Building capacity to help Africa trade better

The Trade in Automotive Components and Regional Value Chain Development


The Trade in Automotive Components and Regional Value Chain Development

The Trade in Automotive Components and Regional Value Chain Development

The development of global value chains (GVCs) has been one of the most striking features of economic globalisation. With the improvements in the efficiency of global travel and communications networks, the distribution of the production chain across multiple countries has become possible. This globalisation of production has allowed production specialisation and hence, efficiency, to increase. These improvements have allowed unit costs to come down and have assisted in ‘democratising’ motorised transport across the developed and developing worlds.

Besides their impact on the consumers of vehicles, global value chains, and their regional counterpart – regional value chains (RVCs) – open opportunities to developing economies that would never have otherwise materialised. While African developing countries simply lack the capacity and resources to design, produce, distribute and market their own fully assembled vehicles, there are far lower barriers to entry for production of vehicle components.

Among the benefits to be expected from such GVC participation by developing countries are the following:[1]

  • The facilitation of domestic and regional industrialisation

  • The creation of job opportunities

  • The transfer of skills and technology from established, developed country producers

  • The potential creation of forward and backward-linked industries (extension of domestic value chains), thereby deepening industrialisation

  • Positive balance of payments effects (BOP) from the move to import less higher value-add, finished goods and more lower value-add intermediate goods and raw materials (except where raw materials can be sourced locally, then there are no BOP effects).

An additional benefit is the potential to upgrade – to eventually advance up the value chain to produce higher value-add, more technology intensive inputs.

A previous tralac blog[2] on this topic examined the potential for regional automotive component value chain development in Africa. With RVCs on the continent of Africa, the goals are slightly different than with the participation in GVCs with the developing world. The African Union has set into motion the process of deepening intra-African trade by means initially, of the African Continental Free Trade Area (AfCFTA), which has already entered into effect. The intra-African trade in automotive components could be based on country-specific relative advantages, based on relative resource and skills endowments. The means to identify these, according to this tralac research, is by using the technique of revealed comparative advantage – a method of identifying a country’s relative industrial strengths using its relative exporting strengths as a reference.

However, even if potential industries can be identified using this method and the results operationalised in a regional industrial policy, the development of optimal RVCs in Africa will require additional policy considerations. To understand why this is the case, consider the nature of the end-to-end automotive value chain. This value chain has been described by Sturgeon et al (2016) as being comprised of six primary links.[3] These are:

  1. Vehicle design and development

  2. Parts and components: electronic components, mechanical components, composite components, wiring, aluminium components, rubber components and software

  3. Systems modules: such as the interior, the body, the electrical system and the chassis system and drive

  4. Systems integration and final assembly

  5. Marketing and sales

  6. Replacement parts and recycling

As is evident, two links in the above chain refer to automotive components trade – link 2 and link 6. Although the set of intermediate components and replacement components largely overlaps, it is not a perfect overlap. For example, vehicle bodies are vehicle components but they are not sold as replacement parts. On the other hand, most of the set of vehicle components that are manufactured will participate in both of these links, or stages of the value chain.

An important distinction between components used in the RCV link 2 and RVC link 6 is therefore based on what part in the RVC the traded components participate in. If they participate in link 2, the form of trade is business to business (B2B), with the eventual consumer (C) involvement only at link 5. However, if they participate in link 6, although the trade is B2B (manufacturer to dealer/servicer), the consumer involvement is directly thereafter.

This lengthy discourse on the distinction between these two modes of automotive component trade is undertaken in order to make an important point about the design of trade policy around automotive components. If RVCs become a continental development strategy, trade policy should be designed to distinguish between the two trade flows of largely similar items. If the cross-border flow of components from one country’s value chain industry to another’s faces the same trade barriers as those of replacement parts (which may be relatively high), this will undermine the development of continental value chains.

