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How to save the sinking manufacturing ship

Give companies an efficient, effective environment and SA will get growth without any further interventions.
Image: Moneyweb

Since 1994, manufacturing has shrunk as a proportion of GDP from 21.5% to 13.3%. In part, this deindustrialisation stems from a rationalisation of the Apartheid economy, which was inefficiently producing goods behind sanctions barriers. The economy adjusted in favour of services upon our readmission into the international trading system, which improved our overall competitiveness and drove the economic growth we saw in the decade and a half up to the 2008 financial crisis.

However, our manufacturing sector has struggled to find its feet. The first decade of democracy represented a readjustment phase, but it has still been losing traction since. For the last decade it has faced escalating costs, particularly energy which has also been highly unreliable, difficult labour relations, and constraints on access to ports and other infrastructure.

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While the rise of China and the rest of the east Asian region as a global manufacturing hub has fundamentally shifted the global economy, our manufacturing sector remains an important part of our economy with the potential to provide jobs and tax revenue. We should aspire for it to be globally competitive, selling sophisticated goods with high value added in a global marketplace. Yet despite several industrial policies that aim to boost manufacturing, the trend continues against us.

We have had some successes, like the motor industry development programmes, but these are piecemeal and do little to turn the general trend. The latest figures earlier this month showed manufacturing volumes were 2.1% lower in February than a year earlier. Of course, it has not been a normal time and one datapoint does not amount to a trend, but it is hard not to conclude that Covid has dealt yet another long-term blow to the sector.

As we’ve argued many times, for the economy to grow we need a conducive environment in which to do business. That is particularly true for manufacturing. We need stable energy supply at as low a cost as possible. We need rail services that efficiently move goods around. We need ports that can move volumes of manufactured goods to international markets. We need skilled workers, both by allowing skilled immigration and through more effective education and training locally. We need good communications and other services to make it cheap and easy to run manufacturing businesses.

Unfortunately, too many of the conversations that I find myself in are about planned interventions.

Masterplans and similar sector-specific interventions have their place. But they are a waste of time if the broader business environment is moving against manufacturing.

Plus, plans can never achieve as much as thousands of companies all seeking opportunities driven by their own incentives. Give them an efficient and effective environment and you will get growth without any further interventions. National plans then become about how to coordinate the economy to hoist more sails in a wind that is blowing in the right direction.

Otherwise, we are merely creating boats forever bobbing in the doldrums.

One of the planned interventions we have been hearing more about lately is localisation. There are, I believe, certainly opportunities around localisation, but we need to be careful. Forcing supply chains to absorb local goods that are expensive or of low quality merely damages the competitiveness of our finished goods, leaving our overall manufacturing weakened. BLSA, together with Business Unity South Africa, has commissioned research to delve into these issues and identify ways in which localisation can be appropriately harnessed to support industrial development. There are positive ways, but this will not be a panacea that makes up for a tough environment.

One thing that does help the environment is infrastructure.

That is why BLSA has published extensive research on ways to stimulate investment in infrastructure. By improving transport and communications networks, as well as energy stability, we are directly improving that macro-environment. I am pleased that government is committed to resolving the challenges to infrastructure investment. We have had several positive engagements with public sector counterparts on this front and sensible progress is being made.

We have world-class manufacturers and there is loads of potential if we can get the basics right. Let’s spend more of our time focused on doing that.

The pause in use of the J&J vaccine has set back vaccination programmes locally and globally. I wrote in Business Report that hopefully, this is just temporary. This puts the country’s target of inoculating 67% of South Africans by the first quarter of next year in doubt.

Despite the depressed state to which we opened the year, economic data have surprised on the upside, I wrote in Business Day. But to prevent further jobs losses and businesses collapses, we have to successfully implement the vaccination programme. We all need to pull together to ensure a sustainable recovery.

Busi Mavuso is CEO Business Leadership South Africa

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Unless the ANC has a full 180 degree turnaround in their socialist policies you will just see more destruction.

No “working together rhetoric” will help unless the ANC reforms or are booted out !!

The order of the boot for the crumbled ANC leaves SA with a broad based political vacuum. Its either doom or gloom. Do you want the Julius version of the corrupt ANC or the dopey DP one? A quick check the credentials of the rest of the political miscreants leaves the jaw truly agape.

