Stop running interference with industrialisation

It is sometimes challenging to be optimistic about South Africa’s chances of economic recovery, especially when we know our history as an African economic powerhouse and the country’s potential to achieve double-digit growth.

Let’s look at the USA and Australia, whose economies are significantly larger than South Africa’s. They have two critical factors driving economic growth: their economies are very diversified, and they have a strong manufacturing sector. Both countries are effectively self-sufficient where industrialisation is sacristan.

On the other hand, South Africa has long relied on global commodity demand and the mining industry to drive economic growth. While this has served the country well in the past, we now see the poor fruits of this harvest as global demand is waning amidst harsh economic conditions. There have been plans to boost South Africa’s industrialisation, which is important as the world moves towards deglobalisation and a greater reliance on subsidies for domestic industries. However, our industrialisation plans are proving to be challenging.

Counterintuitive

A Moneyweb article points out that Government interventions are not generating positive economic output, says Donald MacKay, Director at XA Global Trade Advisors. He was speaking during the session on the future of trade for SA at the annual Tax Indaba, which is currently being held in Sandton.

“We are intervening in the wrong way,” says MacKay. Conceptually, the idea of supporting a particular sector to grow employment may be a valid perspective – but MacKay says there are “sacred cows” in each industry.

The article adds that, for example, Government “inserts” bargaining councils into some sectors but not others. Many of these bargaining councils add an enormous competitiveness burden to the industry. Government then “compensates” the industry by loading high duties on competitive imports. “We make the imports as uncompetitive as the domestic industry, and then we have an equilibrium. The problem with that is you never get good at the thing that you should be getting good at,” says MacKay.

We tie ourselves to a legacy system, he adds.

Government interventions tend to be vertical but ignore horizontal problems such as dysfunctional railways and ports, crumbling road infrastructure, or the electricity crisis. The priority should be to fix these problems, but it is not the “sexy thing” to do. “So whatever industrial policy we plug on top of the problems simply becomes less likely to yield the benefits that we want to achieve,” says MacKay.

The Moneyweb article points out that Growth Diagnostics Director Francois Fouche says SA should be significantly less obsessed with trying to pick the ideal trade partners at industry policy level or the industries it thinks will be winners.

“We should be far more focused on creating an environment that is conducive to becoming internationally competitive,” he says, “We really have to face our own domestic conditions and environment that we have created, especially for manufacturers.”

The article adds that the country does not really have trade challenges; instead, it has “domestic production capability” challenges created on its own account. Government prescribes who can participate in the economy, who can trade with whom, and what and how goods should be produced, says Fouche. He advocates for a less interventionist, more enabling environment where businesses can produce their goods and get them to the ports and those who want to buy their products. This will yield far greater success than the rhetoric currently going around in international trade discussions.

Significant investment

However, it is not all doom and gloom. International companies who have long eyed Africa as a growth market are increasingly using South Africa as a foothold on the continent and are contributing to South Africa’s significant investment in its industrialisation. Another Moneyweb article points out that international automotive giant Stellantis announced plans to invest R3bn in building a vehicle manufacturing plant at Coega, which is planned to be completed by the end of the year. Stellantis owns brands such as Alfa Romeo, Chrysler, Dodge, Fiat, Jeep, Maserati, and Opel.

The article adds that Mikel Mabasa, CEO of the automotive business council Naamsa, confirmed that Stellantis was one of three original equipment manufacturers (OEMs) investigating and considering investing in the establishment of vehicle manufacturing plants in South Africa. However, he declined to identify the other two, stressing it was agreed that these companies would make their own announcements about their investment plans at the appropriate time. He did confirm that neither of them is BYD, the Chinese automaker and the world’s largest electric vehicle manufacturer.

Other recent OEM investment announcements include:

• BMW confirming in June that it will be investing R4.2 billion in SA to prepare its Rosslyn plant in Pretoria for the production of the next generation BMW X3 as a plug-in hybrid vehicle;
• Toyota South Africa Motors announcing in January 2021 it had invested almost R3 billion in SA for the production of the new Corolla Cross sport utility vehicle (SUV) at its plant in Prospecton near Durban; and
• The Ford Motor Company in February 2021 announcing the investment of R20.13 billion by the company and its suppliers for the production of the new Ranger and second generation Volkswagen Amarok at Ford’s assembly plant in Silverton in Pretoria and the adjacent Tshwane Automotive Special Economic Zone (SEZ).

The Moneyweb article points out that apart from these investments by OEMs, automotive component manufacturer Benteler South Africa officially opened its 9 000m2 expansion of its plant in Kariega (previously named Uitenhage) to increase its total production area to 30 000m2. A spokesperson for the Austria-based Benteler Group declined to provide any specific details about the investment amount associated with the project “at this time” but it is reliably understood that several hundred million rand was invested in this project. In addition, at the Naacam Show 2023 last month, 16 automotive component manufacturers in South Africa pledged to invest R4.86 billion into the domestic economy between now and December 2024. Naacam stands for the National Association of Automotive Component and Allied Manufacturers. The 16 companies did not include Benteler.

Imagine a world of unrestricted investment

As we can see, while there are plans to increase industrialisation in Africa’s most diversified economy, it could be accelerated. Once again, Government is (unfortunately) putting its hands up in all the wrong ways.

Despite this, international companies are noticing the potential of the African continent and the advantages of having an African presence. South Africa is the most favourable market to expand into if one wants to capitalise on future demand in the Southern African Development Community (SADC) region, which includes countries such as Angola, Botswana, Namibia, Zambia, and Zimbabwe. It even stretches as far north as the Democratic Republic of the Congo.

The automotive sector is an ideal way to improve our industrialisation as it will create direct jobs as well as indirect opportunities if South Africa can reopen its trade schools and train mechanics and panel beaters. If this succeeds, other sectors will also invest in South Africa.

Covid-19 aside, where there was little to no international investment, industrialisation in South Africa could have been significantly more if Government was not running interference. Imagine a world of minimal political red tape and the investment opportunities that would be present in this environment.