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Medium and Large employers in Durban’s manufacturing sector: past trends and future prospects … and the case for a new survey

School of Built Environment & Development Studies

Imraan Valodia

Myriam Velia

Glen Robbins

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Why are we here today?• Who are we?

– A team from the School of Built Environment and Development Studies at the University of KwaZulu-Natal.

• We have been ….– Contracted by eThekwini Municipality, National Department of Economic

Development and The Employment Promotion Programme of the Presidency (funded by DFID).

• To conduct a …– Survey of a statistically valid sample of medium and large employers in the

greater Durban manufacturing sector in order to provide quantitative and qualitative evidence inform BOTH public policy and the organised private sector in their interactions on present and future investment and employment challenges.

• To do this we need …– To test the ideas and methods we have with relevant stakeholders – such as

yourselves - to obtain insights into what matters the in-depth survey should focus on and how best to interact during and after the research.

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Our proposed format for the session• 1. Background to the survey• 2. Setting the context• 3. Reflecting on selected 2002/03 survey results

– Brief presentation of selected previous survey highlights.

• 4. Discussion– What stands out and what has changed?”– What issues should researchers going into the field be

aware that are relevant to both manufacturers and and government – at present?

– How could the survey be made most useful to firms and organised business groups?

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Do we really need another survey?Yes• Government at the local, provincial

and national sphere does not have in-depth, locally specific information available to it on the state of manufacturing in South Africa.

• Businesses need to have access to relevant and reliable data to inform their collaborative efforts to improve their prospects.

No• Government has too much on its

plate to respond to more research about what it should do.

• Businesses are too busy surviving to have the luxury of spending time answering questions.

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Major national surveys I• 1st Investment Climate Assessment (ICA) 2003

– Funded by DTI & allowed for comparisons with World Bank surveys in other countries

– 800 firms surveyed (75% manufacturing, 34 % exporters)– 63% of sample Gauteng based, 9% KZN based firms– 68% with 50 employees and above– Major findings

• Worker skills – High cost of skilled and managerial posts, low level of training• Macro-economic instability – mainly exchange rates was a major factor• Labour regulation – costs of hiring and firing above OECD average• Crime – direct losses due to crime and costs of security at 1.1% of sales higher

than China, Poland, Brazil, Russia, but lower than Honduras and Guatemala at 4%.

• Other matters:– Firm performance showed strong productivity growth relative to countries such as India

and Brazil (but with higher capital intensity)– South Africa underperforming in FDI attraction due to regulatory and competition issues.

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2003 ICA Obstacles to growth

Source: Clark et al, 2003: 9

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Major national surveys II• 2nd Investment Climate Assessment (ICA) 2010

– The Enterprise Survey of 2008 on behalf the World Bank and covered a sample of 1,056 business establishments. Sampled from four locations: Johannesburg (68 percent), Durban (12 percent).

– About two-thirds of the sample was drawn from selected manufacturing industries. 24% were exporters. About 40% of sample with 50 workers and above.

– Main findings as barriers to investment and exports• SA firms outperform most countries in terms of profit per unit of asset but risk seen as

higher• Labour costs and productivity – “South African average labor productivity is higher

than that of Mexico and Malaysia, and comparable to Chile … But the effect of South Africa’s labor productivity advantage on its unit labor costs is offset by South Africa’s wages.” (World Bank, 2010: 28)

• SA’s unionisation rate not markedly higher but the bargaining council arrangement allows for union negotiated rates to extend coverage to higher proportion of formal workers than in other countries – especially those working in smaller firms.

• Growth of crime affecting business between 2003 and 2008• A greater percentage of firms in South Africa are reporting electricity to be a major

problem than firms in Brazil, Thailand, Malaysia, and Poland

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2003 & 2010 ICA Obstacles to growth

Source: World Bank, 2010: 49

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Major national surveys III• OECD 2010

– “Labour market reforms should complement improved macroeconomic policies to deliver higher employment. A greater level of co-ordination of wage bargaining focusing on wage and price moderation as the ultimate goal, with the government providing a voice for labour market outsiders, could deliver greater wage moderation and increase the credibility of the inflation target. Limiting the legal extension of sectoral bargains would also foster wage moderation and lead to stronger job creation, particularly among smaller and medium sized firms.” (OECD, 2010: 8)