Mathematics and Science are required for manufacturing.

The real disaster in this whole scenario is government – pity Mavuso pussy – foots around the primary issue – grasp the nettle lady and lead

Who on earth would want to invest in manufacturing in S.A. when all you get is 1) ceaseless and ever-mounting red tape 2) militant unions 3) taxation uncertainty 4) entitled labour with endless demands 5) arsonists and extortionists 6) high cost of security for both premises and staff 7) enforcement to use local labour, e.g. construction mafias 8) unreliable energy source, load shedding and load restrictions 9) unreliable logistics due to hijacking, arson and robbery …… and many more constraints ??????

Just another Africa story.
China puts 1.6 million engineers on the market yearly, Africa barely understand the importance of engineering. African policies always tends to try find a culprit for current problems via history/current enemies, instead of finding solutions. Furthermore are Africa always prefer family and friend-orientated policies for management positions, and the best candidates are not considered simply because of their selfish policies. In Africa, the people comes last. A vaccine or electricity or potholes or schoolbooks or whatever, Africa does not have policies that can address the problems (especially in practical terms, not theories).

I get the sentiment in that any country needs a manufacturing sector and more must be done to support this. There is however always this impression created of non-competitive, inefficient SA businesses “Forcing supply chains to absorb local goods that are expensive or of low quality merely damages the competitiveness of our finished goods, leaving our overall manufacturing weakened”. This was stated above with regards to localisation.

With regards to quality and specification, in my experience many local manufacturers make goods of higher specification and quality where the client can afford these. However with regards to expensive, I feel the key issue (there are others such as labour, power, financing, other costs) is the costs of raw material. Before you even get to other costs you cost the raw material and in most cases this costs even more than a complete finished and packed product in China and in some cases even after shipping and duties.

IMHO this is what makes local manufacturing so expensive. The price differences are huge and a lot of reasons are always put forward such as Chinese workers work for a bowl of rice per day (been there and their workers do not work for zero and have a quality of life), foreign companies are supported by Govt subsidies and grants, mass production, scale purchases of raw material etc. etc.. Still have not got to the bottom of this and suggest that something be done about this.

Agree, if one looks at the detail there are just too many hurdles; unless you are a very big or politically connected player that is. Many raw materials enjoy tariff protection or are delayed by import red tape and Portnet corruption. Then add expensive and uncertain electricity and water supply, high administered tariff costs (rates etc), red tape at every turn with incompetent and/or corrupt “civil servants” manning the gates. Now try and get to work with a poorly educated, militant, unionised and entitled labour force threatening violent (often deadly) strikes at every turn and little effective support from SAPS or the authorities when these strikes do turn violent. Finally, every item not nailed down or secured is either vandalised or stolen; PRASA style.

Nope, nothing to be saved here.

Busi, we need you to talk out loudly, very loudly – we have such a wonderful nation – we MUST get this right

”Elementary my dear Watson”

In order to produce, manufacture and increase productivity – there needs to be a very sudden vision of ”our people”, in which individuals ( and unfortunately we will have to include the ”previously advantaged ”pale males” as well), guided by reason, by all to choose their destinies.

What we all know by now, in a Socialistic SA economy, as a rule of law – specifically the threats to the protection of individuals and their property, became firmly established discouraging people to manufacture/produce, trade and innovate.

ANC policy currently is causing turmoil and dislocation – our farmlands were turned into battlefields, factories and railroads were left to decay.

The ANC’s mantra of coming into conflict, or breaking down everything they view as aristocracy, whose wealth was based on inherited assets – brought conceptual confusion and fear to most people in ”iMurthu” , and the seeming chaos of economic activity.

Government procurement which should promote local manufacturing has just created a layer of tenderpreneurs who import finished products cheap from elsewhere. A local manufacturer is subject to a 26% tax on capital if they want to manufacture and sell to government, and is uncompetitive compared to the tenderpreneur and foreign manufacturer.

Growing the manufacturing sector has never been part of the ANC agenda. The ANC policies are focused entirely on redistribution. They redistribute the capital formation of the manufacturing sector through labour laws, BEE laws, municipal rates and taxes, the cost of electricity, cadre deployment at SOEs and municipalities, red tape and the shortsighted policies of the DTI.

