EXECUTIVE SUMMARY · Font: Helvetica Neue LT Std Condensed Manufacturing Bulletin QUARTERLY REVIEW FIRST QUARTER 2012 EXECUTIVE SUMMARY • Business confidence remained stable during

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Manufacturing Bulletin

QUARTERLY REVIEWFIRST QUARTER 2012

EXECUTIVE SUMMARY

• Business confidence remained stable duringthefirstquarterof2012(Q12012).However,thedeficiencyinwaterandelectricitysupply,scarcity of raw materials (e.g. good gradecoal and steel), soaring costs of transportandenergy,uncompetitivecostof labour,anappreciatingrand,uncertaintyandaslowdownin theworld economy andmediocre servicedelivery by the municipalities have beensingledoutbysomerespondentsaspotentialfactorspresentingdownsideriskstotheirshorttolongtermoutlookonbusinessconfidence.Ontheotherhand,somerespondentspredicthigh business confidence and opportunitiesfollowingtheimplementationofgovernment’sinfrastructureinvestmentdrive.

• South Africa is in very real danger of losingits small manufacturing base as a result ofadverse economic conditions and ageingentrepreneurs with only few new onesemerging to replace them. However, thereis a silver lining in that most impedimentsthat undermine the sector’s future can beaddressed by policy and administrativereform. These concerns should be urgentlyattendedtoifSouthAfricaaspirestopreservethefutureofthemanufacturingsector.

• Based on the manufacturing survey,production inQ12012grewby1.9percentquarter-on-quarter, compared to 1 per centinQ42011.However, thevalueofdomesticand international sales (hence profitability)deteriorated over the same period.Consequently inventories are expectedto increase. This is also reflected by theincreaseof the inventories indexcomponentof the purchasing managers’ index. Veryhigh inventories levels are, however, costlydue to storage, damage and obsolescence.Furthermore, the slowdown in the globaleconomy during the rest of the year andthe effect of cheapmanufactured goods onthe localmanufacturing sector are expectedto stifle manufacturing production. TheunexpectednegativepostingofmanufacturingoutputduringthelastmonthofQ12012canattesttothis.

• Manufacturing employment disappointedduring Q1 2012. The manufacturing sectoraccounted for the second highest numberof job losses in the SouthAfrican economy.Also,manufacturinginputcostsrecededinQ12012relativetoQ42011asreflectedbytherespondents’account,thechangeinthepriceindexofthePMIaswellasthemoderationintheincreaseinproducerprices.

• A recession in the eurozone coupled with apossible hard landing in China will negativelyaffectthedomesticeconomymainlythroughthetradechannel.Consequently,themanufacturingvalueadded ispredictedtoshrinkduring2012by about 0.7 per cent in 2012. A reboundis predicted in 2013 as the global economylikely recovers,government’s infrastructuredrive is implemented and the manufacturingcompetitiveness enhancement programmekicksin.Ontheotherhand,therandexchangerate will continue to pose downside risks tomanufacturingexports,goingforward.

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INDEX

Page Article

1. Executive Summary

2. Introduction:FirstQuarter2012ManufacturingCircleSurvey

3. Section 1:OverallManufacturingBusinessConfidence

4. Section 2:SmallManufacturingNeedsPolicyAndAdministrativeReform

5. Analysis:TheCrisisinSouthAfrica’sSmallBusinessSector

6. Section 3:SouthAfricanManufacturingEnvironment:Q12012

8. Section 4:Q12012SurveyResults

12. GrowingthemanufacturingbaseofSA–import,exportandconsumerloyalty

14. Section 5:ManufacturingOutlook

INTRODUCTION: FIRST QUARTER 2012 MANUFACTURING CIRCLE SURVEY

BACkGROuNdOFTHEMANuFACTuRINGCIRClESuRVEy

The Manufacturing Circle Survey is compiled by Pan-AfricanInvestment and Research Services (PAIRS) on behalf of theManufacturingCircle.Thepurposeof thesurvey is tocaptureeconomic and business conditions within the domesticmanufacturingsector.

Thisquarterly reviewcovers the latest trends in thedomesticmanufacturingsector, asgathered fromkey informantsduringthefirstquarterof2012(Q12012).

PROFIlEOFSuRVEyPARTICIPANTS

The survey contained quantitative and qualitative questions,and was completed by a total of 49 CEOs (compared to 48last quarter), varying from small to large sized South Africanmanufacturing companies and covering a revenue base ofbetweenR300millionandR10billion - thebiggestemployerswithinthesector.Therespondentsrepresentdifferentsectorswithinthemanufacturingindustry.

using the Standard Industrial Classification (SIC) of EconomicActivitiescodes,therespondentsoftheQ12012editionoperateinthefollowingsectors:

• Basic metals, fabricated metal products, machineryand equipment and office, accounting and computingmachinery

• Coke, refined petroleum products and nuclear fuel;chemicals and chemical products; rubber and plasticproducts

• Electricalmachineryandapparatusnotelsewhereclassified• Foodproducts,beveragesandtobaccoproducts• Furniture; manufacturing not elsewhere classified;recycling

• Othernon-metallicmineralproducts• Textiles,clothingandleathergoods• Transportequipment• Wood and products ofwood and cork, except furniture;articles of straw and plaitingmaterials; paper and paperproducts;publishing,printingandreproductionofrecordedmedia

COMPANY TURNOVER

Sh

are

of R

esp

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den

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)

0 5 10 15 20 25 30 35 40 45

< R300m

R301m to R999m

R1bn to R3bn

R3bn to R6bn

R6bn to R10bn

> R10bn

Note:Q12012Base=44respondents(41inQ42011)

PictureoncovercourtesyBellEquipment

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QuARTERlyREVIEWTHIRdQuARTER2011

NUMBER OF EMPLOYEES

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SECTION 1: OVERALL MANUFACTURING BUSINESS CONFIDENCE

The Manufacturing Business Confidence measure is basedon theManufacturing Circle Survey and it reflects the overallconfidenceofdomesticmanufacturers inthesector inrelationtotherespondents’feedback.

