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The Thai government recognised that to be globally competitive its automotive manufacturers first needed economies of scale and time to build their productive capabilities in the local market. So it imposed an import duty of 40%-80% (our equivalent is now 25%). It also offered multinational vehicle assemblers corporate tax breaks and duty exemptions on imported raw materials on condition of investment in local manufacturing plants and research & development facilities. Thailand became the Southeast Asian hub of vehicle manufacturing and the 10th largest vehicle producer in the world.
This raises the question: if import substitution has worked for other countries, then why not for us? The answer is that competitiveness is complex and depends on more than import tariffs. Factors such as economies of scale, labour rates, productivity, skills availability, public infrastructure and other government trade and industrial support play a major role.
For example, beyond import protection the Thai government used consumer tax incentives to promote certain types of vehicles over others to create industry specialisation and further scale in the domestic market. It invested in a high-functioning port and reliable electricity supply. It allowed for a standard six-day work week to improve productivity.
It prioritised attracting investment, without concern for local ownership or the creation of local industrialists. And it nurtured a long-term partnership with Japan, paving the way for numerous joint ventures between Thai and Japanese firms that brought technology and skills transfers.
We haven’t done these things. And the reality is that the same constraints that stifle import substitution will stifle export-orientated policies. Except it will be even worse, because out there in the global market our firms won’t be able to fall back on lower freight costs, avoidance of import duties and deep knowledge of the local market.
Lessons for SA
So where does this leave SA? For starters, we should nuance the localisation criticism. Rather than being axiomatic, it should be reserved for specific industries and specific stages in those value chains, for example upstream processing versus downstream manufacturing.
Then we should not be shy to leverage import substitution for selected strategic industries, with the ultimate goal of achieving export competitiveness. It needs to be done better and smarter though, applying lessons from successful comparator economies such as Thailand.
And finally we must get the basics right and fix the handbrakes on competitiveness that plague our firms in both local and international markets. The inconvenient truth is that if our firms can’t be competitive at home, they have no chance abroad.
• Morris is COO at BMA, a management consulting company focused on manufacturing value chains.
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