The global freight crisis: A crisis SA needs?

*This content is brought to you by Corion Capital 

By David Bacher*

The local backdrop

Although it’s difficult to pick a winner, South Africa’s manufacturing sector must be one of its biggest failures over the last two decades. To put the plight of the manufacturing sector into context, since 1990, employment in the South African manufacturing industry has declined by a horrific 40% (Mike Schüssler). This shambolic outcome is arguably the most significant contributor to South Africa’s distressingly high levels of unemployment.

David Bacher

One can spend days attributing how South Africa has got to where it has. We can debate government policy failures, lack of reliable power, high energy prices, corruption, and poor BEE implementation but that will do little to help the current situation. The focus and priority for South Africa is to be proactive and to urgently implement ways to build productive capacity that would increase employment. It is, therefore, no surprise that President Ramaphosa has made the rebound in manufacturing one of his outmost priorities.

The global freight crisis

Transporting a 40-foot steel container now costs approximately $10 000 (Source: Drewry’s Composite World Container Index).  This is a whopping seven times more than it would have cost 12 months ago. This astronomical increase is due to better-than-expected demand for goods, Covid outbreaks in export hubs, container shortages and far too few ships.

In addition to the cost implications, the lack of capacity in shipping has created havoc with global supply chains. It is particularly problematic for those businesses who rely on just-in-time supplies. On an anecdotal note, I was speaking to the co-founder of Mobelli Furnishes – a well-known and respected retailer of high-end furniture – last week. He shared his experience of how the supply has impacted his business. In 2019, he would place an order for furniture manufactured in Asia and receive it four months later. He now needs to place orders eight months in advance.

There is no better time than now

For many years, local businesses have concluded that the benefits of importing goods have far outweighed the risks of relying on and supporting local manufacturers. Has the scale started to shift?

The current global freight crisis could be the kick-start that the South African manufacturing sector so desperately needs. This is due to South Africa depending on the maritime transport of most goods. Local companies must now recognise that producing locally will circumvent higher freight costs. Given the delay and longer delivery times, it will also shorten their supply chain.

These developments, coupled with encouraging statements from President Ramaphosa, will add further impetus to the ‘buy locally’ drive. The President communicated that it is time to implement a new industrial and labour policy to attract and support labour-intensive investments and lower the barriers to entry for businesses.

At Corion, we believe that there is no better time for business to support local procurement. If implemented correctly, it grows the economy, creates jobs, alleviates inequality, broadens markets and creates more opportunities for business in the long term. In addition, as we recognise that businesses are largely profit-driven, it will cut out freight costs and reduce the length of the supply chain. This will provide both cost-advantages and better customer responsiveness.

Continuing with the Mobelli discussion, and taking the above into account, it was not a surprise to hear Mobelli say that they are exploring bringing more of their manufacturing back to South Africa.

We need more of these examples.

  • David Bacher is the Chief Investment Officer of Corion Capital (an Authorised Financial Services Provider). Corion is driven by a desire to simplify the world of investing and manage a broad range of multi-strategy funds.