The manufacturing industry is evolving, but is still sensitive to economic turbulence. Whether you’re starting, managing or growing your operations, you can learn about this sector’s strengths and weaknesses, as well as innovations and advancements in this comprehensive guide.
While factories are manufacturing more products than ever, it’s been a tough ten years for the global manufacturing sector. Following the rise of developing economies in Africa and the Far East, a worrying economic downturn in Europe, and falling manufacturing employment rates in many developed economies around the globe, turnovers just weren’t as great as numerous manufacturers had hope for.
In Manufacturing the future: The next era of global growth and innovation, a comprehensive report from the McKinsey Global Institute, researchers provide a clear view of how manufacturing contributes to the global economy today.
These are the consultancy’s two key findings that might make you think a little differently when it comes to making decisions in your business:
1. Manufacturing’s role is changing
The role of manufacturing is evolving to suit the needs and demands of consumers. For example, Coca-Cola SA incorporated new product options into their product line to suit the South African consumer. The link between manufacturer and customer is becoming stronger as retaining market share becomes more competitive, which results in manufacturers bending to the will of consumers to avoid losing profits.
Another example of how manufacturers’ roles are changing is the automation of the customisation of BMW vehicles. This allows manufacturers to meet the demands of consumers efficiently to ensure they remain interested in the purchase. Instead of previously taking several months to build and deliver a vehicle it now takes a few weeks.
The changing role of manufacturers has more to do with the changing attitude of consumers, as customers are impatient and are seeking instant gratification. This means manufacturers have to work hard and faster to achieve the same results as before.
Related: 3 Important factors that can influence your manufacturing start-up’s success
2. Manufacturing is not monolithic
No two manufacturing businesses are exactly alike; some are more labour- or more knowledge-intensive. For example, labour-intensive manufacturing businesses could be producing mass-quantities of clothing and footwear, whereas knowledge-intensive manufacturers are more automated and rely heavily on expertise, such as information and communications technologies or pharmaceuticals.
Some rely heavily on transport; others need to be close to the customer. A fuel hike, a strike in the mining sector, a drought; these factors can all impact how well or poorly a manufacturer performs, which means they have to plan for these anomalies before they’ve even taken place.
The largest segments of South Africa’s manufacturing sector include industries such as autos, chemicals and pharmaceuticals. These depend heavily on global innovation and R&D, and also require close proximity to markets. The second-largest segment is regional processing, which includes printing and food and beverage production. The smallest segment, producing only 7% of output, creates labour-intensive commodity items.
South African manufacturing output
South Africa has developed an established, diversified manufacturing base that has shown its resilience and potential to compete in the global economy. The manufacturing sector stimulates the growth of other activities, such as services, and enables important outcomes such as employment creation and economic empowerment.
The diverse structure of the South African economy is a critical aspect of the country’s historical and current growth performance. The manufacturing sector continues to contribute toward a significant share of the South African economy, however despite its relative importance, out has declined from 19% in 1993 to about 17% in 2012 in real terms. According to Media Club South Africa, the sector contributed 15.2% to South Africa’s GDP in 2013, dropping to 13% in 2016, but remains the fourth-largest contributor to the nation’s economy.
All ten main industrial sectors have contributed to growth in South Africa’s manufacturing sector, according to Statistics South Africa.
SA’s top 10 industrial sectors
- Agro-processing – Companies such as Tiger Brands, Unilever and Clover
- Automotive – Companies such as BMW, Mercedes-Benz and Toyota
- Chemicals – Companies such as Sasol, AECI and Dow Sentrachem
- Information technology – Companies such as Arrow Altech Distribution, ASD and ATMC
- Communication technology - Companies such as Jasco, Telkom and SNO
- Electronics - Companies such as Microtronix, PCB and CST Electronics
- Metals - Companies such as Billiton, Hulett Aluminium and Iscor
- Textiles - Companies such as JMV Textiles, Gelvenor Textiles and Winelands Textiles
- Clothing - Companies such as Impahla Clothing, Influence Clothing and Trade Call Investments Apparel
- Footwear - Companies such as Hopewell Footwear, Palm Footwear Manufacturers and Julonetix.
Related: Grants, funding and incentives for Manufacturing in South Africa
Government’s plan for action (and growth)
Underpinning this sector is the Department of Trade and Industry’s (DTI) Industrial Policy Action Plan (IPAP), which aims to improve structural development and to increase the competitiveness of South Africa’s manufacturing players. IPAP states that sustainable long-term development should be reinforced by higher growth, exports and labour-intensive, value-added economic activity in the production sectors, led by manufacturing.
According to the plan, manufacturing should play a critical role in South Africa’s economic development in future, particularly considering the country’s resource-rich economy.
Manufacturing has direct employment-creation potential and is the engine of rising per capita income and employment through its stimulation of the rest of the economy. Rising per capita incomes are particularly important for sustained growth and employment creation in the consumption-driven service sectors of the economy, which have become critically dependent on unsustainable levels of household debt. This impacts acutely on women, particularly the working-class and poor urban and rural women.