FIGuRES1A,B,C&d:MANuFACTuRINGBuSINESSCONFIdENCEINQ12012

A: CURRENT OUTLOOk

05

101520253035404550

Poor Fragile/weak Stable Modest to good StrongSh

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Q4 2011 Q1 2012


B: SIX MONTh OUTLOOk

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C: TWELVE MONTh OUTLOOk

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D: TWO YEAR OUTLOOk

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Theshareofrespondentswhoreportedbusinessconfidencetorange between “modest to good” and “strong” fell by about15 per cent in Q1 2012. The proportion of respondents whoexperienced “poor” or “fragile/weak” business confidence,increasedbyabout8percentbetweenQ42011andQ12021.Ontheotherhand,therewasanincreaseofapproximately7percent intheshareofsurveyparticipantswhofeltthatbusinessconfidence remained stable during Q1 2012 relative to thepreviousquarter(Figure1A).

Similar to the outcome of the previous quarter’s survey,the majority of respondents who took part in the Q1 2012manufacturingsurveyexpectedbusinessconfidencetoremainstableinthecomingsixtotwelvemonths(Figures1B&C).

Ontheotherhand,basedontheQ12012survey,48percentoftherespondents(previously46percent)predicted“stable”business confidence over the long-term (two year outlook),whiletheproportionofrespondentswhoenvisagea“poor”or“fragile/weak”businessconfidenceoverthenexttwoyearsfellfromabout15percent inQ42011to10percent inQ12012(Figure1d).

Accordingtotherespondents,factorsthatrepresentdownsideriskstotheirshorttolong-termoutlookinclude:

1. Shortageofwaterandelectricitysupply2. Scarcityofrawmaterials(e.g.goodgradecoalandsteel)3. Highertransportandenergycosts4. uncompetitivelabourrates5. Astrongrand6. uncertaintyandslowdowninglobaleconomicactivity7. Poorservicedeliveryfromthemunicipalities8. Original equipment manufacturers (OEMs) relocatingoutside South Africa due to uncertainties over the

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SMAllMANuFACTuRERSANdTHESOuTHAFRICANlABOuRMARkET

Beyond the economic climate, small manufacturers areconcerned about the regulatory burden. labour legislation isseen as by around a quarter as a hindrance to employmentgrowthandbyoverhalfasamajorregulatorybarriertobusinessgrowthasawhole.Animportantsub-issuehereisthereachofbargainingcouncilagreements,withoneintenfeelingthatwagelevelsworkagainsthiringemployees.

Ashortageoftechnicalskillsisanotherproblem.Skilled,qualifiedartisans–thebackboneofmanufacturing–areinshortsupply,andtrainingpeople iscostly.Some15%ofmanufacturerssaythat thequalityofbasic literacyandnumeracy ispoor,makingon-the-job training doubly burdensome. Moreover, somemanufacturers arewary of the actual abilities associatedwithqualifications, and are concerned about limited appropriatetrainingoptionsavailabletoup-skillsemi-skilledstaff.

Given this background, small manufacturing has proven fairlyresilientinoperatingsuccessfullyatall.Indeed,42%havegrowntheirstaffoverthepastfiveyearsandoverathirdoffirmshopetoincreasetheirstaffcomplementin2012.Butthetrendsandoutlooksarenotencouraging.

OuTlOOkFORSMAllMANuFACTuRERS

Manufacturers weremore likely than other types of firms tohave shed jobs.Many are bluntly pessimistic about the long-term future of manufacturing, and the prospects for newentrepreneurs.Some35%ofthemanufacturerscanvassedsaidtheywouldnotbeinvolvedwiththeirbusinessesintentotwentyyears’time.Afifthhasnolongtermplan,andasenseemergesthatthefateofmanyoftheseenterprisesatthedepartureoftheownerwillbeclosureratherthansaleorsuccession.Ofthosewho intend to remain inbusiness,optimism forgrowing theirbusinesseswas lower than that of their counterparts in othersectors.

The message is that South Africa is in very real danger oflosingitssmallscalemanufacturingbase,asaresultofadverseeconomicconditions,agingentrepreneurs,and fewnewonesemergingtoreplacethem.Thegoodnews–afterafashion–isthatmuchofwhatisunderminingthesector’sfuturecouldbeamelioratedbypolicyandadministrativereform.IfSouthAfricaaspires to a manufacturing future, it will need to take theseconcernsseriously.

automotive production and development programme(APdP)

On the other hand, some respondents argued that theplannedinfrastructureinvestmentspendingprogrammebythegovernmentpresentsopportunitiesfortheirsector.

Themajor findings of theQ1 2012manufacturing survey arepresentedinSection4.

SECTION 2: SMALL MANUFACTURING NEEDS POLICY AND ADMINISTRATIVE REFORM

INTROduCTION

WithconcernsaboutunemploymentinSouthAfricavergingondesperation, there is a clear understanding across the boardthat something needs to be done differently. And while that“something” is up for debate, two concepts arise repeatedlyin policy thinking. The first is small business; the second ismanufacturing.Anappealingcombination:bothjobcreationandvalue-adding;economicgrowthprovidingadignifiedlivelihood.Our manufacturing sector is approaching a unique, possiblyverybeneficial,crossroads.Thatis,providedweunderstanditsrealitiestodealwithitproperly.InNovember lastyear, researchspecialistsSBPpublished thefirst round of its longitudinal SME Growth Index. This is anunprecedentedstudyintoSouthAfrica’ssmallbusinesssector.This year, SBP will be conducting the second. It will be thedefinitive account of the country’s SME sector: over an initialperiodofthreeyears,theGrowthIndexwilltrackthelivesandtravailsofapanelof500firms,toestablishhowandwhytheygrowordecline.Manufacturersconstituteathirdofthefirms–givingussomecrucialinsightsintothesector.

Mostmanufacturersparticipatinginthesurveyworkinplasticsorfood,steelandmetal,andwoodmanufacturing,printing,andmanufacturing for the construction industry,withminorities insuch industries as chemicals, industrial equipment, textiles,and sports equipment. The 2011 survey results showed themedianturnoverofthesefirmstobeR10million,employing29permanentstaffandthreetemporaryworkers.Aroundhalftheemployeesintheaveragefirmareskilled.

WHOARESOuTHAFRICA’SSMAllMANuFACTuRERSANdWHATARETHEIRkEyCONCERNS?

