The national economy has long been supported by industry, in particular the manufacturing sector. Major successes in both the apartheid and post-apartheid eras have helped build the country. The fact that South Africa has long positioned itself as gateway to African markets, both financially and physically, has also served its industrial sector well. Benefitting from a comparatively strong and clear legal and regulatory environment, and reliable infrastructure, South Africa’s competitive advantages have traditionally managed to largely offset the rising costs of energy and labour in the country. However, that trend is proving increasing difficult to sustain and manufacturing activity has slumped – it accounted for 17% of GDP in 2010, down from almost 21.3% at its peak in 1981, according to a report by Pan-African Investment and Research Services.
POLITICAL WILL: Yet in spite of the gentle decline, there is confidence that this long-term trend can be reversed, and, partially due to the fact that labour-intensive manufacturing can help address the country’s serious unemployment problem, there is significant political will to do so. In the automotive sector, for example, an initiative called the Motor Industry Development Programme (MIDP) has been considered a major success in building up that segment of manufacturing, in part because it addresses the specific needs of car and component makers. The MIDP provides a useful case study for the benefits a targeted government strategy can provide to a sector’s overall performance and output, although similar programmes have yet to be introduced in some of the country’s other major industrial segments.
“The automotive sector in particular has focused and customised support,” said Laurraine Lotter, the executive director of the Chemical and Allied Industries Association. “The rest of us have access to some general tax incentives, but they are not as competitive.”
REPUTATION: One clear competitive advantage that the country is able to leverage is an intangible one: its reputation. South Africa benefits from a global reputation as a quality manufacturing market, as evidenced by the presence of South African brands throughout the rest of the continent. Indeed, South Africa is still considered a portal to Africa – through direct exports, capital investment and brand expansion. The country serves as a headquarters for operations across multiple African nations and as an ideal starting point for expansion-minded industrialists.
One of the more recent examples is Kansai Paint Company, the Japanese firm that in 2011 successfully completed a takeover of Johannesburg-based Freeworld Coatings, the leading coatings company in South Africa (active in the decorative, automotive and industrial segments), in hopes of expanding into Africa in general. “South Africa offers a framework for investors to work in,” Nauman Malik, the newly installed CEO of Freeworld Coatings, told OBG. “The infrastructure and regulatory environment is mature, and that is a big advantage. But if the government wants the country to be the hub for Africa there must be more programmes and incentives. It doesn’t take long for other countries to step up and compete.”
Maintaining the country’s status as a regional gateway has become more of a focus in recent years, as other markets on the continent expand and develop. Improvements the country’s transportation infrastructure and connectivity, expanding labour supplies, and less burdensome regulatory regimes elsewhere in Africa have all sharpened the sense of urgency in South Africa to foster growth in its industrial base.
AUTOMOTIVE & STEEL: Of manufacturing’s 17% share of GDP in 2010, almost half was accounted for by the automotive sector, one of the great economic success stories of post-apartheid South Africa and 1% of global production (see analysis). The sector is highly export-dependent: 70% of vehicles are shipped out, while in the domestic market, about 70% of cars are imports.
South Africa is also a major steel producer – the world’s 21st-largest, according to the World Steel Association and equal to roughly 0.6% of the global supply. More crucially, however, domestic production also accounts for 47% of all African output. The majority of production comes from ArcelorMittal South Africa, the local branch of the Indian-owned global steel corporation, which bought the assets of a former state-owned firm – and in doing so most of the country’s capacity. Competitive pricing has also proven to be an issue in the sector (see analysis).
CONSUMER GOODS: Fast-moving consumer goods (FMCG) account for about 15% of manufacturing, according to a 2011 USAID report. Competition has increased since the opening of the market in the post-apartheid era, and is now dominated by a mix of national and multi-national firms. There are about 1800 food production companies, but 10 have captured 70% of industry turnover. Sales reached $27.07bn in the first nine months of 2011, up from $25.02bn in the first nine months of 2010, according to the USAID report.
Global manufacturers with a sizeable local presence include well-known brands such Nestlé, Parmalat and Kellogg’s. However, the sector is also replete with homegrown brands with a regional or global footprint, including conglomerates such as Pioneer Foods, Tiger Brands and SABM iller. Foreign brands without a local manufacturing capacity often use tie-ins with a domestic firm to gain market access. Knorr-branded packaged foods are made and distributed through a licensed local company, Robertson’s, for example.
FMCG producers in Africa sell to a market that is very sensitive to prices, which impacts the ability of companies to expand product lines, according to Peter Matlare, the CEO of Tiger Brands. “Lower-end consumers, because their disposable income is limited, are less risky and want to be assured that products purchased will provide the functional benefits,” he said. “They therefore have a smaller brand repertoire, sticking to products that are tried and tested.” That said, local consumers have a different budget than customers in other African countries because workers are likely to be paid monthly as opposed to weekly, or even daily, according to market research by Nestlé. This means that while people in many African countries shop for small packages – including single servings – there is more demand for larger-size packages of goods in South Africa.
