By Louis Van Tonder, Client Business Executive, Adcorp BLU
Years before the devastating effects of the Covid-19 pandemic were felt worldwide, the South African manufacturing sector had been feeling the pressure. Between 2015 and 2020, the total capacity utilisation in the manufacturing sector has averaged only 79.8%. The question remains, why is South Africa’s manufacturing industry not producing at full capacity?
According to a recent report published by Chief Economist, Annabel Bishop of Investec, the utilisation of manufacturing production capacity in May this year (quarterly data) was at 78.6% of total capacity, up from 76.3% in February and 59.8% in May 2020. While the recent improvement provides a bit of hope, the numbers are still well below the 83.4% average seen during the mid 2000s, which saw the fastest sustained period of economic growth.
Effectively, 78.6% means an underutilisation of 21.4%. The reasons cited for this underutilisation include a shortage of raw materials, a shortage of labour and ‘other’ (such as downtime due to the Covid-19 lockdown, maintenance and changes in productivity). And the largest issue? A whopping 11.1% is due to insufficient demand. Of course, this does not mean demand for production has decreased, it means demand for local production has decreased. Locally produced products are largely much more costly than those imported from industry powerhouses such as China, and South African products often cannot compete.
From industry giants to slow demise
Let’s take a look at the South African steel industry to see this in action. In an article in Engineering News published in 2020, South African Iron and Steel Institute secretary-general Charles Dednam lamented the slow demise of the sector that was once a giant of South African industry. Although its struggles are the result of numerous, often interlinked factors, there is one issue that eclipses them all. “Given its high fixed costs, the primary steel industry relies on economies of scale to realise sustainable margins,” says Dednam. “And in that context, one figure explains a great deal about the state of the industry globally: 928 million. That’s the number of tonnes of crude steel that China – undisputed global champion of scale – produced in 2018. The next largest national producer – India – produced one ninth of that amount. South Africa produced 6 million tonnes.”
The Covid-19 pandemic compounded existing challenges on the local front, such as frequent load shedding and other unplanned power outages, an unreliable transport infrastructure and cripplingly high input costs. The upheaval caused earlier this year by rioting and looting action, primarily in KwaZulu-Natal but also in parts of Gauteng, threw even more obstacles into the mix.
While traditionally there is improvement in manufacturing capacity utilisation in the second and third quarters of the year, South Africa’s third quarter will see substantial damage to its manufacturing capacity due to the disruption of supply chains in July, the effects of which will likely be felt even into next year.
Bringing relief to industries across the board
The government’s economic recovery package and a wide range of fiscal measures, including tax exemptions in distressed sectors, should go some way to bring some relief to businesses affected by the civil unrest and Covid-19 pandemic. But in the long term, particularly considering the dire statistics of the past few years, manufacturing businesses need to implement their own cost-cutting strategies to ensure they survive.
Reviewing production cost in general is a good place to start, but labour cost is the obvious target. While reducing staff numbers seems like a quick way to lower the costs of labour, this has a massive socioeconomic impact, particularly in the current climate. And it can actually be the wrong move for the business – the cost of finding and training new workers often outweighs the financial benefit of trimming down the workforce.
So, how do you reduce labour costs without laying off workers?
- Review your workforce
A review of your workforce will help to ascertain the business’s staff needs and how existing workers can be best employed. For example, are all current workers needed full-time? Could some workers be trained to fill different roles that would add more value?
Overtime and overscheduling are two culprits that can create unnecessary labour costs. Establish what the peak and non-peak production times of your business are so that shifts can be scheduled according to production flow.
Training workers helps your business run like clockwork and reduces the chance of errors and workplace accidents. Apart from the increased productivity created by skilled workers, educational investment in staff fosters motivation and loyalty.
Outsourcing provides more flexibility and less risk to businesses. Temporary or part-time workers can be brought in only when the workload requires it, reducing unnecessary costs. Part-time labour also exempts companies from paying certain benefits that full-time workers are entitled to.
Providing a safe working environment for employees – apart from being the right (and legal) thing to do – will also save money. By keeping your employees safe and healthy, you can avoid workers taking sick leave or staying off work as a result of injuries. Prioritising health and safety also means there’s less chance of workmen’s compensation claims.
Louis von Tonder holds a Master’s Degree in Leadership in Performance and Change from the University of Johannesburg as well as a Postgraduate Diploma in Organisational Development from the University of South Africa. He has more than 20 years of experience in strategic human capital, industrial relations, employee relations and reporting systems. He is currently employed as a Client Business Executive at Adcorp BLU, a division of the Adcorp Group.
Bishop, A. (2021). Capacity utilisation: lifts in Q2.21, while Gauteng announced a raft of plans to boost economic activity and repair in townships post the riots. Available from: https://www.investec.com/content/dam/south-africa/content-hub/annabel-bishop/economic-updates/documents/Capacity-Utilisation-Q2-21.pdf
Dednam, C. (2020). Opinion: South African steel industry is an industry in distress. Available from: https://www.engineeringnews.co.za/article/opinion-south-african-steel-industry-is-an-industry-in-distress-2020-03-06 (Accessed 3 September 2021).