Strikes are not the only disincentive
Car makers weigh up many factors before pulling out
CALM down South Africa. Despite what CEOs say, not every car manufacturer will pull its operation out of the country every time the National Union of Metalworkers of SA (Numsa) goes on strike.
As a rule, it is worth remembering that strike season comes with a steady dose of posturing by all affected parties. There is a reason for it being called strike season.
It is fair to assume that, should the Numsa sign a two-year wage deal, we might see another strike in two years.
Companies know this, and they plan for it, even while considering investing in the country.
As one producer said: “We’ve known for months the strike is com- ing, and we’ve worked very closely with our suppliers to put contingencies in place.” Contingencies would include stockpiling raw materials and final products and scheduling maintenance during shutdowns.
Over the past two weeks, a few automotive production lines were shut, notably General Motor’s Port Elizabeth site, which said it was running short of parts. But so far not a single automotive manufacturer had to cancel exports or domestic deliveries. They were all hesitant to say at what point sales would be affected. Posturing, perhaps?
Of course, violent strikes are not helpful to anyone trying to sell South Africa as an investment. But our troubles run much deeper than a few militant unions running amok every two years for a few weeks.
For car makers, investment decisions are all about the economics. For BMW, the core philosophy is simple: production follows the market. It builds the 3-series in South Africa because more than 50% of the cars it sells in South Africa are that model. In the US, the X5 and X6 are popular — and they get built in the US.
BMW will build a local plant only if it can deliver cars cheaper than those from overseas plants.
Labour would play a part in this decision, but so would factors such as government incentives, the size and growth potential of the local market, the cost and availability of electricity, port and rail infrastructure and export market access.
Earlier this year, Ford, Toyota and GM announced that they would stop manufacturing cars in Australia. The reason was that the strong Australian dollar, high production cost and the small and highly competitive domestic market meant it no longer made economic sense to build cars there. Having a stable labour environment would not counter the economics.
South Africa accounts for less than 2% of the global automotive market. We don’t matter in the greater scheme of things. If investors are ignoring us or pulling out investment, it is because the economics don’t make sense.
Manufacturing is a tough, highly competitive global game. As Uri Dadush, an economist with the Carnegie Endowment for International Peace, says: “Manufacturing is like playing in the top division. If you want a long-term sector that can survive unfettered global competition, you need an investment climate that is suitable for the first division.”
Most developing countries manage to play in the second or third division, which is enough to get you a viable commodities sector. But for a viable, “unattached” manufacturing sector you need to play in the first division.
This, Dadush says, requires a number of factors. Secure property rights, predictable labour markets, a legal system that allows for integration into global value chains, openness to the import of intermediate products, a good logistical system, and openness to foreign investment. Finger-pointing at the unions won’t get us there.