However, new findings demonstrate that this scenario has turned around in recent years, and the East Rand has seen an incredible boom over the last five years. “The upswing in the economy must help to improve the quality of life for all. We have thus devised interventions in our integrateddevelopment plan and growth and development strategy to realise a wider and greater impact,” says Ekurhuleni Metropolitan Municipalityexecutive director for local economic development Karuna Mohan.
To develop a consensus on the state of manufacturing and appropriate policies, the municipality partnered with the University of the Witwatersrand (Wits). Engineering News spoke to Wits associate professor and project coordinator of the corporate strategy and industrial development (CSID) research unit Simon Roberts about the research study. “The ultimate aim of the study is to enable the Ekurhuleni Metro to better understand itsindustry and be able to more effectively facilitate local economic development,” he says.
Research papers were prepared by both parties, focusing specifically on the national development and industrial policy, sustainability, employment, environment, HIV/Aids, skills development and local economic development.
The poor quality of information on economic development at the Metro level prompted the two parties to conduct a manufacturing-firm survey as well as a series of in-depth industry studies. The survey assessed factors underpinningindustrial performance such as the main markets served, growth of demand, obstacles to investment, skills development, factors discouraging employment growth, government policies, local linkages and firm-competitiveness.
Roberts says that research shows that industry in Ekurhuleni has outperformed industries in the rest of the country in recent years. “Manufacturing output growth in Ekurhuleni has averaged 7,3% a year since 1999 while employment growth has averaged 3,3% a year.” This employment growth compares with a contraction in manufacturing employmentnationally. The better performance in Ekurhuleni, he says, can be attributed to a strong response to improved local demand, and the centrality of Ekurhuleni in the local economy. Roberts says that the metal products, machi-nery and appliances sector group is the largest in terms of employment and output in Ekurhuleni. Interestingly, this industry grouping accounts for 30% of value-added manufacturing compared to 25,6% nationally. When looking at employment numbers, the difference is even more striking. This reflects the importance of Ekurhuleni as the workshop of the country, making metal components and tools used in the industry, and the predominance of more labour-intensive activities in Ekurhuleni. “Coastal and more export-orientated areas have been poorly affected by the strength of the currency,” Roberts continues. In addition, this shows that the Ekurhuleni economy can be expected to outperform the national economy given the projected continued strong growth in local demand.
“In our local economic policy, we refer to this as local production for local need,” says Mohan.
While, at the national level, growth has been led mainly by the capital-intensive basic metals and basicchemicals subsectors, in Ekurhuleniit is downstream manufacturingwhich has led the way. “At the national level, transport equipment has also recorded strong value-added growth, mainly due to production of motorvehicles and components under the motor industry development plan,” Roberts explains. “This informs us of the linkages within the Gauteng city region that Ekurhuleni and Tshwane are one integrated economy. Road and raillinkages to move goods become an important aspect in vertical and horizontal planning processes within government to support the economy,” Mohan reflects.
The huge capital expenditure programmes of Transnet and Eskom in the next five years are expected to further drive growth in Ekurhuleni, which is by far the most important site forthe manufacture of machinery and capital equipment for the power-generation and transport sectors. “In this process, a far-flung area in need ofeconomic regeneration, such as Nigel, wouldbenefit, as the locomotive-production plant, which has previously laid off workers due to the recession would now have a demand for products. “We approached some of the large manu-facturers in Ekurhuleni to discuss their readiness to meet these demands, to harness the oppor-tunities and to expand their operations and create sustainable quality jobs,” says Mohan.
Roberts and his partners conducted an in-depth survey for the research paper to better understand the crucial challenges of skills development and firms’ decisions around employment. As expected, the research showed skillsconstraints becoming increasingly evident,especially given the legacy of poor education in the country.
“Skill constraints are particularly evident in firms that have large employment needs, which suggests that government has to focus on skills development with greater urgency.” Mohan reveals that the Metro has engaged with the Department of Labour and various sectoreducation and training authorities for the past two years and will continue to support this process, as labour is an important input into the economy.
Firms surveyed reflected poor education levelsin Ekurhuleni, with the average proportion ofemployees with no formal education being reported as 35%, and a further 27% of employees having below-matric education levels.
“Existing policy frameworks are supporting firms in tackling the problem in an effort to bridge the skills gap,” Roberts says. Surprisingly, a total of R210-million was spent on training by responding firms, of which R142-million was spent on in-house training and R67-million was spent on outside training. This represents close to double the expenditure spent on training in 2003.
On the development side of Ekurhuleni, Roberts tells Engineering News that, on the basis offirm surveys completed in 2003, three specificindustrial groupings were identified for future work. This initiative is part of a programme to de-velop vibrant clusters of economic activity. “Our approach is to facilitate an environ-ment conducive to sustainable manufacturing,” says Mohan.
