Is South Africa moving in the right direction to become a manufacturing economy?

Professor Haroon Bhorat of the University of Cape Town and Michael Osbaldeston, City and Guilds. (Photo: David Harrison)

Professor Haroon Bhorat of the University of Cape Town and Michael Osbaldeston, City and Guilds. (Photo: David Harrison)

Recognised as being among the top three multiplier sectors in terms of value add, job creation, export earnings and revenue generation for every R1 invested, manufacturing has the capacity to uplift an economy. However, with global competitiveness growing aggressively in emerging countries over the past 10 years, more than 300 000 manufacturing jobs have been lost to other countries since 2008, with China taking the lion’s share.

If South Africa’s manufacturing sector is to be revived, there needs to be a substantial refocus by government, business and education, and a roadmap drawn that alleviates current challenges and builds on competitive advantages to see South Africa positioned as one of the world’s manufacturing hubs.

The future of manufacturing in South Africa was the topic of discussion at a Mail & Guardian Critical Thinking Forum last week, hosted in partnership with the manufacturing, engineering and related services sector education and training authority (merSETA), at the WorldSkills South Africa competition at the Cape Town International Convention Centre.

Supported by the department of higher education and training (DHET) and merSETA, the inaugural WorldSkills South Africa was an opportunity to emphasise the key role that artisans play in the economy.

The forum’s discussion panel was comprised of Dr Raymond Patel, merSETA chief executive; Professor Haroon Bhorat, UCT senior economist and director of the Development Policy Research Unit (DPRU) at UCT; Deon Borchjes, manager of technical learning at the Volkswagon Training Academy in Uitenhage; Farah Wally, project coordinator at Technology Corporate Management (TCM); and Michael Osbaldeston, City & Guilds WorldSkills manager in the UK.

It cannot be argued that South Africa is not a manufacturing economy — far from it. A critical question is whether South Africa is moving in the right direction to enable it be become such an economy. 

merSETA’s Patel sketched the current statistics: “South Africa’s GDP is at 1.4%. Our producer price index (PPI) is about 5.8%. Our consumer price index (CPI) is hovering around 5.3%, possibly dropping below 5% with the price of petrol having dropped. Unemployment is estimated to be around 25.4%, or more realistically closer to 30% because of informal trading. Interestingly, our quarter on quarter in manufacturing shows a 6% growth. But is this a background conducive to the country being capable of becoming a manufacturing economy? Certainly not without much change.”

Bhorat agreed, adding he would not be concerned about manufacturing being a 19% share of the GDP movement over 20 years if the economy had grown by 17% instead of the 2.5% that it has.

“Our economy is on a low growth path, which is very worrying for the state of manufacturing, particularly in a context where most of the growth has come from the services sector, from wholesale and retail in terms of GDP and employment, and from the public sector. This means we have the makings of an economy that does not have a sufficiently dynamic, employment-intensive, growing manufacturing sector to lift us from this 2-3% growth rate to a healthier 5-6% level.”

Bhorat emphasised there is no one reason for the state of manufacturing being in decline. 

“If it were that simple, we would have isolated that single weakness and found the political will to pursue a solution. It cannot be one reason, but rather a whole series of factors.”

Education is the cornerstone of any nation’s economic future. The state of South Africa’s education system, from primary through to post-schooling, has long been recognised as not being favourable to the country’s economic growth. One only needs to look at the manufacturing sector to see the repercussions that educational changes at a tertiary level have had on encouraging innovation.

Patel puts the blame partly on the education sector. “Statistics show that up to the end of 2014 manufacturing had endured 36 quarters of negative growth. We need only compare its 19% share of GDP 15 years ago to its 17.7% now to clearly see that our manufacturing is declining. But what are we doing as a country to revive it, and to stimulate innovation and encourage artisanal, technical and engineering development? Clearly, we are not doing enough.

“Until a few years ago we had technikons in our tertiary system, institutions that provided practical learning. But we changed that practical focus when we allowed those institutions to offer doctorates, making them academic institutions and shifting their focus from practical to theoretical learning. In the same way, our universities of technology are not playing the same role the technikons did. We have got it wrong.”

Patel emphasised the urgent need for a long-term education strategy that focuses on producing the learner that South Africa needs.

“Often, universities can be ivory towers, producing knowledge that has become irrelevant. Any country that wants to propel itself into a stable future starts with a 30 to 40 year strategy. In South Africa we’re doing it wrong: we have a strategy and we want our matriculants to match it. That’s completely upside down. Instead we need to decide where we want to go as an economy, redesign our strategy to complement that design, and ensure our universities start contributing knowledge content that is relevant.”

Osbaldeston agreed, pointing out that the UK had made a similar mistake. “In the UK, we turned our polytechnics into universities and academic institutions. By changing the nature of the polytechnics, we shifted the learning focus from a practical element to an academic one. This took away the desire to aim for excellence in the highest technical skills, and removed a critical tool the nation had to enable it to develop the economy further.”

