TIPS RESEARCH REPORT FOR DEPARTMENT OF TRADE, INDUSTRY AND COMPETITION NATIONAL ASSOCIATION OF AUTOMOBILE MANUFACTURERS OF SOUTH AFRICA HARNESSING ELECTRIC VEHICLES FOR INDUSTRIAL DEVELOPMENT IN SOUTH AFRICA Prepared by Gaylor Montmasson-Clair Anthony Dane TIPS is a research Lesego Moshikaro organisation that facilitates policy development and dialogue across three focus areas: Trade June 2020 and Industrial Policy, Inequality and Economic Inclusion, and Sustainable Growth [email protected] +27 12 433 9340 www.tips.org.za Authors Gaylor Montmasson -Clair TIPS Senior Economist Anthony Dane Change Pathways Lesego Moshikaro TIPS Economist DEPARTMENT OF TRADE AND INDUSTRY ACKNOWLEDGEMENTS This research report was authored by Trade & Industrial Policy Strategies (TIPS), a not-for-profit economic research organisation based in Pretoria, South Africa, and Change Pathways, a consultancy based in Cape Town, South Africa. Authors are Gaylor Montmasson-Clair (TIPS), Anthony Dane (Change Pathways) and Lesego Moshikaro (TIPS). TIPS and Change Pathways thank the Department of Trade, Industry and Competition (the dtic) and the National Association of Automobile Manufacturers of South Africa (NAAMSA) for initiating and funding this project. The project was overseen by a Steering Committee comprised of Gerhard Fourie and Frank Stevens on behalf of the dtic, and Norman Lamprecht and Brian Hastie on behalf of NAAMSA. The authors would like to specifically thank the various stakeholders who provided inputs into the research at its various stages. This includes: Audi, BAIC, BMW, BYD, Daimler/Mercedes-Benz, the Department of Science and Innovation, the Department of Transport, Eleksa, the e-Waste Association of South Africa (eWASA), Ford, GridCars, GoMetro, Hyundai, the Industrial Development Corporation (IDC), Isondo Precious Metals (IPM), Isuzu, Kia, Mellowcabs, the National Association of Automotive Component and Allied Manufacturers (NAACAM), Nissan, the South African Institute of International Affairs, Scania, the South African National Energy Development Institute (SANEDI), Sustainable Transactions, Suzuki, Toyota, the University of Cape Town, uYilo, Volkswagen, Volvo. The authors also acknowledge the contribution of Janet Wilhelm (TIPS) for the editing of the report; and Natasha du Plessis (TIPS) for the administrative support. 2 EXECUTIVE SUMMARY The world of mobility is rapidly evolving worldwide. Technological developments are notably enabling the diversification of drivetrains, away from traditional internal combustion engines (ICE) towards electric and other alternative motors. While EVs still account for a marginal share of global vehicle sales, the shift is evident in leading markets. All forecasts point to an exponential growth of EVs in the coming decades. Heightened environmental regulations, linked to climate change mitigation and air quality improvement, have initiated the transition to cleaner forms of transportation. Policy impetus, such as support programmes and tight environmental targets, are now driving the market globally. In addition, favourable economics, which see EVs being increasingly cheaper to own than petroleum-based cars over their lifetime, and consumer experience, linked to the connectivity, reactivity and usage experience of the vehicles, are supporting the transformation. South Africa lags behind this global trend. EVs remain extremely marginal, be it from an offer, demand or manufacturing perspective. As heralded by government and industry alike, it is, however, the ambition of the country to rapidly enter this space. While a coherent policy environment is lacking, the country’s Green Transport Strategy sets out government’s vision to radically grow the uptake of EVs in South Africa. As with every transition, the emergence of EVs brings disruptions, calling for the need to adequately manage the transition. In the short term, this requires supporting the development of the sector, both from a market development and manufacturing perspective, through a coherent policy framework consistent with South Africa’s domestic context. This report aims to inform this transition in the South African context. How can the passenger EV offering be supported in South Africa? When considering the development of the EV market in South Africa, the first question relates to improving the nature (both quantity and quality) of the passenger EV offering in the country. This requires addressing two intertwined questions around a) the availability of EVs on the local market; and b) the competitiveness of the offer. As of April 2020, the number of EVs available in South Africa remains limited, with only two battery electric vehicles (BEVs), 23 hybrid electric vehicles (HEVs) and 10 plug-in hybrids vehicles (PHEVs). No fuel