Foundries, plastic products and machinery were the selected groupings, based on their importance in Ekurhuleni, their existing base of abilities, and their potential for growth andemployment generation. “The cluster approach is premised on eco-nomic potential and is an approach where gains from collective action can be realised.” Roberts says that successful clusters areusually driven by the private sector.
Foundries, plastics and machinery
Foundries are an important subset of metalproducts, which is estimated to employ a total of 15 000 people. Most foundries are concentrated in Ekurhuleni. There are some important developments in the casting of light metals and alloys, which are increasingly replacing steel. “We are trying to find a champion within theindustry to lead this process of placing the foundry industry on the national agenda,” says Mohan.
Being competitive requires upgrading technological skills, and this is a major gap in the South African industry, especially since machinery and processes have not changed much over the last 20 years. The main market in South Africa for castings from the foundry industry is capital equipment, including mining machinery and motor com-ponents, which have seen the strongest growth.
Roberts contends that the main cost implication for foundries is the price of scrap metal. The scrap-pricing issue is currently a major bone of contention, as South Africa is an important exporter of scrap metal to Asian countries. The Department of Trade and Industry, however, wants to support increased local processing of scrap, thereby reducing scrap exports.
With regard to plastic products, it is noted as one of the best-performing commodities in South Africa with an average annual growth in output of 5,3% from 1994 to 2004. Close to a third of the South African plastic products industry is located in Ekurhuleni.
“Although the South Africanplastics industry has performed well, it could be performing much better,” Mohan says. This sector is largely composed of small firms and is relatively labour-intensive. The cluster study involved mapping out the national trends in the industry and the development of the industry in Ekurhuleni. “The research assessed the importance of linkages and markets, technology, skills and tooling for the industry’s performance,” Roberts explains.
The mining machinery group is the single most important subsector of machinery in South Africa. “The challenge is to build onexisting strengths,” Roberts says. The potential for employment and output growth in this industry is further suggested by the planned increases in capital spending by government. “Higher private investment spending will also sustain growth,” he notes.
Together with the expansion of infrastructure in other African countries envisaged under the New Partnership for Africa’s De-velopment (Nepad), this provides potential increases in demand for machinery. “Between 1996 and 2003, Africa was Ekurhuleni’s single-largestexport destination, accounting for 31% of the total value of exports.
“About 80% of this is concen-trated within the SADC trade bloc,” says Mohan.
Roberts maintains that, in recent years, industrial growth and employment in Ekurhuleni has outstripped national performance by a large margin. “Being the largest industrial hub in the country, and as a centre oflabour-intensive manufacturing, the need for Ekurhuleni to sustain this performance is crucial.” The analysis of important industry clusters in foundries, plastics and machinery highlights the need for collective action to tackle constraints and chart a higher growth-and-employment path. “We want to take this further and also be the leader in beneficiation,” says Mohan.
The case of steel
South Africa has long been characterised as an economy that has built a comparative advantage ina range of resource-based inter-mediate products, Roberts says. While South Africa has signifi-cant cost advantages in many of these products, they are generally also characterised by large-scale economies.
In another paper dealing with such issues, Roberts maintains that the case of South Africa’s steel industry is an ideal example to assess market power.
“The challenge is that of import-parity pricing,” he says. He further explains that the core of the study investigated whether low production costs of resource-based products are translated into lowdomestic prices. “Are these prices for the benefit of the users of those products for downstream manufacturing?” he questions. Roberts says that it is necessary to understand the steel value chain, including the nature of steel pro-duction and the characteristics of downstream steel users. South Africa is a highly favour-able location for steel production with its high-quality iron-ore deposits, low electricity costs and low labour costs. “The competitiveness of the industry is reflected in its very large exports and low levels of imports. “The question is whether this is translated into competitive pricingto local users and beneficiators of steel.”
Roberts maintains that a growing issue is that of import-parity pricing,which he argues to be the result of local firms pricing as if they were competing with imports.
“Indeed, this depends on geographical accident as the margin is due largely to the distance of the local market from the sources of imports.” He suggests that a ‘free’ market would result in prices close to export prices.
While import-parity is consistent with profit-maximising behaviour, the nature of steel as an important input for downstream firms means that pricing has an effect on the competitiveness and growth of metal products manufacture. “The implementation of national initiatives on the ground, as well as effective coordination of industry groupings in Ekurhuleni, are needed for better sustainability,” Roberts concludes.
The CSID research programme was established in 2001 by a group of researchers at the School of Economic and Business Sciences at Wits. Over the last four years, the unit has succeeded in establishing itself as a leading research group in South Africa. The main research themes include industrial development and manufacturing-sector chain studies,local and regional economic development, and competition policy and regulation.