LOCAL COOPERATION: Fragmented and largely informal retail sectors across much of the continent make distribution somewhat difficult, often spurring FMCG manufacturers to work alongside local distributors which then resell goods to neighbourhood stores, traditional market stalls and street vendors. In other cases, producers interact directly with these local vendors – Nestlé, for example, has enlisted more than 1500 vendors in South Africa, selling products such as ice cream.
One of the biggest home-grown success stories in South Africa’s FMCG sector is SABM iller, formerly South African Breweries, which has emerged as the world’s second-largest brewer, after a years-long period of acquisitions. The most recent was the $10.9bn purchase of Foster’s Group of Australia in September 2011. Forecasts for the global beer market in 2012 are subdued, based on rising costs for grain and weak demand expected in the US and Europe. However, while rivals such as Heineken and Carlsberg have reduced sales expectations for the year, SABM iller managed to meet expectations as sales gains in African and Asian markets offset declines in more developed markets.
CHEMICALS: The South African chemicals sector is also a key component of the industrial base, and a legacy of a decades-old priority to develop this activity locally. The country’s industry is the largest on the continent, contributing about 5% to the nation’s GDP, and comprising approximately 25% of sales of manufactured goods, according to data from the Chemical and Allied Industries Association.
Sasol, one of the sector’s largest players in industrial chemicals, was established in 1950 by the newly formed apartheid-era government and mandated to mine and commercialise natural resources and chemicals, as well as to ensure that South Africa could tap into its domestic-energy potential and achieve a degree of self-sufficiency. South Africa has no oil, but an abundance of coal. Sasol used and advanced a technology called the Fischer-Tropsch Process, named after two German chemists who came up with it in the 1920s, to process its coal into liquid fuels. Sasol has since been privatises and has emerged as one of the major proponents of coal-to-liquids and gas-to-liquids technologies, maintaining a presence in a number of gas-rich countries, such as Qatar and Nigeria.
CHALLENGES: Industrial output is highly dependent on exterior sales, and as about a third of exports go to Europe, the ongoing sovereign-debt crisis there has had a significant impact on forecasts for local manufacturers. Currency fluctuations also represent a concern, particularly given the links between the rand and the euro. Industry players would prefer a weaker rand, to make exports more competitive, although depreciation appears unlikely at the moment. According to Stewart Jennings, the chairman of the industry lobbying group Manufacturing Circle, “A competitive currency is one of our main lobbying platforms.”
The rand is part of an oft-cited quartet of challenges facing the industrial sector. The other key complications are rising electricity costs, infrastructure bottlenecks and wages. Electricity costs, for example, have risen from R0.32 ($0.039) per KWh in 2010 to R0.40 ($0.049) per KWh in 2011, a 26.3% jump. Forecasting by the Monetary Policy Committee of the South African Reserve Bank, the central bank, factors in tariff increases of 17.3% for 2012 and for 2013.
The potential introduction of a carbon tax also may affect manufacturers’ fiscal burdens, both directly and indirectly. A report from consulting firm Deloitte suggests a tax could reap R82.5bn ($10bn) in revenue from companies based on a rate of R165 ($20.20) per tonne of carbon-dioxide emissions. Almost half of that total would come from Eskom, the national electricity monopoly, whose CEO Brian Dames said in 2011 that the increase would be passed to consumers, further exacerbating price hikes for industry.
The impact of rising wages is in part a factor of South Africa’s storied labour movement, which not only has played a central role in recent history, but is also in a prominent position in setting current government policy. The Congress of South African Trade Unions, the largest umbrella group for unions in the country, help sets policy as part of a coalition along with the African National Congress, the ruling party, and the South African Communist Party.
Strikes and extended bargaining sessions are a regular feature of economic life in South Africa, and the disruptions, though rarely lasting longer than a few weeks, are frequent enough to dent productivity and profitability. Many unions bargain over annual contracts instead of multi-year ones, which means negotiations – and potential strikes – are more frequent.
According to Johann Smidt, the managing director of paint brand ICI Dulux (South Africa), issues with labour is one of the justifications for further capital investments in automation. “As one of the top employers in the country, we would prefer not to move in this direction as the country desperately needs more job creation and retention,” he told OBG.
MODEL OF PROGRESS: Good news on this front came in 2011 in the form of a labour agreement in the textile sector considered to be a innovative model that could be replicable in other sectors. The South African Clothing and Textile Workers Union agreed in October 2011 to a trial period in which new employees will be paid 20-30% less than existing staff. In return, employers will create 5000 new jobs by the time the trial expires in March 2014. Provisions in the agreement guarantee that employers cannot use the scheme to replace older workers with younger and cheaper new entrants.
Such dual-track salary schedules had been resisted by unions elsewhere in the South African economy, but the urgency has been particularly acute in the textiles sector, where 160,000 jobs have been lost in since 1996, according to local media in October 2011.
Another sign of increasing labour market flexibility came from an agreement between supermarket chain Pick ‘n’ Pay and the South African Commercial, Catering and Allied Workers Union. A November 2011 deal allows the retailer to employ a workforce of both full-time and part-time staff, and in return agreed to back off a plan to lay off more than 3000 workers.