cell electric vehicles (FCEVs) are currently on offer. This contrasts with the existing 162 models available worldwide in 2019 (and set to rise to 263 in 2020). The lack of local supply is particularly striking in the entry- and mid-level market segments, with most available models competing in the high-end to niche segments. Correspondingly, the sales of EVs in South Africa have remained extremely marginal with 6 043 EVs sold over the 2010-2019 period, corresponding to less than 0.1% of new car sales. Despite lower running costs, the high upfront purchasing cost of EVs (linked to higher production costs, mainly related to battery production) has been the main inhibitor to increased EV uptake in South Africa. This is exacerbated by the effects of the value-added tax (VAT); the ad valorem excise duty and the import tariff; limited product availability; and awareness issues emanating from range anxiety, security of electricity supply and a limited understanding of the technology. Due to their high upfront cost, EVs are furthermore penalised by the high interest rate associated with vehicle finance in South Africa. 3 Impacting all these factors is the lack of a coherent and coordinated policy environment aimed at driving increased EV penetration. Experience from other countries shows that active policies and measures are needed to improve the EV offering and stimulate demand. Virtually no incentive exists in the South African market to support the demand for EVs. Supporting the passenger EV offering in South Africa would hinge on implementing one or more of three key strategies aimed at reducing the upfront price differential of EVs compared to ICE equivalent: • Reducing the VAT and/or ad valorem excise duties on EVs (through a lower rate or by discounting the battery / fuel cell); • Changing the customs duties to deliver a “level playing field” for EVs originating from the European Union (EU); and • Facilitating access to a preferential interest rate for EV finance. These avenues are not mutually exclusive and should be implemented in conjunction with a package of secondary options. Such complementary interventions can aim to reduce the capital cost of vehicles, further widen the running cost differential between EVs and ICE vehicles, provide non-financial benefits in favour of EVs or enhance customers’ experience. These options are all feasible (sometimes very cost effective) and would deliver the intended benefits but would, on their own, not contribute significantly to the cost competitiveness of EVs. On the capital expenditure front, options range from tax incentives for company fleets or fringe benefits to innovative financing models, to fostering local manufacturing of EVs. Implementing a rebate system is not considered socio-politically viable, unless it is financially self-sufficient (through a feebate system for instance). Measures aimed at altering the operational costs involve modifying the “fuel” costs (by increasing petrol/diesel costs and/or reducing the cost of charging/refuelling), and reducing administrative (e.g. licensing) and associated costs (insurance, parking, toll fees). Non-financial incentives can be beneficial for EVs (e.g. dedicated lanes, parking and/or zones, bundle solar system and EV) or restrictive for ICE vehicles (restricted access, manufacturing or fleet targets). Measures aimed at raising customer awareness are varied. They include improving visibility through the rollout of EVs in public and private fleets as well as public transport, public campaigns and pro- active promotion of EVs by dealerships, and raising the visibility of charging/refuelling infrastructure. Overall, a package of measures would have to manage the need to reduce the high upfront cost of EVs with the cost and socio-political acceptability of interventions. Reducing the VAT and/or ad valorem excise duties would have a meaningful impact but would be difficult to justify socially (and therefore politically). Levelling the playing field for imports would redress an anomaly for BEVs coming from the EU, but it is not possible to guarantee that this would trigger reduced prices for customers (since local manufacturers can offset duties). Providing preferential finance for EVs would have a material impact but would require a partnership with the financial sector and could be socially regressive. All these measures run the risk of being seen as subsidising a product which, initially at least, would be purchased only by high-income earners. In addition, interventions would need to balance market development and industrial development, as some measures, such as fleet-level targets, would help grow the market but may not be aligned with manufacturing objectives. The variety of technologies available adds another level