The Sunday Mail
I have been mulling to interrogate the Confederation of Zimbabwe Industries’ 2014 manufacturing sector survey for the past two weeks.
I guess I was still analysing the study to have a better understanding of it.
But I must also confess that part of the reason why I have been reluctant to review the study is because I have worked for CZI before, and was one of the lead researchers for the same study. My fear was that some may not take my inferences seriously, thinking that I am biased and that “once a soldier, always a soldier”.
I wish to candidly and categorically discuss the results from this important report, hoping my interpretation of the survey, based on years of professional engagement as an industrial economist, may bring important insights for policy and organisational reform.
CZI statistics have sometimes been challenged, just as the Zimbabwe Statistical Agency’s studies are often challenged, sometimes ignorantly.
In its recent study, CZI has admitted that: “Our statistics on capacity utilisation have been received with mixed reactions from different stakeholders.”
I remember in 2011 when average capacity utilisation was reported to be 57, 3 percent.
There was an uproar with some stakeholders arguing that capacity utilisation was rather much lower than that.
I remember Mr Takunda Mugaga, an economic analyst, writing in The Herald of October 10, 2012 that, “No sacred cows or skeletons should be kept in the industrial body’s cupboard… their (CZI) last survey presented a 57, 3 percent capacity utilisation level which most players from the private sector dismissed with the contempt it deserved.”
He further argued that, “as long as capital is hard to come by and with challenges continuing to mount, we will always have doubts.”
Players who didn’t believe in that figure, however, disregarded the lucid fact that the manufacturing sector had grown in real terms by 13, 8 percent (the second highest growth since dollarisation) in 2011, from a paltry two percent in 2010 as measured by Zim Stat.
In 2011, the economy had also grown by 11, 9 percent (the highest so far since dollarisation) from 11, 4 in 2010.
Again, the 2014 study has just told us that average capacity utilisation has fallen to 36, 3 percent from 39, 6 percent in 2013. Mr Mugaga is again on record as saying, “Industry in Zimbabwe is dead… I strongly believe that the core industry capacity utilisation cannot be above 30 percent.”
Industry is, of course, not “dead”, as it is still contributing 13 percent to Gross Domestic Product and a fair share in export receipts. I believe the impressive agricultural season is responsible for having kept our industry average capacity well above 30 percent, as it spurred growth in agro-processing, as well as textiles and ginning to some extent.
Manufacturing has also been making fairly satisfactory moves in trying to recapitalise. (The Mid-Term Fiscal Policy Review Statement has indicated that about 17 percent of total imports in the first half of 2014 were constituted by machinery and equipment).
This tallies with the survey results that 42 percent of the manufacturing sector carried out new investment, with 96 percent of it being capital investment.
In my view, the debate about CZI’s manufacturing sector survey lies not in the results’ authenticity, but in how we should interpret them to influence policy and organisational reform with a view to steering economic growth and development.
My understanding of the private sector is that it is driven by self-interest; and it, therefore, benefits nothing for them to overstate their production capacity levels.
Now let’s jump into the results.
While many newsmen and newswomen reported that capacity utilisation has fallen in the manufacturing sector, they were largely basing (their reports) on average capacity utilisation, which had hitherto been the spotlight of the survey, albeit is having its last supper this year.
CZI highlighted in the survey that: “Readers should note that in the subsequent surveys, focus will be on the weighted capacity.”
So, the spotlight is apparently now on the weighted average capacity, which is arrived at based on the contribution of each manufacturing sub-sector to Gross Domestic Product.
In other words, capacity utilisation has slightly gone up from 36, 1 percent to 36, 5 percent, if results of the weighted average capacity utilisation, the new kid on the block, are anything to go by.
This is somehow augmented by CZI’s Purchasing Managers’ Index variable of current production which registered 50 percent, meaning current production has not changed compared to the previous quarter’s production.
This is, however, not to imply that it’s all happy days in the manufacturing sector.
Of course, the sector is in serious trouble.
The major capacity constraints, contributing a weight of 70 percent, were identified as low domestic demand, working capital constraints and competition from imports, in that order.
What is remarkable to note is that low domestic demand has now overtaken the constraint of working capital to emerge as the most biting constraint.
This is also in tandem with the predictions of the 2014 National Budget, which estimated aggregate demand to be five percent this year, compared to 13 percent in 2012.
Low domestic demand is also the major reason for the change in working hours in the sector, where 20 percent of industry has now reduced its working hours.
