Despite the manufacturing sector being the fourth highest contributor to the gross domestic product, it has been in decline in recent years, and shrunk, impacting the overall economy.
The Covid-19 pandemic has further impacted the sector and its growth. However, through collaborative efforts by stakeholders as well as assessing various key factors and elements, the sector can recover and provide a much-needed boost to the local economy.
Management consulting firm Kearney partner and 2022 Manufacturing Indaba moderator Prashaen Reddy explains that the local manufacturing sector previously benefited from competitive labour costs, competitive electricity input costs and good infrastructure which allowed the sector to serve as a strong and appealing manufacturing country.
South Africa appealed to energy hungry manufacturing such as aluminum smelters and the petrochemicals sector owing to the cost and reliability of electricity in the country.
However, over time, infrastructure has deteriorated while labour and electricity costs have increased alongside frequent power outages in the form of load-shedding which has severely impacted the manufacturing sector. As a result, with limited investment, the sector has not been able to keep up with the export demands.
Further, there is business uncertainty around policies and government's views along with a volatile currency. These factors have led to South Africa’s export basket shrinking and the manufacturing sector holistically declining.
Reddy adds that the pandemic has further challenged the local manufacturing sector. He explains that the local manufacturing sector is tied to global markets and exports. Global supply chains and product demand was heavily disrupted by pandemic-related restrictions which led to many of South Africa’s trading partners being constrained.
Reddy adds that the decline in demand heavily impacted small, medium-sized and microenterprises with many struggling to maintain operations and business.
“There was an artificially depressed demand that caused some challenges within the manufacturing sector. However, we do expect that demand to recover in the years ahead as we emerge out of the pandemic,” says Reddy.
In particular, he explains that the petrochemicals and chemicals manufacturing sector along with the metals machinery manufacturing sector have good growth potential as demand for such products is expected to grow.
Reddy elaborates that there are three key points that need to be analysed to create growth opportunities for the manufacturing sector.
Firstly, the local sector has to look at how it can improve its fundamental competitiveness on the global stage for manufacturing. Secondly, the stakeholders need to evaluate ways to build more resilience in the manufacturing companies and the sector.
Lastly, he explains that stakeholders need to leverage South Africa's geopolitical position in the world in terms of export demand in Africa as a means of continuing to build a good manufacturing sector.
He explains that the local sector also needs to build the right sets of capabilities to align with new technology. As the Fourth Industrial Revolution (4IR) continues to disrupt the manufacturing sector, stakeholders need to adapt to the changes for the sector to remain competitive.
Additionally, as South Africa is a primary resource-driven country, there is potential for the manufacturing sector to grow through becoming more involved in natural resource processing as opposed to importing processed products.
“The mining sector is a sizable sector and contributor to our economy. Therefore, it can work with the manufacturing sector to establish value chains and support each other,” says Reddy.
He adds that government policy is integral in enabling the sector’s development and ability to attract investment.
He cites the African Continental Free Trade Area (AfCFTA) agreement as an example of policy that aims to boost African manufacturing sectors and continental trade.
He elaborates that to further the impact of the AfCFTA agreement, there is a need for collaboration and cohesion of policies across the continent which will then enable the aims of the agreement.
Government support and policy can also boost localisation efforts in the manufacturing sector. Reddy explains that if 5% to 10% of South Africa’s imports were localised, between R45- and R90-billion worth of value could be created in the economy along with about 34 000 jobs.
Reddy adds that through restoring local production of products currently imported will assist the growth of the local manufacturing sector. This in turn will create a resilient manufacturing sector which will assist in creating a resilient economy.
He concludes that addressing such elements is important in restoring the local manufacturing sector post-pandemic and taking South Africa forward in terms of growth opportunities as a country.