IF KwaZulu-Natal, and the country as a whole, are to realise their full potential and restore manufacturing to its former glory, government and local business need to work together on an aggressive import substitution programme, starting with the top 100 items currently being imported.
That was the hard-hitting call from Stavros Nicolaou, Senior Executive, Strategic Trade at Aspen Pharmacare, speaking at the recent KZN Manufacturing Indaba. “We need a society that buys locally. Let’s export products and keep the jobs local,” he urged delegates drawn from leading industries and government departments gathered at the Durban International Convention Centre.
Nicolaou cited the lack of job opportunities as one of the leading causes of the inequality and social tensions currently gripping the nation. “Growing manufacturing is the most effective way to create jobs, but it pains me to note that the opposite has happened. Today, manufacturing accounts for just 11.5% of GDP. Two decades ago this was 22%. Our manufacturing output has effectively halved over the past 20 years.”
He said that while the Department of Trade and Industry (DTI) was working to reverse this decline by placing manufacturing at the heart of its economic policy, this work was being undermined by other departments and some businesses.
He gave an example from his own sector involving a major anti-retroviral (ARV) medication product. “We as a nation are importing 76% of this product from India, some of it higher prices than local companies are offering it for. How can you tell me that’s a good decision for South Africa?”
He added that a local pharmaceutical company – not Aspen – had received a R280-million incentive from the DTI yet had been excluded from ARV tender. “Here’s a local company with a government incentive and near-limitless capacity and, instead, we’re importing and paying more for it.”
The Aspen executive, who is known for coining the phrase “manufacturing activism”, used the platform of the province’s biggest manufacturing focused event to spell out a three-step plan to turn around local manufacturing.
The first step would be to identify the top 100 products currently being imported that were or could be made locally, then substitute those imports with local products.
He acknowledged that this was likely to prove controversial and would almost certainly prompt a backlash from some trading partners and local companies who currently rely on cheap imports.
“That’s why we must have the courage of our convictions and stick resolutely to our guns when it comes to import substitution.”
He gave an example of how Russia was using just such a policy to bolster its domestic manufacturing, saying Aspen had been forced to work with local partners and commit to manufacturing in Russia to gain access to that lucrative market, despite taking the matter up with Russian President Vladimir Putin himself at the recent BRICS summit.
“His answer to us was, ‘Come invest in Russia and we’ll open all doors for you’. So that’s what we’re doing. We in South Africa need to have the same unwavering commitment to supporting localisation.”
The second step Nicolaou proposed was to fast-track regulatory approval of local products. Citing another example from the pharmaceutical sector, he bemoaned the fact the foreign imports appeared to be favoured for regulatory approval over local products when the opposite should be the case.
He said local medical aid companies could also play a major role in this respect by favouring local products over imports. The same attitude should apply to other sectors.
His third proposed step was to extend the current government incentives for manufacturers in a targeted way that supported the import substitution programme. “If we’re serious about an investment-led growth strategy, it means levelling the playing fields for local manufacturers against subsidised importers.”
While tax incentives for companies operating in special economic zones (SEZs) were a good start, they were too restrictive. “For some companies, it’s simply not practical to relocate to an SEZ.” Nicolaou’s suggested solution is to identify key, “carefully ringfenced” import replacement industries and apply tax incentives equivalent to what they would have enjoyed in SEZs.
He said this could be precisely targeted to avoid revenue services concerns and would not be difficult to administer. “It would reward incremental growth and expand the tax base.”
Several of the points raised by Nicolaou were touched on by KZN MEC for Economic Development, Tourism, and Environmental Affairs Sihle Zikalala in his keynote address at the indaba.
“Exports are key. We can’t sustain the economy at a 25% export capacity,” Zikalala said, adding that regional integration was crucial. “Companies in South Africa need to build their capacity to exploit the African market,” he told delegates.
While it was hearting to note that trade was growing, “we still face the challenges of exporting too many raw materials to other countries when we should be exporting finished products. This effectively amounts to the export of jobs, jobs that should be created in this country. Rather, we need to do more to ensure industrialisation here and build our ability to export finished goods,” Zikalala said.