Blog: 16 March 2017 (SA's manufacturing industry)

Related Topics
In today's blog we take a look at South Africa's manufacturing industry in more detail. From its hay days in the early 90's to its struggling position it finds itself in these days, thanks largely due to massive imports of manufactured goods (especially machinery and equipment) from China and Germany. 

While increased trade is not always a bad thing, it does affect numerous local industries (in both positive and negative ways). On the positive side one might get superior quality goods, or cheaper prices due to competitive advantage of other countries (technical know how  or cheaper electricity etc). For South Africa however, it does look like increasing trade since sanctions were lifted against SA after apartheid has lead to South Africa's manufacturing industry's slow but steady decline.
How much are we manufacturing compared to earlier years?
So the first thing to look at in order to determine whether the manufacturing industry is declining is looking at number of units produced. Are we manufacturing more now than we did in the past? One would think the answer to this is yes due to increased demand due to larger population, economic growth etc. The graphic below takes a look at the index level of number of units produced vs the index level of the value of goods sold.
chart created with amCharts | amCharts
As can be seen from the graphic, while the value of sales reported in current prices has increased significantly since 2010, the number of units produced has not really moved. Essentially by January 2017, the number of manufacturing units produced was just 6.1% higher than the average level produced in 2010. That is less than 1% growth in manufacturing output per year since 2010. Making matters even worse, if the Production Price Index (PPI) is used to strip out inflation, the real net increase in the value of sales since 2010 is just 2.86%. Essentially no "real" growth took place in value of manufacturing goods sold after inflation has been stripped out. Only 2.86% real growth since 2010 . That is less than 0.5% growth a year since 2010. No real surprise that manufacturing's relative importance in SA's economy has declined over time then, as the total economy of SA has grown at levels around 1.9% since 2010. While that is not a lot of growth, it is far superior growth to SA's manufacturing industry and because of this the importance of the industry has been declining. 
So why has SA's manufacturing industry been declining in importance?
Well there are a few possible reasons for the decline that we can think of:
  1. Lack of demand in the economy for manufactured goods in recent years
  2. Lack of stable electricity supply has seen SA firms manufacture less due to unstable electricity grid
  3. Increased imports of manufactured goods from countries such as China and Germany
  4. Other industries growing at relatively faster rates than the manufacturing industry leading to decline in market share of manufacturing industry.

We will look to unpack the above mentioned reasons below.
As a starting point, when we say that manufacturing industry has been declining in importance in South Africa, what do we actually mean? Well as the animated pie chart below shows, the contribution of this industry to the total SA economy is slowly but surely getting smaller and smaller. This pie chart (and similar pie charts per South African province can be found here).


So its clear from the above that SA's manufacturing industry has been declining over time (granted not by staggering amounts but it has dropped from over 15% to well under 14% and when talking about the economy being worth trillions a more than 1% drop is significant). While a lack of demand in SA's economy could be a contributing factor to manufacturing's decline, we do not think this is a significant part of it, as the rest of SA's economy has since 2010 up to end of 2016 grown almost 4 times faster than South Africa's manufacturing industry.
Yes South Africa had significant electricity supply problems which affected large mining and manufacturing operations significantly and probably scared off a whole host of potential investors in South Africa.  However to quantify the impact of this on the levels of manufacturing production would be hard to do. If more detailed trade data was available we could perhaps look at whether there has been a spike in manufactured goods imported since 2008. Sadly SARS only supplies detailed trade data from 2010 onwards. But electricity issues definitely had an impact on demand for manufactured goods and the supply thereof.
Increased imports of manufactured goods from countries such as China and Germany? This is definitely having an impact on the amount of goods being manufactured locally in South Africa, as large amounts of machinery and equipment is being imported from countries such as China and Germany.

To test if this is getting progressively worse for South Africa we will compare value of "manufactured goods" imported in 2010 to value of sales of manufactured goods in South Africa for 2010. This will give us a percentage of manufactured goods sold that are imported. This percentage will then be calculated for 2015 in order to determine whether matters are getting better or worse.
Description
Imported manufactured goods value as % of manufactured goods sold
2010
32.8%
201
38.4%
The table above provides clear evidence that the value of manufactured goods being imported into South Africa as percentage of manufactured goods sold in SA is on the increase and this supports the notion that South Africa is manufacturing less as it is importing more and more from other countries.
The graphic below shows the impact of the declining importance of manufacturing in jobs in South Africa. As is clear from this chart a lot of job losses has taken place in the industry, due to lack of demand and people being replaced by automated machines and equipment (probably those imported from China and Germany). Total manufacturing job losses amounted to more than 20% from 2008, with total number of job losses in the industry suffered amounting to more than 420 000 over 9 years (or roughly 48 000 a year). This is clear indicator that the industry is struggling to keep employing people and that automation and their increased efficiency is replacing humans (as output has not dropped as employment numbers have decreased).

Job losses in the manufacturing industry

chart created with amCharts | amCharts
Question one has got to ask is if something can be done to reverse this trend? And to be honest we don't really think so. More and more will be automated as machines don't strike, get sick, take leave etc. These industries would employ more staff in future via the support services they require. People that service the machines, do the coding of the machines etc. And again South Africa is behind the "8 ball" as various Asian countries have made computer programming part of the school syllabus. For South Africa it is still an optional subject and often avoided by students. But increased technology and innovation will require more computer and machine coders than ever before.

If SA cant get on to this band wagon, other industries (such as Tourism and other business support services) needs to be identified and nurtured to ensure job creation takes place in  these industries and that they absorb the slack in the labour market that is being caused by the decline in employment and importance of the manufacturing industry.

Related Topics

Copyright © 2015