Smallmanufacturerstendtobeanoldertypeoffirm,withover90%olderthan5years,andoverhalfoperatingforover20years.Theirownerstendlikewisetobeolderthantheircounterpartsinothersectors–around60%are51yearsoldorolder.Theytendtobeeducatedtomatricordiplomalevel,probablyanindicationthattheirearlycareersinvolvedhands-ontechnicalinvolvementinmanufacturing.

Smallmanufacturerscanbestbedescribedasconcerned.Riskis viewed as a sort of uncertainty, rather than an opportunity.Thecurrenteconomicclimate,unsurprisingly,hashitthemhard,and isseenasakeystrategicproblem.Galloping increases inadministeredprices–suchaselectricityand fuel–aswell asthe cost of imported components, are of greater concern tomanufacturersthantotheircounterpartsinothersectors. PicturecourtesyTheSouthAfricanBrewerieslimited

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AnAlysis: The crisis in souTh AfricA’s smAll business secTorBy:Adcorp,2012

According to theMinisterofFinance, about68%of allSouthAfricanworkersareemployedbysmallbusinessesemployingfewerthan50people.Asizeableproportionofthenationalworkforce(43%)isemployedbybusinessesemploying fewer than 5 people. The small businesssectorisclearlythemostimportantoriginatorofjobsinSouthAfrica.

Against this background, two worrying patterns haverecentlyemerged.

Firstly, thenumberof small businesses inSouthAfricahasstagnatedoverthepastdecade.Between2001and2011, therewas a roughly constant number (2million)of small businesses (see figure). The number of smallbusinesses increased slightly (to 2.4 million) duringtheeconomicboomof2004-2006,butsince2006, thenumber has shrunk by 18.2%. Since the boom, about100,000smallbusinesseshaveclosedtheirdoorseachyear,bringingthetotalnumberofsmallbusinessclosuresoverthepastfiveyearsto440,000.Giventhatthetypicalsmallbusinessemploys12people(asidefromtheowner-manager),arevivalofthissectorcouldpotentiallycreate5.3millionjobs.

NuMBEROFPEOPlERuNNINGTHEIROWNSMAllBuSINESSESINSOuTHAFRICA,2001-2011

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

No. running own business

Source:AdcorpAnalytics(2012)

Thesecondworryingtrendisthatthenumberofpeopletrying to start their own businesses has fallen to anall-time low. In 2001, at a given time around 250,000peoplewere involved in starting their ownbusinesses,whereas in2011only58,000peoplewere trying todoso,adeclineof76%(seefigure).Applyingtheaverageratio of 12 workers per small business, the reductionin entrepreneurial activity over the past five years hasreducedtheeconomy’sjobcreationpotentialbyaround2.3millionjobs.

NuMBEROFPEOPlETRyINGTOSTARTTHEIROWNBuSINESSES,2001-2011

0

50 000

100 000

150 000

200 000

250 000

300 000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

No. trying to start own business

Source:AdcorpAnalytics(2012)

Tosomeextent,theprecipitousdeclineinsmallbusinesscommencementsisconnectedtothe2009recession.Ifonewere tocast this inanoptimistic light, thedeclinein small business commencements might be viewedas a cyclical phenomenon and likely to reverse as theeconomic recovery gathers pace. However, smallbusinesses have been beset by serious challengesover the past decade. Between 2003 and 2010, theSouthAfricanRevenueService’s taxamnesty forsmallbusinesses netted 355,000 new business taxpayers.Overthesameperiod,thenumberofpersonaltaxpayers(probably includingasignificantnumberofunregisteredsmall businesses) increased by 2.5 million or 74%.AlthoughSARS’intentioninbroadeningthetaxbasewastoensuregreaterequityandfairnessinthetaxburden,itislikelythattheincreasedtaxincidencefellsignificantlymore on small businesses than on medium and largeenterprises. The World Bank’s doing Business Reportindicates that, in termsof total tax cost andefficiency,SouthAfrica’srankingfell from18thto44thoutof183economies – a dropof 26places – between2011 and2012.

Also, labour laws and regulations for small businesseshavebeenparticularlyonerous.Between2004and2011,thenumberofcasesdealtwithby theCommissionforConciliation,MediationandArbitration(CCMA)increasedfrom128,000to156,000peryear,an increaseof22%:81%ofreferralsrelatetodismissals,and41%ofthesereferralsoccur in thesmallbusiness-dominated, labour-intensive retail and wholesale trade and business andprofessional services sectors. The automatic industry-wideextensionofbargainingcouncilwageagreements,typicallyreachedbetweenahandfulof largeemployersand trade unions, has forced small businesses amongother non-parties to pay high wages applicable to thelarge business sector or, increasingly, to opt out ofofficial dismissal protections and mandatory statutorywagesthroughtheinformalsector.TheWorldEconomicForum’s Global Competitiveness Report for 2011 citeslabour problems – weak public education, restrictivelabour laws,andpoorworkethic–asamongthemostproblematicfactorsfordoingbusinessinSouthAfrica.

Small businesses offer the only real prospect of large-scalejobcreationinSouthAfrica,yetconditionsforsmallbusinesseshavedeterioratedmarkedly.Thenumberofpeople trying to start their ownbusinesses is a criticalindicatortowatchinthecomingmonths.

6

indexdroppedby6.1indexpointsandreached76.7indexpointsinQ12012.Thedecreaseinthepriceindexis in linewiththemoderationintheincreaseinproducerpricesasobservedduringQ1 2012, partly due to downward pressures on commodityprices.

Theemploymentindex,ameasureofthehealthofthemarketformanufacturingjobs,remainedincontractionterritory,aswasthecaseduring2011.AccordingtoStatisticsSouthAfrica’sQ12012 quarterly labour force survey (QlFS), the constructionand manufacturing sectors contributed the most in terms ofjob lossesduringthequarter.Followingan increaseof53000duringlastquarter,thenumberofmanufacturingjobsdeclinedby67000inQ12012(Figure2).Thisisequivalenttoaquarterlydropof3.7percentinthemanufacturingemploymentlevelandthereby cementing the, mostly downward, trend observed inmanufacturing employment observed since Q1 2008. On theotherhand,theconstructionsectorshedmorethan70000jobsinQ12012(6.7percentcontraction).

