South Africa must incentivise technology investment to keep local manufacturing competitive

South Africa’s manufacturing capabilities and output have been under strain for at least the past decade, and the pressure has intensified more recently due to an intersection of global forces: rapid advancements in automation, digitalisation and artificial intelligence driving greater manufacturing efficiency, the ticking clock of the need to shift to low-carbon manufacturing, the rise of cheaper yet high-quality Asian-manufactured imports into the local market.

The US’s aggressive protectionist moves have upended the global trading order, by creating additional manufacturing capacity in the US while global demand remains the same.

The result being more capacity trying to find its way into existing markets and South Africa now having to compete with countries we didn’t have to in the past.

Other countries and regions are also moving to US-style protectionist stances. Global unpredictability is exacerbated by uncertainty around rising conflict zones, particularly as currently seen with fuel supply and the sudden importance of the Strait of Hormuz.

In addition to these global factors, the survival of local manufacturing, before we even start talking about growth, is under threat due to the well-known local constraints of unreliable and increasingly expensive electricity supply, logistics bottlenecks, failings in public infrastructure and basic service delivery, and ineffective control of crime.

These local issues are within South Africa’s realm of control, if the political will exists; as are matters of economic policy that tend to lag behind current global realities and generally lack coherence and effective, coordinated implementation.

Protection alone won’t secure the future

There is currently much talk, accompanied by some concrete moves by the government, around measures to tighten import tariffs and anti-dumping measures to protect key sectors and specific products.

Such protectionist moves have merit in the short term of retaining local industrial capacity and protecting jobs, but more energy is required on measures that also enhance the ability of local manufacturing to compete on an equal footing with incoming investors and global competitors.

Incentives to support local manufacturers in technology adoption as well as supporting local technology development and innovation could be a powerful lever to advance that equal footing.

Turning research into industry

South Africa is no slouch in research and development, but little or no incentives exist to commercialise this work, resulting in what the CEO of the Technology Innovation Agency, Dr Titus Mathe, calls the “Valley of Death”, where good ideas come to die.

A simple comparison of what South Africa offers in terms of technology incentives versus other emerging economies and BRICS partners reveals a thin layer of support and stimulus that is siloed in different government departments.

Support and incentives are fragmented and uncoordinated, where stimulating technology development and adoption should ideally follow a value chain approach from research and prototyping through to implementation, linked to business development and venture capital.

A critical gap in industrialisation incentives is that many require immediate job creation commitments rather than supporting education and training towards future job creation commitments.

The result is that we are incentivising industry to design new processes and make investments that require semi-skilled and unskilled labour, keeping us uncompetitive.

The skills challenges we face now are a direct result of this. We should have been investing in development of engineers and scientists 20 years ago, which would have maintained our global competitiveness today.

It is not too late. As the saying goes, the best time to plant a forest was 20 years ago; the second-best time is now.

South Africa’s technology incentives are largely focused on supporting early-stage academic innovation in specific research areas, mainly through grants, but we need to see much more activity in translating research coming out of universities and science councils into viable spin-off ventures, rather than the current focus of licensing for commercialisation.

A major frustration that industry faces in working with universities is the impasse over intellectual property ownership, licensing fees and royalties, and annuities. Many a good project has died in the “Valley of Death” because these issues have not been resolved. Universities need to do what they are good at and let industry do what it is good at, with a clear handover.

Investing for tomorrow’s industries

Despite South Africa’s capabilities, our technology developments are often incentivised to “catch up” with the world (such as with lithium-ion batteries, an opportunity that has already passed us by) rather than “leap-frogging” the world and developing for what’s coming next.

We are also seldom incentivised to work fast (again lithium-ion batteries are a good example). To stay relevant, we need to look at the next big thing rather than trying to catch up with the current big thing, and we need to act fast.

Our internal market is small, so exports are vital to making local manufacturing globally competitive (the more we manufacture, the cheaper it becomes). We need economies of scale, and we need to make local manufacturing viable for multinationals.

Simply put, when a global headquarters makes decisions on where to allocate production – which might mean expanding a plant in a conducive location or down-scaling, moving or closing a plant in a less-conducive location – it is much easier to shut down an ageing, old-school plant than one that has invested in technology upgrades.

We want to incentivise multinationals to invest in their South African plants, first so that we are always among their most efficient, and second because it is unlikely anyone will shut down a facility that is not fully amortised.

From policy to implementation

The Department of Trade, Industry and Competition recently released an updated Industrial Development Strategy focused on “the 3Ds” of decarbonisation, digitalisation and diversification – and reversing the fourth D, deindustrialisation.

It is positive to see that the document lists technology-related incentives in its implementation plan, such as “incentives towards low-carbon manufacturing technologies and modernisation of existing industries”. However, such interventions need to be expanded on in much greater detail, more specifically targeted, and prioritised for urgent implementation.

The most dangerous South African epidemic is our inability to speedily implement our plans.

Whether in technology or other aspects of manufacturing, it is critical that incentives are linked to measurable outcomes such as production output and efficiencies, business performance, job creation (current and future), training and education from primary school all the way to postgraduate programmes, export growth and supplier development, with transparent and independent monitoring and reporting on the impact of the incentives.

Building the skills South Africa needs

Technology to support on-the-job learning can reduce time to proficiency for new hires and thereby enhance competitiveness.

We have a Technical and Vocational Education and Training (TVET) system that needs to adapt to specific industry needs, even to the extent of developing custom programmes for specific companies. Industry should not see the TVET system as a “supply” but rather as their own training departments to fast-track skills development. Incentives should not just be about stipends and in-service placement.

Local manufacturers increasingly report losing highly qualified technical skills to other countries, particularly Europe with its ageing population, while what we need is to retain those skills and expand the technological skills base to support manufacturers in adopting advanced technology.

The historic incentive to develop labour-intensive processes coupled with the current slide into deindustrialisation has resulted in our most talented and skilled people becoming disillusioned and leaving. Now, we need to incentivise them to come back.

Encouraging technology uptake is not only a necessity in manufacturing. Technology is reshaping every sector, and the efficiency and competitiveness gains that can be delivered by digitalisation and AI cut across all sectors.

Technology is not just the “techie stuff” that made the Silicon Valley billionaires, but is the use of tools, knowledge and systems to solve problems and make work simpler, easier, faster and better. Incentives must also recognise and encourage the less-glamorous aspects of technology.

Policies targeting industrial development and small business development should also be supporting South Africa’s technology innovators and entrepreneurs with the potential to develop new, homegrown solutions for local and global application across sectors such as finance, agriculture and manufacturing.

Protective tariffs not enough on their own

It is widely agreed that protective tariffs on their own are not sufficient to protect local business. Similarly, technology investment incentives on their own will not be sufficient to reverse deindustrialisation and advance South African manufacturing. They must be part of a coordinated package of instruments that both stimulate and protect local manufacturing.

This must also be coupled with developing a stronger value chain around South Africa’s raw materials, both mineral and agricultural, to stimulate local processing and beneficiation, and move away from being a primary exporter of our natural assets.

There are conflicting perspectives and arguments on whether South African manufacturing can be saved, and how best to save it. We cannot accept the argument that manufacturing must be given up as a lost cause – that would amount to giving up on our country.

South Africa cannot afford to lose manufacturing. We cannot depend on other countries to add the value to our raw materials, we cannot afford to become a net importer, and we cannot put national security at risk by being totally exposed to world uncertainty.

Getting onto the curve of technology adoption and investment is a critical and urgent action. DM