EDITORIAL: Dismal data show manufacturers must compete
While incentives and protectionist measures have a role to play, this won’t address the fundamental challenge facing local industry — a decline in global competitiveness
The latest manufacturing data shows that production in seven out of 10 sectors declined in June, with weak local demand, cost pressures and slowing global orders weighing on activity.
Accounting for more than 10% of formal employment in the country, manufacturing remains an important sector, and various government initiatives over the years have been designed to help stimulate production and job creation.
Yet despite the various efforts, manufacturing employment has been in decline over the past decade. In 2008, manufacturing accounted for more than 14% of formal sector jobs. Since then, nearly 300,000 jobs have been lost, with only 1.744-million people employed in the sector today.
While incentives and protectionist measures have a role to play, this won’t address the fundamental challenge facing local industry — a decline in global competitiveness.
SA’s share of global steel production has declined from nearly 7% in 2007 to 3.7% in 2017
A good example is the local steel industry, where SA’s share of global production has fallen from nearly 7% in 2007 to 3.7% in 2017. Local output has dropped by 31% over the same period, to 6.3-million tonnes in 2017, at a time when global production expanded 25%, according to data from Worldsteel.
ArcelorMittal SA (Amsa), the country’s largest steelmaker, last week reported its first interim profit in six years, mainly thanks to an improved global market and import tariffs leading to lower volumes of imported steel. The industry has also been named a so-called designated sector for government procurement, meaning local steel producers must enjoy preference when any government entity issues a tender for its products.
For Amsa, the strong international market and increased protection against imports have provided interim relief, but it will do little to ensure the sector’s long-term viability.
For any manufacturer to survive, it needs to be globally competitive. For Amsa, this means a reduction of $50 per tonne — or about 10% at current exchange rates — in its production costs.
The steelmaker starts on the back foot, with electricity, rail and port tariffs higher than those of its peers internationally. These costs are largely out of its control, and it therefore needs to find other places to trim fat.
Its other major input costs are raw materials – iron ore, coking coal and scrap metal, and labour. To a large extent, prices for raw materials are linked to global prices, leaving little room to manoeuvre. Amsa does enjoy a preferential supply agreement with Kumba Iron Ore, which gives it an advantage. But it also has limited scope around wages, as these are set on a sectoral basis through a bargaining council.
It is here where skills development and investment in technology separates the wheat from the chaff. Being able to do more with fewer inputs — being more productive — is part of what still makes Germany and South Korea steel-making powerhouses, despite higher labour costs and limited natural resources.
Imposing an import tariff to provide protection — or, as the DA is proposing in its latest measures to revive the manufacturing sector, allowing a price premium of up to 20% for locally manufactured goods procured by government entities — may provide some short-term relief.
However, these measures ignore the knock-on effect of higher costs on other parts of the domestic economy. It also avoids dealing with the real issue, SA’s lack of competitiveness, as illustrated by the country’s ranking of 53rd out of 63 countries in the latest Institute of Management Development’s World Competitiveness Yearbook.
Business’s job is to ensure it invests in the people, skills, products and processes that can compete internationally. The government’s focus should be on creating an economic environment where all manufacturers can start on an equal footing with their international counterparts. That means improving the quality and cost of our infrastructure, from power and ports to telecommunications and roads; improving the quality of our skills; and easing the regulatory burden on companies, and not spending time and money on incentives and protection measures that benefit only a chosen few.