In this opinion article, Manufacturing Circle executive director Philippa Rodseth outlines the organisation’s concerns with the Amended Competition Act, which she argues could create a number of unintended inefficiencies and consequences.
Tackling the structure of the economy has been a long-standing policy position of the current Government. The latest policy tool applied to challenge industry is the newly signed Amended Competition Act18/2018.
The Act’s stated intention is premised on multiple pillars to ensure broad-based economic transformation. Participation of previously disadvantaged persons and black-owned SMMEs, as well improvement of institutional alignment between government departments and policies, is worthy of support.
What is not helpful is the provision which aims to regulate the behaviour of firms by breaking up concentrated business in South Africa. This legislation is informed by a structuralist view that market concentration is to blame for the lack of economic transformation. Some believe that this has led to artificial barriers for SMMEs which could provide cheaper, diversified and innovative products and services to consumers.
Such reasoning presupposes that new market entrants are inherently competitive and able to achieve allocative efficiencies. In practice, this has not always been found to be the case. Furthermore, the notion that concentration is bad, has been contested and found wanting in various economic camps. In fact, the global trend has been towards large scale manufacturing to achieve economies of scale that are beneficial to consumers and to achieving competitive advantages for the country in which the industry is based.
The Manufacturing Circle supports the notion of large-scale manufacturing particularly in the context of a relatively small and isolated economy such as South Africa. Significant scale is needed in order for local companies to be globally competitive. Bulk exports are vital where local demand is limited.
Even though the amended Competition Act policy aims to address the interests of consumers by increasing purchasing power and product diversity, we are concerned that it will create a number of unintended inefficiencies and consequences as it makes a trade-off between market efficiency and addressing the ‘public interest’.
We believe that the dearth of broad-based economic transformation in the economy has less to do with market concentration than with a lack of a focused industrial policy. Essentially, we see the Amended Competition Act as a zero-sum policy favouring political objectives at the expense of South Africa’s manufacturing sector.
History has shown that the most successful nations in terms of economic growth and development are those that have pro-actively supported and contributed to growing the industrial base of their economies. Today, many of the thriving developed economies have strong industrial sectors.
Furthermore, developing countries that have grown dramatically over the past few decades have focused on building their industrial base – highlighting the link between growth in manufacturing output and growth in GDP. The strategies adopted to attract, develop, support and grow the manufacturing sector, form the basis for industrial policy and provide significant support for economic development, including job creation.
The German Wirtschaftswunder in the 1950s was largely SMME driven, relying on a deconcentrated base of small family owned businesses with access to a high skills base. South Africa does not have this infrastructure, and therefore will struggle to create investment at a scale sufficient to drive large scale job creation. In the absence of such a base, the Far Eastern model of large enterprise-led growth is apposite: the chaebol in Korea and the keiretsu in Japan led to the creation of large, globally competitive enterprises that in turn created a supplier base of SMMEs.
Given South Africa’s current established industrial base, the Manufacturing Circle believes that industrial policy should be focused on leveraging off manufacturing at large scale. This will arrest de-industrialisation and job losses, and act as the engine for the growth of a vibrant SMME sector.
Herein lies significant opportunity. Starting with the demand-pull established by existing large companies operating at scale, we need to identify the means to open up supply chains and identify opportunities for new entrants.
The most common frustration voiced by an SMME is difficulty in accessing markets and finance (which are intrinsically linked). The importance of working with existing large business should not be ignored. This offers the chance to identify and integrate opportunities for new entrants across value chains.
Such activity is already evident in the automotive sector, with commitments by the Original Equipment Manufacturers (OEMs) to open up supply chains enabling diversity and transformation, in exchange for government incentive benefits offered under the Automotive Production and Development Programme (APDP).
The Manufacturing Circle’s Map to a Million paper released in November 2017, elaborates on what is required to stimulate meaningful transformation of the economy. We have proposed demand-side interventions, including boosting demand for goods manufactured in SA, calling for commitment by business and government to visibly support procurement of locally manufactured goods, provided their cost and quality are competitive. SA should actively pursue import replacement where commercially viable and investigate options to invest in catalytic projects, using products produced domestically. Export-led growth opportunities need to be pursued.
The Manufacturing Circle wants to be realistic and constructive in identifying real actionable steps that can create an environment in which manufacturing can thrive and jobs can be created, facilitating inclusive economic growth for the benefit of all. It is only new demand that will create new factories and more jobs, and it is only through more competitive supply of input costs, better skills and more coordinated policy interventions that manufacturing in turn can be competitive.
While domestic demand is not sufficient to sustain industry, it is a good base from which to build a dynamic export industry. Stimulating domestic demand will boost investor confidence, particularly when coupled with policy certainty, supportive regulation and competitive incentives, but to be effective would need to be accompanied by appropriate supply-side policies that build the skills base and support technological upgrading. A strong industrial base is a prerequisite to effectively capture a higher share in international trade. But, participation in global value chains requires economies-of-scale to specialise in value-added tasks. Destroying larger companies is detrimental rather than beneficial.
Our concern is that we are seeing continual introduction of new legislation to address perceived failures, which seems to exacerbate negative outcomes and create ever greater obstacles to desperately needed new investment.
New legislation, which threatens to negatively impact our existing industrial base and the economies of scale needed to be globally competitive, is not helpful in growing our economy, particularly in promoting opportunities for SMME development on our home front.
Rodseth is executive director of The Manufacturing Circle, which promotes the interests of manufacturers to enable job-rich growth in the South African economy. Members of the Manufacturing Circle have announced their commitment to local procurement and job creation.