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Manufacturing in South Africa is in serious trouble

By 27th Mar 2015Sep 20th, 2019No Comments

If nothing is done by our policy makers, the situation is certain to be even worse in 2023 when, as a country, we will be expected to have created many more job. This is a recipe for disaster, especially if the rand should continue its downward spiral against major currencies like the US dollar.

Concretely, what are the challenges facing manufacturing? The answer is that a growing number of manufacturers, but especially companies within the metals and engineering sector, are simply unable to compete against the deluge of cheap imports flooding our country. They can’t compete not because they lack experience, are not sufficiently sophisticated or rely on antiquated technology. Instead, they have a variety of factors working against them.

For a start, much of the international competition facing them is unfair in nature and the playing field is uneven. Many of the Asian imports against which they compete are directly or indirectly subsidised by governments whose primary concerns are creating jobs for their citizenry and improving their balance of payments. Generally, their input costs are also much lower than those faced by their South African counterparts who are lumbered with, among other things, relatively higher labour costs for the same calibre of unskilled or low-skilled employees and ever-spiralling administered costs.

In the metals and engineering sector in particular we have seen a growing number of smaller, mostly family-owned companies closing down over the past few years. Formal employment levels have declined from 413 515 in 2007 to 374 959 in 2014.

Before the dawn of democracy in 1994, South Africa was a pariah among civilised nations, with few countries openly trading with it. Its economy was insular, with high tariffs in place to protect local business. Being part of the civilised international community presented South African business with an opportunity to access new markets abroad, but it also opened the thitherto-sheltered local business up to aggressive international competition.

Full membership of the international community and its structures like the World Trade Organisation (WTO) meant that the high protective tariffs that had been in place to shelter the local economy had to be jettisoned or reduced to WTO-approved levels. Regrettably, in most cases South Africa moved from one extreme to another, with high tariffs eliminated altogether instead of being reduced to internationally accepted levels.

As a result, as of 2014 local manufacturers exported an estimated 35% of their production, while imports had captured nearly 45% of the domestic market. In the metals and engineering sector, 60% of the products were exported and imports accounted for the same percentage of the domestic market. Current indications are that imports are gaining the upper hand, at the expense of local producers and their employees and, therefore, at the expense of the local economy.

A number of sub-sectors in the metals and engineering industries continue to shrink, with devastating consequences for business owners and their employees. Companies that were previously manufacturers now import and on-sell a fair percentage of products that they used to produce themselves. One such company, with a 33% capacity utilisation because of low demand and our relatively small market, now manufactures only 40% of its own products and imports 60% of what it sells domestically.

“If we can manufacture it competitively, we manufacture it. However, if we cannot do so, then we import it,” said the business owner.

The veteran manufacturer – a member of our Federation who has been part of the family business and has worked in no other sector throughout his life – added ruefully that some of his imported products are landed in South Africa for less than half the price that it costs him to manufacture them here. Like many others, he felt strongly that “the Government has no clue what manufacturing is about or what is going on”.

Regrettably, although the Department of Trade and Industry is doing its best to support business, with its Manufacturing Competitiveness Enhancement Programme being a commendable initiative, it would appear that there is little or no policy coherence at national Government level – sometimes within the same ministry. Instead of a single-minded determination to accomplish a particular goal, we sense at times the existence of different – and sometimes conflicting – priorities between and among some departments and ministries.

What are some of the challenges facing manufacturing? The aforementioned business owner captured it as follows: “Our biggest problem in South Africa is volume. The unit costs are quite high because we are not able to use our factories 24 hours a day. We use our factories for only a third of the time.”

The main cost factors, he said, are raw materials (he manufactures hand tools) and labour costs. He pointed out that while he and other local manufacturers have to comply with the South African Bureau of Standards’ quality specifications, many of the imports competing with his products are not of the same standard.

It is unfortunate that, in terms of the Budget presented by Finance Minister Nhlanhla Nene last month, over the next few years non-energy-intensive sectors like tourism will receive priority. That means that manufacturing, which is a vital part of any growing economy, will continue to struggle and lag behind.

Compounding matters for manufacturing is our state of industrial relations. For instance, the five-month-long strike in the platinum mining sector and the month-long strike in the metals and engineering sector last year affected many companies badly. After all, this is a sector that supplies to the mining, construction and auto-manufacturing industries, with instability in anyone of those industries affecting the metals and engineering sector directly.

Despite the challenges, the businessman was still optimistic that solutions can be found to the numerous challenges facing the country in general and manufacturing in particular. Concluding our meeting, he said to me: “I think that there are still many opportunities in South Africa, but we just need to work together.”

I concur. This is such a beautiful country with so much potential, but it will not realise that potential until such time that all stakeholders pull together in the same direction, putting South Africa’s interests first. That requires that all of us – the Government, business and labour – put our differences aside and rise above our respective selfish interests. It requires that we engage openly, robustly and yet constructively in the interests of South Africa and future generations.

The Southern African Metals and Engineering Indaba taking place on 28-29 May at Emperors Palace is an opportunity for such an engagement. We look forward to the participation of all three stakeholder groups in the search for lasting solutions.

Kaizer Nyatsumba is the CEO of the Steel and Engineering Industries Federation of Southern Africa.

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