The “hollowing out” of South Africa’s manufacturing sector has occurred as a result of the country’s premature de-industrialisation, professional services firm Deloitte emerging markets and Africa MD Dr Martyn Davies tells Engineering News Online.

Expanding on the phenomenon, he says that South Africa has suffered from continuing pressures as a result of de-industrialisation. He believes the country’s premature de-industrialisation talks to the “structural disconnect” at the level of the political economy, which is preventing the country from improving its competitiveness and affordability.

During a panel session at the Manufacturing Indaba last month, panel members discussed the merits of special economic zones (SEZs) and the fact that these were “indicative of the fact that the rest of the economy is not working effectively”.

Davies questions the logic behind establishing SEZs, stating that it “almost seems to be a resignation to the fact that, at a national policy level, South Africa is unable to move policy that disables de-industrialisation”.

While SEZs are intended to disable de-industrialisation, in order for this to be done effectively, Davies notes that he would prefer to see “the whole country as an SEZ” as opposed to just some geographically dedicated zones, which are often in faraway places and removed from the larger economy.

Davies further mentioned during the Indaba that, apart from SEZs, financial incentives for manufacturing were a potential avenue for mitigation.

While these, in effect, fall in line with President Cyril Ramaphosa’s economic recovery and stimulus plan to unlock greater investment, Davies laments the President’s focus on attracting foreign direct investment (FDI) to South Africa.

Attracting higher FDI, he tells Engineering News Online, has not had the desired impacts up to now. A lack of growth, existing policy, labour issues and legislation all play a role in why this is the case, he points out.

South Africa operates within a relatively risky emerging market peer group, Davies adds, stating that, when it comes to investing in South Africa, “there also seems to be a sense of ‘risk on’ by global investors, as opposed to ‘risk off’”.

He questions the local financial incentives currently in place, which he says are often burdensome and too complex. This affects corporates and small businesses alike, with the latter often being unable to access incentives.

Apart from financial incentives, he notes that labour incentives should also receive due consideration, despite labour often being viewed as a challenging, or difficult, topic to speak about.

“We need to streamline things and we need to make things clearer and, ultimately, we need to get implementation going, and [we need] more of it.”

SETTING THE STANDARD

Davies highlights the South African automotive sector as an industry where there is a winning formula. The automotive sector is “the only real successful current industrial sector” in the country, he states.

Growth in the automotive sector is supported by the recently extended Automotive Production and Development Programme (APDP), which will run from 2021 to 2035. The APDP is a production incentive scheme for the motor industry aimed at promoting production volumes in the specified motor vehicle industry, promoting added value in the automotive component industry and, in turn, creating employment across the automotive value chain.

To put manufacturing’s dire straits into context, he suggests picturing the automotive sector out of the equation – it shows a South Africa with a severe lack of successful industrial sectors.

EMERGING SECTOR?

South Africa’s manufacturing industry is lagging, according to data from Statistics South Africa, which showed that the sector had contributed about R386.8-billion to gross domestic product in real terms in 2018.

This is poor, Steel and Engineering Industries Federation of Southern Africa economist Dr Michael Ade told Engineering News in a recent interview, compared with finance, real estate and business services’ contribution of R640.3-billion and general government services’ R478.6-billion, especially considering the huge potential of the sector.

Renewable energy adoption has the potential to create a significant industrial sector, but it has not reached that point yet.

South Africa’s manufacturing and construction industries stand to benefit from the renewed momentum of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).

The local-content requirements of the REIPPPP should aid in the recovery and growth of the domestic manufacturing industry, which has been impacted on by the more than two-year delay in the programme.

Building full ecosystems in South Africa, meanwhile, is probably another key to unlocking not just the country’s potential, but also that of its industrial sectors.

A full ecosystem, Davies explains, comprises a combination of bank support, good infrastructure, accessible and understandable financial incentives, research and development by the State, human capital supply and a safe environment.

“When you have that, and you [add] all of this together, you start making things happen,” he comments.

He says that industries “need to come about again”, but says legislation and policies, among other areas of concern, continue to hold the manufacturing industry back.