HomeAnalysisPiggy’s Trading & Investing Tips: Glimpse of manufacturing sector

Piggy’s Trading & Investing Tips: Glimpse of manufacturing sector

Batanai Matsika
ONE of the foundational principles in the theory of international trade has to do with comparative advantage. The law is popularly attributed to English political economist David Ricardo and his 1817 book, “On the Principles of Political Economy and Taxation”.

It refers to an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners. There have been several discussions on the development of the African Continental Free Trade Area (AfCFTA) and how it could benefit developing nations such as Zimbabwe.

A common question has been on the key sectors that Zimbabwe should focus on and whether there is any comparative advantage in sectors such as manufacturing.

Broadly speaking, the manufacturing sector in Zimbabwe has been adversely affected by:

  • Constrained aggregate demand,
  • Capital shortages; and
  • Structural issues such as power disruptions.

That said, authorities expect the sector to rebound on (i) the gradual re-opening of the economy; and (ii) enhanced availability of foreign currency following the introduction of the foreign exchange auction system.

From a global perspective, countries that have a comparative advantage in the manufacturing sector have invested heavily in technology growth and efficiency.

According to the World Robotics 2020 Industrial Robots Report, there was a total of 2,7 million industrial robots operating in factories around the world, representing an increase of 12%.

The growth was driven by success stories of smart production and automation.

According to the International Federation of Robotics, the United States of America was ninth in the world in terms of robot density as of 2019 and third in terms of annual robots deployed, with 33 300. China deployed 140 500 the same year, Japan rolled out 49 900, and South Korea, which has a fraction of the USA’s GDP and population, deployed nearly as many at 27 900.

The USA is still second in terms of global manufacturing share, though, accounting for 16,6% of global output as of 2018, down from 29% in the early 1980s.

The benefits of increasing robot installations include rapid production and delivery of products at competitive prices. Automation also enables manufacturers to keep production in developed economies without sacrificing cost efficiency.

In a new world order that is characterised by production processes, which are driven by robots, it is difficult to envision the future of a struggling Zimbabwean manufacturing sector that has been reeling under sub-optimal capacity utilisation levels.

In fact, the sector remains littered with dogs and zombie companies that are stagnant and have moribund prospects, limited cashflows and low market share.

A major concern is that such companies are “uncompetitive survivors” and a barrier to productive growth given that the survival of weak companies contributes to lowering the average overall productivity.

Such companies are detrimental to the economy as they lock up capital and talent that should be available to more successful and dynamic companies in other sectors of the economy.

Piggy has previously cited Turnall Holdings as a good case-study.

While residential housing in the country has proved to be resilient on the back of diaspora remittances, Turnall Holdings continues to face competitive pressures.

There has been a growing preference for alternative roofing materials that is lighter and cheaper amid high construction costs. There is a similar substitution effect in its concrete piping products, which are losing market share to PVC pipes.

The company risks losing market share in the future considering the changing preferences to cheaper construction materials being produced by new Chinese entrants that have garnered market share. The list does not end on Turnall Holdings alone.

General Beltings, MedTech and Zeco also face similar constraints.

In the outlook period, stock picking in this sector is of paramount importance given the current state of the economy.

  • Get more tidbits on the stock market by joining a PiggyBankAdvisor WhatsApp Group (+263 78 358 4745).
  • Matsika is the head of research at Morgan & Co, and founder of piggybankadvisor.com. — batanai@morganzim.com/ batanai@piggybankadvisor.com or +263 783 584 745.

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