The QlFS reports that, across all sectors, significant joblosses occurred in the following provinces: Eastern Cape (47000),kwaZuluNatal (43000)andFreeState (16000).On thecontrary,asignificantincreaseinjobswasobservedinGauteng(25000)andlimpopo(11000) inQ12012.Theoverallrateofunemploymentrosefrom23.9percentinQ42011to25.2percentinQ12012.

SECTION 3: SOUTH AFRICAN MANUFACTURING ENVIRONMENT: Q1 2012

Manufacturingoutputexpandedataquarterlyrateof1.9percentcomparedto1percentrecordedinthepreviousquarter(Table1).However,goingforward,weexpecttheeffectsofaslowdownin global economic activity to weigh in and consequently putdownwardpressuresontheperformanceofthemanufacturingsector.Infact,manufacturingoutputshrankduringMarchafterpositive postings during the rest of Q1 2012. Consequently,thepositivecontributionofmanufacturingproductiontotheQ12012GdPwillbecontained.

ThepositiveoutcomeinmanufacturingproductioninQ12012ismainlyattributableto:

• “Motorvehicles,partsandaccessoriesandothertransportequipment”growingby6.2percentinQ12012(upfrom-9percentinQ42011);

• “Furnitureandothermanufacturingdivision”expandingat6.1percentinQ12012(upfrom-9percentinQ42011);

• “Petroleum,chemicalandrubberproducts”expandingat3.8percentinQ12012(upfrom0.1percentinQ42011);

• “Textiles,clothing, leatherandfootwear”growingby2.5percentinQ12012(upfrom-2.4percentinQ42011);

• “Radio, TV communication apparatus and professionalequipment”expandingat1.9percentinQ12012(upfrom-2.3percentinQ42011).

On theotherhand,manufacturingsub-sectors thatperformedbadlyinQ12012include:

• “Electrical machinery” shrinking by 3.7 per cent in Q12012, compared to 4 per cent growth in the precedingquarter;

• “Wood, paper, publishing and printing products”contractingby1.5percentinQ12012incontrastwithanexpansionof8.3percentrecordedinQ42011;

• “Foodandbeverages”shrinkingby0.5percent,comparedtoa0.7percentgrowthintheprecedingquarter.

Alsoworthmentioning, thegrowthofmanufacturesof“basiciron and steel, non-ferrous metal products and machinery”moderated from8per cent inQ42011 to1.6per cent inQ12012.Ontheotherhand,thegrowthinmanufacturesof“glassandnon-metallicproducts”remainedunchangedat0.6percentinQ12012incomparisonwiththeoutcomeinQ42011.

The purchasingmanagers’ index (PMI), a gauge of the healthof themanufacturing sector, reached 55.4 index points inQ12012,upfrom50.5indexpointsinQ42011(Table2).Areadingabove the critical mark of 50 indicates an expansion in themanufacturingsectorwhereasa readingbelow50 indicates acontraction.

Except for the “backlog on order sales” and “employment”indices, all other component indices of the PMI were inexpansion terrain inQ12012.Ofnote, the“newsalesorder”index,aleadingindicatoroffutureeconomicactivity,increasedfrom50.4 indexpoints inQ42011 to60.6 indexpoints inQ12012. However, going forward, downside risks exist as weexpectdevelopmentsintheglobaleconomytodampenthelocalmanufacturingsector.

Ontheotherhand,betweenQ42011andQ12012, thepricePicturecourtesyTheSouthAfricanBrewerieslimited

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TABlE1:SOuTHAFRICANMANuFACTuRINGPROduCTION:Q12012

Manufacturing Division Weights,2005

Q/QSeasonallyAdjusted% Growth

FoodandBeverages 15.4 -0.5Meat,fishandfruit 1.8 -2.0dairyproducts 0.8 1.1Grainproducts 0.8 -0.4Otherfoodproducts 5.2 -0.8Beverages 6.8 -0.1

Textiles,clothing,leather&footwear 4.9 2.5Textiles 1.6 1.9Wearingapparel 2.3 0.1leather&leatherproducts 0.6 4.1Footwear 0.4 11.6

Wood,paper,publishing&printingproducts 10.2 -1.5Wood&woodproducts 2.0 -2.4Paper&paperproducts 3.8 -1.4Publishing&printing 4.3 -1.2

Petroleum,chemical&rubberproducts 22.1 3.8Coke,petroleumproducts&nuclearfuel 8.5 17.4Basicchemicals 4.5 1.8Otherchemicalproducts 5.3 -4.8Rubberproducts 1.0 3.1Plasticproducts 2.7 -1.5

Glass&non-metallicmineralproducts 4.8 0.6Glass&glassproducts 1.0 5.0Non-metallicmineralproducts 3.8 -0.8Basiciron&steel,non-ferrousmetalproducts&machinery 22.9 1.6

Basiciron&steelproducts 7.7 3.8Basicprecious,non-ferrousmetalproducts 3.4 -4.1Fabricatedmetalproducts 5.7 4.8Machinery&equipment 6.1 -0.9

Electricalmachinery 2.5 -3.7Radio,tvcommunicationapparatus&professionalequipment 1.1 1.9Radio,tvcommunicationapparatus 0.4 12.8Professionalequipment 0.7 -4.4

Motorvehicleparts&accessoriesandothertransportequipment 10.9 6.2Motorvehicles 4.9 13.8Bodiesformotorvehicles,trailers&semitrailers 0.5 3.9Parts&accessories 4.7 1.3Othertransportequipment 0.9 -0.6

Furniture&othermanufacturingdivision 5.2 6.1Furniture 1.3 6.1Othermanufacturinggroups 3.9 6.3

Total 100.0 1.9

Source:StatisticsSouthAfrica,Manufacturing:ProductionandSales

TABlE2:kAGISOPuRCHASINGMANAGERS’INdEx(QuARTERlyAVERAGE)

Date PMI* Business activity New sales Backlog of

order sales Inventories Purchasing commitments

Suppliers’ performance Prices Employment

Expected business

conditionsQ12011 55.5 54.1 60.2 40.6 57.5 48.8 56.1 80.3 48.8 62.2Q22011 55.1 56.8 60.0 41.1 58.3 54.4 49.7 79.6 48.5 63.0Q32011 48.3 44.6 47.9 42.3 51.4 48.4 53.1 74.7 42.0 58.0Q42011 50.5 51.0 50.4 45.2 52.1 51.4 55.4 82.8 45.7 59.6Q12012 55.4 58.9 60.6 41.5 53.1 50.3 52.0 76.7 47.0 64.6

