Keeping Competitors Out

While our attention so far has focused on corporate commitment to selfregulation, our second hypothesis focuses on firms pressing governments to regulate. We claim that companies that are faced with a strong foreign competitor adhering to only low regulatory standards will pressure their governments to tighten regulation.

The South African automotive sector provides a good testing ground for the extent to which such companies indeed seek to level the playing field by lobbying for stricter public regulation. We compare an automotive firm faced with an attempt at market entry by a low-regulating foreign competitor with firms that are not confronted with such an attempt. We identify a low-regulating foreign competitor by examining the level of regulation it has to comply with in the country of origin, and the implementation of these requirements. Attempts at market entry are specified as holding sales contracts with a South African car dealer and the perception of established South African firms that a low-regulating competitor strives for market entry. We assess whether our expectation holds by identifying the lobbying activities of car manufacturers within the national association. More specifically, we investigate who initiates and drives the lobbying activities within the association and whether a fostering of governmental regulation results from these activities.

The South African car-sales market is dominated by the same seven large brands that also hold prominent positions on OECD markets (see previous section). While South Africa is a high-price, high-quality car market comparable to Europe, Japan, and North America, the uneven income distribution, high rates of unemployment, mass poverty, and a relatively small middle-class population result in a mismatch between demand and supply. Car manufacturers from low-regulating countries, such as China, India, and South America, producing low-price cars increasingly seek to enter the South African market and to satisfy the South African demand for cheap cars. Chinese automakers Chery and Brilliance signed contracts with South African car dealers to gain access to the South African market. The foreign offer of cheap cars poses a significant threat to South African mass producers, such as Ford, General Motors, Nissan-Renault, and VW; it will make it much more difficult for them to sell their relatively costly cars to the average South African consumer. The premium segment (BMW and Mercedes Benz), by contrast, would not be affected since the new competitors do not target the same high-end market. Toyota constitutes a special case since it is the only company that strives for dominance in all market segments—middle class, premium and, long term, also in the Third World segment.

According to our “keeping competitors out” hypothesis, we expect the South African car producers focusing on the mass market to lobby the government for stricter regulation that effectively raises the bar for market entry of emerging-economies car producers. By contrast, the premium-segment producers and Toyota should refrain from such lobbying activities.

Our empirical evidence shows that, indeed, the National Association of Automobile Manufacturers of South Africa (NAAMSA) is actively lobbying the South African government to issue stricter emissions regulations for newly registered vehicles. These lobbying activities have been quite successful so far. In response to pressure from NAAMSA, the South African government raised emissions standards to the EURO 3 norm emissions control level. In addition, it announced that it would raise the standard to the EURO 4 level within the next two years. These stricter regulatory requirements have the effect of keeping the competitors from China, India, and South America out of the South African market since their cars observe only lower emissions standards and cannot be easily upgraded.

Additional confirming evidence for our hypothesis is offered by the fact that the “Fuel and Emissions Committee” of NAAMSA is chaired by one of the mass producers; vice chairs are held by representatives of two other mass producers. In fact, all six car firms that were interviewed stated that three out of the four mass producers were, and still are, driving the lobbying activities. In contrast, the premium producers as well as Toyota and the fourth mass producer have refrained from engaging in the issue.

In short, our evidence shows that all firms, with the exception of one mass producer, participate in the lobbying activities. This exception may arise from the fact that this producer sells one product line in South Africa that does not comply with the shortly to be imposed emissions norm. One of this producer’s product lines would thereby become illegal. The other South African car producers, by contrast, all comply with the highest international standards, not surprising, since large parts of their production are exported to the high-regulating markets of the European Union, Australia, New Zealand, Japan, and the United States. They are therefore complying with emissions standards of these export markets, which are above the existing South African standards. As a result, their interest in stricter regulation is much more pronounced.

 
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