Alarm bells ring for sector employing 1.6 million South Africans

South Africa’s manufacturing sector is under increasing pressure despite recent relief from load-shedding, with companies operating in this area reporting significant declines in profit and equity. 

In PwC’s recent Manufacturing Analysis for 2024, the accounting firm laid bare the challenges the manufacturing sector faces in South Africa. 

Manufacturing plays a significant role in South Africa’s economy, accounting for 13% of the country’s GDP—largely in part due to its collaboration with other emerging market economies. 

This contribution is mainly driven by exports. In 2023, South Africa exported R403 billion worth of machinery and manufactured goods, accounting for 19.7% of all exports. 

South Africa remains Africa’s most industrialised economy and is home to factories of some of the largest German and Japanese automotive manufacturers. 

Despite this, South Africa remains dependent on imports for a wide range of factory-produced items as the sector has faced severe headwinds in recent decades. 

South Africa’s manufacturing sector has experienced a steady decline since the late 1990s as the ‘Tiger’ economies in Asia came to dominate the industry. 

This decline was accelerated by the increasing severity of load-shedding in the past decade, significantly impacting the sector’s output. 

These companies had to invest heavily in backup power solutions just to keep their doors open, and if they did, they struggled to get their products to market due to Transnet’s ailing performance. 

Despite improvements in these areas, data compiled by PwC shows that the manufacturing sector has performed poorly so far in 2024. 

Revenue in the sector has declined by 2.5% compared to 2023, and net profit has plunged by 145.6%. Total assets held in the sector declined by 6.8%, and net equity by 11.72%. 

PwC’s analysis showed that the decline in net profit was driven, in particular, by the speciality chemicals and paper and wood sectors, which registered losses in the first part of 2024. 

Significant profit increases from packaging were not enough to offset these declines. 

In spite of this poor performance, the sector remains a vital source of employment, with factories employing 1.6 million South Africans and paying out R614 billion in wages. 

The manufacturing sector will continue to be under pressure in the coming years, with PwC expecting it to grow marginally above inflation for the next decade. 

As with the past decade, much of its challenges have resulted from poor local governance and a difficult operating environment in South Africa. 

Chief among these challenges is the increasing number of water shortages experienced nationwide, particularly within Gauteng. 

Water is a universal input and critical to most manufacturing processes. Furthermore, it is much more expensive to reduce your reliance on government-supplied water than electricity. 

One of the country’s largest asset managers, Coronation, has begun engaging with companies it invests in regarding their resilience in the face of water shortages. 

In particular, the asset manager said companies are having to reduce their reliance on deteriorating municipal infrastructure.

South Africa is a water-scarce country, and the supply chain from source to tap is immensely complex. The regulatory framework that governs water infrastructure is also complicated and problematic, Coronation’s Marie Antelme and Leila Joseph said. 

While water as a resource is regulated by the Department of Water and Sanitation (DWS), the provision of water – which is what most companies rely on – falls under the purview of local government.

The legislation governing the two entities is different, and one department cannot interfere with the workings and obligations of the other. Thus, appeals to the national government are often misplaced. 

In the case of Gauteng, it is a very specific issue because three major metros contain a significant portion of our national manufacturing capacity. They are all at risk from water supply disruptions.

Of course, when the water supply is disrupted, businesses cannot operate. It means that there will also be an impact on the workforce. 

Another major challenge for the manufacturing sector is the growing prevalence of carbon taxes around the world, whether on local production or on imports. 

As much of South Africa’s electricity is generated by Eskom which relies heavily on coal, many local productions fall foul of these policies. 

This makes South African exports less competitive and imposes signifcant costs on these businesses, which can only be avoided by investing heavily in reducing reliance on Eskom.