Local value chains crucial for growing exports

24 May, 2020 - 00:05 0 Views
Local value chains crucial for growing exports

The Sunday Mail

Trade Focus
Allan Majuru

THE coronavirus pandemic has ushered in a new norm in terms of doing business.

The future of trade is not what we projected it to be.

Covid-19 has increased the need for nations and organisations to shape the next normal.

With supply chains disrupted across the world, some local businesses will find the current business environment challenging.

This is even worse for those manufacturers who were dependent on imports for their production processes.

The impact of this also stretches to decline in demand for various products such as furniture and general clothing in export markets.

The closure of borders to all things other than essential products by neighbouring countries such as South Africa, has adversely affected Zimbabwe along with other countries in the SADC region.

Based on the unpredictability of this pandemic, it will be a while before countries fully restore global trade of non-essential products, which will have negative implications on local manufacturing companies that import most of their raw materials.

These raw materials are no longer as accessible as before, indicating an urgent need to develop alternative sources.

To address the challenges, it is also important to look beyond the immediate crisis and start to work around requirements of the new normal.

But what is the new normal?

The new normal should place emphasis on development and strengthening of local value chains, which in turn leads to import substitution, particularly of raw materials.

Given the ongoing challenges with sourcing imports because of travel bans and restricted movement of certain cargo, the over dependence on other countries for raw materials will affect production for most manufacturers.

These bans have revealed how much local players across all sectors must develop their value chains so that they maximise revenue and cushion themselves from global shocks.

For example, India imposed a ban on exports of many pharmaceutical raw materials in March 2020 which meant companies that were importing from India have been facing shortages and reduced production.

The impact of such trade bans can be mitigated if local value chains are developed to ensure the consistent availability of key products that are produced within Zimbabwean borders.

This means product value chain stakeholders across all sectors should move with speed to engage local suppliers of each activity node so that they develop capacities and accelerate the import substitution drive in order to maximise their export revenue.

This allows businesses to examine their activities and identify competitive opportunities, such as production at lower costs, thereby offering lower prices to consumers and saving more as a company.

A value chain can optimise operational efforts, reduce waste and improve profitability.

For instance, one local company has reduced its costs by constructing a milling plant in Zimbabwe, which has led to reduced imports such as maize grits.

By doing so, they have also reduced their risk and reliance on imports and have managed to maximise costs for their final product.

In most cases, local manufacturers admit there are local suppliers who can provide the same product that they import.

However, they do not always agree on price and quality.

Due to these gaps in the local value chains, local manufacturers have had to look externally for raw materials, which could have been sourced locally.

Countries in the region, such as South Africa, that have developed a strong manufacturing sector have done so on the back of solid value chains, with co-operation from players in the chain, financiers and authorities.  Across the world, development of local value chains contribute to economic development, particularly through strengthening of local industries and job creation.

Where common problems are recurring, value chains can be used as a diagnostic tool to identify critical issues and blockages for specific groups and subsequently generate robust and effective policies and development strategies.

This will also provide a logical framework to formulate intervention strategies for producers and how to develop capacity.

Further, value chains are inherently scalable. Take the Macadamia Growers Association in Chipinge or the Banana Farmers Association in Honde Valley, for instance.

The frameworks being utilised can be replicated in other industries to propagate economic development and reduce poverty.

Another example is Delta Corporation Limited, which has been financing small holder farmers under the Beverages Sorghum Contract Farming Scheme to increase their capacity to grow an essential product in their sorghum beer value chain.

In 2016, Cairns revived an outgrower scheme that benefited a large number of households in Manicaland and improved local supply of raw materials into their production.

The company highlighted that this move was going to reduce production costs by reducing the import bill and make their products more affordable.

Local value chain development will also enable identification of core rents and barriers to entry that determine who benefits from production for diverse final markets.

Given the aforementioned advantages, it becomes clear that some of the economic challenges Zimbabwe is facing are a result of dysfunctional value chains, which have seen potential revenue leaking out of the country in the form of raw materials.

Zimbabwe is well-endowed with numerous minerals and resources. Regrettably, most of these are exported raw.

These natural endowments require full processing to obtain maximum value as the unconverted raw materials represent less than 10 percent of the value of the processed product.

The real value can then be derived in full processing through value chain development and in some instances enforcing import substitution tactics for local businesses.

For example, the country produces quality trees that can be used for its own paper making as well as timber that can be used to supply the local furniture industry.

According to Trade Map, Zimbabwe exported wood and wood charcoal worth US$19,4 million in 2019, up from US$14,6 million in 2018.

During the same time, the country imported paper and paperboard worth US$89,3 million, down from US$116,6 million in 2018.

These statistics indicate that the country is losing money through importation of products made from timber.

This money could have been saved and prioritised for other development projects if the timber value chain was fully developed, from timber extraction to paper production.

Another example is the local leather sector where some shoe manufacturers import their leather from as far as Italy.

The major reason for sourcing from foreign suppliers, they say, is that such leather is of high quality and farmers in those countries take good care of the cattle.

In countries such as Italy, India and Singapore that are big in export of raw leather, they have well-coordinated value chains where the cattle farmer, tanneries and manufacturers work closely to produce the best product.

Unlike the local industry which does not fully utilise the role of the farmer in the leather value chain, in other countries, the farmer is an integral stakeholder in the entire value chain as his output determines the quality of what the entire leather industry produces.

So, if the stakeholders in the local leather value chain can organise themselves, from farmers, tanneries and shoe manufacturers, the potential is high that the country can produce an equally competitive processed leather. This in turn will result in import substitution, which in turn will save the country the much-needed foreign currency, create jobs and improve the livelihoods of Zimbabweans.

 

Allan Majuru is ZimTrade chief executive officer.

 

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