Source:BureauforEconomicResearchNote:*Seasonallyadjusted

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FIGuRE2:EMPlOyMENTTRENdSINTHEMANuFACTuRINGSECTOR:Q12008–Q12012

1650

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1750

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1850

1900

1950

2000

2050

2008 Mar

Jun SeptDec2009 Mar

JunSept Dec2010 Mar

Jun SeptDec2011 Mar

Jun SeptDec2012 Mar

Th

ou

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Manufacturing employment

Four period Moving Average

Source: Statistics South Africa, Q1 2012 Quarterly labour ForceSurvey

SECTION 4: Q1 2012 SURVEY RESULTS

kEyFINdINGSOFTHEMANuFACTuRINGCIRClESuRVEy

This section provides an analysis of developments in thedomestic manufacturing sector, based on the respondents’feedbackintheQ12012ManufacturingCircleSurvey.

4.1dEMANdCONdITIONS

FIGuRES3A,B,C&d:TOTAlMANuFACTuRINGSAlES(dOMESTICVSExPORTS)

A: DOMESTIC SALES (VALUE)

0 5 10 15 20 25 30 35 40 45

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B: DOMESTIC SALES (VOLUME)

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C: EXPORT SALES (VALUE)

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PicturecourtesyAspenPharmacareandPeterMoreyPhotographic

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D: EXPORT SALES (VOLUME)

< -15%

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Theproportionofsurveyedfirmsthatrecordedpositivegrowthinthevalueofdomesticsalesdeclinedfromabout91percentinQ42011 to66percent inQ12012.domesticsalesof themajorityofrespondents(about34percent)recordedagrowthratebetween0and5percent.Ofnote,theproportionoffirmsreportingacontractionofbetween1 to5percentmore thandoubledbetweenQ42011andQ12012(Figure3A).Inthesamevein, therewasadecline fromabout87per cent inQ42011toabout71percentinQ12012intheshareofmanufacturingfirmsthat reportedpositivegrowth in thevolumeofdomesticsales.However,mostrespondents(about40percent)reportedgrowthinthevolumeofdomesticsalesrangingbetween0to5percentduringQ12012(Figure3B).

Turning to the internationalmarket, the share of firmswhoseexport sales value grewbymore than 15 per cent, increasedfromabout9percentinQ42011to21percentinQ12012.Inall,about29percentoftherespondentsreportedacontractioninthevalueofexportsalesinQ12012;comparedto30percentinQ42011 (Figure3C).Similar to thechange in thevalueofexportsales,theshareofrespondentswithavolumeofexportsalesexceeding15percentrosefromabout10percentinQ42011toabout20percent inQ12012.Theshareofsurveyedfirmswho recorded positive growth in the volumeof exportsreached73percentinQ12012,upfrom64percentduringQ42011(Figure3d).

The ratio of domestic sales to total sales outweighed that ofexportsinQ12012:

• About 13 per cent (previously 12 per cent) of firmssurveyedshiftedatleast60percentoftheirproductiontotheinternationalmarketinQ12012(Figure4);

• Incontrast,about76percent(previously70percent)ofrespondentsallocated60%ormoreoftheiroutputtothedomesticmarketinQ12012(Figures5).

ManufacturingproductionperformedbetterinQ12012comparedtoQ42011.However,domesticandexportsalesdisappointedinQ12012comparedtoQ42011.Thisisalsoreflectedbytheincrease in the inventories component index of thePMI from52.1indexpointsinQ42011to53.1indexpointsinQ12012.Itshouldbenotedthatahighlevelofinventoriesisusuallynotthebestoptionforafirmduetostoragecosts,obsolescenceanddamagecosts.

FIGuRE4:RATIOOFExPORTSAlESTOTOTAlSAlES

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31% to 60%

> 60%

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FIGuRE5:RATIOOFdOMESTICSAlESTOTOTAlSAlES

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0% to 10%

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31% to 60%

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Q1 2012 Q4 2011

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PicturecourtesyBellEquipment

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4.2SuPPlyCONdITIONS

FIGuRE6A&B:INPuTCOSTS

A: TOTAL INPUT COSTS

0 5 10 15 20 25 30 35 40 45

0% to 5%

-5% to -1%

-10% to -6%

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Q1 2012 Q4 2011

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B: IMPORTED INPUT COSTS

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0% to 5%-5% to -1%

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Q1 2012 Q4 2011

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Thirteen per cent of firms surveyed (previously 6 per cent)experienced declining total input costs in Q1 2012 while 14percentofrespondents(previously9percent)reportedfallingimported input costs during the same period (Figure 6 A &B). The share of respondents who experienced increases inimportedinputcostsofmorethan15percentrosefromabout11percentinQ42011toabout16percentinQ12012.Ontheotherhand,about50percentofrespondents(previouslyabout30percent)recorded0to5percentincreasesinimportedinputcostsduringthefirstquarterof2012.

Reflecting themovement in theproducer price index inflationandthepriceindexofthePMI,theshareofrespondentswhoreportedapositivegrowthintotalinputpricesdeclinedfrom94percent inQ42011 to88percent inQ12012.Similarly, theshareoffirms thatexperiencedapositivegrowth in importedinputcostsfellfrom9.1percentinQ42011to86percentinQ12012.Themajorityofrespondents(about50percent)reportedagrowthrateofimportedinputcostsbetween0to5percent,comparedto30percentofrespondentsinthepreviousquarter.

lowercommoditypricesonthebackofaslowdown inglobaleconomic activity are partly responsible for the lower inputcostsobservedduringQ12012.However,administeredprices(specificallyenergyprices)andlabourcostsremainkeyfactorsinputtingupwardpressuresoninputprices.

FIGuRE7:RATIOOFIMPORTEdINPuTCOMPONENTSTOdOMESTICINPuTS

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> 60%

31% - 60%

11% - 30%

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FIGuRE8:CuRRENTEMPlOyMENTlEVElS

ChANGE IN ThE NUMBER OF EMPLOYEES

> 5%

< -5%

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Q1 2012 Q4 2011

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In tandemwith the QlFS, employment in themanufacturingsector deteriorated during Q1 2012. Thirty five per cent ofsurveyedfirmsreported job lossesduringQ12012,comparedto27percentinthepreviousquarter(Figure8).

