Multinational strategy, industrial policy and local capability: A comparison of automotive industry development in South Africa and Thailand

In most developing countries experiencing rapid increases in automotive production, the strategies of multinational firms have been of great importance. On the one hand, key decisions regarding investments in assembly and related supply chains can elevate a national industry’s position within global networks in terms of technology and production capacity. But while the expansion of FDI and foreign ownership may bring benefits, it can also bring problems. The cost in terms of incentives required to entice investment can be very high, increased foreign ownership may lead to the downgrading of domestic R&D and the sidelining of domestic suppliers. The manner in which global strategies are affected by factors such as local and regional vehicle demand, host country policy and domestic supply capabilities is therefore of extreme importance to host country national development.  The purpose of this paper is to examine the interplay of these factors in two emerging market locations, South Africa and Thailand.

The specific questions we address relate to:

1.     The impact of government policy, including trade tariffs, consumption taxes and government incentives, in forging particular vehicle demand profiles and the nature of production platforms.

2.     The role of factor costs and operational competitiveness factors (i.e. lean production capabilities) in shaping the competitiveness of assembly operations and their local component manufacturers.

3.     The level to which the sectors are embedded in each location as measured by the types of investment that firms have undertaken, the strength of respective supply chains and the upgrading of technological capabilities.

Apart from the more general economic parallels associated with their middle income status and future growth potential, in both South Africa and Thailand, governments have granted the automotive sector substantial support. Foreign investment, especially by Japanese firms, has also been important. The automotive sector in the two countries also hold dominant positions within their respective regions, but while Thailand is centrally located in a large and dynamic market region, the countries on South Africa’s periphery are poor and collectively comprise a tiny market.

The two industries are also important competitors, particularly in relation to the assembly of light commercial vehicles (LCVs), with Toyota’s Integrated Motor Vehicle (IMV) programme indicative of this. Toyota is the dominant vehicle assembler in both markets. Toyota’s assembly plant outside Bangkok is its lead plant internationally for the manufacture of a range of light commercial vehicle derivatives, including the Hilux model, which is also the most significant vehicle model assembled by Toyota South Africa at its Durban plant.

The format of the paper is as follows. Following the introduction, section two outlines the global trajectory of automotive industry development as it impacts on emerging markets. Two factors are evident; the first is that the share of emerging markets in global production is growing rapidly, a process which has received a further boost following the fallout of the global financial crisis whose impact on growth in developed markets was much more severe than in the developing world. The second is an apparent concentration of emerging market production in selected producer countries.

Section three, draws on primary and secondary research, including extensive site visits in both Thailand and South Africa, to delineate the main dynamics of the South African and Thai industries, demonstrating how the policy regime in each country, together with market factors have influenced various multinational strategies. Whilst the Thai and South African automotive markets are not entirely dissimilar in respect of their overall levels of demand, the profile of vehicle consumption in Thailand and the scale economies realized in that economy for LCV assemblers points to a very different market dynamic. South Africa’s light vehicle market is dominated by (highly fragmented) passenger vehicle sales; whereas Thailand’s light vehicle sales are dominated by LCVs, which are produced in very high volumes. This has provided Thailand with an advantage in relation to the securing large scale FDI. Recent Thai automotive industry growth rates have been rapid while the South African automotive industry has, on the other hand, meandered along, dependent on a subdued and highly fragmented domestic market, preferential market access to the European Union, and substantial government export incentives. Toyota’s production profile, together with their respective supply chains, is used as case studies to explore the divergent performance of the two national industries.

Section four compares how the above factors have affected the pattern of FDI in each country particularly in relation to the extent to which it has established an embedded industry with sustainable long term growth prospects. We show that Thailand has secured for itself a far more advantageous position within the global automotive industry in relation to South Africa, e.g. through a combination of carefully coordinated tariff protection and consumption taxes, Thailand has concentrated light vehicle ownership across a narrow range of LCV demand, and in market segments well protected from international competition, thereby providing a major incentive for the local assembly of such vehicles. At the same time, it has supported the localization of production through a suite of greenfield investment incentives, coupled with the development of low cost infrastructure, the supply of skilled and semi-skilled employees, and the implementation of advanced lean production methodologies. In combination, these factors provide Thailand with a significant competitiveness advantage over South Africa. The paper attempts to capture the exact extent of the competitiveness differential between the two economies, and in so doing creates an analytical framework that can be used to assess the macro and micro level factors constraining and/or enabling the competitiveness position of regional and/or national automotive manufacturing industries.

 

Justin Barnes is an adjunct associate professor of industrial studies at the School of Development Studies, University of KwaZulu-Natal. He is also the chairman of B&M Analysts, a benchmarking and cluster facilitation company.