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Collaboration seen as key to unlocking South Africa’s industrial potential

LAGGING CONTRIBUTION Data from Stats SA in 2018 show that manufacturing contributed about R386.8-billion to gross domestic product in real terms

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DR MICHAEL ADE He believes that an industrial revival is still a possibility for South Africa

Photo by Creamer Media's Dylan Slater

ERIC BRUGGEMAN Supporting local manufacturing will have the effect of creating opportunities for new entrants to markets and increasing job creation

Photo by Creamer Media's Dylan Slater

PHILIPPA RODSETH Improved manufacturing, while not a silver bullet to the country’s challenges, will assist in avoiding a “missing middle”

EBRAHIM PATEL Ebrahim Patel was recently appointed to lead the newly restructured Trade and Industry portfolio

Photo by Creamer Media's Dylan Slater

14th June 2019

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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The revival of South Africa’s flagging manufacturing sector is core to President Cyril Ramaphosa’s broader economic recovery plan. The importance attributed to manufacturing is evident in the President’s decision to appoint the experienced Ebrahim Patel to lead the newly restructured Trade and Industry portfolio, which reconsoli- dates the Department of Trade and Industry with the Economic Development Department.

There is also growing recognition within government that, despite having the most diversified and industrialised economy in sub- Saharan Africa, South Africa’s manufacturing performance lacks vibrancy, even when compared with some of its African peers.

Indeed, some African economies are starting to use expanding manufacturing sectors as bases to not only reduce reliance on imports, but also boost exports. In fact, in a release last month, event organiser Siyenza Management estimated that Africa’s manufacturing output could exceed $1-trillion by 2025, half of which would be exported to other regions across the globe.

Siyenza Management is the organiser of the upcoming Manufacturing Indaba, which will be held at the Sandton Convention Centre on June 25 and 26.

In contrast, South Africa’s manufacturing industry is lagging. Data from Statistics South Africa (Stats SA) in 2018 shows that the sector contributed about R386.8-billion to gross domestic product (GDP) in real terms. This is poor, given the huge potential of the sector, and when compared with finance, real estate and business services’ contribution of R640.3-billion and general government services’ R478.6-billion, says Steel and Engineering Industries Federation of Southern Africa economist Dr Michael Ade.

The manufacturing sector’s share of GDP continues to shrink – having been the largest contributor in the 1980s – and it also shows a steady decline in its share of employment as a percentage of total jobs created. Stats SA data shows that the sector is, on average, losing 69 000 jobs on a year-by-year basis.

Signs of this stagnation are apparent in the seasonally adjusted Absa Purchasing Managers Index, updated earlier this month, which fell to 45.4 index points in May from 47.2 points in April.

The decline does not bode well for a recovery in activity in the manufacturing sector, given that output had already declined notably on a quarter-on-quarter basis in the first quarter, Absa says.

Ade adds that, while there is potential to double current production levels in South Africa by pushing capacity utilisation to 85%, it is currently estimated that, all things considered, utilisation rates will, in the short term, rise only modestly from the 81% and 80.1% recorded in 2018 and the first quarter of 2019 respectively. Ade acknowledges that, while the trend is positive, it is not enough to absorb new job seekers on a large scale.

Nevertheless, he believes that an industrial revival is still a possibility for South Africa through a combination of rising domestic demand, increased localisation or import substitutions and higher exports.

Export volumes are increasing, supported by an improved market share in various regional markets. “A turnaround of the industry in the next five years will be good for the economy, given the extended implication for other key economic sectors,” Ade avers.

This sentiment is supported by South African Capital Equipment Export Council CEO Eric Bruggeman, who believes that imports of manufactured goods are currently “excessive”, with national government, local municipalities and State-owned entities (SOEs) exacerbating, rather than mitigating, the problem.

Supporting local manufacturing will have the effect of creating opportunities for new entrants to markets and increasing job creation, as well as supporting skills development and training, he says.

Missing Middle

To ensure that this happens, industry body Manufacturing Circle (MC) executive Philippa Rodseth calls for more long-term policy consistency.

Unfortunately, this is not currently the case, as consistent, stable and coordinated policy, which is key to addressing demand intervention and supply-side challenges, is lacking, she tells Engineering News.

“We can’t afford to become a wasteland of imports and, because of the structure of our economy, we can also not afford to have a ‘missing middle’ that doesn’t incorporate manufacturing,” she notes.

Rodseth highlights that improved manufacturing, while not a silver bullet to the country’s challenges, will assist in avoiding a ‘missing middle’ – in the form of jobs, skills and remuneration.

“We need to fill the gap between poorly paid, low-skilled manual labour and the well-paid, highly skilled service-related jobs,” she explains, proposing that the manufacturing sector offer this opportunity.

She refers to the MC’s Map to a Million New Jobs in a Decade plan, which prioritises the prevention of further deindustrialisation in industrial belts, such as the Vaal Triangle, as well as the stabilisation of the industrial base and the prevention of further job losses.

The plan aims to increase the use of existing capacity and boost the demand necessary to underpin new investment.

The map proposes a number of demand- and supply-side interventions to increase domestic demand, pursue import replacement and enhance South Africa’s export competi- tiveness, while improving manufacturers’ competitiveness by reducing input costs, changing fiscal policy and supporting labour productivity.

