Lower labour productivity destroying manufacturing

MANY South Africans are extremely worried about the high unemployment rates in the country, where the official unemployment rate stands at around 34%. The expanded unemployment rate is at about 44% and the youth unemployment rate hovers around 60%.

It is against this background that some people have incorrectly concluded that the South African government has deliberately planned to de-industrialise the country’s economy to focus on financial services.

The latest announcement by the SA Revenue Service that we had a trade surplus of R19billion in September was encouraging, seeing that we had more exports than imports.

What is more significant about this latest trade surplus is that exports of motor vehicles were one of the major sectors that accounted for a significant part of these exports. The reason why this is important to note is that the motor vehicle manufacturing sector in South Africa is one of the most globally successful industries, through which many hundreds of thousands of people are employed.

The three most successful manufacturing sectors that form almost 70% of manufacturing in South Africa begin with food and beverages, by far the largest component of our manufacturing. The second largest component is that of petroleum and chemicals, and the third largest component is basic iron and steel.

The picture which emerges here is that the fast-moving consumer goods market forms the backbone of South Africa’s manufacturing sector, which is why products from huge multinational corporations like Unilever, Procter & Gamble, Nestlé, Colgatepalmolive, British American Tobacco and Coca-cola are regarded more as “household names” in South Africa than many equally successful products by South African businesses.

Why is it that the job-creating manufacturing sector has been significantly underperforming compared to other sectors like the financial services sector, where there has been significant jobless growth over the past few decades? There are a number of reasons which have been cited for the decline in the manufacturing sector. Eskom load-shedding has been cited as the major cause of the decline in the manufacturing sector and other sectors of the economy.

It is precisely for this reason that Minister of Finance Enoch Godongwana announced at last week’s Mediumterm Budget Policy Statement that the national government was going to absorb at least one-third to twothirds of Eskom’s current debt of R400 billion. This immediately led to Moody’s international credit rating agency upgrading Eskom’s credit rating to positive, which is the very first time Eskom has been so upgraded by Moody’s in 15 years.

We hope this will help Eskom fix most of its current operational challenges, such that there will be less load-shedding in the future. It will, however, be most disingenuous to claim load shedding can be blamed the most for our manufacturing sector woes. Various studies have clearly shown that labour productivity has either significantly reduced or remained flat over a number of decades in South Africa, while salaries have been significantly rising.

This has been good motivation for the manufacturing sector to quietly and gradually move to automation, which seems to be a more suitable alternative as robots are more reliable, more accurate and never go on strike for higher salaries.

Some further research on why manufacturers are battling to survive in South Africa shows that there is continuous lower total capacity utilisation in South Africa – it is alleged that there is insufficient demand for some of the goods being produced in the country.

There is also a shortage of raw materials for some of the products being produced. This has resulted in angry customers who, in turn, abandon their demand for such locally produced products, and ultimately leads to less profitability for such domestic producers. On the other hand, these domestic manufacturers are afraid of holding too much inventory because they find it costly to store such products, and also find it difficult to sell such products. The net effect of these issues is that many smaller domestic manufacturers battle to reach the appropriate economies of scale that are required for them to become profitable. The South African government finds it uncomfortable to protect the interests of South African manufacturers in the same way as our trading partners don’t hesitate to use various protectionist measures.

It is on these grounds that the local chicken market has been flooded by cheap imports from countries like Brazil which literally closed down Rainbow Chickens. The same can be said about the local clothing and textile industries which have been shut down by cheap imports from India and China.

For South Africa to take its manufacturing sector back to its glory days, the manufacturing industry and the government must start making very difficult decisions to reverse many of the problem areas, including resorting to tough protectionist measures that many of our trading partners implement with impunity.

The age of automation has arrived, and it is more reliable. For how long will people continue to be in denial of the issue of lower labour productivity destroying our manufacturing sector?