KAREN KEYLOCK: The compelling case for raising investment in local industry

The world has been a global village for decades. Then came the Covid-19 pandemic, highlighting the risks and threats arising from the heavy reliance many economies had placed on sourcing their goods internationally — often at the expense of local industry. 

According to Santam’s “Most Loved Local” survey, released in December 2023, 97% of SA consumers believe it is important to support local. It is likely due to a renewed awareness of the role of local businesses and the effect of international supply chain disruptions during the pandemic.

This aspiration is not limited to consumers and is not simply a “feel good” goal. A study commissioned by Proudly South African, the country’s national “buy local” campaign, conducted by Iraj Abedian’s Pan African Investment & Research Services, highlights the positive effects of domestic manufacturing investment on GDP, fiscal revenue, real wages and consumer inflation. It concludes that the SA economy would benefit from an increase of just 10% in investment spending in the manufacturing sector.

To this end the government’s Retail, Clothing, Textile, Footwear & Leather Master Plan 2030 has the goal of increasing local procurement from 44% to 65% by 2030.

Proudly South African was born out of the 1998 Presidential Job Summit and established in 2001 to influence procurement in the public and private sectors, increase local production, and encourage consumers to buy local. Proudly South African also initiated an import replacement drive that focuses on what can be made in SA rather than being shipped here from elsewhere.

Cheap imports

In the private sector large enterprises such as Mr Price, Pick n Pay, TFG and Woolworths have committed to supporting the local textile manufacturing industry through procurement and partnerships. Pick n Pay says locally sourced goods represent 40% of total clothing sales and local retailers are hoping to source 60% of all textile products locally during the next five years.

It is expected to create about 121,000 jobs in the textile industry by 2030.

The Most Loved Local report’s findings show that though consumers may want to shop at stores that support local, almost two-thirds of respondents saw economic challenges as the biggest obstacle to supporting these businesses, as cheap Chinese imports are hard to beat.

But people don’t understand the economic effect of their purchasing decisions. By buying Chinese-made products you are in effect helping the Chinese to create jobs. China has 1.4-billion people, with an unemployment rate of 3%-6%, a far cry from SA’s 33%.

Recognising this conundrum, the SA Revenue Service recently closed a tax loophole that allowed orders from Chinese e-retailers such as Shein and Temu of less than R500 to be taxed at a flat rate of 20%, with zero VAT. This meant local producers and retailers could not compete on price, creating an unfair advantage for international online retailers. From September 1 the tax rate on all imports, regardless of value, increased to 45% plus VAT.

Considerable potential

Takealot owner Naspers and local textile and fashion players have welcomed the move, stating that Temu and Shein are threatening SA’s efforts to reindustrialise and localise manufacturing. Governments worldwide, including the US and in the EU, are moving to do the same, recognising the harm these enterprises are doing to local economies and industries.

Despite SA’s considerable agricultural potential and significant exports, there is a discrepancy between demand and local production for many food products. This gap is being filled by imports — the highest of which are wheat, corn, rice, meat, nuts, fresh vegetables and sugar.

A revitalised sense of patriotism is driving a trend towards increased local food production. The Agriculture & Agro-processing Master Plan has identified agroprocessing as a key driver for growing the economy, creating jobs and promoting the growth of small and medium enterprises (SMEs).

Similarly, the implementation of the department of trade, industry & competition’s Poultry Sector Master Plan has caused the industry to invest R800m to upgrade production, resulting in the production of an additional 1-million chickens weekly.

The Sugarcane-based Value Chain Master Plan has drawn commitment from large users of sugar to procure at least 80% of their sugar needs from local growers, causing a rise in local production and a decline in imported sugar last year.

There are also commitments from private fast-moving consumer good (FMCG) retailers and manufacturers to support local procurement. Pick n Pay is considering buying produce directly from farmers, which will also save on value chain costs. SA Breweries has committed to sourcing at least 95% of what it uses to manufacture its products in SA. That includes sourcing locally grown barley and hops, and using local manufacturers of glass bottles and labels.

The compelling reasons for retailers to source locally include the following:

• Greater control and increased business resilience as susceptibility to global shocks is significantly curtailed.
• Reduced carbon footprint and lower handling, storage and logistics costs.
• Marketing opportunities driven by more consumers favouring brands with a social conscience.
• The satisfaction of knowing you are contributing directly to SAs social upliftment and economic growth.

One of the barriers to achieving a stronger, more competitive local supply chain is access to funding, but private sector funding is readily available through the banking sector. And, as the Pan African Investment & Research Services research shows, it presents big benefits for producers, retailers and the economy.

• Keylock is national retail services manager at Nedbank Commercial Banking.