Woe­ful state of SA man­u­fac­tur­ing

Tech­ni­cal in­no­va­tion and em­ploy­ment can com­ple­ment each other, and SA needs both

Financial Mail - Investors Monthly - - Guest Column - SI­MON RAUBEN­HEIMER Si­mon Rauben­heimer is a port­fo­lio man­ager at Allan Gray.

Through­out history, man­u­fac­tur­ing has been the path­way for the de­vel­op­ment of na­tions. From the Nether­lands in the 17th cen­tury to the US in the 20th cen­tury and China to­day, it has been fun­da­men­tal to pros­per­ity.

But SA man­u­fac­tur­ing is in a per­ilous state. There are var­i­ous dy­nam­ics that have caused this de-in­dus­tri­al­i­sa­tion. Some go back al­most a cen­tury, but iso­la­tion un­der apartheid made things worse. For ex­am­ple, by the end of the 1980s, SA had the widest range of tar­iffs among a group of de­vel­op­ing coun­tries.

Post-apartheid trade lib­er­al­i­sa­tion ex­posed in­ad­e­qua­cies, as man­u­fac­tur­ers strug­gled to ad­just to an open econ­omy.

To­day, new chal­lenges have made it worse. These in­clude:

Ad­min­is­tered prices: be­tween 1980 and 2007, elec­tric­ity prices rose by 9% per year, or 1% less than in­fla­tion. But since 2007, they have in­creased by 17% per year, or 11% more than in­fla­tion.

Pro­duc­tiv­ity: labour pro­duc­tiv­ity fell by al­most a third since 1967 — and man­u­fac­tur­ing pro­duc­tiv­ity has lagged even that, by 35%.

Labour: the av­er­age an­nual num­ber of work­days lost be­tween 2008 and 2014 (ex­clud­ing 2010) was 5,1m, com­pared with an an­nual av­er­age of only 1,8m for the 13 years from 1994 to 2006.

In­fra­struc­ture bot­tle­necks: rail ca­pac­ity lim­i­ta­tions and port and road con­ges­tion are in­fa­mous. The main­te­nance back­log on roads in “poor” and “very poor” con­di­tions amounts to R200bn. And rolling black­outs cost the econ­omy up­wards of R20bn (or 0,5% of GDP) per month.

Pol­icy un­cer­tainty: there is con­fu­sion about BEE codes, prop­erty rights, min­i­mum wages, labour re­form and the im­por­ta­tion of rare skills. The same es­tab­lish­ment that is guilty of cre­at­ing the con­fu­sion is also re­spon­si­ble for pro­tect­ing the sugar, chicken, ce­ment, textile, cloth­ing, plas­tic and automotive in­dus­tries via tar­iffs or quo­tas.

Ex­oge­nous fac­tors: the weak global re­cov­ery af­ter the 2008 cri­sis si­mul­ta­ne­ously low­ered the de­mand for lo­cal ex­ports and in­creased im­port com­pe­ti­tion — and the rand made plan­ning hard.

These tra­vails are echoed on the JSE. Many listed busi­nesses have dis­ap­peared: Dor­byl, Con­trol In­stru­ments, Racec, Alert Steel, Brikor, Protech Khuthele and Sany­ati are just a few. The rest have mostly lagged the JSE’s Alsi.

Com­pa­nies ex­posed to the met­als and en­gi­neer­ing sec­tors fared par­tic­u­larly badly, fall­ing by 50%-100%, even as the mar­ket rose 2½-fold since 2008.

It is hard to imag­ine that Aveng, ArcelorMit­tal and Mur­ray & Roberts were among the JSE’s top 40 large caps in 2008. To­day, hav­ing fallen by over 90% from their highs, they are small caps.

Ar­gent, Aveng, ArcelorMit­tal and Hu­lamin are now priced at dis­counts of be­tween 45% and 75% to their net as­sets. Yet the av­er­age JSE com­pany trades at a 130% pre­mium to its net as­set value.

There is no easy cure ei­ther.

Some is­sues will ebb; some are per­ma­nent. Real elec­tric­ity price in­creases will re­main higher than their his­toric av­er­ages for a long time. And it is dif­fi­cult to imag­ine wages ris­ing by less than in­fla­tion.

Man­u­fac­tur­ers agree. One re­sponse has been to ac­cel­er­ate mech­a­ni­sa­tion — to do more with fewer work­ers. Food com­pany AVI has more than dou­bled rev­enue in the past 10 years by dou­bling its plant and ma­chin­ery while grow­ing its work­force by only 15%.

The sec­ond ma­jor im­per­a­tive is to grow off­shore. From the small­est of man­u­fac­tur­ing busi­nesses, like Me­ga­tron, to giants like Sa­sol, AECI and Nam­pak, cap­i­tal is be­ing redi­rected over­seas. This trend shows in SA’s cap­i­tal ac­count. Last year, SA com­pa­nies grew in­vest­ment abroad by 17%. For­eign in­vest­ment into SA dropped 23%.

South Africans can­not spend their way to pros­per­ity — the gap be­tween what they con­sume and what they pro­duce has to nar­row.

The coun­try needs to boost in­vest­ment in fixed as­sets (like fac­to­ries, in­fra­struc­ture and agri­cul­ture) by 30%-50% to re­main rel­e­vant. To­day, we in­vest less than 20% of our GDP in fixed as­sets, com­pared with the 25% of lower-mid­dle-in­come coun­tries.

Man­u­fac­turer’s share prices sug­gest per­ma­nent change: profit mar­gins are not go­ing back to what they were. But money flows to where it is treated best, which to­day ap­pears off­shore or in any­thing that can cut em­ploy­ment.

In­no­va­tion that re­duces cost and im­proves ef­fi­ciency must be lauded. But tech­ni­cal in­no­va­tion and em­ploy­ment can com­ple­ment each other. SA needs both.

The per­for­mance of man­u­fac­tur­ers has been cycli­cal and patchy

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