Lionel October, the Director-General Trade and Industry, recently addressed the delegates of the Manufacturing Indaba 2018 at the Sandton Convention Centre in Johannesburg. Below are some notes from this Address:
Speakers Notes: Director General Trade and Industry
Subject: Manufacturing Indaba
Venue: Sandton Convention Centre
Date: 20 June 2018
1. Salutations; Senior leaders from business and government and labour; esteemed members of the diplomatic core; conference delegates and members of the media
2. Apology on behalf of the Minister: May I apologise on behalf of Minister Davies who has had to attend a G20 meeting in Paris dealing with the crisis in the global steel industry, amongst other considerations.
3. Word of thanks: Thank you for the opportunity to address the Manufacturing Indaba. May I thank Siyenza for hosting the manufacturing Indaba for the last 5 years. Man Indaba now acknowledged as the premier event for the manufacturing sector on the annual calendar. The dti is a proud partner. We need to ensure that government works with private sector to make the Manufacturing Indaba an even more prestigious event. We are also supportive of efforts to ensure that African countries in the SADC and beyond participate as partner countries in our shared effort to secure an integrated investment led trade and industrial integration programme on the African continent. May I also thank all the sponsors and participants in the event.
4. The importance of manufacturing and a ‘new dawn’ for SA: It is now widely acknowledged that the Manufacturing Sector is an indispensable sector if we are to achieve our economic growth targets in future. SA has been through a difficult period but we are confident that the new leadership in government have signaled a new dawn for the economy. These efforts centre on;
- a. Dealing with institutional failure in key institutions, especially those SOE’s which are vital to the countries growth such as Eskom and Transnet
- b. Ensuring that SA is open for investment, especially in the productive sectors of the economy, resting on a solid foundation of policy certainty and investment and development friendly regulation and the removal of unnecessary red tape barriers. The dti’s ‘one-stop investment shop’ is critical to this effort,
- c. Supporting investors with a wide range of supply side support measures including tax incentives, on budget support measures, SEZ’s and so forth
- d. Harnessing support measures and building partnerships to ensure that over concentration in the economy and high barriers to entry are minimized and to ensure that there is inclusive growth. The dti’s Black Industrialist Programme has become a standard-bearer of this effort. Over a hundred black industrialists are now being supported through this programme.
- e. Utilising demand side levers, particularly public procurement to raise aggregate domestic demand by supporting local procurement through designations and other localisation tools.
5. 2018 marks the 10 annual iteration of the Industrial Policy Action Plan. IPAP 2018 makes the point that the – deep-seated structural problems in the domestic economy have remained stubbornly in place. These relate to SA’s historical legacy including:
- – the country’s resource dependence;
- – low levels of investment and growth of the primary production and manufacturing sectors of the economy with ‘premature’ de-industrialisation
- – race-based inequality and poverty combined with enormous disparities in the profile of ownership, control and employment in the economy,
- – In addition, deep-seated skills shortages amongst other structural issues.
6. It is for this reason that the IPAP 2018 is premised on the principle that the ongoing effort to reindustrialise SA must rest on the need for deep-seated structural reform. Recent positive changes in the domestic political economy suggest that there will be added impetus to address these structural issues.
7. Getting on with the job: Whilst in the course of the implementation of ten years of IPAP we have always stressed the absolute imperative for structural reform, we have tried simultaneously to ‘get on with the job’ in an environment where a set of objective and subjective domestic and global circumstances meant we have faced very stiff headwinds. In short these ten years have been a hard struggle. As we also note in the Legacy Report of IPAP 2018, from day one – the implementation of the first IPAP – we had to contend with the global financial crisis, whose effects rippled through the SA economy from 2009 onwards, affecting manufacturing particularly severely.
This was compounded by the subsequent tapering of the commodity super-cycle, characterised by a sharp fall in demand for commodities as global recovery continued to falter and China adjusted by rebalancing its policy towards enhanced domestic demand.
In all, the economy shed 1 million jobs, with the manufacturing sector losing almost 320,000. Government had to respond – and respond it did – through resolute counter-cyclical industrialisation efforts that arrested the scale of job losses during this period. I cannot overstate this: there was a real danger of even deeper deindustrialisation; and we averted it.
