The Automotive Industry in South Africa

The automotive industry in the world has been synonymous with industrial development. The 1950s onwards has seen a tremendous increase in the automobile industry both in production and market size. The number of automobile manufactures has increased and not only limited to traditional car makers such as Toyota, Ford, Volkswagen and General Motors. The automotive industry is very competitive, but the returns are very high. The profit margins for automakers and suppliers continue to grow in the last ten years while car sells reached a record 88 million cars in 2016(Parkin et al.2017, para.1). Luxury car brands have also become popular as customers preferences change. They include Lamborghini, Audi and Ferrari, majority manufactured in Italy. The automotive sector is crucial to the economy due to its contribution to employment. For instance, the automotive industry is responsible for over 3% of all manufacturing jobs in the US (Platzer & Harrison 2009, p.4). However, the 2008 financial crisis saw a decline in sales in automobiles resulting in companies such as General Motors laying off workers and closing assembly plants. Most states in the world have contributed significantly to the growth of the automotive industry. They include market-driven assistance in removing trade barriers and tariffs to allow for exports. Governments are also developing policies to help automakers reduce the cost of manufacturing, increase safety standards and reduce environmental pollution.

The purpose of this paper is to conduct a comparative analysis of the role of the state in the automotive industry. The study will focus on the US, German and Indian automotive sectors.

The USA

Both the US federal government and individual states are extensively involved in the automotive sector, Both have developed legislative policies aimed at growing the industry by making it less capital intensive and improving competition (American Automotive Policy Council 2016, p.4). The US automobile production has doubled since 2009 and is expected to exceed 12 million vehicles annually by 2018 (American Automotive Policy Council 2016, p.4). Furthermore, revenues from auto sales have increased by over 60% since the financial crisis of 2008 (American Automotive Policy Council 2016, p.4). The role of US government in automotive industries is limited to policies regarding safety standards and environmental protection through the Environmental Protection Energy. The state focused on promoting innovation in the sector to make the US manufactured cars more competitive in the global market.

Safety standards

Consumer protection is the one-way government is involved in businesses. Customers need to safeguard against products and services that put their health and safety at risk through relevant federal agencies. Automakers are required to adhere to strict regulations aimed at enhancing client safety and reduce accidents caused by faulty automobile parts. Car manufacturers that do not abide by those rules incur heavy felony charges and are forced to recall back their vehicles from the market. For instance, Toyota was forced to recall over 2.9 million vehicles due to faulty Takata airbag inflators that were doomed to chemically unsafe (Tajitsu 2017, para.1). The same company was forced to recall over 340,000 cars worldwide for their hybrid vehicles that had faulty parking brakes causing accidents and deaths (Associated Press 2016, para.1).

Fuel efficiency

The federal government has imposed new fuel standard policies aimed at increasing efficiency of fuel consumption in cars (Klier & Sands 2016, p.2). The purpose is to cushion consumers from the high cost of automobiles as a result of fluctuating oil prices. EPA is enforcing the legislation aimed at improving innovative technologies that enhance the fuel efficiency of cars not only produced in the world but also in Germany and Japan (Carley et al.2011, p.370). However, the problem is that customers are used to gasoline vehicles leading to low demand for fuel-efficient vehicles. The US government is increasing the gas tax aimed at making gasoline-powered cars pricier and spurs market for electric cars or those that use alternative energy (Klier & Sands 2016, p.3). Furthermore, the federal government is increasing funding (to $25billion) through programs administered by Department of Energy to expand the manufacturing of fuel-efficient cars (Klier & Sands 2016, p.3). The move is necessary due to increased competition from Chinese auto industry producing clean energy cars and threatening to overtake the US (Tang 2009, p.4). Automakers are being encouraged to invest in biofuels to reduce reliance on diesel and petrol (Carley et al. 2011, p.373).