Manufacturing is central to South Africa’s export strategy, based on value-added, labour-intensive tradable products that generate revenues that have a significant, positive impact on the balance of trade.
Manufacturing also plays a critical and indispensable role as a driver of innovation and productivity growth. Manufacturing must increasingly provide machinery and other inputs for the country’s infrastructure-build programme, which is central to South Africa’s growth strategy and, more generally, into public goods, including transport, health, education and housing.
Manufacturing sector statistics
- Manufacturing contributes 15% of South Africa’s GDP.
- Exports from South Africa jumped 12.8% to R99.6 billion in November of 2016.
- Manufacturing has, however, experienced a year-on-year contraction with 114 000 jobs lost.
- The Manufacturing sector currently employs around 1.7 million people.
- Foreign direct investment flows into South Africa decreased 74% to USD1.5 billion during 2015.
SWOT analysis of the South African manufacturing sector
All ten major industrial sectors have contributed to growth in South Africa’s manufacturing sector during the last decade according to Statistics South Africa. However, as you look to improve output or scale back or pour fuel on the fire to grow your company, you must take note of the following strengths, weaknesses, opportunities and threats:
The strengths of the manufacturing industry are that it is relatively stable. Although the demand for manufacturing tends to fluctuate with the ups and downs of the economy, it is characterised by regular periods of recovery following any downturns. Additionally, manufacturing has become highly efficient over the last century, with the ability to maximise both the productivity of workers and machines to improve profitability.
South Africa arguably boasts world-class infrastructure, exciting innovation, research and development capabilities and an already established manufacturing base. It is actively involved in the development and roll-out of new green technologies and industries, creating new and sustainable jobs in the process and reducing environmental impact.
A chief weakness of the manufacturing industry is that much of it is built on the production of non-essential goods. This means that a downturn in the economy can have a damaging effect on it. Another weakness is that it is a mature industry. This means that there is heavy competition and potentially little room for growth. As a result, the manufacturing sector can be a cash-cow for those who are already in it, but may be unattractive to new entrants.
Set prices that affect the economy, such as electricity tariffs and petrol prices, form part of the macro policies that need to be reviewed to enable the manufacturing sector to work efficiently and affect the economy positively. As this is a national challenge, government should play an enablement role and not an intervention role. An adversarial relationship between government, labour and business, arguably, severely hampers a coordinated approach for the good of the sector.
Related: Examples of a SWOT
Manufacturing is among the top three multiplier sectors in terms of value addition, job creation, export earnings and revenue generation for every R1 invested, according to Deloitte’s 2013 report, Enhancing manufacturing competitiveness in South Africa.
Opportunities for the manufacturing industry remain in the technology and bio-technology areas. These are growing market segments with higher profit margins. Foreign markets with a growing middle-class are providing opportunities for technology and bio-technology manufacturers to increase their profitability through exports. The future of manufacturing in South Africa, arguably, lies in the country’s ability to become a stable business destination that’s globally competitive.
South African manufacturing jobs have been lost or exported to other countries since the beginning of 2008, with the majority going to China.
The South African business environment has worsened while administered prices in Brazil, Russia, India and China have decreased by over 36% in the last decade. Here are some facts of interest:
- By contrast, electricity costs have been raised by over 170% in South Africa, and this is predicted to continue to escalate at more than double the forecasted inflation rate.
- Our domestic market is vulnerable to imports from China, India, Brazil and other countries that offer much higher incentives and protection to their manufacturers.
- The largest threats to the manufacturing industry today are from low-wage high-productivity nations like China, India and Brazil. India, for example, has the ability to supply highly-educated workers at low wages to fill roles in the high-tech manufacturing market segment.
- There is a need to review the bulk infrastructure pertaining to the reliability of water and electricity supply that allows for manufacturing to take place.
- Frequent strikes indicate that the collective bargaining system is placing pressure on manufacturing and that more leeway has to be given to other methods that were successful in some areas of industry, such as central bargaining.
Opportunities and threats impacting supplier value chains
As the manufacturing industry focuses more on big data and the Internet-of-Things (IoT), suppliers will need to start to implement this technology in order to keep pace with the innovating manufacturing industry. Suppliers will need to shift from traditional supply chains towards a connected, smart, and highly efficient supply chain ecosystem.
Supply chains currently exist as isolated steps between marketing, product development, manufacturing and distribution. Digitisation will bring all those steps together, creating an integrated system that is fully transparent to all the players involved. By incorporating this technology, the supply chain can react to disruptions or even anticipate them, in real time as conditions change.
On the other hand, technology takes time to roll out, which will cause friction between the various steps until everyone is up to speed. Updating systems could also be a large financial constraint for smaller sections of the supply chain causing smaller operations to lose business to large operations able to afford to upgrade their technology.
With new technology, it will create an entirely new way of interacting between businesses; this will create new ways of serving existing needs and disrupt prevailing industry value chains. Supply chains could also be disrupted by international or local innovative competitors that have adapted faster to the innovative connected technologies of IoT.