• OECD 2013– “Youth employment could be improved by reforms of the vocational education and

training as well as apprenticeship systems, for instance by providing tax credits to firms hiring trainees, by simplifying hiring administrative procedures and by building more public private partnerships. ‑

– Product market regulation should be less restrictive, particularly as regards barriers to entrepreneurship. The within sector legal extension of collective ‑bargaining agreements could be curtailed, while the level of centralisation and co ordination in collective bargaining could be increased to allow for greater ‑influence of outsiders on wages and conditions.” (http://www.oecd.org/economy/surveys/southafrica2013.htm)

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Why is this survey different?• Overseen by a steering committee of both government and business

representatives.• Has obtained ethical approval of research design by a committee of University

peers.• Has buy-in from a senior officials in all spheres of government.• Is of direct interest to a range of influential institutions such as the World Bank,

IDC, OECD and others.• Will cover anything between half and two thirds of medium and large

manufacturing employers in the greater Durban area.• Will track and trace firms that were part of the original World Bank survey from

2002/2003 to give a unique insight into changes over time that no other survey can do.

• Will cover issues of interest both to firms and and government.• Has built in a solid report-back and results communication approach to ensure

stakeholders can access material.• All data of both surveys will be placed on line – in a confidential format – for

access by others interested in using the material.• It is not just a perceptions survey. We intend to get data to discuss actual trends.

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Why manufacturing?• Manufacturing has, for a number of decades, been the

leading formal employment provider in Durban.

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Formal Employment in eThekwini8 broad economic sectors

AgricultureManufacturingElectricityConstructionTradeTransportFinanceCommunity servicesHouseholds

Years

Form

al E

mpl

oym

ent

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Why manufacturing?• Manufacturing has for many decades been the leading

contributor to value added in Durban.

2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

Gross Value Added for eThekwini8 Broad Sectors

Agriculture

Manufacturing

Electricity

Construction

Trade

Transport

Finance

Community services

Years

GVA

(R10

00)

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Why manufacturing?• Taking account of employment and economic contributions the subdued

growth rates are notable/of concern.

Transport, storage & comm.

Financial & business

Wholesale & retail trade

Construction

Manufacturing

Community services

Agriculture, fishing & forestry

Electricity, water & gas

Mining & quarrying

-10 -8 -6 -4 -2 0 2 4 6 8 10

Ethekwini GVA growth recent periods

15 year growth rate2006-20112001-20061996-2001

Percentage growth in period

Sect

ors

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The types of questions that are prompted by these graphs

• What factors have influenced firm survival and decline?• Have firms grown sales/employment/exports?

– Which type of firms? If not, why not?• What product changes have there been?• What are the constraints to investment and growth of

the business?– Have these constraints changed?

• How have firms changed their patterns of suppliers they use and markets they sell into?

• What policy factors have impacted on these trends?

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SOME EXAMPLES OF FINDINGS GENERATED ….

The 2002/03 Large Manufacturing Survey

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The 2002/2003 survey• Funded by USAID and managed by the World Bank with

support from a team at Unisa’s BMR and UKZN.• Replicated in Durban and Johannesburg in the absence of

any planned national firm survey.• These surveys informed the development of Business and

Investment Climate Surveys in many countries.• The Large Manufacturing Firm Survey involved a sample of

225 firms of 50 employers and above.• Multiple questionnaires used to give a “360 degree” view of

the firm but with a strong focus on establishing policy-related constraints to firm growth (labour policy, HIV, access to markets, interest rates)

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A reminder of the domestic context – late 1990s and early 2000s

• Major changes in labour legislation– Basic Conditions of Employment Act– Labour Relations Act

• Major tariff reforms under the Uruguay Round of GATT

• Exchange rate volatility• Government programmes limiting growth of

public spending• Interest rates high after 1997 Asian crisis

The Context at the time of the Survey: impressions

• CEOs are generally optimistic about the future

– 70% expected sales to increase in the immediate future

– 66% optmistic about sales in the longer term future

(Note that positions determined by past profit level changes and set around specific expectiations with regard to exchange rate and interest rate trends)

• CEOs plan to stay in their current location in the case of a production expansion (73% would stay in current premises & another 11% in their current industrial area).

