Going bust gradually … and then suddenly

REMGRO Chair Johann Rupert used this quote in reference to South Africa, which, he believes, is in the gradual stage, but warns that the “suddenly” could come.

It’s happened elsewhere. Some of the more prominent examples include the United States banking sector during the 2008 global financial crisis, Greece, and close to home, our neighbour Zimbabwe.

The same could happen to us. We are not immune.

We too often delude ourselves that we are different; that we somehow live in this silo of separateness down south. What we need to face is that we are not different, and that we are all connected and affected by each other in the most fundamental of ways. We are neighbours on one planet, shaped by each other’s triumphs and declines.

This hit home on a recent trip to Harare where I visited a number of factories in the manufacturing sector that are operating far below capacity. I saw innovative, hardworking managers and workers who are truly committed to Zimbabwe, trying to keep head above water in a country where politics override economic fundamentals.

I saw the capacity utilisation in these factories ranging from 10% to 40%, and it was distressing to see.

One of the factories was a light engineering company that up until a few years ago used to employ more than 400 people. Today it employs 70 people.

A former key line of theirs was the manufacture of 20 – 30 tons of copper wire per month. They imported the copper from Zambia. The factory was so busy back then that you could not speak on the factory floor as all the machinery was going flat out. Today, the factory floor is quiet, this part of the business is defunct and the copper manufacturing machinery, albeit in excellent condition, is mothballed.

Another factory I visited used to manufacture high quality fridges, designed for local conditions as well as for export. Not so long ago they had no choice but to mothball the machinery and they now keep alive by assembling fridges under a toll manufacturing agreement with a company in South Africa.

Why did they go into such decline? One of the main reasons is that the reduction in sales from the regression in the economy meant that their fixed costs per unit went up to such an extent that it was no longer viable to manufacture. Coupled with the non-supply of raw materials from what was formerly Zisco Steel, and the delay in the refurbishment of NewZim Steel, meant that any cost advantage they had from local supply was taken away.

In 2011 the Zimbabwean government sold a 54% stake in NewZim Steel to an Indian firm called Essar Africa Holdings Limited, and in 2014 they awarded a tender to a Chinese company to refurbish the plant.

“The plant has deteriorated further than we had initially thought and we have had to revise the initial business plan to incorporate the extensive refurbishment,” Industry and Trade Secretary Abigail Shoniwa told Zimbabwe’s parliament.

What really hit me between the eyes was how integrated and connected business is with the broader political, economic, social and technological dynamics. The factories I visited in Harare have sound machinery, excellent managers and productive workers. They have invested in the skills and talent of their people but because of forces beyond their control they now live from month to month.

Amongst these forces was the dollarization of the economy. While it brought stability to the country and inflationary environment, at the same time it introduced a double-edged sword where Zimbabwe became open territory for companies outside of it. They started exporting to Zimbabwe, and getting paid in US dollars. This has had the effect of further eroding local manufacturing.

Presented with these odds, even the best financial director in the world would not be able to keep a factory sustainable.

It is remarkable that the factories I visited are even managing to survive.

It speaks of their talent and resilience but the stark lesson is this: when the macro enabling factors in a country are not supportive of business, then avoiding going bust, both gradually and then suddenly, becomes a massive challenge.

Whether anyone likes it or not, it is wake up call for all of us in South Africa and it requires profound and proactive leadership to address our own fundamentals.

Unless the enabling factors are put in place here, despite the best will and talent in the world, companies will not thrive; jobs will not be created.

We have to start putting South Africa first – and I don’t mean South Africa at the expense of other African countries, but rather as a country that is part of Africa where the cost of doing business is prohibitively high.

All of us in South Africa … government, business, labour, citizens … have to come together and get to the root of our core issues, which have been clearly identified in the National Development Plan (NDP). It is essential that the NDP becomes a standard item on everyone’s agenda and we need to seize the opportunities that come from acknowledging that we are part of Africa and integrated with Africa.

As part of this, the business sector in South Africa needs to be far more unified and vocal in its approach. Business does not currently speak with one voice. We have a number of business organisations all doing their own thing at a time when we all urgently need to converge our thinking to find commonality and issues that unite us.

If we are really committed to moving South Africa, Zimbabwe and all the countries in the region forward, then we must speak out together and work together, not only for the good of business owners, but for all people working in our businesses.

 The first step is to acknowledge our integratedness and connectedness.

If we do not do this, we will not achieve the vision of the NDP and we will miss the greatest opportunity of our time. The choice is ours. We can choose the high road as described in the NDP, or we have the option of the rand weakening further and business being further compromised. The future – triumph or decline – is in our hands.

This article was written by Professor Owen Skae, President of the South African Business Schools Association (SABSA) and the Director of Rhodes Business School.

Professor Skae writes in his individual capacity and hence the views expressed are not necessarily those of SABSA or the member schools. For more information on SABSA and its members, visit its website www.sabsa.co.za

This article appeared in Leadership, Edition 360, June, 2015. It is reproduced with their permission.