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Rising energy prices weigh down African manufacturers

7th February 2014

By: Irma Venter

Creamer Media Senior Deputy Editor

  

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Africa is blessed with natural resources – key inputs to the manufacturing process. However, as is well known, the majority of these natural resources are exported to the developed world in their raw or semiprocessed form, says Frost & Sullivan Africa industry unit consulting manager James Fungai Maposa.
“It is for this reason that industrial development on the continent has been focused largely on light industries such as food processing and textiles. This limitation, comparably smaller domestic markets and infrastructural challenges are factors that have stifled the regional manufacturing sector’s growth potential.”

Africa’s manufacturing sector accounts for just under 15% of overall yearly export earnings.

In South Africa, manufacturing contributes between 10% and 15% a year to the economy. This contrasts sharply with China, where the manufacturing sector contributes between 40% and 50% to the country’s yearly gross domestic product.

Despite the low contribution of sub-Saharan Africa’s manufacturing sector to the region’s economic output, a growing urban population is expected to demand more from this sector, says Maposa.

Over the next 20 to 30 years, sub-Saharan Africa’s urban population is expected to more than double, creating lucrative supply opportunities for domestic and international manufacturers of goods such as cement, steel, structural timber, food, beverages and many other electric and electronic consumer goods, he notes.

Another factor that may aid the manufacturing sector is the possible integration of the continent’s three regional economic communities: the Southern African Development Community, the East African Community, and the Common Market for East and Southern Africa.

“The proposed free trade area will assist the continent’s manufacturing sector to supply its produced goods to a wider client base consisting of 26 countries, with a total population size of 521-million consumers,” says Maposa.

A slowdown in economic growth within the developed world is, however, going to contribute to a rise in competition in the developing world, with a number of multinational companies expected to set up shop and/or grow their presence as demand for their goods increases. The competition is expected to originate from key manufacturing regions such as Asia (China and India), Europe and North America, says Maposa.

“Operational efficiency is a competitive advantage that Asian manufacturers have leveraged in order to maintain a competitive edge and supply goods into the market at a comparably lower pricing point to their African counterparts,” he adds.

“A myriad of challenges restricts African manufacturers from being as effective and efficient as its main competition. The most prominent among these challenges is the continued rise in input and operating expenses which continue to deplete the African manufacturing sector’s profitability and, ultimately, restrict the industry’s growth, evolution and progression.”

New and effective business and operating models need to be explored, urges Maposa, as this would ensure that the regional manufacturing sector has the ability to compete at a level comparable to the global centres of manufacturing excellence.


Rising fuel and electricity prices continue to adversely impact on Africa’s manufacturing sector, notes Maposa.

Capacity constraints, and the rise of electricity prices to fund the construction of new and refurbished power generation facilities, are at the heart of the continent’s current energy crisis. In most parts of West and East Africa, backup power systems (diesel-powered generators) are used by manufacturing companies as their main energy source.

Another challenge is the use of higher-priced fuels to produce electricity, as a number of African countries do not have access to lower-priced fuels such as coal, while the continent also has poor intraregional transport and logistics infrastructure, says Maposa.

The reliance on higher-priced electricity for production processes inhibits African manufacturing companies from competing effectively with their Asian and developed-world counterparts, he adds.

“The shot in the arm that Africa’s manufacturing sector requires in order to ensure a stable supply of affordable electricity [will be]regional governments’ commitment to double, or even triple, existing power generation, transmission and distribution infrastructure over the next 20 to 30 years.

“South Africa leads from the front with its new build programme. Other nations that are investing heavily in the expansion of existing power infrastructure include Ethiopia, Nigeria, Mozambique, Zambia, Tunisia, Uganda, Tanzania and Ghana.”

Independent power production is another strategy that African manufacturing companies should proactively explore to sustain their long-term growth ambitions, adds Maposa.

Investing in power generation infrastructure in the short term will add significantly to the capital costs of the manufacturing concern. However, the incurred cost can be offset in the medium to long term, ensuring stable productivity in the midst of the current unreliable power supply by most of the region’s State-owned power utilities, he explains.

“Investment in renewable-energy sources, such as wind and solar farms, is a strategy that African manufacturing companies can consider exploring over the next 20 to 30 years. In countries such as South Africa, the setup of renewable power producing facilities also comes with tax incentives and improves the respective companies’ social licence to operate.”

African manufacturing companies should also “proactively pursue” investment in more energy efficient production equipment in order to reduce annual energy spend, suggests Maposa.

“When compared with of the developed world, several African manufacturers are producing their wares using antiquated production infrastructure.

“However, the short-term costs of investing in them are exorbitant and adversely impact on the short-term profitability of these companies. This is particularly true for larger production facilities that have sizeable installed bases of motors, drives, pumps and other electric equipment used in respective production processes. Investing in energy efficient equipment does, however, affect long-term gains that will eventually allow local manufacturing companies to compete at pricing points similar to their Asian counterparts.”


Most manufacturers and manufacturing sector economists are of the opinion that African labour is overpaid, and employees should be more productive if they are to earn the wages they feel they deserve, says Maposa.

Increasing salaries and wages is a cost that is largely borne by manufacturing companies, which feel they are unable to raise product prices based on the risk of losing market share to lower-priced Asian imports of a comparable quality.

In contrast, mining and manufacturing labour unions are convinced they should be earning more, based on the ‘super profits’ of their employers.

The wage negotiation cycle almost always consists of announced strike action, periods of operational downtime, and an eventual agreement between employer and employees after a series of mitigatory discussions.

“This, unfortunately, happens on a near- annual basis, costing the regional economy significant amounts of revenue through lost productive time,” notes Maposa.

“Running a lean operation that functions only on critical hires is a strategy that African manufacturing companies can consider implementing over the next few years to sustain profitability.

“A leaner operation allows manufacturing companies to design systems and procedures that render these organisations more efficient from a productivity point of view. Other advantages include the upskilling of labour, where most employees are trained to do two or three jobs along the production value chain, switching from one role to the next with relative ease. For these leaner operations, the use of incentivised remuneration packages, such as profit-sharing and cost-saving schemes, is another strategy that employers can implement to keep employees motivated, willing to contribute, as well as more productive.”

Automating sections of the production value chain is yet another strategy that manufacturing companies can explore to curtail the adverse impacts of labour unrest, says Maposa.

However, proposals to automate existing and new build production facilities are often frowned upon by regional industry Ministries and labour unions, owing largely to African economies struggling with escalating unemployment.

“[But], in order to remain viable over the next 20 to 30 years, automation is a strategy that simply cannot be ignored by the region’s manufacturing companies. From a policy perspective, job creation should be more innovative in that it should not focus on keeping jobs that should not be kept, but rather creating new sectors and industries that will take up those employees that are made redundant by the automation process,” says Maposa.


Competition for limited raw materials has significantly raised the regional and global manufacturing industry’s input costs.

The growing demand for inputs, such as base minerals, timber and agroforestry produce, into various production processes continues to rise, resulting in costs for these commodities trending upwards as demand currently outstrips supply, says Maposa.

“To avoid supply shortages, backward integration is a strategy that Africa’s manufacturing companies are expected to seriously consider in order to sustain short-, medium- and long-term growth ambitions.”

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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