Innovation key to sustaining manufacturing sector

By October 21, 2015 Industry News
Photo: Bloomberg

Photo: Bloomberg

Noting that the South African manufacturing sector was going through a structural adjustment phase, rather than a cyclical downturn, Steel and Engineering Industries Federation of Southern Africa (Seifsa) CEO Kaizer Nyatsumba has called for a rethink of South Africa’s approach to manufacturing, arguing that innovation was crucial for the future survival of this economically pivotal industry.

“For recovery to start in the sector, export markets need to recover and domestic demand from mining, the automotive sector and construction has to resume. Far more important, however, is the need for South African manufacturing to be far more efficient in its production processes.

“While there are certain factors that are not within their control – such as the comparative cost of South African labour, power supply and various administered costs – local manufacturers will have to embrace advanced manufacturing methods and processes and invest in the latest, more efficient technologies,” he told the Industrial Development Conference, in Sandton, on Tuesday.

Nyatsumba acknowledged, however, that higher levels of mechanisation would have an adverse effect on job creation at a time when South African unemployment figures lingered at unsustainable highs.

This required government and its various agencies, such as the sector education and training authorities, to invest heavily in the upskilling and reskilling of the general South African workforce.

Equally important were policy adjustments from government and cohesion between business and labour, he held.

“We are in uncharted waters. Cooperation among business, government and labour to find solutions is critical. We are encouraged by recent approaches to tackle the current steel crisis and we can only hope for more such trilateral approaches in future. Only such an approach will stand a good chance of lasting success,” said Nyatsumba.

According to the Seifsa head, the local manufacturing sector had almost doubled in size over a 14-year period from 1994 until the international financial crisis of 2008, resulting in a 21% contraction in output that year.

While the industry had since expanded by some 6%, he argued that the level of value added to the economy today remained 16% lower, while output was 25% lower than during the peak of 2007/8.

Prices for South African metal sector exports were also depressed and could, if previous metal price cycles were iterated, continue for another 20 years.

The domestic sector was, meanwhile, “critically” linked to the mining, construction and automotive sectors, Nyatsumba noted, which, as a group, directly contributed 17%, or R570-billion, to South Africa’s gross domestic product in 2014.

“These vital sectors are one another’s customers and suppliers, which means that instability affecting one sector inevitably affects the others.

“Further, these four sectors are very electricity intensive and are almost equally hard hit by electricity outages which disrupted production and led to the underutilisation of production capacity, higher costs, the substitution of locally manufactured products by imports, the threat of not fulfilling export orders and losing contracts, as well as uncertainty about the viability of fixed investment,” he commented.

Moreover, the consequences of the rise of China and India, as well as the structural adjustments taking place in those economies, on the local manufacturing, would be significant.

“There are massive surpluses generated in those markets, which find their way onto the world market. The current rebalancing taking place will shift their input demand patterns downward permanently.

“Demand out of Africa could decline in response, owing to its dependence on Chinese demand for its commodities for its own growth,” he cautioned.