We are two weeks into the New Year,a time companies are expected to resume operations after their traditional shutdowns.
By Kumbirai Makwembere
Companies, particularly in the manufacturing sector, traditionally halt their operations mid-December to allow for annual maintenance of their plant and equipment.
This year, however, appears to be different. The media is awash with reports that some companies instead of just going through their annual shutdowns have decided to close shop permanently.
It is reported that Reckitt Benckiser, manufacturer of popular household brands such as Nugget shoe polish, Dettol and Cobra, would discontinue manufacturing its products in the country opting to only distribute them locally through agents.
There are also rumours of firms in the manufacturing sector that have gone for months without paying their employees whilst others are now working shorter hours.
There have been calls on government to put in place measures to stop the de-industrialisation of the sector.
The Confederation of Zimbabwe Industries (CZI) in its 2013 edition of the Manufacturing sector survey proposed a raft of measures to government aimed at stimulating activity in the sector so as to grow capacity utilization from the current 39.6% level to above 80%. Some of them include establishment of special economic zones which would have tax incentives for sector players, provision of affordable funding and protectionist measures to shield companies from import competition.
Recently, the CZI disclosed that the sector needs approximately US$8 billion for its revival. The funding will be channelled towards the rehabilitation of productive facilities and the provision of working capital. But truly speaking, can the sector be revived? Furthermore, as the whole country is thirsty for money, if we manage to raise US$8 billion, should manufacturing be our first priority?
Reviving the sector is an uphill task as there are a host of challenges that need to be met. Companies are closing shop largely as a result of imported competition as Zimbabwe is not a competitive producer owing to structural inefficiencies in the economy. For starters, there is a general shortage of capital in the country.
Most local firms are making use of short term expensive money to retool yet ideally one should make use of cheaper long term money. The net effect has been that most of the profits generated by companies are going towards the servicing of debt.
Local firms are also incapacitated from courting offshore investors as the country’s empowerment laws remain a thorn in the side of investment.
The country’s infrastructure is also in a deplorable state making it costly to transport goods and services. Resources need to be channelled towards rehabilitation of roads and the railways. The latter plays an instrumental role as it significantly lowers production costs per unit. Pricing and provision of utilities also needs to be looked at. Supply of electricity remains erratic forcing firms to resort to alternative forces of energy that are expensive and result in higher production costs per unit.
There is also need to relook at the business models currently in use if the sector is to regain an edge in manufacturing. Some firms are still making use of old technology which renders them uncompetitive. No amount of money can make a poor business model work. There is need to mechanize the production processes and move away from intensive use of labour.
Sable Chemicals is an example of a company that took long to realize that their manufacturing process in the production of nitrate is obsolete and expensive as it chews up electricity. The company is now looking at coal gasification which will cost approximately US$200 million to install.
Companies are again failing to produce products efficiently owing to shortages of key raw materials. Importing raw materials together with resorting to alternative substitutes negatively affects product price and quality.
Turnall, for instance, is now importing asbestos fibre from Russia and India following the closure of Shabanie and Mashava mines. The company finances the import bill through short term borrowings that are expensive. Furthermore, the imported fibre has a lead time of three months yet payments are required in advance. Fibre from Russia and India costs US$1300/tonne compared with US$600 when the local mines were still producing. Additionally, the majority of manufacturing firms rely on output from agriculture which is depressed at the moment.
Production of raw milk, wheat and soya beans dipped significantly over the years and this impacts negatively on companies like Dairibord, Blue Ribbon and Olivine.
It is therefore evident that a holistic approach is needed if the manufacturing sector is going to be revived. Unfortunately, the much talked of protectionist measures are not the way to go as they are short term in nature. Globalisation has enabled easy movement of goods and services across geographical boundaries.
Additionally, such measures tend to protect inefficiencies within companies. Such measures again force consumers to settle for sub-standard expensive products that will be coming from these local companies. There has also been talk that labour costs locally are expensive.
However worth noting is that these costs are much lower when matched with regional levels but are high when matched with the level of productivity within the respective companies. It is therefore necessary for management and shareholders to ramp up production levels and not force employees and consumers generally to take a haircut.
In actual fact there is need for fresh brains at the helm of most of these companies. We still have the same executives who were in charge of companies during their period of collapse.
Reality is that the manufacturing sector is walking on thin ice. As the new year unfolds, there is need to prioritize how we allocate the few resources that we have.
It would seem logical to focus on agriculture and mining as these two will eventually impact downstream companies through provision of support services. In this regard there is need to put in place favourable policies to encourage sustainable growth. A revisit of the empowerment law is key for mining whilst finality on the land reform through provision of land title is of paramount importance to ensure the land is used as collateral for accessing finance.
We also have to accept that some companies in the manufacturing sector are as dead as the dodo and therefore cannot be rescued. For some companies it appears much cheaper to start similar companies from scratch as those would not be as highly geared as the existing ones. There is need to focus on areas in which there is a prospect of comparative advantage.
The country has lost its competitive advantage for example in textile and hence it will be a waste of time trying to revive the clothing industry.