He emphasised that South Africa is not unique with its dwindling manufacturing sector, saying that the UK was faced with similar challenges.

“During the 1970s, the UK lost the majority of its manufacturing sector — its shipping, coal, textile and most of its steel industries. The leadership of our nation at that time made a conscious decision to move away from manufacturing and to move into the knowledge economy — retail, tourism, banking and insurance. As a result the UK has gone from being a major producer and exporter of textiles to the world to not producing one single yard of cloth. The mining industry is virtually non-existent. The shipping industry has been snapped up by other more competitive countries in southeast Asia. The political decision in the 1970s to reduce manufacturing had a massive impact unemployment levels across the UK, and the nation is still reeling from it 40 years later.”

The panel was unanimous that entrepreneurship played a vital role in manufacturing, and needed to be stimulated.

“Innovation is critical in manufacturing, and is at the heart of entrepreneurship. However, I believe that the whole concept of entrepreneurship in this country is misconstrued. We tend to see anyone who starts a business as an entrepreneur. But that person is not necessarily an entrepreneur at all — he or she is simply a businessperson. Entrepreneurship is about so much more than simply starting a business — it’s about creativity and innovation, seeing a gap in the market and starting something new to fill it. In reality, South Africa has very few entrepreneurs.”

Bhorat agreed, saying pockets of innovation had been there in the past, with shining examples like the invention of the Kreepy Krawly and the technological expertise of Mark Shuttleworth. Without adequate research and development, however, innovation was unlikely to happen in the future.

“One of the markers of an innovative economy is how much is spent on research and development. South Africa’s spend on this is substantially lower than other emerging markets.

The number of patents issued in this country is incredibly low, and tend to be concentrated in the mining sector. Research and development stimulates innovation, and generates the kind of globally competitive high-tech manufacturing that we want. 

“In the long run, manufacturing remains in crisis. As a result of lack of innovation, we have a lack of competitiveness in the manufacturing sector, and we’re far from the point where we can say we have a launch pad for long term dynamic growth in manufacturing,” says Bhorat.

The question of what needs to be done to increase the manufacturing sector’s level of competitiveness remained.

Critical to all of this was “investment in our country’s richest resource: its people”, said Patel.

“South Africa’s greatest asset is not its gold, diamonds or platinum. Its richest asset is its human resources. In 1965, Zambia’s GDP was twice that of South Korea’s. Today South Korea’s GDP far exceeds both Zambia’s and South Africa’s. What it did differently was it invested in its people. That country is the largest recipient of gold medals in the last five international WorldSkills competitions. WorldSkills gold medallists in South Korea are highly regarded and well rewarded, incentivised, and encouraged to become ever more innovative, entrepreneurial and industrious.

“For South Africa is to start improving its manufacturing, it needs to begin with education —  looking at more appropriate curriculum design as a start. We need to develop our education from the standpoint of where we’d like our country to head economically.”

Patel cited Singapore as a prime example of successful education planning: when Singapore took the active decision to increase its GDP, improve its economy and uplift the quality of life of its people, it invested in education, instituting a 30-year plan that focused on primary, secondary and tertiary learning for its youth.

While noting that the need for educational changes was fundamental for improved competitiveness, the panel agreed that a multi-pronged approach was essential, and that government, business and academia needed to work together for the sector to progress.

Bhorat noted that government needed a more defined industrial strategy for manufacturing upliftment, and gave examples from the success of southeast Asia.

“None of the southeast Asian economies got where they are today without carefully tailored state support. South Korea’s ship building industry that destroyed the UK’s came from nothing and was built entirely from state support. Samsung, now a global technology giant, started out as a backyard manufacturing company that could not even produce microwaves successfully, and it was through consistent state support and skills development that it grew to the global success it is today.

“I don’t believe South Africa has an industrial strategy that is sufficiently attuned for competitiveness.”

Bhorat said government and industry also needed to pay more attention to relative wage levels in relation to costs.

“Relative unit labour costs are key in certain levels of manufacture, particularly labour intensive areas. There is no way South Africa will have a globally competitive plastics, clothing or textiles industry as long as we have the type of unit labour costs we have currently. We need to recognise that relative labour costs play a significant role in competitiveness.”

The panel concluded by agreeing that for South African manufacturing to be stimulated, there needs to be focus on the fundamentals as an integrated strategy. These include education, investment in research and development, better management of wage levels and labour costs, and buy-in from all stakeholders. Only then can the South African manufacturing sector hope to play a role on the global stage.

How South Korea outgrew South Africa

In the 1960s South Korea and South Africa had similar sized economies. Today, just more than five decades later, South Korea is a considerably higher income country, and South Africa lags behind. The key reason for this is that our manufacturing share of GDP has barely changed in 50 years. The share of GDP that was constituted by manufacturing was about 19% when democracy came to South Africa in 1994, and has since declined to 17% of GDP. 

For any working market to grow from middle income to high income status, manufacturing is central. What we’ve seen in South Africa is a stalemate in terms of the growth of manufacturing and its contribution to GDP.