A wounded manufacturing sector

CLOTHES — Locally manufactured products are priced relatively higher

Linda Tsarwe
The annual Confederation of Zimbabwe Industries (CZI) state of the manufacturing sector survey is one of the few surveys carried out in the country that gives the market an indication of what is happening in the economy from a business perspective.

More than 250 questionnaires are sent to respondents in the manufacturing sector across the country. Directors and chief executive officers in participating firms complete the questionnaires. The results of the survey are based on the responses given by the respondents and are used as proxy to represent what is happening in the industry.

The survey for 2014 has been released to the market, and as expected, the sector is hounded by challenges that continue to weigh down on performance.

Average capacity utilisation for 2014 declined to 36,3 percent from 39,6 percent in 2013, although on a weighted basis it was up 40 basis points to 36,5 percent. According to data released by the CZI survey, capacity utilisation in the manufacturing sector took its biggest dip since 1994 in 2008 when it fell to 20 percent.

This was when hyperinflation was at its peak and there was virtually nothing happening in the economy as far as production was concerned. After dollarisation, capacity utilisation started to pick up advancing to a high since 2008 of nearly 60 percent in 2011.

However, from then on it started proceeding downwards as the sector was again embattled by a spectrum of challenges.

One of the main challenges has been the lack of capital. Because of low foreign direct investment, many have failed to get access to working capital that ensures continuity in production, among other key operational areas.

Respondents to the survey pointed out working capital constraints as the second most major capacity constraints. If this is addressed, it will work as one of the many elements that support increased production.

Not only will capital injection assist in working capital, but it will also help in retooling of factories. Many manufacturing companies are operating with old machinery that is costing them potential profits through wastages. To compensate for such production wastages, locally manufactured products are priced relatively higher when compared to the same goods imported from the region resulting in the imported products having a pricing edge over the local ones. Because of the liquidity squeeze that consumers are facing, they have become more frugal than before and therefore will opt for the imports that are price favourable.

Furthermore, local demand has also dwindled following the liquidity challenges, which makes it even more difficult for local producers.

Many times, manufacturers have been out calling for protection against imports so that the playing ground is “levelled”.

This, however, is quite a contentious issue and the decision to implement protectionist policies is not as easy. It is argued that the influx of imports is not necessarily the problem, but a mere result of low production by local manufacturers because they do not have adequate capital.

It is, therefore, ideal to open up the country to foreign capital which would flow into dry sectors such as manufacturing, with the expectation that local products can resultantly shape up to the game.

Apart from increases in costs due to production inefficiencies, there was also an outcry from manufacturers over the huge burden of labour costs. While labour plays a pivotal role in the manufacturing sector because the industry is not highly mechanised, the wage system is inflexible and regardless of a decline in business activity, labour costs are fixed.

To aggravate the situation, there is always an annual pressure to increase wages by worker representatives. A total of 55 percent of the respondents indicated that their wage bill had increased in 2014 with 85 percent of the reasons being wage negotiations. Yet, the capacity utilisation is declining and resultantly turnover keeps getting lower.

Ironically, inflation has been close to nil in 2014, with a period when it was actually negative. This is quite a setback for the manufacturers who are faced with a greater proportion of fixed costs that have to be honoured using a down trending turnover. This explains why most of them have not been able to register profits as the optimal revenue needed to cover their cost base is a near impossible task in this environment.

Many employers are advocating for a performance related pay, but moving to such a system is not as easy, and the issue is currently heavily argued.

The external environment has also had a huge bearing on the sector and the manufacturers have also highlighted how the dilapidation of infrastructure has rendered their industry uncompetitive.

According to the survey, manufacturers pointed out challenges such as power cuts and shortages, poor road infrastructure, water shortages, inefficient rail network within the country and poor transport infrastructure for access to ports as the main infrastructural problems they were currently facing.

Of the five, power shortages emerged as the most problematic factor. Manufactures are suggesting solutions such as foreign direct investment and private generation or importation of power which should result in increased power generation and availability.

There is also need for rehabilitation and maintenance of existing infrastructure as well as encouraging alternative power sources for domestic use.

In addition, the cost of power has been burdensome for many, who have primarily blamed the pricing model. The system of bill estimates that was used before the prepaid meter system prejudiced consumers and the prepaid meter put this problem to rest.

However, the national power company has not rolled out prepaid meters across the country, and reports have mentioned the rolling out of prepaid meters might be discontinued due to increasing cases of pilferages. If this is true then some companies might still be faced with the challenge of bill estimates.

Overall there has, however, been a call to reduce tariffs because the current charges are squeezing most companies dry, considering that most of them are in survival mode.

A lot of other issues were mentioned that hurdle the viability of the manufacturing sector. Of the respondents, 55 percent indicated that their businesses have not been viable in 2013, which is an increase from 31 percent in 2012. To constantly test the business viability of the economy, CZI introduced a Purchasing Managers Index (PMI) which will be used as a leading indicator of economic health.

The PMI measures five factors being, current production, rate of new orders, supplier deliveries, inventories and employment levels. Each of the factors is adjusted and weighted according to the time of the year and other factors. A PMI of over 50 percent shows growth in the manufacturing sector while one under 50 percent shows that the sector is declining. From the survey, the PMI calculated to 43,4 percent which confirms contraction for the sector and subsequently indicates a deteriorating economy.

The manufacturing sector used to be a great contributor to the country’s GDP as well as one of the biggest employer in the market in its hey days. From the CZI data, capacity utilisation hovered close to 80 percent around 1996.

The current state of the manufacturing sector is deplorable and continues to harm the economy from all angles; increased unemployment, pressure on the current account through high imports, lower GDP growth, just to name a few.

Manufacturers have listed a number of areas they view should be addressed to turn their industry around. Issues such as capital shortages, reforming labour laws, infrastructure challenges, just to name a few, ought to be resolved. This should increase capacity utilisation and may result in Zimbabwe being a net exporter, which is a positive contribution to GDP.

However, tackling such issues lies with the Government that should implement policies that support growth to key sectors of the economy.