South African policy needs to catch up with electric vehicles
South Africa has every reason to be proud of its automotive manufacturing industry. It is a tremendous asset to the country’s balance of trade. Two-thirds of the vehicles it makes are exported, accounting for about 15 percent of the South Africa’s exports (and valued at ZAR175 billion in 2020). But this strong industry is under threat from the global shift from internal combustion engines (ICEs) to more carbon-friendly new energy vehicles (NEVs).
South Africa’s biggest vehicle market, by some distance, is the European Union. 73 percent of vehicles exported by South Africa go to Europe compared to 11 percent to Asia and six percent to Africa. The challenge is that Europe is set on eliminating IEC vehicles and has set a deadline of 2035 for the outright ban of sales of new petrol and diesel powered vehicles.
That deadline may seem a long way off and no reason for any sort of panic in South Africa. But some countries in Europe have brought the deadline forward. Last year, the UK announced it had advanced the deadline to 2030. Norway, which has a higher percentage of NEV new car sales than any other country (65 percent), will introduce the ban as early as 2025. There is every reason to expect other major Western European economies to advance the deadline too. Some observers, including the European Automobile Manufacturers Association, warn that the new Euro 7 emissions legislation, due in 2025, ‘could kill off internal combustion engine cars by 2026’.
The point is that a massive shift in South Africa’s main automotive export market could happen very quickly. By some estimates NEVs could account for 30 percent of European sales in 2022. In September last year, zero-emission vehicles outsold conventional diesel engine vehicles in Europe for the first time ever. This may be an anomaly, related to the global semiconductor shortage, but it should also be a warning to South Africa’s policy makers that they may need to start playing catch up very soon.
South Africa produced a draft Green Paper laying out a support framework for NEVs in May 2021. Public comment was requested – and extensively supplied by South Africa’s seven major automakers – whereafter the document was expected to be gazetted and presented to cabinet for approval in October 2021. This has simply not happened yet and no reason has been given for the delay. The National Association of Automotive Manufacturers of South Africa (Naamsa) has described policy making as ‘sluggish’ while Toyota South Africa CEO Andrew Kirby suggests the timeframe has ‘moved back’ at least six months.
The draft Green Paper was praised by the industry at the time but detail is needed in at least two critical areas.
First, the Green Paper argued for a two-pronged approach. It wants to see NEVs manufactured for the South African market as well as for export. But the local market, so far, is miniscule and located at the top end of the price range. Only six fully-electric models are on offer, the cheapest being the Mini Cooper SE at about R700 000. Most of the other models on offer cost over R2 million. Only 896 NEVs, of all types (fully-electric, plug-in hybrid and traditional hybrid), were sold in South Africa in 2021.
One of the problems is that until the introduction of the hybrid Toyota Cross in October 2021, all NEVs available in South Africa had to be imported and the excise duties are 25 percent, seven points above the import duties on ICE vehicles. The tax, originally introduced to protect South African golfcart manufacturers is now an anomaly and needs to be reduced or eliminated as soon as possible.
The problem is not just price. There are valid concerns about charging infrastructure, which needs to be put in place. It is not clear whether this should be a government or a private sector responsibility. In addition, potential buyers driven by ecological concerns could point out that the electricity used to recharge NEVs in South Africa is a long way from carbon-neutral in the first place.
The second issue is that NEVs are quite simply more expensive to manufacture than ICEs. According to Citi GPS – a consultancy part of the banking and financial services group – the manufacturing costs of EVs are 10-30 percent higher than for ICE vehicles. The consultancy warns that the higher sales of NEVs in Europe are driven almost entirely by sales subsidies (up to €6000 in Germany) as well as tax exemptions at various points in the value chain. This could change, they argue, as the higher costs are mostly related to battery technologies which are undergoing an intense development process around the world.
The South African automotive industry is built on incentives offered by government to manufacturers including localisation allowance credits, excise duty rebates and outright grants. The new South African Automotive Master Plan (SAAM), which lays out these incentives, pushes localisation requirements from 38 to 60 percent. It was passed last year and is intended to inform industry planning until 2035, but is silent on the issue of NEVs. It is likely that incentives for this sector could be easily added to the SAAM but, at the moment, manufacturers are operating in the dark.
It has been suggested that planning around the Toyota Cross, the first hybrid to be manufactured in South Africa, involves assumptions on the part of Toyota about future incentives. The hybrid version of the vehicle (at R448 000) costs only R23 000 more than the ICE equivalent. Toyota’s South African CEO has admitted that these prices will be ‘hard to sustain if the expected rebates don’t materialise’.
One of the great advantages of the Toyota Cross is that as a traditional hybrid, it does not need to be plugged into charging points. Not only will this make sales into Africa possible, but, from an environmental point of view, it is a major green advantage in a country where the national power grid is so ‘dirty’ (coal fuelled).
Traditional hybrids also emit only marginally more carbon than plug-in hybrids. Nevertheless there is a groundswell against hybrid NEVs in Europe because they emit considerably more carbon than fully electric vehicles (although much less than ICEs). This probably means that even if it is a success in the South African market, the Toyota Cross is not part of the answer to the country’s EU export conundrum. The solution to that requires decisions from government.
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