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Lessons to learn from new top runner

Plans to introduce a new tax on automobiles in South Africa to try and curb the emission of carbon dioxide, go exactly the opposite route to those that were followed by what is currently the largest automobile market in the world, China. On its way to the number-one spot, dislodging the United States from a position it has held for more than 100 years, the Chinese slashed by half the sales tax on cars with engines smaller than 1.6 litres to 5% a year ago.

Following this route, China has not only stimulated its domestic automobile market, but also incentivised less polluting smaller cars rather than penalising larger, more polluting vehicles. This strategy has been complemented further by subsidies to farmers to replace outdated trucks with small, 1.3-litre or less vehicles. Another $1.5 billion in subsidies will go toward upgrading automakers’ technology and developing alternative energy engines.

The net effect of this situation could mean a double whammy for South African vehicle manufactures BMW, Ford, General Motors, Daimler, Nissan, Toyota and Volkswagen, since they already have to compete increasingly with cheap Chinese imports in the local market.

The South African industry is already struggling to get back on its feet after being hit by the global economic crisis and depressed local demand that saw new vehicle sales fall to six-year lows in 2009.

About the new proposed tax, set to be introduced in March this year, the director of the National Association of Automobile Manufacturers of South Africa (NAAMSA) warned that the “industry is currently emerging from one of the deepest and most severe recessions in its history, and the introduction of additional taxes… could, if they are too punitive, result in the industry lapsing into recession."

How well the Chinese industry has done in recent years on the back of government support and the impact of the recession on other parts of the world, is illustrated by the fact that it outperformed the expectations of international industry experts. The respected "McKinsey Quarterly" in August 2004 predicted that “by 2010, China will become the world’s second-largest automotive market, trailing only the United States”.

It has now moved into the number-one spot at the end of 2009 and is expected to retain this position for the rest of 2010, exceeding sales in the US by at least two million vehicles.

"Popular Mechanics" earlier this month wrote that “a China invasion of the US auto industry has been anticipated with fear and loathing for a decade. If companies enter the US with impossibly cheap cars, the worries go, they could grab the attention and imagination of car buyers, especially the next generation of car buyers who have a more global view of culture and brands than their parents and grandparents. Havoc would then be wreaked upon Detroit and the established Japanese imports.”

The Chinese were present at this year’s showpiece of the American auto industry, the North American International Auto Show. Most interest was stirred by Chinese automaker BYD, which said it will be ready to launch electric vehicles in the US by the end of 2010.

Industry observers took serious notice of BYD for the first time in 2008 when Warren Buffett’s Berkshire Hathaway announced a $280-million investment in the company.
At Detroit, BYD said it has recently completed all approvals from the Chinese government and those designs and its engineering was done with the US market very much in mind. It is presently preparing applications for safety and engineering clearance from the US Department of Transport.

This may turn out to be a more complicated and burdensome process than the Chinese may have anticipated, and if history is anything to go by, it remains to be seen if the Americans will allow a level playing field for the pretenders from the East.

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