Environmental protection

The US government involvement in the automotive industry is focused mainly on reducing carbon emissions. Legislators have drafted strict ecological laws on carbon emissions to be adhered by car manufacturers and heavily enforced by EPA. The Environmental Protection Agency is unwavering in implementing the Clean Air Act (Carley et al.2011, p.375; McCarthy & Copeland 2016, p.8). States are also enacting their air pollution laws that automakers who have assembly plants operating with the country need to follow. There are laws on internal combustion engines aimed at decreasing level of carbon emissions when gasoline is burned (Carley et al. 2011, p.375; Carley et al. 2017, p.5). EPA sets the required carbon emissions in cars to protect the environment and decrease global warming. Therefore, companies need to conduct carbon testing for emissions before releasing the vehicles in the market. However, car manufacturers find it difficult to adhere to required carbon levels for diesel engines. The result is a culture of constant emission cheating among companies ranging from Volkswagen to Renault. For instance, in 2015 Volkswagen admitted to a carbon emission scandal by using software that cheats the amount of carbon the engines in its cars emitted (McGee 2017, para.1). The company had to pay up to $15 billion in civil settlement claims and $4 billion to settle criminal charges in the US (McGee 2017, para.8).

Germany

Germany is known for being the hub of automobile manufacturing in the world. German brands such as the Volkswagen and Mercedes Benz are renowned worldwide for their high quality, durability, safety and efficiency of fuel use. German car manufacturers sold over 15 million units, accounting for over 19% of the automobile production in the world in 2015(Germany Trade and Invest 2016, p.2). The country has been prosperous in the production and export of passenger and light commercial vehicles bringing in over 144 billion Euros in 2015 (German Trade and Invest 2016, p.2). Over 79% of the cars made in Germany are exported to overseas markets (German Trade and Invest 2016, p.2). The automotive industry is the heart of German economy and contributes 20% of revenues to the GDP (German Trade and Invest 2016, p.3). The state is promoting “Made in Germany” slogan to increase the market for the country’s automobiles. For this reason, the government is heavily involved in this sector. The state is involved in addressing manufacturing costs, financing and reducing pollution levels.

Manufacturing costs

Despite the German automakers making huge revenues, many experiences high manufacturing and operational costs that reduce their profit margins. The high prices are associated with both the manufacture of cars and the spare parts. Most of the global automobile spare parts suppliers are based in Germany (Germany Trade and Invest 2016, p.2). Most companies experience high employee wages and a rigid labor market that threatens the growth and success of the automotive sector (Duestche Welle 2017, para.3). The result is that large companies such as Mercedes Benz and Volkswagen are moving their production facilities to East Asia (Duestche Welle 2017, para.10). Car manufacturers of Germany already have 20% of their production and operational activities in East Asia while 40% of auto suppliers plan to invest in China (Deustche Welle 2017, para.8). China is particularly attractive to German automakers because of its low hourly wages, the vast pool of skilled labor and large consumer market (Duestche Welle 2017, para.11). The great exodus of car manufacturers in Germany will lead to high unemployment levels and loss of revenues regarding taxes. Policymakers are looking for ways to lower the manufacturing costs through tax credits and low price of raw materials such as steel.

Industrial Financing

Innovation is part of the industry culture in automobiles in Germany (Germany Trade and Invest 2016, p.4). The result has been German car manufacturer’s continuously post excellent financial results despite the crisis in the market. Manufacturers and suppliers have received government financing since the 1960s. The financing saw the boom in the German automobile production in the 70s,80s and 90s. Industrial development in Germany has been and continues to be heavily supported by the state (Voltis 1997, p.52). The German government has encouraged banks to offer credit to automotive companies while also stabilizing the financial system to avoid ripple effects on the sector(Voltis 1997, p.55). Successive political operations in Germany have advocated for burdensome regulation of car industry positively. For instance, the high trade barriers of importation ha protected the German automakers from external competition in the domestic market (Voltis 1997, p.54).

Germany automakers lead the world in R&D (Germany Trade and Invest 2016, p.3). The government offers tax credits to auto manufacturers to offset their expenditures and guarantee long-term investments. Moreover, the government allocated a certain percentage of GDP to R& D where automakers can apply for funding (Voltis 1997, p.61).