Variousreasonsexplainingjobcutsinthemanufacturingsectorsurfaced during the Q1 2012 manufacturing survey. Theseinclude:

1. Theincreasedtendencybymunicipalitiestoprocurelower-costimportedgoods

2. Seasonaleffects,i.e.certainjobsarenotrequiredoutofaparticularseasonduringayear

3. Highfixedcosts4. unfairtradepractices.Forexample,exportstoBrazilfacingbetween8to14percenttaxes

5. SluggishvehiclesalesinEurope6. Increased investment in less labour intensive assetsas a result of uncompetitive costs of labour and lowerproduction

Ofnote, theproportionoffirmswhofelt that theskillsprofilein the existing workforce is “less than adequate” increasedby6percentbetweenQ42011andQ12012,whiletheshareof respondents who viewed the skills profile in the existingworkforce to be “good” fell by about 4 per cent during thesameperiod (Figure9A).Ontheotherhand, thecompositionofskillsavailabilityinthemanufacturingsectorshiftedbetweenQ42011andQ12012.InQ12012,29percentofrespondents(previously26percent)reportedthestatusofskillsavailabilityintheirindustrytobe“adequate”while55percentofrespondents(previously60percent)consideredtheprofileofskillsavailability

11


in their industry to be “less than adequate”. The Q1 2012outcome represents a turnaround in the condition of skillsavailableinthemanufacturingsectorduringQ42011.

FIGuRES9A&B:SkIllSPROFIlEINMANuFACTuRINGSECTOR

A: SkILLS PROFILE IN EXISTING WORkFORCE

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Poor Less than adequate Adequate Good


B: STATUS OF SkILLS AVAILABILITY IN INDUSTRY

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Concerningtheproductivityoflabour,themajorityofrespondents(about76percent)reportedstabilityinlabourproductivityduringQ12012,comparedtoabout65percentofrespondentsinQ42011(Figure10).Ontheotherhand,61percentofrespondents(previously69percent)reportedastableregulatoryenvironmentin Q1 2012 (Figure 11). Of note, share of respondents whoreportedanimprovedregulatoryframeworkdroppedfromabout13percentinQ42011toabout2percentinQ12012.

FIGuRE10:lABOuRPROduCTIVITy

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Q4 2011 Q1 2012

01020304050607080

Deteriorated Same Improved


FIGuRE11:REGulATORyENVIRONMENT

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Deteriorated Same Improved


FIGuRE12:OPERATINGPROFIT

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FIGuRE13:dEBTlEVElS

Q1 2012 Q4 2011

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Ungeared

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50% to 64%

> 65%

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In tandemwith the poor performance ofmanufacturing salesinQ12012relativetoQ42011,theshareofrespondentswhoreported operating losses before cost funding increased fromabout30percentinQ42011toabout60percentinQ12012(Figure12).

Theproportionofrespondentswhoregisteredadebttoequityratioofatleast65percentincreasedfromabout12percentinQ42011to16percentinQ12012.Themajorityoffirms(53percent)reportedadebttoequityratioof25percentorlessinQ12012incontrastwith74percentinQ42011(Figure13).

ContrarytothetrendinQ42011,theproportionofrespondentswho accessed credit at between Johannesburg InterbankAgreedRate(JIBAR)plus3percentandJIBARplus6percentdecreased in Q1 2012 while the proportion of respondents

12

accessingcreditatlessthanJIBARplus3percentincreasedinQ12012comparedtoQ42011(Figure14A&B).ThischangeisinlinewiththeincreaseincreditlendingobservedduringQ12012.

FIGuRES14A&B:INTERESTRATES

A: ShORT-TERM FUNDING RATE

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Q4 2011 Q1 2012

0102030405060708090

< JIBAR plus 3% JIBAR plus 3% to JIBAR plus 6%

> JIBAR plus 6%


B: LONG-TERM FUNDING RATE

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Q4 2011 Q1 2012

0102030405060708090

< JIBAR plus 3% JIBAR plus 3% to JIBAR plus 6%

> JIBAR plus 6%


GrowinG The mAnufAcTurinG bAse of sA – imporT, exporT And consumer loyAlTyBy:StewartJennings,CEO,PGGroup

The story of the vuvuzela is becoming an increasinglyimportantoneforSouthAfricanproducers.

It representedmorethan justasymbolofasuccessfulFIFA Wold Cup. Just two years ago small, localmanufacturers were optimistically heeding the clarioncall to set up injection moulding businesses and startproducingintheirownright.Butsadlythisoptimismwasquicklysilencedafteranalmostimmediatereactionfromforeignmanufacturerswhohavebegunproducingcheapreplicasatamassscale.

Vuvuzelasarebutoneexample.localproducersofsteelpotsandpans;solarwatergeysers; lightfittings, tyres,windscreens,othervariousautomotivecomponentsandof course textiles and clothing have all felt the effectof cheap – and in somecases vastly inferior – importshamperingtheirabilitytoproduceatcompetitivelevels.

I fully subscribe to the notion that theworld’s presenteconomicsituationisduelargelytoravenousconsumptionfinancedbyunsustainablelevelsofconsumerdebt.IfwedigalittledeeperintowhichgoodsarebeingconsumedwefindamorepressingthreattoourownGdPgrowth– almost50%ofmanufacturedgoodsnowavailable inSouth Africa are imported,mostly from countrieswithindustry subsidisations that make it impossible for asimilar South African product to compete effectively.Whatisneededisatwo-prongapproachthatfollowsanexport-ledstrategy togrowmanufacturingoutput,whiledefendingourindustryagainstthethreatofcheapimportsfromcountrieswithheavilysubsidisedindustries.

In order to create sustainable jobs, the South Africangovernment together with local business must put itscollectiveweightbehindgrowingthemanufacturingandagriculturesectors.Wehaveseen theeffectof relyingonaservices-relatedeconomyforgrowthandithasnotfaredwellfortheuSoranumberofcountrieswithintheEuropean union. However, South Africa’s agriculture,mining and manufacturing sectors have all shownnegativegrowthoverthepastfiveyears.

