Motor Industry Rescue Plan Smacks of Corporate Welfarism

Current debates on the motor industry rescue plan remind me of the origins of the term “Hobson’s choice”. The phrase draws from a Mr. Hobson that rented out horses, and gave his customers no choice as to which horse they would rent. By limiting the choices available to customers, Mr. Hobson ensured that he both managed his stock, and ensured a rotation of horses.

South African motor industries, through skilful lobbying, are arguing that the rescue plan is the only option available to South Africa. The underlying motivations of job creation, expansion of local manufacturing and positive impacts on the current account deficit provide a formidable argument. Yet, the South African government is not similar to the customers of Mr. Hobson, in theory it has significantly more scope to craft an economy wide response to the global economic meltdown, than simply respond to the special interests of multinationals in the motor industry.

The central proposal for the rescue plan is the extension of credit, focussed on automotive component manufacturers. There is a devastating truth that without an extension of credit, these operations will struggle to survive, and in many instances will be forced to close shop. This undesirable outcome is one of the major motivations for the rescue plan. However, critics of the rescue plan argue that the component manufacturers are in the same position as clothing, furniture or other engineering firms. This criticism points out a systemic failure of credit availability for struggling firms across the economy in South Africa. The policy suggestion is that rather than focus on one sector, the South African government should develop proposals and funding for an economy wide response to firms that will struggle with declining demand, especially due to the global economic meltdown. The argument, thus, is for a systemic shake up of credit provision to smaller firms, rather than a focus on one sector, despite its obvious importance. 

Yet, the deeper question that arises is whether the motor industry has acted in the spirit of the Motor Industry Development Plan (MIDP). In other words, have they behaved in a manner that nourishes and sustains a growing local supply industry? Two factors indicate that the proposed rescue plan could be considered “corporate welfare”.

First, the motor industry has argued that for the industry to be viable in South Africa, it will need to increase local procurement from 40% to 70%. The current low level of local procurement is surprising given that the MIDP has been the flagship of industrial policy interventions by the state. The question might well be asked why local procurement has been so low, despite a programme designed to support its expansion. It is a complex question to disentangle, with the availability of skills, and costs of local procurement often cited.

A central part of understanding this problem is that the tax incentives under the MIDP ironically favoured the importing of components in addition to the fact that car manufacturers provided only limited support to local manufacturers. For instance, it is common in several industries in emerging markets for large firms to support suppliers during difficult times with upfront payments, or alternatively provide matching funds with development finance institutions to ensure continued supply.

Second, the large multinational car manufacturers have been quick to repatriate profits without adequate investment in a downturn. During the boom years – lasting till mid 2008 – there was significant scope for building an investment fund to support the industry in a downturn. Supporters of the rescue plan however point out that the global economic downturn was sudden, and unexpected. Even if this were the case, effective use of state resources for private activity, must be crafted with the long-term perspective that must inevitably assume that the good times will not last forever. In truth, this criticism applies to government as well, which was unable to effectively monitor the building blocks for a sustainable industry.

The voices of dissent on the rescue plan offer ideologically polarised views, which lay the foundation for reappraising the imminent decision to support the rescue plan.

From a free trade perspective, a recent OECD study makes the point about intervening in any other sector, besides the financial sector, which is considered systemic. Intervening in sectors that are unlikely to have strong demand or be resilient during a downturn, would not only lengthen the recovery period, but would have deeper impacts on jobs and markets. In South Africa, a small but powerful group of technocrats argue this point.

Beyond the ideological bluster, the very real need to have continued demand for products is a practical reality that should guide policy interventions. However, in our context, government activity cannot be limited to the financial sector simply because South Africa is unique in having such high unemployment and high inequality internationally. Simply focussing on financial markets, would thus simply replicate current market conditions.

A variant on this theme trumpets the freedom of small businesses. In framing the current rescue package, the industry proposals are not for a bail out, but rather for a loan to the sector. As such, the rescue plan would lock component suppliers into the motor industry, with lead firms (i.e. large multinationals) taking on little of the risk. Rather than locking these component manufacturers into a highly concentrated market, they should be focussed on differentiating products for a wider, potentially international market. There are of course, dangers in attempting this, as most markets adopt increasingly protectionist and nationalistic trade policies. However, the important factor brought to the policy table is that small manufacturers must focus on having multiple customers and be able to adapt to changes in the economy. On the factory floor, such a proposition is not only daunting, but also costly. The plus factor in the long term would, however, be a stronger and more independent manufacturing base.

At the other end of the spectrum are calls for government to become a major customer of motor vehicles. Unlike the calls for more cars for blue lights for politicians, this argument suggests that rather than having a rescue package, government could purchase much needed cars for police stations, taxi recapitalisation, ambulances and in other areas. The significant motivation is that rather than having small companies having to pay off debt in future, government would create a new order book to support an important sector. Administratively this would be simpler, argue its proponents. However, there are valid criticisms that government cannot perpetually sustain its demands for vehicles, thus offering only a short-term solution.

An alternative proposal from transport planners is that component manufacturers should be provided with funding to purchase equipment and undergo training to support the provision of rolling stock and parts for an expanded public transport system. Whilst these proposals still require careful explication, the impulse of linking social and economic objectives should indeed be a core and foundational principle.

There is however a certain inevitability in government agreeing to some form of rescue plan, euphemistically called a stimulus package. The National Union of Metalworkers of South Africa have however warned that any government funding should not should not “go towards CEO bonuses or pay for industry inefficiencies”.

The careful campaign by the motor industry is attempting to create a Hobson’s choice for government, as they have focussed on small business support, job retention and creation and the creation of a long-term competitive industry. However, the rescue plan would reflect the continued dominance of sections of the private sector that have the capacity to lobby effectively, and who represent a special interest. In effect, the signing of the rescue plan would reflect that special interests would once again dominate in our economy, with large multinational companies having successfully extended a period of government support and in effect, added an additional layer of support.

Instead, government should be playing the role of a developmental state; one that is embedded in societal relationships, but has the autonomy to construct economy wide interventions, which widen opportunities for smaller businesses that are valuable because of their innovation, contribution to employment and because they increase the prospects of economic inclusion. Sadly, it looks as if the multinationals might just win this one.  Perhaps what this Hobson Choice means is that the tail is wagging the dog.

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