Pollution

Just like the US, German is keen to regulate the auto sector to reduce pollution. The purpose is to help attain the country’s air quality and climate change policies. Therefore, reduction of carbon emissions from cars is necessary. The German chancellor has expressed a desire for the automakers to face out diesel and petrol vehicles to decrease pollution in the country’s industrial cities (Field 2017, para.2). Industry trends show that there is an increase in demand for fuel-efficient cars in the European Union and the world, particularly in East Asia (German Trade and Invest 2016, p.4). Merkel is urging manufacturers to diversify to electric cars to take advantage of the high demand for electric cars (Fields 2017, para.5). She further urged the industry players to restore the public trust after recent incidences of emission scandals (Thomasson 2017, para.4). For instance, Opel, a GM brand was also discovered to be using software to bypass EU carbon testing standards(Sorokanich 2016, para.2).The chancellor pointed to the fact that the future of internal combustion engine which the German car sector is built on is uncertain (Thomasson 2017, para.1). The entire German political system and even the opposition are in agreement that the automotive industry needs to undergo electrification to be sustainable (Fields 2017, para.7). The government aims to achieve the push towards electrification by enacting policies aimed at boosting production quotas for electric cars in Germany (Fields 2017, para.7).

India

Developed countries in Western Europe, North America and Far East Asia have dominated the automotive industry for decades. However, developing countries such as India and Brazil are producing excellent passenger and light commercial vehicles for traditional rival manufacturers. The increase in foreign direct investments in the world countries has led to a booming automobile sector ( Biesebroeke & Sturgeon 2010, para.5). Furthermore, the new markets in developing countries provide an opportunity for the global outsourcing of supply chain for General Motors, Ford, and Volkswagen Toyota among others (Biesebroeke & Sturgeon 2010, para.5). However, countries such as India are boosting their automotive industries with the success of Tata Motors.

India is the 5th largest commercial vehicle manufacturer and the 7th largest car manufacturer in the world (Urdhwaresh 2013, p.9). The revenue turnover of Indian automakers was $20 billion in 2006 while that of auto-components amounted to $10 billion in the same year (Ranawit & Tawiri 2009, p.4; Sheob & Maqbool 2017, p.25 ). The Indian government is keen to develop the sector to realize more revenues and drive the economy. Indian automakers are investing heavily in R &D through technological acquisition to establish a competitive advantage (Ranawit & Tawiri 2009, p.4). The result of the R&D is cheaper cars that are of high quality and fuel efficient. For example, Tata Motors unveiled the most affordable car in the world in 2008 (Ranawit & Tawiri 2009, p.4; Sheob & Maqbool 2017, p.27).

Liberalization and globalization

The liberalization and globalization of India’s economy since 1991 has had a positive impact on the automotive industry. India at this time abolished the industrial licensing system, encouraged FDI up to 51% in priority industries and MRTP licenses boosted the sector (Ranawit & Tawiri 2009, p.33). The result was the entry of global automakers that increased competition and production. They include Peugeot, Ford, General Motors, Toyota, Fiat, Hyundai and Mercedes-Benz. To discourage importation, the government raised excise duty from 52% to 66% on passenger cars manufactured outside the country (Ranwit & Tawiri 2009, p.34). Moreover, international firms were encouraged to set up actually production facilities(no assembly plants), invest at least $50 million in operating as a subsidiary and attaining indigenization rate of 50% in the third year of operation(Ranawit & Tawiri 2009, p.35).

Environmental regulations

The government is also imposing stricter environmental laws. The government aims to reduce greenhouse gas emissions to steer the sector towards electric cars. The fuel standards focus on improving traffic flow, enhanced energy efficiency, investing in vehicles that are eco-friendly among others (Urdhwaresh 2013, p.21). Indian car manufacturers have not been involved in any carbon emissions scandal. Therefore, the reputation of Indian automakers is very high.

Conclusion

The automotive industry is very lucrative and therefore, governments pay special attention to it. The countries with the successful automotive companies include the US, Germany and India. Both the US and German governments regulate the sector through financial support and environmental regulations. Germany promotes a ”Made in Germany” approach to improve the performance of the sector. India is an emerging market for automobile manufacturing and export. The success of Tata Motors is a testament to that fact. Liberalization and globalization have been the state’s role in promoting the development of automobile industry in India.

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