By Pule Pule – Sector Specialist: Manufacturing at the PIC

South Africa (SA) needs solutions to pervasive unemployment, inequality and poverty. Regrettably, these have become our triple problem. The current socio-economic environment suggests there is no silver bullet to solve these intractable hallmarks that have come to define our post-democratic development path. The reality is that many interventions are required. A determined focus on manufacturing is one possible intervention to improve growth. Globally there are sufficient examples of countries that have experienced significant developmental outcomes when manufacturing capability improves. In advanced economies like the United States, Germany and Japan, manufacturing steered their development. By prioritising manufacturing, China, Taiwan and South Korea experienced rapid, sustained growth.

SA’s manufacturing sector has, unfortunately, declined over many years. As a percentage of GDP, manufacturing value add declined from 21% in 1994 to 12% in 2021, suggesting that the country has been deindustrializing. The number of manufacturing jobs at the end of 2022 declined by 12%, compared to the same period in 2009. The sector employs over 1.6 million people: 55% semi-skilled, 22% skilled and 23% low-skilled labour.

In a country plagued by high unemployment, more resources must be rallied to reverse the declining trend. The sector is an important growth catalyst for several reasons. It provides linkages to other sectors of the economy, including agriculture and the services sector, and when manufacturing performs well it stimulates growth in other sectors. According to the National Treasury, manufacturing has a domestic output multiplier effect of 1.4 and an employment multiplier effect of 1.7 for unskilled jobs. It has the potential to create a considerable number of skilled and unskilled jobs and it drives research and innovation.

In terms of competitiveness, SA is an underperformer among emerging economies. In 2020, SA ranked 52 out of 154 countries in terms of Competitive Industrial Performance Indexes –behind China (2), South Korea (5), Taiwan (8), Russia (35), India (40), and Brazil (42). SA’s key advantage, however, is that its manufacturing base comprises a diverse set of industries where agro-processing, automotive, chemicals and metals industries are well advanced. Geographically, the country is far from major Western and Asian markets which makes it tough to compete in the production of low-value items. Nonetheless, SA has retained comparative advantages in several industries including chemicals, defence, machinery and transport equipment, as well as food and beverages. It is important that these industries remain competitive and continue to supply products to international markets. One way of improving competitiveness is by embracing technology that improves productivity such as industrial robots and 3D printing. Regulatory and structural headwinds that manufacturing firms face need to be resolved. These include access to reliable and affordable transportation to the ports, a solution to our persistent electricity crisis and a more stable domestic labour market.

Incentivising growth

Incentives are an important government policy intervention to stimulate investment in manufacturing. In the 2021/22 fiscal year, the Department of Trade, Industry and Competition spent R11.6 billion on various programmes. Industrial financing amounted to R6.5 billion or 55.7% of total expenditure. Manufacturing incentives amounted to R3.6 billion. A substantial portion of financing goes towards programmes linked to the automotive and agro-processing sectors as well as to the black industrialist program. These incentives drive investment and without them the local manufacturing sector would not have been able to create or retain jobs, especially in a post-COVID-19 pandemic period still marred by uncertainty. In the automotive industry, the incentives were instrumental in unlocking investments for the production of new vehicle models by multinational automotive manufacturers and suppliers. For black industrialists, the incentives are a crucial source of equity needed to make projects bankable for various development finance institutions and other funders. Incentives are having a meaningful impact in promoting investment and in preserving some of the industrial capacity in the country. Incentives also attract private sector investment. In 2021/22, R34.2 billion in private sector investment was leveraged highlighting the enabling role of state incentives.

Manufacturing in Asia

One lesson from Asia and the elevated levels of growth in China, Japan, Singapore and Thailand, is that rapid development requires a dedicated and deliberate commitment to grow manufacturing. Manufacturing value add, as a percentage of GDP, stands at 27% in China, 20% in Japan, 21% in Singapore and 27% in Thailand. Asian countries did several things: first, learning from others is vital. Asia’s industrial development was preceded by the industrial revolution in countries like Britain and the United States. Asian countries learnt from these and in the process acquired skills and became acquainted with critical technologies. Second, the state took the lead in planning, financing, and building catalytic infrastructure and industries. Alternatively, industrial policies were geared towards attracting supplementary funding from foreign sources towards development. Third, export orientation was one of the key focus areas. Exports allow companies access to customers at a global level and helps achieve economies of scale. Although local context matters, learning from the experiences of others will assist.

Manufacturing in Africa

The continent presents a significant market for manufactured goods with a current population of over 1.4 billion. Africa’s population is expected to grow to 2.5 billion by 2050. However, economic linkages and trade bonds within the continent are not strong. Initiatives such as the African Continental Free Trade Agreement (AfCFTA) are beginning to forge collaboration and could spur economic growth and industrialisation. The AfCFTA will be the largest free trade area since the formation of the World Trade Organisation. Some of the trading bloc’s expected benefits include increasing trade among African countries, stimulating production through the development of regional value chains, and strengthening the capacities of African companies to access and supply world markets. Apart from countries such as SA, Egypt, Morocco and Kenya, the manufacturing sector remains underdeveloped in many countries. Africa is also the least developed continent which means a lot more work needs to be done around infrastructure development and building industries. Industries that are consumer facing and those that provide inputs into infrastructure development stand to benefit. Therefore, potential investment areas include agro-processing, clothing and footwear, pharmaceuticals, electronics, and cement production.

To get manufacturing right, there are many variables and many moving parts. For SA to reverse its manufacturing decline, the engine must fire on all cylinders. Fortunately, there is a history of world-class manufacturing in the country and there is a solid base from which to build. Going forward, numerous things need to be done urgently and done right: electricity and water must be available. The rail and port system needs to operate efficiently. University scientific and engineering research must be aligned with industrial needs. Business, labour, and government need a common ground. Funding and technical assistance must be accessible to emerging businesses and start-ups. Government policies must address challenges faced by industries. Consumers need to consciously procure locally manufactured goods.

The effort to boost manufacturing is therefore a collective one. This would require everyone to do their bit within their sphere of control and influence. Without a collective effort and the resolve to take the steps necessary to promote local manufacturing, it will not be possible to create the jobs that are needed to reduce inequality and lessen poverty.

As the biggest asset manager on the African continent, whose investment activities inform and shape the SA economy, the PIC continues to invest in the manufacturing sector and has investments in listed as well as unlisted companies. Currently, the PIC has exposure in numerous manufacturing sub-sectors including beverages, cement, chemicals, food processing, paper and packing, as well as pharmaceuticals. The PIC seeks to sustain and grow the manufacturing sector in line with government policies and national programs.