According to a recent study undertaken by Pan AfricaResearch, manufacturing has followed a distinctivedeclinesince1981.Thestudyreferredto themultipliereffectontheSouthAfricaneconomy–itlooksatthescaleofimpactthatanincreasedinvestmentinmanufacturingwouldhaveonotherareasoftheeconomy.Theresultsshowjusthowimportantmanufacturingisforachievinggrowth and creating jobs in South Africa. For eachinvestmentofR1inthemanufacturingsectorthereturnonoveralloutputholdsavalueofR1.13–theonlyothersector in South Africa that achieved multiplier effectlevelsgreaterthantheinitialinvestmentwasagriculture.

Themanufacturingsectorholdsthepotentialtogeneratesignificant spill-over effects on the economy and, thestudy showed, it consistently featured among the top-three sectors with the highest multiplier effects in

PicturecourtesyPGBison

13


terms of output, employment, export earnings andfiscal revenue. It is, however, essential that the localmanufacturing sector achieves a 10% annual growthrate in production in order to foster an environment inwhichtheseeffectscanbegintotakeplace.Thereporthighlighted that evenwith the new rescue package ofR25 billion of investment for themanufacturing sector(spreadoverasix-yearperiod),thesectorwouldneedafurtherR43billionworthofinvestmentinordertoachievegovernment’sjobcreationtargets.

If youwere to look at South Africa’s GdP, our growthis consistently below that of other African countriesincluding Namibia, kenya, Malawi, and yet we havethe largest economy in Africa with a well-establishedinfrastructural base. Between 2000 and 2010, SouthAfrica’s gross domestic output averaged 3.6%, whichwasthelowestgrowthinthepoolofpeercountries,andstandswell below theaverageof5.8%. Ifwewant togrowmanufacturing, and employment alongside it,wearenotgoingtodoitwithapedestriangrowthrate.

Accordingtotheresearchfindings,exportswillincreaseby around R52 billion over the next decade if thesector growsat a 3.4% rate.Agrowth rateof 10% inmanufacturing production would help promote othersectors in the economy. If this can be achieved, acumulativeR151billiongrowth inexports is likelyoverthe next ten years. Additional employment of about454,000 will also be created, contributing positivelytowardsgovernment’sNewGrowthPathtargets.

The report indicates thatcertainstrategiesare requiredto foster this re-industrialisation plan. These include acompetitive exchange rate policy for the rand; tradepolicies that promote manufacturing; electricity pricingto be differentiated in order to help energy intensiveindustries manage production costs; skills generationmust be encouraged; infrastructure backlogs must befast tracked and initiatives such as theMotor Industrydevelopment Programme must be emulated in otherareasofmanufacturing.

Beyond thesemeasures it is important to ensure thatlocalmanufacturingfollowsadefensivestrategyagainsttheincreasingthreatofcheapimports.

Recent Adcorp statistics indicated that 440 000 smallbusinessesinSouthAfricahavehadtoshuttheirdoorsoverthepastfiveyears.Smallbusinessesemploy68%ofthecountry’sworkforceandeachsmallbusinessemploys12 people, on average. Many, if not most, of thesebusinessesareinvolvedinsomeformofmanufacturingorproduction.Theseclosureshavecertainlybeenaffectedby the 2009 recession, onerous tax policies and risinglabourandpowercosts,butitwouldbenaïvetoassumethatavastportionoftheseclosureshavenotbeenlargelyaffectedbyaninabilitytocompetewithincreasedlevelsofdumped,importedgoodsonSouthAfricanshores.

Indeed, the vast portion of the Manufacturing Circle’smembers are feeling the effects of a contractingmanufacturing sector on a daily basis, the PG Grouphas certainly not escaped it. We have unfortunatelybeen forced to retrench 180 employees over the past18-monthsinourPGGlassdivision,largelyasaresultofless-expensive,poorerqualitywindshieldsandotherauto

glassproductsfindingtheirwayintoconsumers’vehicles.Thereisalsoarisingtrendforimportersoflower-pricedwindshieldsandautoglasstocherry-pickthefast-movingmarketsandproduct ranges thatbestsuit them.Whilewestockover4000differenttypesofautomobileglass,these importers have the luxury of satisfying only thefast-moving, high-margin products, while also hand-pickingthemostcommerciallyviableregions.Theimpactonour retail distributionnetworkandproduct lineshasbeen devastating, and is now in danger of severelyaffectingtheSouthAfricanconsumer.Withoutastronglocalautoglass industry,whowouldservicecustomersintheoutlyingareas?Andhowwouldtheseimportersbeabletosustainanationaldistributionchannel–currentlyconsisting of 260 outlets –being serviced by PGGlassandGlassfit?

Ofcriticalconcerntomeisanincreasinglyapparentlackof control and standards of these imported products.Whencostsareeradicatedfromproductionyouaremore-than-likelytakingqualityawaywithit,eveninthecaseofheavygovernmentsubsidisation.Incertaininstancesthismaybepalatablebutwhenitcomesatthecostofjobsintheeconomyandwhenitputsacustomer’slifeatstake–asitmaywelldointhecaseofafaultywindscreen–itisnotacceptable.Theproblemisthattheconsumerdoesnotknowwhichimportedwindscreenissafeandwhichisnot,itislikeplayingRussianRoulette.TheansweristosticktosafeSouthAfricanbrandsonallyourpurchases.

AfterextensiveresearchundertakenbyourownsuppliersaswellasateamfromtheuniversityofStellenbosch,wefoundcertainmistruthsinthemessagesthatdistributorsof imported windscreens are telling consumers.Specificallywithregardtothesafetyoftheproductstheyareselling.FromaPGGroupperspectiveweconsiderthistobeutterlyunacceptableandpotentiallylife-threateningfor consumers.Wehave startedengagingheavilywithour consumers to ensure that they understand theimplications of not buying the Shatterprufe brandedwindscreens.

Sowheretofromhere?

Whileinvestinginmanufacturingandincreasingourlocalproductiontothis10%levelmustbecomeakeypriority,themostimmediatesolutionwe,asmanufacturers,cantakemightwellbetoappealtotheconsumernottooptforcheaperimportedproducts.Itremainstheresponsibilityofanymanufacturertoeducatetheconsumerastotheimpactthatbuyingthesegoodswillhaveonthecountryasawhole;onjobsand,mostimportantly,ontheirownsafety.

