manufacture wholesale general purpose machinery industry south africa

Introduction

This report examines the manufacture of general purpose machinery in South Africa. The wide range of manufactured equipment is used throughout the economy, and sales of general purpose machinery totalled some R38bn in 2017. The metals and machinery sector employs approximately 295,000 people and is a major contributor to South Africa's wider manufacturing industry. Growth in the machinery manufacturing industry continues to be constrained by South Africa's poor economy, insufficient demand from key customer markets, and declining manufacturing competitiveness relative to major exporting nations such as China. Recent and upcoming changes to the legislative and policy environment are also identified as potential threats to local producers of general purpose machinery.

Introduction

Strengths

• High levels of manufacturing capacity.
• Reputation for high-quality products.
• Robust regulatory framework.
• South Africa is the major distributor of general purpose machinery into Africa.
• Strong government support for manufacturing and localisation.

Weaknesses

• Capital- and energy-intensive.
• Declining manufacturing competitiveness relative to key exporting nations such as China.
• Dependent on sustained economic growth to drive demand in key customer markets.
• Fragile labour market and relatively frequent industrial action.
• High carbon emissions.
• High exposure to exchange rate fluctuations.
• Shortage of skills.

Opportunities

• Environmental regulation driving investment into air and water filtration and purification.
• Government investment, particularly in water treatment.
• Increasing African demand for machinery; exports into Africa.
• Local content thresholds and preferential procurement designations.
• Technological advancements in manufacturing; Industry 4.0 and the Internet of Things.

Threats

• Continued falling relative competitiveness.
• Continued recession and declines in volume production and manufacturing capacity utilisation.
• Increasing imports of machinery.
• Negative impacts of new policy e.g. Carbon Tax, Mining Charter, Protection of Investment Act.
• Rising electricity, fuel, and labour prices.

Outlook

Seifsa forecasts that the market for general purpose machinery will remain relatively flat in 2018, growing by 0.6%. Despite some unexpected gains in volume production in the wider metals and engineering sector, the machinery sub-sector continues to face stagnant demand as a result of the struggling mining, construction, and wider manufacturing industries. A number of associations are also concerned by the increasing volume of machinery imports as South Africa's export competitiveness relative to major manufacturing countries such as China falls. While increases in exports partially mitigate the effects of weak local demand, Seifsa and the Manufacturing Circle suggest that it is unlikely the negative trends in production and competitiveness will shift, barring significant recovery in the economy and key customer markets.

Outlook

Introduction

This report focuses on the manufacture of general purpose machinery in South Africa. Sales of general purpose machinery were worth some R36.2bn in 2016 and, according to the Manufacturing, Engineering and Related Services Sector Education and Training Authority (merSETA), employment in the metals chamber stands at 298,000. Despite annual sales increases, the volume production of general purpose machinery has been declining for some years and the industry is experiencing subdued demand and increasing competition from imports.

Strengths

• General purpose equipment is used by a variety of different sectors.
• High levels of manufacturing capacity.
• Positive trade balance and significant levels of international trade.
• Reputation for high-quality products.
• South African manufacturers are the major distributors for general purpose machinery into Africa.
• Strong government support for the manufacturing sector through the DTI and IDC.

Weaknesses

• Relatively capital- and energy-intensive.
• Very dependent on economic growth and the larger manufacturing sector, since upstream manufacturers are important consumers of general purpose machinery.
• Volume production has declined for a number of years.
• Vulnerable to exchange rate fluctuations.
• Widespread competition from imports.

Opportunities

• Carbon Tax and dust emissions targets driving private sector demand.
• Government investment, particularly in water treatment.
• Increasing African demand, exports into Africa and share of all African exports.
• New preferential procurement designations and compulsory sub-contracting regulations.

Threats

• Continued recession and declines in volume production.
• Increased competition from imports.
• Political instability undermining confidence and long-term investment.
• Rising input costs in the form of electricity prices and wages.
• Strained labour relations.

Outlook

Analysts at the Manufacturing Circle expect that the greater industry will recover somewhat in 2017. However, declines in the volume production of general purpose machinery have been standard since at least 2012 and the sector has consistently under-performed even by the lights of the stagnant manufacturing sector. While the value of sales and exports is increasing, cushioning the segment against contraction, SEIFSA has suggested that the trend in production is “unlikely to reverse itself.” Due to the sector's trade portfolio, the exchange rate may provide an opportunity to leverage relative competitiveness, but Philippa Rodseth of the Manufacturing Circle suggests that the political problems underpinning currency volatility also discourage organic investment in the industry. Despite increases in expected Government spending, SEIFSA forecasts that production will decline by 3.2% in 2017. Nevertheless, individual manufacturers such as ACTOM, along with various associations, feel that businesses are stable, buoyed by the increasing value of exports, even as production falls.