It is also the top reason for retrenchment in the sector.
The capacity constraint of competition from imports has also moved from the fifth position in 2012 to now claim number two. Competition from imports has actually been identified by the survey as the most biting factor that is contributing “very badly” to the doing-business environment in Zimbabwe, sharing the same position with cash shortages.
The 2015 National Budget, which is already in consultation mode, should take on board concrete measures to address these constraints.
What surprises me about many manufacturers is that they are still using a pricing mechanism that does not pay particular attention to competitiveness.
The survey says that 71 percent of manufacturers use mark-up pricing.
The challenge with mark-up pricing is that it provides an incentive for inefficiency and also tends to ignore the price expectations of consumers.
Neither does it consider the threat of competition.
No wonder why competition from imports has been cited by local manufacturers as the most biting doing-business constraint.
Surely, manufacturers ought to work with other competitive pricing models such as taking the international market price and then try to work backwards.
I was also shocked to observe that in a country with a huge energy deficit, the manufacturing sector players, who are the ones who actually need an average of 18 hours of uninterrupted power supply daily, are virtually not using alternative power sources to save electricity.
The survey reported that only four percent of manufacturers are using alternative power sources.
Industry is actually shooting itself in the foot by doing this.
For a sector that stated in the survey that the most problematic infrastructure factor is power cuts and shortages, we surely expect it to be trying to use green alternative energy sources such as solar for lighting and water-heating.
This will relieve pressure on electricity use and foster sustainable electricity supply for the main operations of industry.
Heads up CZI!
Heads up CZI’s energy and climate standing committee.
The industrial body must be at the forefront of promoting green energy use as a means to supplement energy supply in the manufacturing sector. This will also lower the manufacturing sector’s costs of production, as solar energy doesn’t attract a utility bill come month-end.
The survey has highlighted that labour laws are not flexible when it comes to adjusting wages in relation to productivity. Manufacturers argued that it is difficult to retrench staff where a company failed to sustain its labour costs.
I remember not very long ago TN had to recall its retrenched workers after it failed to raise the money to retrench them.
The recalled workers will still need to be remunerated by the very company that is facing problems.
Is such a scenario in the interest of sustainable economic transformation?
Thankfully, Government has admitted, in the 2014 National Budget, that the labour laws “tend to be skewed in favour of employees without taking due cognisance of productivity and the capacity of companies to pay. This has contributed to numerous company closures”.
Government should, therefore, expedite the process of redressing this anomaly.
The survey has managed to prove that labour laws are indeed skewed in favour of employees in that the major reason contributing 85 percent for any pay increases in the manufacturing sector is collective bargaining.
What it means is that once workers demand a wage increase, even where it is not viable, they are going to get it in all cases.
In my view, the labour flexibility architecture that should be put in place must not leave employees vulnerable.
For example, it can be accompanied with the creation of a mandatory unemployment fund, contributed by both employer and employee, which dismissed employees can benefit from, for a certain period.
Employers will also be required to offer continuous training to their employees so that if they are to be dismissed, their chances of employability will be very high. It is, however, saddening to note that the manufacturing sector, which is crying for labour flexibility, is a victim of not providing continuous training to its employees.
The survey has indicated that only 11 percent of the manufacturing sector has invested in training and employee development. Government will not buy the call for labour flexibility if captains of industry are not committed to employee training and development.
I guess that’s why (Public Service, Labour and Social Welfare) Minister Nicholas Goche has already been quoted by this newspaper as saying: “We flatly refused to agree on the issue of labour flexibility which employers wanted.”
I, therefore, call on captains of industry to increase investment in employees.
Export earnings are currently our biggest source of revenue and Government has been calling for increased manufactured exports.
The CZI study has established that identifying potential markets and buyers is one of the problematic factors for exporters.
Those that are not exporting at all also cited lack of representation in export markets as one of the main reasons for their inability to export.
I challenge CZI to rise to these challenges.
With assistance from organisations such as International Trade Centre, CZI can be capacitated with international market analysis skills which it can disseminate to its members with a view to promoting international trade literacy.
This will surely result in increased exports, as manufacturers would be able to identify attractive export markets and other dynamics such as market access conditions on their own.
CZI’s annual manufacturing survey must not be a talk show.
It is imperative to seriously address the dynamics coming from this important study.
Everyone must identify their roles – be it consumers, Government, banks, captains of industry, media, inter alia.