Perhaps it is time for local manufacturers to beginengagingmoreintentlywiththeirowncustomers.Attheriskofsoundingalarmist,perhapsitistimetotakealookat your own business and checkwhether you blowingyour own vuvuzela. Is your product loud, recognisableandhugelypopular today? If so,will it still beyours tomanufacturetomorrow?

ItisalsovitalthatSAwholesalers,retailersandthepublicsupportqualitySouthAfricanproducts.youwillbesavinglives by creating employment and creating a biggereconomyforallofus.

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SECTION 5: MANUFACTURING OUTLOOk

Economic activity in South Africa is expected to moderateto 2.5 per cent in 2012,mainly as a result of (1) a recessionin theeurozoneon thebackof theprotracted sovereigndebtcrisisand(2)apredictedslowdown(hardlanding) ineconomicactivity in China. Figure 15 shows the value of South Africanmanufacturedexportstovariousregionsintheworldfrom2007to 2011. Europe dominates the pack in terms of importance.Consequently, the impact of a recession in the eurozone onSouthAfricanmanufacturerswillbesignificant.Inflation-adjustedmanufacturingvalueaddedisexpectedtoshrinkby0.7percentduring2012.

FIGuRES15:VAluEOFSOuTHAFRICANMANuFACTuRINGExPORTSByREGION

0

20

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60

80

100

120

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Africa Americas Asia Europe Oceania

R B

illio

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2007 2008 2009 2010 2011

Source:Quantec&PAIRS

From 2013, going forward, recovery in the global economycoupled with the implementation of the government’sinfrastructure investment drive, as well as themanufacturingcompetitivenessenhancementprogramme,ispredictedtoboostthemanufacturingsector.Inflation-adjustedmanufacturingvalueaddedispredictedtoreboundandexpandbyanannualrateofabout3.9percentin2013.However,withtheimprovementinglobalinvestors’riskappetiteandtheassociatedcapitalinflowsintoemergingmarkets,therandexchangeratewillcontinuetopresentdownsideriskstothesector’soutlook.Table3presentsprojectionsforkeymanufacturingandeconomicvariables.

TABlE3:MANuFACTuRINGOuTlOOk(ANNuAlPERCENTAGECHANGE)

2010 2011 2012f 2013fManufacturing VariablesRealmanufacturingvalueadded 5.4% 2.4% -0.7% 3.9%Realmanufacturinggrossdomesticfixedinvestment 3.4% 10.4% -3.0% 9.4%Manufacturingemployment(number) -3.3% -1.4% -3.8% -1.0%Realmanufacturingremunerationperemployee 10.3% 2.1% 1.6% 5.4%Realmanufacturingexports 6.0% 6.7% -4.1% 4.6%

key economic variablesRealgrossdomesticproduct 2.8% 3.1% 2.5% 3.4%Consumerpriceinflation 4.3% 5.0% 6.2% 6%Producerpriceinflation 6.0% 8.4% 8.9% 9.2%Primelendingrate(percent) 9.8% 9% 9% 9.1%ExchangerateR/$ 2.1% -3.7% -1.2% 2.0%

Source:Quantec&PAIRSNote:Constant2005priceswhereapplicable

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Notes:

TheManufacturingBulletinisaninitiativeoftheManufacturingCircle.ItaimstoserveasavoiceformanufacturinginSouthAfricawithinsightfulanalysisoftrendsaswellasinformedcommentonwhatneedstobedonetoensurethatSouthAfrica’smanufacturingbaseisnurturedandgrown.

TheManufacturingCircleismadeupofanumberofSouthAfrica’sleadingmanufacturingcompaniesfromawiderangeofindustries.SomeofthemembersareleadingSouthAfricanexportersofmanufacturedgoods,othersarelocallyfocusedcompaniescompetingwithimportsfromaroundtheworld.ThereisonecommondenominatoramongthemandthatisapassionformanufacturingcoupledwithaferventbeliefthatforSouthAfricatobestrong,itsmanufacturingsectormustbestrong.

Astronganddevelopingmanufacturingsectorwilldrivethecreationofskilledandsemi-skilledjobsintheSouthAfricaneconomy-jobsnotjustinthelargemanufacturingcompaniesbutcriticallyalsoinentrepreneurialsmallcompanies.Newjobsgohandinhandwithanincreaseinfixedinvestmentinplantandbuildings–afurthermultiplierofeconomicgrowth.JobcreationisaprimaryobjectiveoftheManufacturingCircle.

Formed in 2008, the Manufacturing Circle has been quietly going about its business of interacting withgovernmentandotherstakeholders inordertoreview,debateandhelpformulatepolicieswhichwillhaveapositiveimpactonSouthAfrica’smanufacturingbase.

kEyINITIATIVESTOdATEHAVEBEEN:• Theneedforacompetitiveandstablecurrency• Preferentialprocurementforlocallymanufacturedgoods• TheneedforalowercostofcapitalinSouthAfrica• InputsintoIPAP2andtheNewGrowthPlan• EffectivetradepolicywhichsupportsSouthAfricanmanufacturing• Inputanddebateontheissuesofelectricitycostsandcarbontaxes• Improvinginvestmentandexportincentiveschemesandprocesses

ManufacturingholdsthekeytoagrowingandemployingSouthAfricaneconomyandtheManufacturingCircleisplayingakeyroleinfindingthatfuture.

Research And Analysis

Sections1,3-5byPan−AfricanResearchandInvestmentServicesWeb:www.pan-african.co.za

Email:[email protected]

Section2bySBPWeb:www.sbp.org.zaEmail:[email protected]

Manufacturing Circle

Email:[email protected]:www.manufacturingcircle.co.za

ToreceiveyourcopyoftheManufacturingBulletinonaquarterlybasis,pleaseemailyourpostaladdressto:[email protected]

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EXECUTIVE SUMMARY · Font: Helvetica Neue LT Std Condensed Manufacturing Bulletin QUARTERLY REVIEW FIRST QUARTER 2012 EXECUTIVE SUMMARY • Business confidence remained stable during