Chinese automaker scraps South Africa factory plans over tariff barriers

Chery Automobile will not build a car plant in South Africa. The Chinese automaker’s vice-president and management board director, Zhou Biren, confirmed the decision, pointing to a tariff structure that makes importing finished vehicles more attractive than assembling them locally.

The arithmetic is straightforward, if frustrating for South Africa’s automotive sector. The country levies a 25 percent import duty on completely built-up vehicles, while locally assembled manufacturers receive import rebate credit certificates valued at a 20 percent discount on their full worth. That five percentage-point gap is too narrow to justify the capital required for a new plant.

Additional reference context is available at https://iol.co.za/business-report/economy/2012-04-02-chery-avoids-investment-in-south-africa/.

“A lot of the countries that attract foreign investment have a lot of incentive policies, which we still need in South Africa,” Biren said.

The decision lands against a sobering backdrop. The last greenfields car manufacturing investment in South Africa came from BMW, which opened its Rosslyn plant in 1968. More than four decades have passed without a comparable commitment from another major automaker.

Biren held up Brazil as the sharpest contrast available. The Brazilian government has built tariff walls that make local production far more compelling than importing. Brazil charges a 35 percent customs duty on Chinese vehicle imports, and manufacturers who fail to source 65 percent of components domestically face a local content tax of 43 percent. Meet that threshold and the tax falls to 13 percent. The combined effect leaves manufacturers little choice but to build locally.

“These duties on vehicles imported into Brazil provided much more protection to motor manufacturers in that country than in South Africa and forces you to invest there, otherwise you need to give up these markets,” Biren explained.

That is precisely where Chery is directing its money. The company is investing 400 million dollars (approximately 3.05 billion rand) in a Brazilian manufacturing plant, with production expected to begin by the end of next year. It will be Chery’s first sole investment in a foreign facility, with an initial annual capacity of 100,000 units. Outside China, Chery vehicles are currently produced across 16 countries, though the company owns none of those plants.

South Africa’s own policy framework adds further complexity. The Motor Industry Development Programme, which replaces the current Automotive Production and Development Programme next year, requires domestic manufacturers to produce at least 50,000 units annually to qualify for full government benefits. Biren acknowledged that Chery’s current South African sales volumes fall well short of that threshold.

The underlying logic is not complicated. A new plant demands enormous upfront capital, and that capital only makes sense when projected sales volumes can sustain operations at scale. Biren was clear that Chery needs its South African sales to grow substantially before local assembly becomes viable, and the tariff structure has to make that growth path worth pursuing in the first place.

What changed for Brazil was political will, expressed through policy. South Africa has not yet made the same choice. Whether the incoming Motor Industry Development Programme shifts that calculus, or leaves the next generation of automakers reaching the same conclusion as Chery, remains the open question facing the sector.