The manufacturing sector has been redistributed successfully. Capital formation leads to job creation, specialization, increased productivity and higher wages and grows the tax base. When they redistributed the capital formation in this sector, they destroyed jobs, lowered productivity, reversed specialization, lowered the average inflation-adjusted wage and shrunk the tax base.

The high unemployment rate and the rising levels of poverty prove that the ANC was successful in the implementation of the destructive policies. This is exactly what the majority wanted and voted for. This is how African nations create their own poverty and decay, time and time again.

Unless some drastic changes are made I cannot see the trend changing. We need to urgently reduce labour laws and protections to encourage as much employment as possible. From an economic perspective it is better to have 20% unemployment with a lower average wage, than 40% unemployment but with a higher average wage. The reason why wages are being pushed upwards in some developed economies is because the supply have run dry while demand remains high, this in effect forces wages up. In SA’s situation the government is forcing wages up through legislation while there is no demand, this can always only lead to massive unemployment.

Further specifically when it comes to manufacturing we need to decide how important this sector will be in the future. If it will form an integral part of the economy we need to stop being afraid of making China mad and start imposing tariffs on the cheap imports that affect local manufacturing. Currently China is not a trading partner as this implies both parties’ interests are looked after, but the relationship more closely resembles China dictating the terms of trade and SA just rolling over.

In my opinion we will never be able to compete with the manufacturing capacity of China and India, so we need to develop the economy away from commodities and manufacturing. Economies need to change overtime and this is where we have failed as we continue to rely on commodities and an already decimated manufacturing sector.

Apparently if you mention ccma = auschwitch you get censored

Ship SA: “Mayday! We are sinking!”

German Coast Guard: “Halló. What are you thinking about?”

(…as some pointy in time, SA will reach submersible status)

How about starting with keeping the power on and remove the Luthuli house mafia.

Well WMC is importing big time from EU and USA.We just have to look around.
Coffee from Germany,Chocolates,biscuits,etc from Switzerland,Turkey,uK.
Ribs from Germany,Spain,Portugal.Cosmetics from Germay,France.
mCDONALDS from UAE. Cars from germany,america,UK.

WMC is not manufacturing they benefiting at the expense of the poor.

No doubt the government has to get its house in order but for the local manufacturing industry to rely on it to fix the current predicament in manufacturing is naive. The industry has to take ownership of its own business inefficiencies, such as the inability to see trend & changes coming and adapt accordingly.
We have all seen China’s adoption of Industry 4.0 and smart manufacturing principles years ago and only now trying to come up with a plan to move in that direction.
Now we are in desperate need for immediate and practical actions to breach the gap in market share before it becomes insurmountable.
The automotive sector has been more successful in growth because of their supplier development programs that insist suppliers follow protocols for complete process efficiency, quality, pricing and delivery.
Manufacturers need to fix the existing inefficiency problems of the supply chain with collaborative effort.

@Busi Mavuso – We dont need your research to understand the problem. I know plenty of economists who have written about manufacturing and the SA economy. The writing has been on the wall for 26 years.

There is only 1 elephant in the room. Its the cancer causing agent in South Africa. If you look closely … the elephant is between A and C.

Many jobs have been lost to imported goods. Especially furniture. The furniture retailers are the enemy of the furniture manufacturing industry’s. Furniture is imported by the container load, RTA & packaged in corrugated cardboard boxes. Stored in the furniture importers warehouse and distributed to there many stores around South Africa and neighbouring states taking away 1000’s of carpentry and associated jobs.

We don’t have high quality wood in this country so are unable to manufacture high end furniture. SA pine grown in hectares is a useless substitute and is really only good for fires

Import tariffs have to be increased on chinese goods, for starters. Particularly on furniture and clothing.
The Western Cape, once had a thriving clothing industry in Lansdowne and Salt River areas. These companies had to, mostly, all close their doors, since 1994. The chinese imports, low quality in most cases and very cheap, due to their slave labour conditions as well as wages, have killed the clothing industry in our country.
I know of large aluminium factories in SA that are now closed as well. Many staff retrenched and Cpt branch now reduced to tiny sales office.
The problem here is that government is well aware of the problem but political infighting and corruption will always be something that can be exploited by others.

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