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GDMA – Constraints to growth

0 10 20 30 40 50 60 70 80 90

Infrastructure

Export & Import reg./procedures

Business expansion & set up regulations

Environmental regulations

Tax regulations

Tax rates

Recent labour regulations

Cost of capital/credit

Availability techn./voc. labour skills

Change in government policies

Corruption in government

HIV/AIDS

Currency volatility

Crime & theft

Percent of firmsMajor problem Moderate problem19

Mean (% - 2001)

0 5 10 15 20 25 30 35

Metal products (n=45)

Electrical & electronic machinery (n=31)

Leather and footwear (n=26)

Food processing & beverages (n=58)

Iron and steel (n=8)

Paper and furniture (n=82)

Non-metallic mineral products (n=22)

Chemical products (n=123)

Vehicles & autom. components (n=39)

Textiles (n=152)

Excess capacity: extra production that can be generated with capital stock

0%Mode

20%Median

21% / 22%Mean2000/2001

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Number of vacancies

SIZE Mean Median Sum 50-99 0.4 0 90 100-199 1.1 0 185 200+ 8.9 0 1797

Total 3.5 0 2072

• For all sectors, median = 0.

• Textiles & vehicles account for 63% of all GDMA vacancies.

Number of vacancies (n=600)

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Recruitment problems

0102030405060708090

100

Sen

ior

offic

ials

& m

anag

ers

Pro

fess

iona

ls

Tech

nici

ans

& a

ssoc

iate

dpr

ofes

sion

als

Cle

rks

Ser

vice

wor

kers

,sho

p &

mar

ket

sale

s w

orke

rs

Cra

fts

& r

elat

ed w

orke

rs

Pla

nt &

mac

hine

ope

rato

rs &

asse

mbl

ers

Labo

urer

s &

rel

ated

occu

patio

ns

Per

cent

of

firm

s

Extremely hard Moderately hard Not hard at all

At least 26% of vacant posts are hard to fill

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Firm ratings of barriers to export growth (n=342)

0 10 20 30 40 50 60 70 80 90 100

Licensing/Patent rights

Quality of goods not up to international standards

Lack of production capacity

Longevity of firms: lack of confidence in SA firms

Tariff barriers

Niche markets

Unreliable suppliers: lack of confidence in SA firms

Lack of knowledge/information on demand

Currency movements

Poor business linkages

Goods still not competitive

Cost of imports (n=338)

Major problem Moderate problem No problem 23

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Collective agreements and firm response to labor regulations: GJMA

Level of collective agreement

No agreement 15% Establishment level

13% Company level 32% Sector/Industry level

51% Wage determination

5%

0 10 20 30 40

Hire fewer workers

Use more machinery

Hire more temporaryworkers

Use sub-contracting

Improved labour relations

Increased labourproductivity

Percent of firms

Response to labor regulations

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Rating of location on costs & reliability of services (% of firms)

-40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Reliable w ater supply

Reliable electric supply

Reliable telecomm. services (domestic)

Reliable telecomm. services (international)

Low cost of off ice space

Low cost of w ater

Low cost of electricity

Low cost of telecom. services (domestic)

Low cost of industrial land

Low cost of telecom. services (international)

Low local tax rates

Excellent Fair Poor N/A

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DISCUSSION

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Two questions for discussion• What have been the most significant changes in the operating

environment for firms in the past decade?• What are the pressing factors impacting on firm present

performance and their future prospects?• Comment specifically on factors affecting:

– Competitiveness– Access to markets– Labour and skills issues– The regulatory environment– Local environment and services– Infrastructure access and performance– Other?

• Conditions improved, worsened or remained largely the same?• How could a survey best measure this?

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Next steps and further information• Pilot survey to be initiated in April 2013• Main survey goes to field between June and December 2013• First results issued in early 2014• Regular updates and interim findings discussed with stakeholders and made available on

internet and in media.• For further information on the 2002/03 study see http//www.sds.ukzn.ac.za/files/RR64.pdf• Project web page to be launched soon.• Thank you in anticipation of your cooperation• For further details please email: veliam@ukzn.ac.za, valodia@ukzn.ac.za and

robbinsg@ukzn.ac.za