HomeBusiness DigestA crisis crying out for a solution

A crisis crying out for a solution

Last week the Confederation of Zimbabwe Industries published results of its 2012 manufacturing sector survey.

Report By Kumbirai Makwembere

The results were not surprising at all and they only confirmed the view that manufacturing remains in the doldrums and is proving difficult to revive.

Capacity utilisation dropped to 44,2% from 57,2% against government’s set target of 70%. Some companies in the leather and allied sectors are even operating at lower capacity utilisation levels of 27,5%.

However, there are some firms in the beverages sector, like Delta, that are operating at levels close to 80%. The lagers unit, for instance, is running at 88% capacity.

The challenges besieging the sector are not new but the same the country has been trying to address for long, particularly since the adoption of multiple currencies.

Results from the survey indicate shortage of working capital remains the biggest constraint to capacity utilisation, with a score of 32,3%. This has resulted in some companies recording losses regardless of the good business models they employ, as most profits go towards servicing debt. Both the cost of funding and tenure remain unfavourable. Lending rates average 16%, whilst tenures for most facilities remain below one year.

Turnall, for instance, relies on imported fibre which it sources from as far afield as Russia. The raw material is paid for in advance and deliveries have a lead time of three months. This forces the company to borrow to fund its working capital cycle.

Business 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 the 51% indigenous ownership requirement in companies should be waived. Existing shareholders must also be prepared to cede some shareholding in exchange for money.

The challenge with most local shareholders is they are obsessed with control to the extent that they are not willing to bring new shareholders on board, even if this is the only way to rescue the company from collapse.

Inconsistent supply of utilities was also advanced as the other reason for inefficiencies in our local industry. Provision of electricity and water in the country is unreliable. Furthermore, the pricing of these utilities is steep. Business has 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 some examples of these measures. This, however, is both expensive and unsustainable.

Government should speed up liberalisation of the energy sector. Media reports indicate that 10 power producers were licensed in the current year; hopefully these companies will bring long-lasting solutions.

Local firms are also suffering from low product demand as they are failing to compete with imports that land in the country at lower costs. Respondents to the survey indicated most of the competition is from South Africa. Inefficiencies are in the form of high repair and maintenance costs due to the use of aged plant and machinery.

While the hyperinflation that prevailed in the country is the excuse advanced for having frequent breakdowns, we also feel some company executives are to blame. This is because up to now, some firms are still making use of machinery that came into the country second-hand before Independence.

The inefficiencies in these local companies have availed opportunities to foreign firms that are flooding the market with their products.

Our cost structures locally are again on the high side when matched with other regional players. For instance, labour costs currently average US$150 locally against US$100 in the region. This scenario is compounded by the fact that production volumes are low, resulting in high production costs per unit. Perhaps firms should start matching remuneration with the level of production taking place.

Coming up with a solution for local manufacturing companies is always a difficult task. Some are of the opinion companies should be shielded from external competition, which they view as unfair. This has problems in that it makes consumers settle for substandard and higher-cost products. The Buy Zimbabwe campaigns have not yielded the desired results as consumers will always opt for the best products with the best quality and optimum price.

The best solution going forward will be to provide business with cheap funding to retool production facilities as well as working capital. This money again has to be long-term, and judging by the loans available locally, this will be difficult. The only other way out is foreign money, which again might not flow in due to the ongoing implementation of Indigenisation and Economic Empowerment laws.

It is inevitable the country will only be left with manufacturing companies with comparative advantage. We are better off importing products that we cannot produce competitively and channelling our limited resources to areas like mining and farming, where we have the potential to do well.

We can attract foreign investment in areas like mining by being investor-friendly and then building on that by developing downstream supporting industries whose costs and prices are competitive.

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