SA can pick the low-hanging fruit to boost manufacturing

SA’s department of trade, industry & competition is pushing on with localisation and import substitution. These policies aim to build and upgrade domestic production to supply domestic and foreign markets, support broader economic development and promote employment growth.

The government’s commitment to localisation was included in the Economic Reconstruction & Recovery Plan of 2021. With this policy in mind SA should identify low-hanging fruit available to it by growing “tradable sectors” such as mining, manufacturing and agriculture to make localisation a reality.

In the first half of 2022, SA’s manufacturing sector sales rebounded, recording a 9.6% increase to R1.41-trillion, compared with R1.28-trillion in the first half of 2021. The food and beverages and automotive divisions were the major drivers behind the rise.

However, manufacturers in communication equipment, electrical machinery and clothing failed to perform. These industries have a low production capacity coupled with high operational costs and are often stifled by the influx of cheaper Chinese alternatives, leading to dismal returns.

The SA manufacturing sector contributes only 13% to GDP, which is unimpressive relative to installed production capacity in the sector. Therefore, a localisation initiative is required.

In the industrial context, localisation is split in two. It is used to refer to the designation by the government of specific products it will procure solely (or principally) from local suppliers. In another context, localisation refers to a policy programme aimed at reducing imports across a broad range of product categories purchased by the government, businesses and households.

The idea of localisation is an attractive one, and it emerges from a chain of deliberations at a legislative level. First, SA is in desperate need of industrial jobs. Second, despite that need a significant fraction of industrial inputs, intermediate goods and consumer products is imported from manufacturers beyond our borders, creating jobs in other countries.

Third, current demand should be channelled back towards local products. Since GDP is made up of the sum of consumption, investment and exports less the cost of imports, anything that reduces imports raises GDP. In this way localisation promotes growth, industrialisation and employment.

The idea of industrialisation through localisation presumes that demand for imported goods can be redirected to domestic firms, promoting expansion in output, employment and expertise in local manufacturing. It is therefore pertinent to identify and profile scalable industries suitable for localisation.

According to Intracen, SA’s medical equipment, printing and paper industries imported R9.8bn, R28bn and R15.3bn worth of goods, respectively, in 2021. Based on these amounts these subsectors could be suitable for localisation initiatives. Demand is also guaranteed as public institutions consume most of the aforementioned goods, thus creating a platform for the government to lead by example in terms of the localisation drive.

Our suggestion is thus that SA’s localisation efforts (current and future) be spearheaded by commodities that are consumed (and imported) in bulk by the government and associated institutions. Public institution procurement structures provide a suitable platform for product uptake, competition and fair pricing mechanisms for domestic firms.

To combat the production of inferior-quality goods as a function of localisation, the government should establish innovation hubs to continuously improve product quality in line with global standards.

The department of trade, industry & competition identified 42 product areas such as printing and publishing, textiles, clothing, footwear, rubber and machinery & electronic equipment for the pilot localisation programme, with R240m mobilised in May 2021 to support the recruitment of technical experts able to identify and implement the proposed localisation initiatives.

If successful, the policy initiative is expected to direct more than R200bn in domestic demand away from imports to locally produced goods. However, a link between SA’s current economic limitations and the baseline localisation requirements is important in determining long-term feasibility of the programme.

The increase in SA manufacturing sales is a positive result for the sector, particularly in positioning it as a high-growth and high-impact sector.

However, despite these positives, production continues to be hampered by electricity supply constraints. In addition, production costs continue to trend upwards, driven by higher input costs (especially imports), which are forecast to continue to exert pressure on margins over the next few years. 

Other challenges linked to the “localisation through manufacturing” agenda include the lack of technical know-how and difficulties sourcing the materials required in production. The rollout of sector-specific training courses at technical colleges could provide a skilled workforce to aid in fulfilling the localisation agenda within the target industries.

Developing strategic sourcing plans through localising the materials supply chain and leveraging domestic demand to establish material supply contracts could provide enough materials to sustain production. If manufacturing gains momentum it will bode well for the workforce of 1.7-million people, as well as for the country.

• Panashe is a senior researcher, and Chiguvare an analyst, at advisory firm Birguid.