Firms manoeuvre past the dollar

Business Reporters
AS the economy continues to suffocate from a liquidity crisis and the impact of the elusive greenback, companies have resorted to outsourcing goods rather than manufacture locally due to a cost spike. Outsourcing, toll manufacturing and importing for resale have become more popular and Zimbabwe is perpetuating job exports as less effort and resources go towards resuscitating local production.

It means that the crisis is deepening by the day while Zimbabwe becomes more dependent on the external world for most of its requirements leaving the country vulnerable to external shocks.

Local firms are now outsourcing goods such as powdered milk, sugar and agro-chemicals as they find it cheaper to outsource and repackage some products rather than produce the goods themselves.

The longer it takes to address the constraints, high costs and liquidity in the main, militating against local production the longer and more effort and resources it will require to correct the situation.

While the US dollar has stabilised inflation and brought about predictability critical for planning, it is masking the real crisis countenancing Zimbabwe as everybody slumps into a false sense of security that all is well. Because of the US dollar Zimbabwe has found it easier to purchase virtually anything from across the world. But the greenback is masking the real crisis – a crisis of production and productivity.

Zimbabwe does not print money. It follows that with relations with the West still frosty, sanctions on its collar bones, foreign direct investment negligible and exports wafer thin, Zimbabwe appears to be digging in.

And sustainable economic turnaround appears an arduous task for a country that relies on the external world for even the most basic goods in what obviously drains whatever little liquidity we can mobilise.

According to industry players, some local companies were toll manufacturing in other countries where production costs are lower.

Under such an arrangement, a product may be designed in Zimbabwe, sent for manufacturing offshore, comes back into the country as a finished product and is then repackaged.

Most of the bulk products are being outsourced mainly from South Africa, Mozambique and China, Pakistan among others. Retailers have resorted to house brands such as TM’s “Super Saver” and OK Zimbabwe’s “Shopper’s Choice” which are toll manufactured or outsourced to avoid costs.

Spar supermarkets have a wide variety of “Spar” branded products including milk, yoghurts and candles. Dairibord entered into toll manufacturing of its Dairibord Chimombe, which lands in cartons from South Africa to augment local supply. The cartons land at US1,05c which is cheaper than the US1,20c it costs to produce the same product locally.

The arrangement started in December 2012 with volumes expected to grow to 200 000 litres per month.

Agricura, a subsidiary of Chemco Holdings, also moved away from producing agro-chemicals, preferring outsourcing products from overseas suppliers. The products are packaged and labelled by the company.

Producing locally has become too expensive for companies as a result of production inefficiencies emanating from the use of obsolete equipment, absence of long-term credit, power shortages among other factors. But this only makes economic sense where an effective solution appears on the horizon.

The cost of money has also become burdensome for most companies due to high interest rates resulting from the cost of getting offshore lines of credit associated with perceived country risk profile and credit risk.

While the cost of external funding is high due to the country risk profile, funding from domestic sources is also expensive due to credit risk, the short-term nature of deposits and thinly spread loans and small volumes.

“In the absence of volumes people want to cover up with high prices. At company level, if volumes are not moving fast enough people try to cover their costs through pricing,” economist Witness Chinyama said.

The transitory nature of deposits has also made it difficult for industry to obtain long-term credit for retooling and working capital from the local banks. This has been compounded by lack of long-term finance.

Other factors that have constrained the industry include low aggregate demand due to low disposable incomes across households.

Individual consumption is skewed towards basic commodities thereby negatively affecting the rest of the industry outside the chain of manufactured basic commodities.

In addition, lack of demand has also been worsened by the fact that Government has little to spend. In a country with a Government with little spending power, the economy goes into stagnation in the absence of a stimulus package.

With Zimbabwe’s debt at close to US$11 billion, this on its own raises the country’s risk profile and makes it difficult for companies to source offshore finance. Producers also face stiff competition from imports, which has seen the country literally running trade deficits with most of its trading partners.

With both prices and cost of production on the high side the US dollar, which is the dominant transaction currency in a basket of currencies that include the pula, rand, euro and pound the greenback appears somewhat too strong for a country emerging from a crisis as its value is underestimated. As such, some manufacturers have resorted to importing finished bulk products for packaging to counter the uncompetitiveness associated with producing locally. The depreciation of the rand has also made imports cheaper. Such an environment, economic analysts said, militated against production.
According to the Confederation of Zimbabwe Industries, deterioration in the economy has seen capacity utilisation in the manufacturing sector coming down from 44,9 percent last year to 39,6 percent in 2013.

“The amount of capital one needs to produce is too high and expensive,” said Nestle Zimbabwe chief executive Mr Kumbirai Katsande.

“As such, most companies are now outsourcing bulk products and in the process escape higher costs of manufacturing. We are also on the edge of deflation as prices have continued going down while costs are staying up. Under such environment, outsourcing becomes more profitable.”

Economist Dr John Robertson said the cost of producing in Zimbabwe was high due to the cost of inputs such as salaries and wages, electricity and other utilities, old and inefficient production processes.

“We are not getting the value from the US dollar due to high interest rates, transport and insurance costs. Even goods exported to us have to bear these additional costs, which have to be recovered from customers.”

Dr Robertson said Government needed to craft economic policies that allow efficient production especially of agricultural produce, which is a critical input cost to manufacturing and eventual retail price.