Complete transparency can also create risk for businesses within the supply chain, as its processes and systems will be revealed, which could leave it vulnerable to competition replicating its competitive edge.
Innovation and disruption within the manufacturing sector
By 2025, a new consumer class will have emerged, and the majority of consumption will take place in developing economies, creating new market opportunities. Meanwhile, in established markets, demand is fragmenting as customers ask for greater variation and more types of after-sales service. A rich pipeline of innovations in materials and processes – from nanomaterials to 3D printing to advanced robotics – also promises to create fresh demand and drive further productivity gains across manufacturing industries and geographies.
Gartner predicts that 45% of the wold’s fastest growing companies will employ ‘smart’ machines and virtual assistants by 2018, to replace many human functions. For manufacturing, self-aware technology and interconnected devices will allow businesses to reduce human capital and improve profitability. AI and self-aware technology won’t require training as they operate self-sufficiently, the machinery won’t become distracted, or leave for a competitor, which is making this technological option so appealing to manufacturing business owners.
Related: Essential insights to drive innovation in your business
There is currently technology growing in support which takes over the mundane, repetitive tasks, allowing workers to focus on tasks that involve intuition or creative thought. This gives manufacturers the opportunity to combine both robotics and human intuition, resulting in an increase in productivity.
As a result of this technology, manufacturers and policy-makers need new approaches and capabilities. Companies must develop a detailed understanding of specific emerging markets, as well as the needs of their existing customers. They will also require agile approaches to the development of strategy – using scenario planning rather than forecasts, for example.
The location of manufacturing plants will be a key change too. Labour-intensive industries almost always follow the path of low wages, but others, with more complex needs, must weigh factors such as access to low-cost transport, consumer insights, or skilled employees. The result could well be a new kind of global manufacturing company – a networked enterprise that uses ‘big data’ and analytics to respond quickly to changing conditions and can also pursue long-term opportunities.
Factors that affect SA’s manufacturing sector
1. Weakening Rand
During the 2008/2009 economic crisis, the manufacturing industry contracted sharply. Its subsequent recovery hasn’t been enough to make up for the volume of manufacturing production to return to previous levels.
The weakened Rand does negatively impact manufacturing businesses, specifically those dealing with international suppliers. However, a weakened Rand helps exports businesses receive more revenue for every unit sold in USD; it also assists because it becomes too expensive for importers to compete with local manufacturers.
2. Oil price
The drop in the oil price has been challenging for many countries across the world, but South African manufacturing has actually benefited from this as many businesses utilise oil as a major input, such as the petrochemical sector specifically paints, coatings and plastics.
Low raw material costs will allow manufacturing businesses to increase profits, potentially growing their business; on the other hand this benefit may just reduce their overall costs as other operating costs need to also be taken into account.
3. Political landscape
The arguable turmoil in South Africa’s political landscape has a negative impact on the country’s economy, which is directly linked to manufacturing. A downturn in the economy results in a similar reaction from the manufacturing industry.
Related: Essential elements to consider when moving your factory into the digital age
4. Potential ratings downgrades
A sharp decline in foreign direct investment would result if South Africa were to perform any worse on the AT Kearney’s FDI confidence index. This would impact the economy and growth, as well as cause current investors to sell their stakes in the country and invest elsewhere. Since manufacturing is sensitive to the performance of the economy, this event would negatively impact it.
5. Trade embargos
Should embargos be placed on countries that South Africa’s manufacturing industry either receives supplies from or exports goods to, the sector would have to quickly find a replacement and negotiate terms to the best possible outcome. But, since businesses were most likely dealing with the most cost-effective option, it will reduce profits. However, the opposite can be said for countries that have lifted embargoes, as these may be the more cost effective option for South African manufacturers.
6. United States presidency
Donald Trump’s election as president of the United States of America came as a surprise, catching many off guard, putting others into varying states of confusion. During Trump’s campaign, he promised to implement protectionist trade policies that could result in tougher future trade negotiations for South African manufacturers.
Those trading with the United States of America will either have to find alternative buyers/sellers or they will have to settle for the tougher trade options. If Trump delivers on his early threats it will be manufacturing exporters that will be negatively impacted.
7. Aggressive/active players
Despite aggressive or active players in the same industry, South African manufacturing is making broader strategic partnerships moving forward, to ensure long-term growth.
“Costs are also rising with the added challenges of China dumping products in Africa, particularly along the coastal countries. China is a very aggressive new player and we need to enact protection at a government level point of view,” explains ArcelorMittal South Africa chairman Mpho Makwana speaking about the steel industry.
With the increasing innovation in manufacturing, this industry is set to develop into an almost unrecognisable automated system of robotics. However, South Africa’s manufacturing industry is sensitive to the economy, but can recover itself once the economy starts to positively perform.
The rising cost of living in China is causing many investors to look to Africa to invest in, especially considering the human capital boom that is taking place here, which should increase foreign direct investment through the next two decades, if SA doesn’t get downgraded. Regardless of political climates, the manufacturing industry is continuously developing, innovating and improving itself to remain locally and internationally competitive.