Can SA revitalise its manufacturing capabilities?

Can SA revitalise

its manufacturing capabilities?

Many industries are reliant on imports as part of the manufacturing supply chain, but is there potential for SA to optimise its manufacturing capabilities to assist in streamlining production locally in a cost-effective manner? And if so, what is required? Philippa Rodseth, Executive Director at Manufacturing Circle provides some insight.

In 2008, the manufacturing sector’s contribution to GDP was 15%. This figure was sitting at around 11% at the end of 2020.

What is the current state of the manufacturing industry in South Africa?

Manufacturing, with its strong multiplier effects on value addition, job creation, export earnings and revenue generation, is the engine of growth for our economy.

However, manufacturing is currently experiencing challenges evidenced by its declining contribution to GDP. In 2008, the manufacturing sector’s contribution to GDP was 15%. This figure was sitting at around 11% at the end of 2020. International experience shows that for South Africa’s stage of economic development, manufacturing could contribute up to double this level.

It was reported that South Africa is producing less now than it was a decade ago. What is the reason for this?

There are many factors that have contributed to the premature de-industrialisation of our country. These include electricity supply constraints, rapid increases in administered prices, labour and political instability and competition from unfairly incentivised imported products.

What role does current legislation/policy play?

Policy and legislation play an important role in providing the framework and guidelines in which industry can operate. To drive industrialisation, many government departments play a role including the Department of Trade, Industry and Competition (DTIC), Department of Mineral Resources and Energy (DMRE) and the National Treasury. We find that in some areas; policy, legislation, and implementation is not always consistent and aligned.

It is often said that manufacturing costs are higher in South Africa. Why is this and what can be done to mitigate this?

Our member companies note high costs relating to ports, rail and electricity. Portnet tariffs are significantly higher than the world norm. This is a serious impediment to exports, and inflates import parity pricing. We need to improve port efficiency to reduce costs.

Much of our manufacturing is located in Gauteng, with associated costs in transporting raw materials to the point of manufacture. We advocate for the reinstatement of rail subsidies for containers destined for export to overcome the inland location disadvantage of much of our manufactured product.

Electricity costs have increased considerably, driven by tariffs at an Eskom level and in some cases compounded by additional costs added at municipal level. We accept that Eskom will never be sustainable without cost-reflective tariffs. And we accept that tariffs have been below what it costs Eskom to generate, transmit and distribute electricity. But we do believe that Eskom has to keep cutting those costs. We also need a better understanding of Eskom’s new tariff structures and tariff philosophy. Furthermore, at a municipal level, a backlog in maintenance and inconsistencies in charges and mark-ups need to be urgently addressed.

What is the actual decline in employment in the manufacturing over the last 10 years?

In 2008, the manufacturing sector employed 2.1 million people, contributing to 14% of all jobs. In the second quarter of 2021, this figure had fallen to 1.41 million people, or 9.5% of all jobs. Manufacturing employment has declined by 700 000, or a third, over this period, and total employment provided by the sector has fallen below 10% for the first time on record.

Is there potential for SA to revive its manufacturing industry, and if so what steps are required to do so?

We do believe that this is possible. South Africa has a number of strong companies, many committed people and an infrastructure that if adequately enabled can drive growth, employment and equality.

Increasing demand for manufactured product is our highest priority. Many of our factories are operating under full production capacity.

To increase aggregate domestic demand, a commitment by both business and government to visibly support Proudly South African is important to increase the procurement of locally manufactured

goods, provided their cost and quality are competitive. Retailers in particular should commit to clear labelling of products on shelf to ensure that consumers can make informed choices.

We also advocate the investigation by government of its options to invest in catalytic projects and infrastructure projects. An increase in the renewables component of electricity procurement, with solar and wind generation equipment manufactured in SA is also an important area worth investigating.

Furthermore, we need to increase our exports. This involves enhancing our competitiveness with particular reference to reducing port and rail costs.

Which manufacturing industries have the most potential in SA?

The manufacturing sector is an ecosystem with complex and interconnected value chains, so it is not possible to ring-fence or highlight a particular industry. Having said that, opportunities presented by renewable energy infrastructure build are currently being explored.

Does SA have the human capital skills to compete on a global level or are there major skills gaps?

We have shortages of suitably trained artisans and middle management. This is the result of poor output from the schooling system, limited uptake into the Technical and Vocational Education and

Training (TVET) system and incoherence between the programmes offered through the TVET system and the skills demands of the manufacturing sector.

In basic and tertiary education, general skills are prioritised. Industry-specific or technical skills are in short supply. The shortage of skills and the ageing of the available skills are key cost factors affecting the medium-term sustainability and expansion of SA’s industrial activity.

To address this, our education system needs to be realigned to focus on delivering skills that are required for further training in areas with the highest potential for job creation.

We are also of the view that core jobs in production will shift from manual- to techintensive activities, requiring different skills sets. Demand for customised products will raise demand for skills in design and R&D. Fourth Industrial Revolution trends will not only disrupt traditional manufacturing jobs, but also jobs in design, development, and related services.

This dynamic is resulting in an increasing skills gap, which is exacerbated by the emigration of highly skilled workers from SA shores alongside immigration restrictions for highly skilled foreigners. An additional challenge is that education is directed mostly at new entrants to the job market, rather than at existing workers.

We therefore suggest that the visa system for scarce skills is an important mechanism to allow for scarce skills to be deployed in SA, and suggest that requirements are linked to the duration of such visas and demonstration of skills transfer to SA citizens. 

Philippa Rodseth: Executive Director at Manufacturing Circle