The Automotive Investment Scheme (AIS) is a government initiative that aims to develop the automotive sector. The Department of Trade Industry and Competition describes it as an ambitious programme that aims to “increase plant production volumes, sustain employment and/ or strengthen the automotive value chain.”
The AIS offers significant financial incentives to automotive equipment manufacturers, contract manufacturers and other businesses throughout the automotive sector value chain. These incentives reflect the government’s appreciation of the vital role the automotive sector plays in South Africa’s economy.
In order to take advantage of the AIS, companies need to meet a minimum level of B-BEE compliance. Moreover, the applicable B-BBEE requirements have recently become significantly more stringent.
Fortunately, with an effective B-BBEE strategy in place, and the appropriate compliance technology, meeting the requirements is within reach of all interested stakeholders.
Below, we explain the benefits of the AIS and consider the B-BBEE requirements needed to take advantage of the scheme. We’ll also discuss why meeting the new B-BBEE requirements can be easier to achieve than you might expect.
Benefits of the AIS
To encourage investment in the automotive sector, the AIS makes non-taxable cash grants available for eligible initiatives.
The government also recently adopted measures to strongly incentivise the adoption of electric vehicle manufacturing. Manufacturers of New Energy Vehicles and Energy Efficient Vehicles are now potentially eligible for a 30% grant.
B-BBEE requirements for the AIS
Initially, the B-BBEE requirements for the AIS were minimal. A company simply needed to be B-BBEE compliant to qualify. That is, businesses did not need to achieve and maintain any specific B-BBEE level.
The requirements were revised in 2021, and companies now need to meet specified B-BBEE levels. These follow a phased approach as follows:
- Original Equipment Manufacturers (OEMs) must achieve at least B-BBEE level 6 as of July 2021 and at least B-BBEE level 4 by 31 December 2022.
- Components Manufacturers (CMs) must achieve at least B-BBEE level 8 as of July 2021; at least B-BBEE level 6 by 31 December 2022; and at least B-BBEE level 4 by 31 December 2023.
New Manufacturing Entities must achieve at least B-BBEE level 8 for the initial 36 months after incorporation. Thereafter, they must meet at least B-BBEE level 4.
Automotive industrial policy: A South African success story
To appreciate the scope of South Africa’s industrial policy as it relates to the automotive sector, let’s step back and consider the investment environment.
According to figures released by automotive business council NAAMSA, “capital expenditure by the seven major vehicle manufacturers in South Africa reached a record R9.2-billion in 2020”. NAAMSA attributes the record level of investment to Automotive Production and Development Programme (APDP), which offers tax incentives to manufacturers in the automotive sector.
The figures are particularly notable in comparative terms. Amid declining FDI across the economy, the automotive sector is demonstrating robust growth. While automotive production did decline somewhat over 2020, in line with broader economic trends, the broader trend is positive.
The South African experience is in line with global expectations. A global review concluded that, worldwide, the two most popular stimulus measures amongst automotive manufacturers are, firstly, tax incentives, and secondly, direct financial subsidies.
The South African government’s “automotive master plan” prioritises both measures, with cash grants channeled through the AIS as outlined above.
Ownership as a (new) opportunity
Given the popularity of the cash incentive structure of the AIS, and considering the ongoing success of the localisation policy within the sector, we can appreciate why the AIS represents significant appeal and opportunities for all stakeholders.
Historically, however, there has been a constraint on meeting one of the elements of the B-BBEE Scorecard: Ownership. Low compliance with the Ownership element of the Scorecard is particularly notable when we consider that for many businesses in other sectors, the Ownership element is often seen as the lowest-hanging fruit (arguably even to the exclusion of more flexible B-BBEE compliance initiatives).
