Will It Be Annual Or Permanent Shut Down For Industry?

A DRIVE through the industrial sites around the country may persuade one to conclude that manufacturing processes have advanced because of emissions of clear as opposed to thick dark, smoke.

In actual fact it signifies the little production actually taking place. On all fronts, 2008 was a drastic year for players within the manufacturing sector. Annual shutdowns came as early as March for some firms and for some these might turn out to be permanent closures.

Together with agriculture and mining, the manufacturing sector is one of the economic pillars upon which our economy has been based.

For the six months ended June 30 2008, the sector accounted for 15% of the country’s export proceeds. Contribution to GDP in 2007 was approximately 17% whilst 15% of the country’s formal labour force had jobs in this sector. 

Production from the sector has however been in freefall since the turn of the millennium. According to the 2007 CZI manufacturing survey, output for 2007 declined by 28% compared to the 18% slump experienced the prior year.

Most companies are operating below the 10% capacity level. Financial results indicate that volumes have slumped by between 20% and 80%. Colcom reported a volume decline of 72% whilst Delta had a fall of 43%. Though Zim dollar figures point to phenomenal growth, revenues have plummeted in real terms.

Frankly speaking, firms are walking on thin ice –– just producing enough to break even. Some firms, like Art, are even considering halting production at some plants owing to massive under utilisation of machinery whilst others like PGI have sent employees on leave as cost cutting measures. Colcom and CFI have shelved some of their projects owing to a shortage of stock feed.

Persistent power cuts, raw material shortages and deteriorating infrastructure are some of the problems haunting the sector. Inflation has also taken its toll on employee incomes.

Salaries are no longer a source of motivation for most. Employee fatigue is now evident thereby exacerbating the brain drain as experienced workers seek greener pastures in the region.

Companies have turned into training institutions with interns joining in the exodus band soon after acquiring the requisite skills.

The exchange rate management framework in place is hindering progress within industry. The recognized inter-bank market is greatly lagging the open market thereby overvaluing the local unit.

Huge exchange losses have been encountered in converting export proceeds to the local currency.  Firms have also encountered problems in trying to access their Foreign Currency Accounts.

Forex shortages have become perennial challenges to the firms’ ability to procure essential raw materials.
Hyper-inflation has crippled businesses’ ability to finance projects.

Credit lines have collapsed forcing industry to operate on a cash basis. Bank notes on the other hand have been in short supply for some time now. In other countries, such a scenario would see a number of firms falling by the wayside. A notable example is the ongoing credit crisis that has forced Ford, General Motors and Chrysler, better known as “the big three” companies of the US automobile industry to beg Congress for a lifeline.

Effects of the June 18 price blitz are still visible. Manufacturing is in dire need of massive recapitalisation.

Bacossi and Aspef facilities have not yielded the desired results. In his half year monetary policy statement, the central bank governor disclosed that, approximately US$13,5 million and Z$2,7 quadrillion had been disbursed to 95 manufacturers to boost production whilst Z$160 trillion had been disbursed to support 15 major grocery and hardware retailers and manufacturers.

These injections are just a drop in the ocean as independent analysts estimate US $2 billion as the minimum amount needed to bring industry back to optimum levels.

The legal and regulatory environment has been another thorn to the segment. Gravely crippling the sector is the current pricing mechanism enforced by the National Incomes and Pricing Commission. This pricing system is sinking companies deeper in quicksand.

Price reviews have always lagged the rate of inflation or the movement on the exchange rate upon which prices are now based. So how are firms managing?

Most corporates are now focusing on generating “other income” as core activities are not generating enough revenue streams to sustain operations. Fair value adjustments and realised gains on equity investments have been buttressing earnings of late. Some firms had even established safe havens in illegal foreign currency trading before the plug was pulled.

Companies have also resorted to growing exports in the face of plummeting local demand for products as a result of shrinking disposable incomes. Innscor turnover from regional operations amounted to US$85, 5 million which translated to a growth of 61% from the prior year.

Management even highlighted that the group will focus on expanding its presence within the region   Art also disclosed that regional operations now account for 49% of the group’s turnover.

Those serving the local market are producing high margin products. Dairibord Zimbabwe Ltd is one such firm that has successfully moved from producing traditional milk which is always under the spotlight of the authorities.

Innovative modes of payment have however had to be developed to enable value retention. Fuel coupons and payment in the form of raw materials are now popular. In short “Barter trade” is back.

The advent of Foliwars was a great relief to most companies as it enabled regionally comparable prices to be charged. Rates of stock turnover are however still low as the majority of the potential market is still earning Zim dollars.

As the curtain comes down on 2008 expectations are high that the downward trend might still be reversed, if only the political standoff can be addressed. This will help create an atmosphere conducive to business operations.

BY KUMBIRAI MAKWEMBERE