The demand-side interventions the plan highlights include a commitment by businesses and government to visibly support the Proudly South African brand, and further increasing the procurement of locally manufactured goods, with government investigating options to invest in catalytic projects.

Supply-side interventions include ensuring the effective price regulation of natural gas and electricity, regulating the pricing of key inputs from sole suppliers or even introducing competition in electricity generation by deregulating the sector.

Government Input

Existing trade agreements, including the new African Continental Free Trade Area, should be supported, Ade tells Engineering News.

Temporary import tariffs should be systematically approved, based on rational motivation from beleaguered local producers and within the confines of the World Trade Organisation rules, as this would protect struggling industries by enabling them to be more resilient amid unfair foreign trade poli- cies, he suggests.

Incentives meant to attract foreign investment into special economic zones should also be extended to local investors, he adds.

Ade argues that, under Patel, the expanded Department of Trade and Industry should focus on initiatives to increase local demand, ensure consistent power supply from State-owned power utility Eskom and obviate steep electricity price increases. Maintaining the framework for negotiated price agreements for electricity should also be a priority, he emphasises.

Ade suggests that South Africa’s leadership will need to focus on containing “rapid and uncontrolled” increases in administered prices, such as the prices of fuel and electricity, and reducing increasing intermediate input costs and high import penetration.

Here Rodseth agrees: “Greater regulatory assertiveness in this regard, from rail tariffs to natural gas prices, would enhance our competitiveness as a country.”

Continuing support for designation for local procurement by SOEs and its effective monitoring could also play a key role, Ade adds.

Support of such initiatives to boost GDP growth to above 5%, as identified in the National Development Plan, will be necessary to sustain inclusive growth and reduce the unemployment rate to below 15% by 2030, he says.

Moreover, Rodseth highlights that South Africa will need to review its visa system – such as linking the duration of visas with skills transfer to local citizens – to attract scarce skills.

This, she explains, will enable investors to bring in skilled employees who can manage plants, subsequently resulting in job creation.

“It will buy us time to overhaul our current education and vocational training system so that we can start building the pipeline of skills and experience for the future.”

The early signs are that Patel and his team will be looking to replicate the success of the Automotive Production and Development Programme in other sectors of the economy, including agroprocessing, chemicals and pharmaceuticals and renewable energy.

Bruggeman and Rodseth insist, however, that any industrial policy programme pursued by government will only have the desired effect if there is deep collaboration between industry and government.

“You can have policies and incentives, and people can create new industries using incentives and grants, but if they do not have a market for their products, their business is very short-lived,” Bruggeman points out in his insistence on the importance of growing the local manufacturing sector.

While Rodseth also remains confident that the sector will continue to be fundamental to the economy, she laments that these are structural challenges that still need to be addressed, adding that revisiting port tariffs is an option to consider.

Game-Changing Opportunities

Moreover, Ade says the local manufacture of components for the renewable-energy and automotive sectors, as well as a working government infrastructure programme, could be potential game changers.

These will provide a “much-needed boost” for the survival of the manufacturing sector, he adds.

The high level of interdependence between the automotive industry and the metals and engineering cluster, in the form of spillover benefits from automotive programmes such as the recently announced Automotive Masterplan, illustrates the point. The same applies in the case of other manufacturing industries and complementary economic clusters, he explains.

Broadly speaking, an increase in the infrastructure pipeline will boost manufacturing by ensuring that scheduled repairs and maintenance, as well as the servicing of mills, factories and power generation facilities, are executed timeously.

“This initiative will support greenfield investments, which will also benefit the construction sector,” he notes.

Bruggeman notes that support of local manufacturing in the water and electricity sectors will be mutually beneficial, as the much-needed new water and energy infrastructure that is provided will create employment opportunities.

“It’s not a big problem to solve – we just need recommitment,” he states.

However, while renewable- energy components manufacturing and the infrastructure programme are “along the lines of how the industry should be thinking”, Rodseth warns that industry and government should be mindful of “picking a winner” from a policymaking point of view.

She explains that, for the wider manufacturing sector to increase its contribution to GDP, the country needs to consider the areas in which it would be competitive and focus on what needs to be done in these areas.

“We need to look at specific projects or big interventions that are commercially viable. For the rest, if there is a policy in place, it needs to be administered consistently.”

In identifying and advancing catalytic projects, which are implemented at scale to catalyse widespread economic growth through multiplier effects, South Africa has the potential to use its industrial development institutions to drive demand for locally manufactured goods, Rodseth explains.

For example, if South Africa could underwrite a $6-billion project to build a new 1 700 km gas pipeline from the gas-rich Rovuma basin to Temane, in Mozambique, demand would be created for an estimated 1.1-million tonnes of pipeline manufactured in South Africa.

“This would not only provide an extraordinary stimulus for the distressed primary steel industry but also utilise capacity in the secondary steel industry for the manufacture of spiral-weld pipe, valves and ancillary products,” Rodseth elaborates.

She concludes that studies have indicated that the introduction of additional natural gas into South Africa would create up to 350 000 jobs.

Edited by Terence Creamer
Creamer Media Editor

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