As industry recovers from the fallout of the global slowdown, the government is working to deepen economic integration

Manufacturing constitutes South Africa’s secondlargest economic sector and currently accounts for 15.2% of GDP, as well as being responsible for the creation of roughly 1.7m jobs. It also ranks among the top three sectors in terms of multiplier effect, producing R1.16 ($0.11) of value added for every R1 ($0.09) invested according to industry representative group the Manufacturing Circle.

The sector’s contribution to GDP has, however, been steadily declining over the past three decades, having accounted for 19% of GDP in 1990 and 21.8% in 1980. Indeed, this is part of a broader shift with the tertiary sector, which today makes up around 70% of the national economy, having captured share from other, more traditional activities, including mining and agriculture. However, manufacturing has also experienced lower-paced growth due to a confluence of challenges ranging from labour unrest and poor productivity to price pressure as well as the influx of cheaper imports.

Considering the sensitivity of manufacturing output to employment – of the estimated 1m jobs the country lost over the course of the global recession, nearly a quarter were in manufacturing – industry receives substantive attention in the country’s development strategies and policy frameworks. Key amongst these is the Department of Trade and Industry’s (DTI) Industrial Policy Action Plan, which incorporates some targeted measures and interventions to support a selection of industries and bolster the competitiveness of those with high job absorption rates and an export focus.

A Matter Of Rankings

In Deloitte’s 2013 Global Manufacturing Competitiveness Index, South Africa is placed 24th, a ranking that instils confidence or arouses concern depending on the context in which it is considered. While it is ahead of the likes of France, Italy and Spain, South Africa falls behind its BRICS peers, China (1st), India (4th) and Brazil (8th), states that could be viewed as closer competition in terms of attracting manufacturing investment and producing goods destined for shared export markets. Over the next five years, Deloitte predicts South Africa will slip one spot down to 25th, while India and Brazil will move up to occupy second and third place behind China. In a 2012 report published by the DTI’s Small Enterprise Development Agency (SEDA) as a percentage of total world manufacturing output, South Africa’s contribution fell from 0.61% in 1990 to 0.5% in 2010.

On A Positive Note

In its most recent quarterly survey (for the second quarter of 2014), the Manufacturing Circle recently revealed that the majority of respondents anticipate either “fragile/weak” (49%) or “stable” (33%) conditions over the next 12 months. Only 8% remained upbeat, anticipating conditions would be “modest to good”, while none (0%) consider future conditions as being “strong”. Concerns identified by those surveyed include: prospects of industrial action, socio-political instability, low productivity, currency weakness and associated rising costs, weak demand and increased competition.

However, given the various exogenous pressures that exist – including lower trade demand in key export markets – and the challenging domestic dynamics, the decline is comparatively modest. “Conditions have been tough. Our manufacturers found themselves in challenging positions following the global financial crisis, with global demand having imploded while costs in the domestic arena escalated significantly,” Garth Strachan, the deputy director-general for Industrial Development Policy of the DTI, told OBG. “That we have avoided industrial decline should be viewed as a success.”

Production, as measured by Statistics South Africa, increased by 1.3% in 2013, with higher volumes recorded in seven of the 10 category groupings. By value, the leading South African industrial sectors are petroleum and chemical products, and food and beverages, both with 25% each. The country has the largest chemicals industry in Africa, estimated at $30bn, contributing around 5% of the country’s GDP. Meanwhile, beverages account for just over 4% of all manufacturing sales, while food is responsible for 13.5%. Within the sector, beverages account for 24% of sales. Iron, steel and metal make up 20% of the sector: South Africa was ranked as the 21stlargest crude steel-producing country in the world in 2013, according to the World Steel Association. South Africa is also the largest steel producer on the continent, manufacturing around 45% of the total crude steel made in Africa in 2013.

Motor vehicles take up 10% of the sector, and wood products are at 8%. Despite making up just 6.5% of sub-Saharan Africa’s (SSA) population, the country possesses the region’s largest and most diverse industrial base and is responsible for around onethird of its GDP. Growth in sub-Saharan Africa is expected to be 5% in 2014 and 5.75% in 2015, presenting a growing market for exports and opportunities for supply chain integration.

“South Africa has a lot working in its favour. While we are guilty domestically of harping on the negative, global investors think of us positively,” Karthi Pillay, Deloitte’s manufacturing industry leader, told OBG. “We are a stable and safe country despite some political issues. We have a secure and well run financial system, good infrastructure and are considered a nice place to live.”