However, as OEMs tend to be subsidiaries of multinational corporations, corporate governance rules exclude the possibility of local ownership Link to ‘Empowerment in a foreign language’]. Consequently, compliance with the Ownership element is low. Indeed, one study found that OEMs that performed in the lowest quartile of B-BBEE compliance amongst automotive manufacturers recorded “no compliance whatsoever in the ownership element”. Compliance in terms of Ownership was, unsurprisingly, highest with South African-owned companies.
Given the more stringent B-BBEE requirements of the AIS, structural limitations to compliance are clearly not ideal. Fortunately, the DTIC has responded with a more flexible way for OEM’s to meet Ownership compliance requirements. Through the new multibillion rand Automotive Industry Transformation Fund (AITF), OEMs can meet the equivalent of extending equity to Black investors through a contribution to the fund.
The move is significant because OEMs can finally significantly meet the requirements of all the elements of the B-BBEE Scorecard, including Ownership.
Flexible B-BBBEE solutions for a complex supply chain
Of course, given the breadth and scope of South Africa’s automotive sector, there’s a wide range of strategies companies can deploy to enhance their B-BBEE scorecards, either to take advantage of AIS or simply to leverage the opportunities afforded by B-BBEE.
Locally-owned Component Manufacturers, for example, are able to address the Ownership element more conventionally, through the sale of equity.
But we can also look beyond the Ownership element. After all, the automotive value chain is specialised, complex and highly capital intensive. Manufacturers need effective, responsive suppliers who can rapidly meet their needs at each stage of the production process. Production is also highly time-sensitive, and producers need reliable access to quality materials and specialised tools.
This is where Enterprise and Supplier Development (ESD) can be such a powerful mechanism.
Through ESD, companies dedicate resources to growing and developing small Black-owned businesses. That can include businesses within their supply chain.
And when you consider the range of goods and services manufacturers need to maintain effective and efficient operations – not just specialist suppliers, but security, couriers, general office supplies and beyond – we can appreciate just how broad and flexible ESD can be when applied to the automotive industry.
Practically speaking, a well-planned ESD initiative can be an excellent way to enhance your B-BBEE scorecard while also improving the quality and consistency of your suppliers.
Conceptually, ESD is in harmony with the values and aims of AIS more broadly. Helping develop suppliers and create a more inclusive business environment in the sector is in the spirit of both the AIS and B-BBEE. In this sense, ESD is not merely a means of securing AIS grants. Rather, we can understand B-BBEE and AIS as complementary interventions that help drive growth in the sector.
Importantly, ESD opportunities are not limited to manufacturers. Considering the stakeholders in the sector more broadly, we can also appreciate that businesses further down the value chain, such as automotive retailers and fleet companies, in turn can leverage ESD to enhance their own B-BBBEE Scorecards. Rather than simply being a top-down incentive programme, ESD, as ideally conceptualised, should be a framework for creating a more robust and inclusive economy for all participants.
Optimising B-BBEE in the automotive sector
The South African government’s focus on developing automotive industry is a testament to the sector’s central role in the broader economy.
The sector already provides much-needed economic stimulus to relatively impoverished communities situated around major automotive industrial sites. B-BBEE offers a broad and flexible number of options to extend the social impact to local communistes, such as through programmes that meet the standards of the Socio-Economic Development (SED) element of the Scorecard.
In all cases, stakeholders need to take a broad and integrated approach of B-BBBEE and other incentives. Considering the social, political and regulatory complexities particular to the automotive value chain, navigating B-BBBEE compliance is no simple matter.
As leading B-BBEE specialist with deep experience throughout the automotive sector, BEE123 is uniquely positioned to help automotive businesses optimise B-BBEE compliance and take maximal advantage of all incentives and opportunities while creating enduring social benefit.
B-BBBEE compliance isn’t a once-off event. It’s an ongoing process, in a rapidly evolving regulatory environment. BEE123 can help you make informed strategic business decisions every step of the way.
With BEE123’s unique insights and our proprietary B-BBBEE compliance technology our clients can unlock more value from their B-BBBEE compliance than ever before.