.

South Africa, if it so chooses, must have the right to subsidize its automobile industry. Botswana exports some automobile parts such as batteries and electrical harnesses and also gains from this program.  The only question is why the Batswana should pay South Africa’s subsidises and vice versa, especially given the value of Botswana’s subsidies compared to South Africa’s? There is a simple solution to this subsidization issue. SACU members that use SACU customs and excise revenues to subsidize their industry should have the cost of those subsidies deducted from their annual SACU earnings and the money returned to the SACU revenue pool for re-distribution and in that way we each pay our own subsidies.

But of course South Africa, like everyone else, would much prefer to have someone else pay their bills for them. The automobile industry in South Africa now wants the APDP to be extended to bus and truck manufacturing and given that 83% of the cost will be paid by the citizens of the Botswana, Lesotho, Namibia and Swaziland, why would the South Africa Department of Trade and Industry object?

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated.