Localisation: Supporting a strong recovery
“The argument in favour of re-shoring and localisation is not new
By Shannon Gernetzky, Sector Head of Industrials, and Sean Wegerhoff, Industrial Advisory Lead at Standard Bank
Many people re-discovered their enthusiasm for locally produced goods during the disruptive, bewildering early days of the pandemic. The result is “localisation”, an emerging global trend that could revitalise local factories. If we respond quickly and wisely, there are three obvious benefits: economic resilience, more balanced trade, and greater fixed investment.
All over the world, in April and May 2020, essential goods were unavailable or delayed. The next step was a tentative, anxious query: Can’t anyone make this locally? What happens if China’s factories remain closed for another month? What happens if there is another pandemic?
These questions, and the complex answers to them, give new impetus to the idea that more of what we consume should be produced locally. The argument in favour of re-shoring and localisation is not new.
The idea behind re-shoring sounds simple and sensible: future disruption of cross-border logistics seems inevitable. This time it was coronavirus, but next time it might be something else: another US-China trade war, a tsunami, or even another disease. Therefore, companies and countries would be wise to act now to become more resilient and less dependent on imports.
The complexity and fragility of global industrial production is self-evident. To some extent, our health and national security are at the mercy of factories in faraway places. The reality is much more nuanced and complicated: localisation brings risks as well as benefits.
Even a small shift could have a big, positive impact considering South Africa imported goods worth as much as R845 billion in 2019. We certainly have the capacity to do far more locally. Factories in South Africa have a lot of spare capacity at present and we have the expertise to produce a much larger share of the goods that we buy every day from retailers and wholesalers. An order of gloves or masks can, in theory, reaches a hospital in Tshwane more quickly and with fewer obstacles if the factory is in Germiston rather than Guangzhou, China.
We also have local spending power. Spending on durable goods in SA has risen by R43 billion over the past seven years, to R221 billion in 2019, according to SARB data. Much of that growth was recorded in our trade partners’ accounts. We know that SA consumers spend approximately R148 billion per year on clothing and footwear and R134 billion on vehicles. Local factories supply much less of those than they used to.
Imported goods supply 38%, on average, of all domestic demand for manufactured products. For some sub-sectors, however, up to 90% of domestic demand is met by imported supply. A few industrial sub-sectors (food & beverages, wood & paper) still hold their own against imports.
If we respond quickly and wisely, there are three obvious benefits.
Firstly, resilience. More local industrial capacity means that supply chains for essential goods will be shorter and more reliable than cross-border trade that is at the mercy of politics and panic about pandemics.
Secondly, more balanced trade. If the gap between our imports and exports grows too wide, we face a dangerous trade imbalance.
Thirdly, new local production means more local investment in long-term, productive assets that are inevitably more efficient and technologically advanced than existing ones.