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Regaining the edge in manufacturing

Kumbirai Makwembere

THE NEW YEAR has begun on a positive note with the mainstream and resource index gaining 6,5% and 8,19% respectively. Activity picked up after government officials indicated that the constitution-making process will only be complete in the third quarter implying that presidential elections may only be held in the coming year. This resulted in buyers, especially foreign buyers returning to the market.  Foreign investors were taking positions for 2011 evidenced by the strong movements on the heavy weight counters.

Simply put, the past month saw some sense of optimism returning to the market. These sentiments were echoed by various captains of industry at the recently held Mandel Economic Symposium. The minister of Economic Planning and Investment Promotion,  Tapiwa Mashakada, disclosed that government is projecting GDP growth of above 10% from the initial estimate of 9,3%. Mining and agriculture are expected to continue spearheading this economic growth with further expansions of 44% and 19,3% expected in the current year. Traditionally, the foursome of mining, agriculture, manufacturing and tourism anchor the performance of the economy. Hence if the economy is to fully recover to levels prevailing in the 1990’s, the latter two sectors must recover as well.

Tourism is showing some signs of recovery evidenced by a 47% jump in tourist arrivals announced in the Monetary Policy Statement for the nine months to  September 30 2010. Though city hotels, through conferences and workshops, are currently accounting for the greater proportion of these numbers, occupancies and room rates have generally improved. African Sun reporting results for the full year to  September 30 2010 disclosed that occupancies improved by 41% to 45% while Average Daily Rates (ADR) stood at US$79 representing a growth of 8%.

Worrisome though, is the slow pace of reform in the manufacturing sector. In 2010, the sector is believed to have grown by a modest 2,7% with a further growth of 5,3% projected for the current year. This is too little considering that production is coming off a low base. Most companies scaled down operations or closed when hyperinflation intensified in 2008 and also due to the infamous June 18 price blitz. A growth of at least 10% would be reasonable given the impressive performance in agriculture and mining sectors.

Though capacity utilisation improved to 43,7% from the 32,3% recorded in 2009, however it remains below the 60% target set by the government in its inaugural fiscal policy statement post the adoption of multiple currencies. It would appear that this depressed scenario is likely to continue in the sector as there are a host of challenges hindering growth. These factors are also weighing negatively on the competitive edge of both the companies and the country as an attractive investment destination.

The greatest challenge is that of utilities. Provision of electricity and water supply in the country is unreliable. Furthermore the pricing of these utilities is steep. Companies have been forced to put in place back up plans which obviously come at a cost. Use of generators to power operations as well as installation of water purification units are few examples of these measures. This however is both expensive and unsustainable. Government should therefore liberalise the energy sector through allowing corporates to import power individually so that they have uninterrupted power supply which helps them to plan ahead.

The high cost structure particularly wages is another factor weighing down on productivity of local companies. It is difficult on the part of companies to pay high salaries at a time when production remains low. Firms should be allowed to match remuneration with level of production taking place. Labour should move from the practice of negotiating wage increments on a quarterly basis as this was necessitated by hyper-inflation. Use of multiple currencies has brought about stability making it suitable to undertake this process on an annual basis.

Local companies are also suffering from shortages of capital to revive their operations. Some companies continue to record losses regardless of the good business models they employ. Cairns Holdings for instance remains in the doldrums despite the fact that demand for groceries and beverages remains strong. The solution is to inject cheaper funding to be used for working capital as well as retooling of machinery.

Companies should therefore be allowed to explore all possible financing avenues. In this regard, the authorities should be flexible on issues relating to ownership of companies. Indigenisation and economic empowerment regulations should be applied on a case by case basis.  If a company secures capital from an offshore investor in exchange for equity, then 51% ownership requirement in the companies should be waived. Allowing Ecobank to acquire a 70% stake in Premier Banking Corporation as well as the sale of a 54% stake in Zisco Steel to Essar are steps in the right direction.

The inefficiencies in the local companies have availed opportunities to foreign firms that are flooding the market with products. While this has helped improve product availability there is risk of rand induced inflation.

To counter the influx of imports, management within companies should move away from the cost plus pricing approach as they will not be able to compete with foreign products. Rather companies should assess their manufacturing processes, refine them to eliminate unnecessary costs which will help them produce products at prices lower than those of foreign companies.

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