South Africa announces tax incentives to boost EV production

South Africa has announced a major tax break for investments in electric and hydrogen-powered vehicle production.
The new measure allows for a 150% tax deduction on investments.
The incentive aims to sustain the automobile industry, which contributed over 400 billion rand ($21 billion) in exports last year.

According to Bloomberg, the new measure, announced in Wednesday's budget, allows for a 150% tax deduction on investments, addressing concerns from automakers.

South Africa stands as the foremost automotive manufacturing hub in Africa, boasting the presence of renowned global brands including Toyota, Isuzu, Volkswagen, and Mercedes, among others. The incentive aims to sustain the industry, which contributed over 400 billion rand ($21 billion) in exports last year.

Companies have been concerned that the lack of government support would decimate South Africa’s biggest manufacturing sector as demand for gasoline and diesel-powered internal-combustion vehicle engines in Europe — South Africa’s main export market — falls. Last year, Mercedes-Benz, which ships 90% of its South African production to Europe, announced production is at risk amidst the global EV shift.

“This financial incentive is a crucial step in attracting investments, fostering innovation, and driving the growth of the EV sector within South Africa,” Mikel Mabasa, chief executive officer of the National Association of Automobile Manufacturers of South Africa, said in a statement. Still, he said, South Africa's plan to roll out its first EVs in 2026 is too late.

The tax break is important to South Africa, a country that, despite its natural advantages, has made limited strides in developing an electric vehicle industry. South Africa ranks sixth globally in the supply of raw materials essential for lithium-ion battery manufacturing and boasts increasing nickel supplies and the world's largest reserves of manganese – crucial metals for battery production.

South Africa also has ambitious plans to develop a green hydrogen industry and is the world’s biggest producer of platinum, a metal used in fuel-cell engines that would be powered by hydrogen.

According to Kwasi Ampofo, head of metals and mining at Bloomberg BNEF, this incentive, coupled with South Africa’s battery raw materials as well as the existing auto industry, could help the country become an EV hub in the region.

However, legacy challenges such as load shedding, the high carbon intensity of its power grid and weak economic growth could derail its ambitions.