For South Africa’s stage of economic development, manufacturing should be contributing at least double what it currently does to the gross domestic product (GDP), states industry body Manufacturing Circle executive director Philippa Rodseth.
Manufacturing has declined from 26% of South Africa’s GDP in 1994 to less than 13% currently.
Further, South Africa’s manufacturing under-use rate is recorded at 19.7%, which means that its factories are not producing at full capacity. Stats South Africa attributes this underuse to insufficient demand – about 12.4% – for locally produced goods.
Rodseth adds that imports have further reduced the need for locally manufactured goods.
These figures mean that South Africa’s unemployment rate has increased to 29.1% – the highest it has been in 11 years – with the biggest employment losses recorded in the manufacturing sector.
In February, prior to the Covid-19 crisis, the seasonally adjusted purchasing managers’ index of banking services company Absa declined for a fourth consecutive month to reach 44.3. By April, it declined by two points from 48.1 in March to 46.1 as the majority of manufacturing came to a halt as a result of the lockdown.
“In essence, the decline brought the index to the lowest level since the second half of 2009, when the economy had started to recover from a deep recession triggered by the global financial crisis of 2008,” Rodseth explains.
The indices reflecting business activity and new sales in the manufacturing sector reached almost 11-year lows. Employment figures in the sector declined from 39 index points in March to 26.6 index points in April, which in the long-run could lead to job losses. The sustained weakness in the employment indicator corresponded with recent announcements of planned retrenchments in the factory sector and wider economy.
Rodseth says employment figures in the sector at this point are deemed unlikely to turn around without a sustained improvement in demand to bolster industry activity.
“The manufacturing sector’s challenges relate to competition, achieving a supportive international trade position with particular reference to unfairly incentivised imports, and insufficient local aggregate demand.”
She adds that many manufacturers face concerns regarding slow productivity growth, high input costs, the variable local availability of certain inputs, a lack of investment, high electricity costs, poor infrastructure and heavy regulatory burdens.
“These factors all reduce the competitiveness of many firms in the sector.”
Engine for Economic Growth
Rodseth maintains that manufacturing remains the engine of growth for South Africa’s economy – even more so following the economic impact of the Covid-19 national lockdown.
“Although we have been experiencing premature deindustrialisation, with the pandemic exacerbating the situation by slowing down the economy and contributing to uncertainty, the importance of manufacturing has been highlighted.”
For example, industry has been made very aware of the importance of manufacturing in the procurement of medical equipment and personal protective equipment (PPE) in response to South Africa’s health and safety needs. It has become apparent that relying heavily on imported PPE is unsustainable and does little to help the already sluggish economy, she adds.
“Imported products are in high demand globally. This impacts on availability and price, which motivates for an assessment on how we can upscale our local capabilities,” Rodseth explains.
In addition, the national lockdown and phased reopening of the economy has also highlighted the importance of connecting value chains and the interconnectedness of the economy.
She notes that, for example, the reliable supply of locally manufactured input materials for the production of N95 particulate filtering masks has been identified as a limitation in terms of value chain and economic interconnectedness.
“Manufacturing, for example, supplies to the mining and construction sectors, and we need an holistic view of how our ecosystem operates and where we need to support it.”
Rodseth says manufacturers and all other businesses need to be cognisant and proactive in three interrelated key areas going forward.
Firstly, manufacturers and all stakeholders in the value chain need to help consumers understand the importance of buying locally manufactured goods. This should be followed up by providing the means to easily identify such products when making purchasing decisions.
Secondly, it is important for industry to identify key imported products and materials and to assess whether increased localisation is possible. This can be achieved by ensuring a thorough understanding of manufacturing capacity through the application of a comprehensive value chain assessment.
Finally, industry and government should work together to prioritise local procurement within the industry and by end-consumers. This can be achieved by identifying opportunities in value chains for local procurement.
Beyond this, Rodseth notes several areas for practical implementation that should be prioritised to ensure that the manufacturing sector in South Africa flourishes, especially amid the Covid-19 crisis.
In addition to increasing aggregate demand for locally manufactured products, she says identifying import replacement opportunities and streamlining designation is key, as is growing exports and identifying catalytic project opportunities.