Lending A Hand

Total exports to the African continent more than doubled between 2008 and 2012 to reach R200bn ($18.94bn) and Africa has now overtaken the EU, where the share of exports has fallen from 34% in 2001 to 22% in 2011, as the largest market for South African manufactured products. Bilateral trade with China also grew 32% from R205bn ($19.41bn) in 2012 to R270bn ($25.57bn) in 2013. Most observers, however, believe this to be just the tip of the iceberg. This is especially true in the case of the Southern African Development Community (SADC), where intra-regional trade as a percentage of total trade does not exceed 15%. Despite efforts towards forming a common market, formal and non-formal barriers still persist. “It is an exciting period for the region. We just need to sort out politics so that better integration takes place,” according to Kaizer M. Nyatsumba, CEO of the Steel and Engineering Federation of Southern Africa (SEIFSA).

“While we have capability advantages in areas like services, ICT and engineering, it is patronising to assume that we are the gateway into Africa. We have to find ways to assist other African countries and find complementarities to generate mutual gains,” said Strachan. Mazwi Tunyiswa, the head of the Industrial Development Corporation’s Metals, Transport and Machinery Products special business unit, agrees with the need to follow a more coordinated approach. “If we can finance projects throughout Africa, and source the equipment from here, it’s a win-win. We cannot expect our neighbours to simply open up their markets without offering something in return.”

Logistics

South Africa’s transport infrastructure, in particular its airports, is among the best on the continent in terms of capacity, efficiency and sophistication. However, just as with the utilities sector, under-investment over the past few decades has led to various capacity challenges, high usage costs and bottlenecks. Inland transport is heavily reliant on a road network, with an estimated 70% of all freight travelling by road rather than rail, which most consider to be the more reliable, cost-effective and environmentally friendly platform.

Human Resources

There is plenty of scope for improvement, however. “Long-term manufacturing challenges related to hard factors like electricity and logistics are solvable. But the education system needs to be fundamentally overhauled. 22% of our youth are not matriculating, and we have abandoned our artisanship programmes that used to produce technical tradesman like carpenters and tool makers,” says Deloitte’s Pillay. The World Economic Forum (WEF) predicts demand for technicians until 2020 will experience a compound annual growth rate of 2-4%. Such a rate will far exceed the 7000 new entrants being produced each year. According to the Adcorp Employment Index, there are as many as 829,800 unfilled positions for high-skilled workers across a wide range of occupations. Not only does a skills deficit make it harder to tackle unemployment, which is hovering around 25%, it also hampers the ability of industries to move downstream into further beneficiation.

In the WEF’s “2012/13 Global Competitiveness Report”, South Africa is rated 134th out of 144 countries surveyed for pay and productivity. Wage levels over the past three years have risen by 11.5%, tripling consumer inflation. The WEF report also ranks South Africa last (144 out of 144) in terms of labour-employer relations, something that is not particularly surprising considering the history of industrial action in recent years. “Labour is costing more but is not matched with increased productivity. This is adding to the cost of doing business and unfortunately, leading companies to pursue more capitalintensive production despite the high unemployment rates the country faces,” Nyatsumba told OBG.

SEIFSA, which represents employers in both the metal and engineering sectors, faced four weeks of strike action by 220,000 workers represented by the National Union of Metalworkers. The strikes ended in July 2014 following the union’s acceptance of a wage settlement offer.

More Power

Electricity prices in South Africa have risen by more than 170% over the past five years, a trajectory set to continue as the national power utility, Eskom, has been granted annual tariff increases of 12.69% in 2015/16 to fund a needed capital spending campaign. For energy-intensive industries, such as non-ferrous metals, for which the value of electricity consumed makes up 11% of total input costs, these rate hikes are a concern. Until recently South African industry benefitted from some of the cheapest utility tariffs in the world, according to Coenraad Bezuidenhout, executive director of the Manufacturing Circle.

Worries are not only about price rises, given the low base, but have more to do with phasing them in appropriately. Industry has been unanimous in expressing its disapproval at the effects of carbon taxes, which were introduced following a proposal by the National Treasury to charge R120 ($11.36) on every metric tonne of carbon emitted above a 60% threshold effective in 2016. “One has to wonder whether, as an underperforming and developing economy, South Africa can afford climate change policies that are being applied to developed countries that have already been fortunate to go through their own industrialization without such burdens,” questioned SEIFSA’s Nyatsumba.

The Falling Rand

In nominal terms, the rand depreciated by 17.6% against the dollar over the course of 2013. While a weak currency promotes exports, a number of rand-induced input costs such as fuel are contributing to increased production costs, potentially negating some of the gains to be made. Producer price inflation, as measured by Statistics South Africa, averaged around 6.4% in the second half of 2013, up from 5.5% in the first half.

According to a Manufacturing Circle bulletin, supply-side bottlenecks, especially from work stoppages, could mean that even if currency movements contribute to newfound demand, this is not being reflected in added export volumes as orders are going unfulfilled. In the third quarter of 2013, strikes cost the automotive sector 58,000 vehicles in output and an estimated R20bn ($1.89bn). Industrial Development Corporation figures show the deficit-to-GDP ratio widened to 5.8% in 2013 from 5.2% in 2012, underpinned by the largest trade deficit in relation to GDP (2.2%) recorded in the past four decades.