The manufacturing sector was able at least to weather the worst of the Great Recession and its lingering low-growth aftermath. While the share of manufacturing value-added to total GDP declined from 15% to 13%, (which was a trend experienced by many developed and developing countries) manufacturing value-added in real terms grew from R338 billion in 2009 to R383 billion in 2016. This was led by sectors such as food and beverages, automotives, chemicals and plastics, averaging 2% annual growth.
Over the 10-year IPAP period, while imports have doubled, manufactured exports have grown four-fold – mainly dominated by metals, metal products, machinery and equipment, including capital equipment and mining machinery and equipment.
8. As we look back on ten years of the IPAP it is appropriate to reflect on both the shortcomings of government but also the achievements.
I wish to spend a short time on two sectors, which have been supported by the dti. This is because they demonstrate very clearly what can be achieved when industrial policy is carefully designed; is the subject of a close collaborative relationship between government, business and labour and where these interventions are adequately resourced.
- Beginning with Automotives: The sector currently contributes 33% to manufacturing GDP and about 6% to overall GDP. It produces approximately 600,000 vehicles per year, supporting 113,000 jobs. Exports have doubled over the period; and the industry has seen R45 bn worth of investment flowing in from some of the world’s leading global vehicle manufacturers – for example, Mercedes Benz, Toyota, VW, BMW, Ford, BAIC, BAW, Isuzu and others.Government is extremely keen to maintain this momentum, being fully aware of the very stiff competition we will continue to face from other national production centresAs part of the ongoing effort to sustain SA’s competitive capabilities in this sector, the dti has developed an Automotive Masterplan 2020, working together with the automotive companies, component suppliers and labour. The aim is to ensure that SA retains and grows its automotive sector, is able to continue to compete with other national jurisdictions for production platforms, and that it grows its exports and secures higher levels of localisation and empowerment. In consultation with the NT the final work is being done on the plan and once it has been adopted by Cabinet it will be announced in the near future.
- Clothing, textiles, leather and footwear: This sector has been under intense pressure for over 20 years. In the wake of the devastation it experienced following from the trade liberalisation and restructuring of the 1990s, many thought its days were numbered, as it shed some 120,000 jobs.However, government responded robustly; and over the past decade the sector has been saved from extinction and, indeed, substantially stabilised. Through the conditional support measures offered under the Clothing and Textile Competitiveness Programme the CTLF sector currently employs around 95,000 workers, contributing 8% to manufacturing GDP and 2.9% to overall GDP. In the leather sector 22 new factories have been opened, supporting 2,200 jobs.Manufacturing value addition for companies receiving the incentive has grown by 60.8%, and productivity by 22.3%. Two national and eight regional clusters have been established, providing a platform for cooperation between government, labour and the textile and apparel manufacturers and retail value chains. This has allowed for the development of a dynamic market in fast-turnaround, quick fashions items.But there’s no room for relaxation. In the face of continually intensifying international competition, the dti has recently launched a wide-ranging collaborative study with all the relevant sectoral players in the textiles, clothing, leather and footwear and retail value chain. This will in the course of 2018 result in the adoption of a CTFL Masterplan to deal with new and rising threats to the domestic industry, raise competitiveness, deepen localisation and support job creation across the entire retail value chain. This study is now very close to completion.
9. The Fourth Industrial Revolution/ Digital Transformation: It is important that this and previous Manufacturing Indaba’s have placed emphasis on this matter. May I suggest that it is important to approach the phenomenon from two vantage points – the one a technological the other a policy and regulatory framework.
From a technological standpoint we can all agree that seismic technological advances are already and will in future have a massive disruptive effect on our economy across the mining, agriculture, manufacturing and services sectors – additive manufacturing; digital transformation, computing; the internet of things and massive advances in production capabilities and systems. Government has already put in place interventions to support this effort. Two examples would be the Product Life Cycle Management Facility, which has been put in place at the CSIR, and secondly the extent to which the dti has revamped and scaled up the National Tooling Initiative now called Future Production Technologies to support the foundry, tooling and other sectors.
