Local manufacturers look north during SA recession

© Marcin Balcerzak – 123RF.com

Second quarter GDP data released by Stats SA shows that the manufacturing sector's output has shrunk by 6.3%, the second quarter in a row that negative growth has been recorded. In addition, Stats SA's figures also reveal that the sector's contribution to GDP in the quarter was only 12.5% - a lack of performance that economists have laid partly on load shedding, fluctuations in the rand, and steadily increasing production costs, said Solomon Gounden, Head of Foreign Exchange, Commercial and Business Banking of Standard Bank.

"It is against this background that more manufacturers are looking to Africa as an export destination to increase sales and the sustainability of their businesses. Like other investors, manufacturers are looking to infrastructure development, which is the base of the high growth being experienced in some African economies, to reduce some of their woes by offering opportunities to take advantage of the demand for imported capital goods, construction services and even agricultural products such as fertilizers.

"This demand has also encouraged manufacturers of fast moving consumer goods (FMCGs) to examine opportunities. The driver in this market is the nascent consumer renaissance that is developing and offering new markets for their products. The attraction is the expanding middle class in key economies where people have higher levels of discretionary income.

"Even though the continent presents opportunities for local manufacturers that have the advantage of being African and, therefore, are more familiar with the way business is done on the continent, a cautious approach to expansion across borders should still be exercised.

Assess levels of demand

South African manufacturers contemplating a move into Africa must first assess levels of pent-up demand and decide whether it would be more advisable to establish manufacturing capabilities across the continent or, more cautiously, service the markets from South Africa according to import demand."

The pattern emerging is that inter-Africa trade is particularly strong between South Africa and its neighbouring states, and this has now extended to markets that are further afield from our borders, said Gounden.

These trading patterns have emerged as South Africa has exceptionally strong relationships with SADC countries. Now, with pressure to open new markets, the desire for manufacturers is to grow their trading profiles beyond these states and move to the north, east and west of the continent as opportunities arise.

"This desire for expansion is, however, accompanied by several challenges. The strong relationships that exist with our neighbouring states are reinforced by established infrastructure in these states. It is, therefore, relatively easy to transport goods across borders. It is much more challenging to supply goods to markets like Angola. Haulage must take place over considerable distances and border crossings present further challenges."

Considerable investment

Non-tariff barriers and other issues, such as poor infrastructure and long distances, make the investment in processes and time considerable. For some, this required investment could be enough to deter investigating trading opportunities any further.

"However, many South African manufacturers have overcome these challenges and entered markets like Angola, which have large middle classes and high levels of purchasing power. While some major South African manufacturers have established factories in Luanda, others have used the burgeoning demand to export products and boost their production capacities in South Africa.

"Market sectors that have shown exceptional growth are those associated with packaging, production and distribution of soft drinks and production of consumer items."

The problems associated with intra-Africa trade are the subject of initiatives by various countries and trading blocs to remove barriers. These developments include agreements on tariffs and the establishment of free trade areas between the SADC, the EAC and COMESA.

"Although these steps represent a significant step forward in promoting continental trade and open the way for South African producers to supply new markets , there are also other challenges that have to be addressed" said Gounden.

These include:

• The differences in quality standards existing across markets;
  
• The need to understand consumer preferences and priorities;
  
• The realisation that simply replicating items on offer in South Africa is not enough in a continent where each market has unique preferences;
  
• Addressing the infrastructure shortfalls presently having a negative impact on effective trading practices and the movements of goods in Africa; and
  
• The duplication of productive capacity. This can occur where some potential markets have industrial activities and access to commodities that mirror South Africa's activities.

"Other major considerations are likely to arise when trade becomes liberalised. South African manufacturers could find themselves, in future, competing in markets where the status quo has changed. This could occur if changes in regulations allow international competitors to enter markets where South Africans, due to tariff agreements and proximity to neighbouring countries, had previously enjoyed unfettered access to markets.

"There is no doubt that if the African renaissance continues to gather momentum, South Africans will be quick to identify and exploit opportunities as they arise. The expertise exists within our country for challenges to be addressed and overcome; however those who will benefit the most will be the courageous 'early adopters' who realise the potential of Africa and have the courage to enter new markets," said Gounden.