“We are not asking for either a high or low currency, just a non-volatile one,” according to Bezuidenhout. As the rand is one of the more actively traded emerging market currencies, currency movements are for the most part driven by exogenous factors that are challenging to influence via monetary policy. According to Bezuidenhout, however, “the way the fiscus is spent and cost recuperation for the likes of water, electricity and tolls implemented, make the currency vulnerable.”

Import Arrivals

South Africa’s manufacturers, who export to extremely competitive markets in Europe and Asia, as well as more challenging economies in Africa, have nonetheless also had to contend with increased pressure. In the 20 years since the fall of apartheid and the wholesale opening of the economy, the country has transitioned between extremes, having gone from virtually zero to 70% import penetration. More than half of the firms in the Manufacturing Circle’s survey indicated a fall in the value and volume of their domestic sale in the fourth quarter of 2013. Growth in consumer spending is moderate in an environment of low consumer confidence arising from tight credit conditions, high household debt, concerns over unemployment and rising expenditures (see Economy chapter). In a sluggish domestic market, this is naturally raising the level of debate over the degree to which certain categories of imported goods should be permitted from entering into the country. “We are the only country in the BRICS grouping that does not have tariff protections for manufactured goods,” Hector Molale, the managing director for aluminium producer Hulamin Extrusions, was quoted as stating at a conference in late May. For the DTI’s Strachan, accusations of exuberant trade liberalisation are unfounded, especially as the tariff regime must adhere to parameters set by the World Trade Organisation to which South Africa is a signatory and must abide by if it wishes to retain favoured nation status itself. “We will always offer protection if it is determined that import cheapness is created artificially and unfairly through evidence of dumping, especially when goods are sub-standard and pose health, safety and environmental risk.”

Consumer Goods

Predicated on a growing middle class, urbanisation and the advent of more formalised retail channels, the World Bank forecasts Africa’s food and beverage market to triple in value to reach $1trn by 2030. South Africa’s leading manufacturers, facing a somewhat saturated home market, are aggressively expanding their footprint northwards to take advantage. South Africa’s largest food producer, Tiger Brands’ distribution network extends to 22 African countries, with top line revenue from outside the country reported at 35%; up sevenfold from 5% five years ago. Pioneer Foods, considered the country’s second-largest food company, has African operations spanning Botswana, Namibia, Zambia and Uganda. 16% of the group’s business from continuing operations is outside the country. Its CEO has predicted that South Africa will eventually only form a small component of its SSA portfolio.

While having moved its headquarters to London in 1999, SABM iller, the world’s second-largest brewing company, retains a strong connection with its place of origin, South Africa. The global beer giant, present in 75 countries, has operations and affiliations in 31 African markets. Growth in profit generated from the rest of Africa over the course of 2013 exceeded that being generated from any other region the group is present. Johannesburg-based Nampak, a packaging company that supplies most of the continent’s leading fast-moving consumer goods, has been opening plants across sub-Saharan and East Africa and recently acquired Nigeria’s Alucan for R3.3bn ($334.95m). Sales outside South Africa account for around 30% of its business.

Continental expansion for the food and beverage industry is not just taking the form of placing products on store shelves, with a number of South Africa’s leading agribusinesses pursuing backward vertical integration into production and sourcing. The country’s two largest sugar producers, Illovo and Tongaat Hullet, own plantations across the continent. While integrated poultry producer Astral foods, which has mills and hatcheries in Zambia, Mozambique and Swaziland, reported revenue growth of 30% from the rest of its Africa operations in the financial year ending September 2013.

“The world needs to be fed, and Africa is one of the last places with untapped agriculture potential. South African farming land is over-utilised and limited by volatile weather and water supply, whereas places like Zambia have an abundance of quality land,” Piet Mouton, the CEO of PSG Group, a holding company based in southern Africa, told OBG.

Outlook

While the industrial sector has navigated through the global slowdown, it remains under duress. The country should improve on factors that erode its competitiveness such as high administered prices and low labour productivity. Many of the constraints plaguing the sector are not unique to the country, and are even more pronounced elsewhere on the continent. Sub-Saharan Africa is tapped to be one of the world’s fastest growing regions and will require a broad range of consumer and industrial goods over the coming decades. This has placed South Africa, with solid industrial infrastructure, a diverse manufacturing base, and a reputation for quality products, in a leadership position. While government and industry have had an adversarial relationship, they agree that economic integration with the rest of the continent should be a priority, with benefits for the most successful industries, such as automotives and fast-moving consumer goods.

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The Report: South Africa 2014

Industry & Retail chapter from The Report: South Africa 2014

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