Local manufacturing constraints

SA's exports to Germany, one of its largest trading partners, fell by 13% between January and November last year, a decline to R34,6bn from the R39,8bn achieved in 2011, according to SA Revenue Service data. But over the same period last year, Germany's total imports increased by 2%, according to its official statistics.

This suggests that SA-specific factors were to blame for the sharp drop in its exports to Germany, says Andreas Künne, who heads the German embassy's department for economic & global issues.

"You have soaring electricity costs, your infrastructure is ageing and your skills base is not improving the way it should," Künne told local manufacturers at Stellenbosch University's fifth International Conference on Competitive Manufacturing last month. "Also, if you look at the labour cost per unit in SA, you will find it has increased by 134% since 1994. In Europe, this figure over the same period actually decreased, because of improvements in productivity."

In 2012, SA's manufacturing growth averaged a mere 2% (compared with 2,6% in 2011 and 5% in 2010) while export growth for the first 11 months was only 3% up on 2011. Though this is not surprising, given global weakness and a multitude of domestic constraints, the upshot is that export volumes are still trailing 13% below their 2008 peak.

SA Chamber of Commerce & Industry CE Neren Rau says a mix of factors is to blame. While he agrees that the most significant has been SA's loss of price competitiveness, he feels the global slowdown and the past performance of the rand have also played a role.

Manufacturing Circle CE Coenraad Bezuidenhout says there is no question that the competitiveness of SA manufacturers is being undermined and margins are being squeezed. He, too, blames the past performance of the currency, but also rapid, bunched-up administered price rises and the fact that labour cost increases have outpaced gains in productivity.

The manufacturing lobby group is calling on national treasury to undertake a fiscal review to ensure that the way SA finances the expansion and maintenance of infrastructure contains cost increases for users.

It also wants industrial customers to be afforded industrial policy incentives to compensate them for the rapid escalation in electricity prices, since this "poses a severe threat to cost competitiveness, and ultimately employment, in the sector".

At the same time it has warned that a myopic approach to sectoral labour disputes and protracted and violent strikes could render manufacturing vulnerable to further job losses.

Rau says the biggest risks to SA's manufacturing competitiveness are labour issues and electricity price increases. He notes that multinational firms operating in SA benchmark their performance and cost structures against their operations in other countries. "Global shareholders aren't in business for social reasons. This is a business fundamental not appreciated in SA by many government leaders," he says. "To think that investors will keep on investing in SA no matter what is just foolish."

since 2008. Despite adding about 3000 jobs in the final quarter of 2012, (during which the sector grew by an annualised 6,6% quarter on quarter compared with just 0,5% in the third quarter), the sector's employment prospects remain bleak.

Most telling is that the employment subindex of the Kagiso purchasing managers' index has remained anchored in negative territory for more than four quarters (on a quarterly average basis), suggesting that most manufacturing firms are not willing to hire new workers.

On a more positive note, there are signs of an uptick in global manufacturing conditions as well as in domestic sales and business activity.

In addition, production capacity utilisation by large manufacturers jumped to 83,8% in the final quarter of 2012 - a level that would normally signal a rise in investment activity. Moreover, SA exports to Southern Africa were up 26,2% in the first eight months of last year. Economists are hopeful that ongoing expansion of SA business activity to the region and increased infrastructural investment will help raise manufacturing activity this year.

Source: Financial Mail