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OPEN ECONOMY: Are natural resources, value addition enough?

14 Sep, 2014 - 06:09 0 Views

The Sunday Mail

We often wonder why for a country blessed with abundant resources, we seem short-changed in terms of national revenue.

Why is it for a country that possesses the raw materials, we import finished commodities at a premium?

As it is today, developed countries typically excel in producing and exporting capital goods like electronics, machinery, and high value consumer goods while developing nations such as ourselves only play the part of exporting the raw material to these goods.

Indeed, we are pursuing indigenisation policies to rectify some structural inequities, but will such policies be enough to ensure long-term profits from our natural resources?

Perhaps a better solution offered thus far along this discourse is the pursuit of value addition and beneficiation.

After all, profit is all about percentages and attaining as much margins out of revenues. Hence, value-addition and beneficiation may help us acquire a greater percentage of tradable value of some of these commodities.

This seems to make sense.

Therefore, have we done feasibility tests and proper analysis in value-addition and beneficiation?

For value-addition and beneficiation to be well-implemented, we must understand the value chain of most of these commodities traded across global borders.

Diligent research into cost structures, production, product delivery and pricing, must be done in order to strategically understand where we can leverage our capabilities and gain greater dividends in tradable value.

Basically, we should find where value lies.

I took on my own, less competent analysis, and decided to focus on supply chain management (SCM).

I reluctantly came to two conclusions.

First, when you conduct a SCM analysis on many capital and high end consumer goods, you will discover that raw materials and mineral resources will realistically only increase our margins by a considerably less extent than what may be widely expected.

You see, while developed nations export capital goods to countries like us, we are often second choice markets and much of the value captured along the supply chain is kept within their own consumer markets. Companies like Philips and Apple are dominant suppliers of capital goods globally.

Yes, if you trace most of their products you will find that many components are extracted from countries like ours. Steel, copper, chrome, just to mention a few.

However, that is a small percentage of the final value of the completed product.

For instance, in a Philips refrigerator that costs US$500, metals extracted from Zimbabwe may only contribute US$50. That means for each unit, our resources are merely 10 percent of value. What makes up the other US$450 or 90 percent?

Supply chain costs such as distribution, warehousing, production, salaries for European labour markets, advertising and other selling expenses in those developed markets come in.

All this is economic activity that takes place within developed nations’ borders. I concede, this lacks any empirical evidence. But in comparison, the iPhone value chain aptly illustrates this pattern. Although the iPhone is predominantly manufactured in Asia, Asia captures only about 18 percent of the value added in iPhone sales. The fundamentals are the same. The other 80 percent of Apple value is in constructing Apple Stores in global premium malls, research and development salaries to Western labour markets, and many other value-additions outside the fraction taken up by mineral components. Second, assuming your agreement that many of the value-added activities are outside of our market reach, maybe we could try to compete for greater share in production activities. This was the strategy taken by East Asian countries which leveraged large populations willing to accept low wages and economies of scale to attract investment into production industries.

Decades later, the benefits are evident, especially in China and India. Unfortunately, we are at a comparative disadvantage in terms of activity based production. Our industrial infrastructure and current resources do not make us competitive in most industries. Costs of doing business in Zimbabwe are high. We do not have huge populations of low-cost labour; even for more skilled production functions, our proficient labour market is shrinking.

Simply, we cannot offer to produce capital goods more cheaply or at better quality than many other countries.

The implication of my conclusions is that we are not at a position where we can solely rely on mineral resources and value-addition. Their cherished value is indisputable; however we should continuously be challenging ourselves to pursue more industry on the competence of our innovation and creativity.

Industry that we can create for ourselves and control a larger share of the value chains; the way we can with agriculture and tourism. With regards to value-addition of capital goods and high end consumer goods, we are inherently at a comparative disadvantage. I intend to leave this discussion open and perhaps more proficient personnel will take to investigate this matter. I have barely just touched the surface on this issue. Hopefully this topic can generate greater debate and informed input. I have come across good arguments especially on value- addition and such discourse can only be progressive.

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