However, this matter also has to be examined, most importantly from a regulatory and policy framework perspective. The European Union for example have moved with speed to ensure that issues of data security and concentration and competition issues are dealt with. Given the importance of this issue, the dti has assembled a Task team, which is developing a policy and regulatory framework for Digital Transformation. When this work has been completed the dti will put in place a process to ensure that SA’s policy and regulatory framework is fit for purpose to maximise the opportunities and withstand the challenges and threats which will be presented by the Fourth Industrial revolution. This will include engagement with the private sector and labour.
10. BRICS and the SADC: This year SA will host both the SADC Summit and Industrial Summit as well as the BRICS Summit. Both represent important opportunities for SA to strengthen the partnerships in the region and beyond.
11. Conclusion: Under the more promising conditions that we may now realistically expect to emerge from recent developments in the political economy, the need to build on the lessons and platforms of the first IPAP decade is self-evident. At the structural level, this means paying increasingly focused attention to the major fault lines that characterise our economy as we have underlined above. At an operational level, IPAP focuses on the following 10 key themes, which inform the work of the Department of Trade and Industry and act as a roadmap for the wider industrial effort:
11.1. Grow the economy. Working closely with the private sector, government must secure and support investment in a modernised and competitive manufacturing and export sector. Investment must wherever possible focus on the labour-intensive value chains that link the primary and secondary sectors of the economy: agro-processing; clothing, textiles, leather and footwear; component manufacturing for the automotive and metal fabrication industries; and so forth.
Most importantly, ensure that economic and industrial growth and higher levels of investment secure, strengthen and build black management, ownership and control in the economy and that empowerment is enabled and advanced through the creation of decent employment.
11.2. Strengthen efforts to raise aggregate domestic demand – mainly through localisation of public procurement and intensified efforts to persuade the private sector to support localisation and local supplier development. Very choppy waters in the global trading regime taken together with over-supply in critical sectors will lead increasingly to aggressive and even cut-throat import penetration of the domestic market. Taken together with illegal imports this represents a significant threat to the domestic economy.
Both the letter and spirit of the BEE codes do not mean that importers who are black owned should trump locally manufactured goods. As we point out in IPAP 2018 – if a supply chain is not localised there will be no empowerment, no local job creation, no building of local industrial and technology capabilities and so forth.
11.3. Step up South Africa’s export effort – with a focus on key existing exporters, emerging export-ready firms and strong support for new black industrial entrepreneurs with a geographic focus on new emerging markets especially on the African continent.
11.4. Create and reinforce policy certainty and programme alignment. This requires intensified efforts to secure a streamlined, inter-departmental ‘clearing house’ to steer policy and programme alignment, deal with bottlenecks and ensure that all departments, SOCs and agencies are pulling in the same direction and supporting the industrialisation effort.
11.5. Strengthen ongoing efforts to build a less concentrated, more competitive economic and manufacturing environment in which barriers to entry for new entrants are lowered.
11.6. Build a stronger system of industrial finance and incentives to support and secure higher levels of private sector investment in the productive sectors of the economy and grow exports. The IPAP Chapter on incentives points to some of the proposals in ongoing work in this regard.
11.7. Press ahead with technology-intensive, value-adding beneficiation projects which fully leverage SA’s comparative resource endowment advantage into a global competitive advantage. IPAP 2018 updates this work, with a strong emphasis on the increasingly significant opportunities emerging in fuel-cell manufacture.
11.8. Support the further strengthening of energy-efficient production and carbon mitigation efforts and measures in a manner that allows for sustainable adaptation by all the energy-intensive sectors of the economy. This requires careful, intra-governmental collaboration to shift both energy and all other forms of production to a less carbon-intensive and sustainable platform which is globally competitive and does not lead to job losses. It must also allow for systematic retraining and ‘switching’; and it must ensure that agriculture, mining and manufacturing (especially in renewable energy) do not fall behind the sustainable production and technology curve.
11.9. Finally: Understand, grasp and prepare for the foreseeable effects of the Digital Industrial Revolution and emergent disruptive technologies, collaboratively adapting SA’s productive and services sectors to meet the challenges, including those relating to employment displacement. For example, we are currently engaged in an urgent effort to develop an appropriate policy and regulatory framework for e-commerce – the rapid of expansion of which presents both important opportunities and potential threats to the domestic economy.