“Unions are seeing the reality that companies are saying that the costs are too high,” said Hilton Lazerus, the head of the lending unit to chemicals-based industries at the Industrial Development Corporation (IDC). “There are concessions being made on both sides.”
For Jennings, it is worth the time to court labour leaders and work together. “A lot of the things the unions say are things we also identify with,” he told OBG. “Business has to engage with labour.”
PUBLIC POLICY: Although problems in the industrial sector have been partially blamed on a lack of coordination and communication between government departments and agencies, there is a distinct sense of political capital in support of the sector. The Department of Trade and Industry (DTI) must address industrial policy and the decline in manufacturing. It has expressed its big-picture priorities and plans through its Industrial Policy Action Plan (IPAP), which provides a 10-year outlook and a three-year strategy outline.
The latest IPAP highlights ambitious job creation as the main focus, in line with the New Growth Path (NGP), a November 2010 document from the Ministry of Economic Development. Slow job growth between 1994 and 2008 has spurred the government to increase the number of employment opportunities in the economy by 5m by 2020. The NGP cited manufacturing among several sectors with the most potential to grow.
The IPAP 2, as the second three-year period is called, expires in 2012/13 (ending at the second quarter of 2013), and has projected that its programmes will add 43,000 direct jobs and 86,000 indirect ones to the economy. The IPAP 2 states, “There has been growing recognition that industrial policy needs to be scaled-up from ‘easy-to-do’ actions to ‘need-to-do’ interventions, to generate a new path of industrialisation.”
The assessment found that economic growth in recent years in South Africa has been dependent on services and consumption, and this is one area in which the DTI hopes to make a difference. The department believes that private sector lending is driving the shift to consumption and services-driven activities, and that more money should be earmarked for manufacturing.
FINANCE: An obstacle to this is that banks lack access to longer-term financing, which is required for capital-intensive investments into industry, as it takes longer to profit from a new factory than from a new mall. One solution has been to rely on non-commercial banking, with the DTI indicating that competitive emerging markets and development banks are playing a larger role in economies such as South Korea and Brazil.
As a result, there is a renewed focus on South Africa’s IDC. This development bank has agreed to set aside R66bn ($8.1bn) for the next five years for priorities set by IPAP and NGP. The bank aims to disburse the funds in loans of R1m ($122,400) or more. “Terms are generally for about five years, and at varying rates that start at about 3% below the country’s benchmark,” said Mazwi Tunyiswa, who heads the development bank’s unit specialising in metals, transport and machinery.
INDUSTRIAL ZONES: Industrial Development Zones (IDZs) have become a recognisable component of South Africa’s industrial sector, although their performance hitherto has been of mixed success. The DTI has invested R7bn ($856.8m) in three coastal-city industrial zones – at Coega, in Eastern Cape State and located at roughly the midpoint between the country’s eastern and western extremes; at East London, on the south-eastern coast, and at Richards Bay, on the north-eastern coast. The zones have attracted R11.8bn ($1.4bn) in investment by 40 companies, although a study by the University of the Witwatersrand found that much of that total was accounted for by existing investors shifting activity to the zones as opposed to greenfield projects.
The DTI began an internal review of their policy on industrial zones in 2007, which concluded with a 2012 report suggesting the need for more coordination between government actors. Confusion over tax incentives, as well as locating the zones in economically disadvantaged areas instead of according to the needs of companies, has limited the success of the zones.
Changes to policy could also bring more support for new ventures, strategic locations, such as close to ports or raw materials, and possibly a clustering strategy. For example, a zone proposed to capitalise on the country’s platinum deposits, the world’s largest, is under consideration. Platinum could be used to make fuel cells, and Anglo American Platinum, which trades on the Johannesburg Stock Exchange, is the world’s largest primary producer of platinum.
In February 2012 the government passed the Special Economic Zone (SEZ) Bill to facilitate the creation of new zones that will expand upon the work carried out by IDZs and attract further investment. Using a wider geographical focus to help spread industrialisation beyond traditional urban centres, the SEZs will focus on innovation and will be organised around specific sectors. Additionally, the bill provides for the establishment of a SEZ board to regulate policy, as well as a fund to offer additional incentives to businesses. Some R2.3bn ($281.5m) is due to be allocated to the SEZs over the next three years.
OUTLOOK: For the first 11 months of 2011 output rose 7.7% in comparison to the same period of 2010, according to Statistics South Africa. The fastest-growing manufacturing sectors included electrical machinery; radio, television and communication equipment; and automobiles and components, each of which expanded by 10% or more. A continuation of these short-term trends will depend on a combination of factors in the global economy that remain outside the control of South African industrialists. Domestic risks to the short-term outlook are a factor largely of rising costs of business and regulatory uncertainty – all of which are compounded by a hazy forecast for global demand in certain segments.
Improving the long-term outlook, however, is what most industrialists are focused on, and where the discussion is most heated, but with the government pouring an increasing amount of resources into the sector, hopes are high that results will show in the near future.