By way of example, consider the Zambian case. Zambia was identified in recent tralac research[4] as a potential exporter of automotive cable, wiring looms and electronic components, based on its revealed comparative advantage as a copper exporter. This means that Zambia would occupy a regional value chain upstream of substantially completed units, and downstream of smaller components. However, when examining Zambia’s tariff structure, it is found that there is an average tariff of 13.5% on the relevant sub-heading (HS870899) and an average tariff of 10.2% on the heading (HS8708)[5]. The same pattern is seen in other African countries identified as potential participants in continental automotive value chains. Examples are Benin, Togo, Mozambique and Uganda.

One potential solution is for these countries to follow the lead of Africa’s leading exporter of automotive components, South Africa, and establish Industrial Development Zones (IDZs) targeted at the automotive industry.[6] South Africa’s Automotive Production Development Programme (APDP) is a comprehensive industrial policy aimed at supporting and incentivising the automotive industry in South Africa through import protection, tax relief and direct support.

One strategy that is a key component of the APDP is the maintenance of Industrial Development Zones, which are a subset of what are usually termed Special Economic Zones (SEZs). SEZs are geographically delimited zones within a country, that are subject to different tax, customs and other policies to those that prevail in the rest of the country. The Department of Trade and Industry (DTI) defines and IDZ as “a purpose built industrial estate that leverages domestic and foreign fixed direct investment in value-added and export-oriented manufacturing industries and services.”[7]

South Africa, has several IDZs targeted at the automotive industry:

  • Coega IDZ: located outside Port Elizabeth, it is the leading IDZ in the country and hosts Isuzu as well as two large Chinese automotive corporations

  • East London IDZ: also hosts automotive component manufacturers and its IDZ hosts Mercedes-Benz

  • iDube TradeZone: located outside Durban, this IDZ hosts automotive component manufacturing, among other manufacturers.

These IDZs are also Customs Controlled Areas, which makes the corporations resident in the IDZ eligible for value-added tax relief as well as relief from customs legislation. There are other benefits, such as lower corporate tax, building allowances, employment incentives and tax allowances.

One solution then, for Africa’s aspirant automotive component exporters, is the establishment of IDZ or SEZs, where parallel, more liberal, trade policies can operate. However, African exporting countries need to continue to support and invest in SEZs to ensure that value chain contributors are adequately incentivised to continue to operate. There are examples of SEZs – such as Uganda’s Lake Victoria Free Trade Zone – that have not been not effectively maintained. However, with appropriate ongoing support and policy continuity, investors could be attracted and in time, Africa’s exporters can look to upgrade their production along the automotive value chain. There is also then a strong case for making SEZs a component of a continental industrial strategy.

[1] Erwin, A. 2016. Building a value chain for the automotive industry in Africa: Lessons from Nigeria. TIPS Development Dialogue Seminar.

[2] https://www.tralac.org/blog/article/14363-how-viable-are-auto-component-regional-value-chains-in-africa.html

[3] Sturgeon, T., Daly, J., Frederick, S., Bamber, P. and Gereffi, G. 2016. The Philippines in the automotive global value chain. technical report for USAID, final draft for review), May. Duke University, USA

[4] Stuart, J. 2020. The Automotive Components Trade in Africa: Its Place and Potential. tralac Working Paper No. S20WP02/2020. Stellenbosch: tralac

[5] Trade Map. 2020. https://www.trademap.org

[6] In fact, Togo does have an SEZ and was the first African country to establish one, but its performance of late has been disappointing, indicating the need for policy adjustments. Uganda established the Lake Victoria Free Trade Zone in 2006 but it has fallen out of use. Mozambique is in the process of establishing a SEZ at Soalpo

[7] The DTI. 2020. https://www.thedti.gov.za/industrial_development/sez.jsp

About the Author(s)

John Stuart

John Stuart is an economist and policy analyst with special interests in trade, economic integration, technology & ICT and economic modelling. He began his career in academia at Rhodes University and later the University of Cape Town, after which he entered private consulting first with AFReC (Pty) Ltd and subsequently with management consultancy PBS (Pty) Ltd, where he served as Chief Operations Officer. Following his time at PBS he created agri-tech startup AgriDrone, one of the first UAV startups in Africa. He has subsequently researched and written extensively for tralac and also consulted to various organisations including the UN Economic Commission for Africa and the OECD. He holds an M. Com degree in Economics from the University of Natal (Durban).

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