Population Studies & Development Studies

An Assessment of the Opportunities to Increase the Value-add in KwaZulu-Natal's [ School Research Reports]

Robbins, G. Valodia, I. Velia, M. and Lebani, L. (2006). An Assessment of the Opportunities to Increase the Value-add in KwaZulu-Natal's Dominant Export Industries. Research Report 68.

Executive summary
      Why are exports important?
      Exports are important to regions for a number of reasons. For a small open economy increasing access to new markets can allow wealth creation that would have been limited by the size and scope of opportunity in the domestic market. But more than this, export activity is also important in that it allows the export firms to improve their competitiveness and ultimately improves their chances of survival through exposing firms to competition and new environments from which to learn. This learning is around firms improving their processes and products in line with market demand. As Lall points out, earnings are generated by exports, and these earnings allow for new investment possibilities to emerge. When these are taken up, product quality evolves in such a way that it opens up new markets and production orders, and thus a further expansion of exports and new investment opportunities. This is referred to as a virtuous cycle.
      What is value added?
      “Wealth created is measured as value added which is sales less the cost of bought-in materials, components and services. This can be calculated from the audited annual reports and accounts for European companies but not for U.S. and Japanese companies which do not publish sufficient information. Since the cost of bought in goods and services is rarely given in the annual reports, an alternative approach is [generally] used to calculate value added: exactly as defined above. This is: Value added = Operating Profit + Employee costs + Depreciation + Amortisation.”
(http://www.innovation.gov.uk/value_added/home.asp?p=home)
      Why is it important?
      “The importance of value added as a concept lies in its focus on the wealth created by a company rather than on its sales (which, could in large part, reflect the resale of expensive items the company has purchased) or on employment (which could be largely low skill, low value added jobs). This focus on the wealth created by a company facilitates questions about how much wealth is created, whether the company is increasing the wealth [it] creates year by year and how efficiently it is creating wealth.” (http://www.innovation.gov.uk/value_added/home.asp?p=home)
      How do value added and exports interact?
      According to Lall:
 As technologically-intensive goods are income elastic and substitutes for old technology, the sectors involved in such goods grow rapidly.
 As technological intensive industries allow large learning effects, they have important spillovers. They are thus important for growth prospects.
 Finally, the development of technological intensive goods and the presence of such sectors lower the vulnerability of individual countries to price changes and to the potential displacement which results from strong competitive pressures.
Investments in advanced technology and exports offer an opportunity for firms to upgrade and for knowledge spillovers. Both effects are associated with improved wealth creation – a double whammy positive effect is the expected result.
      Some key findings from the data: KZN exports and value added
      KZN economy:
• KZN GDP has been growing from 1996 to 2003, with a peak in performance occurring in 2002. Moreover, the province’s GDP has, since 2000, grown in excess of national growth (Figure 5). Manufacturing GDP has also grown.
• The manufacturing sector is important to KZN. Though the contribution made by manufacturing to employment has been stable from 1996 to 2003, it absorbs about 20% of total KZN employment.
• KZN was, in its share of share of manufacturing GDP in second position in 2002 after Gauteng: 21% of SA manufacturing GDP was in the Province (half the contribution of Gauteng). Specifically, KZN’s share of secondary industry GDP was 20% compared to 39% for Gauteng (based on data at 1995 constant prices). Having said, it is important to emphasise the key contribution made by KZN in the primary sector: the province’s share of South Africa’s agriculture, forestry and fishing GDP was 24%, 3 percentage points above that of the Western Cape (21%).
• At a broad sectoral level the overwhelming importance of manufacturing can be seen in the data (Figure 7). However, what is also notable is, together with a slight decline in the relative importance of manufacturing since 1996, the growing importance of transport and finance-related activities and services. This indicates some level of maturing of the KZN economic structure.
      KZN trade:
• KZN’s relative share of South African exports has remain relative constant over the period 1996 – 2003 at around 17%, although as total SA exports have grown so has the absolute level of KZN exports.
• The postcode trade data, which allow for an analysis of sectoral performances show that KZN has a narrow export base. This particular feature, identified for the end of the 1990s in earlier research (see Velia and Valodia, 2003a) has been altered relatively marginally. ‘Ores, slag and ash’, ‘aluminium products’ and products from the ‘iron and steel’ sector amount to 49.7% of the province’s exports.
• The data show that KZN is a major export centre for ‘ores and slag’, ‘aluminium’ and ‘pulp’. Moreover, aluminium exports are primarily from KZN. For this particular sector, the data show a substantial increase in export after 2001. As aluminium exports remain high after 2001, this is not an ad-hoc transaction. Also, the data show that some amount of fluctuations demarcates the trends for the inorganic chemical sector. In contrast exports of ‘pulp of wood, waste and scrap of paper’ have declined since 2000. Some of the changes might reflect changes in commodity prices.
• 88% of KZN exports of ‘ores slag and ash’ were in the ‘iron ores segment’. With such trend already reported in earlier research on KZN trade, producers in the province do not appear to have generally turned towards the production of new products for exports in the more recent years.
• What the data show however is that there are pronounced changes over the years in terms of the dominance of some of the main products. Thus, shifts are observed in ‘ores slag and ash’ which suggest specialisation. The data also suggest the development of specific products. This seems to have occurred in ‘paper and paperboard’ and in ‘iron and steel’. For instance, kraft and writing paper have displaced other types of paper (in particular cellulose wad). Also, the composition of ‘furniture’ has evolved away for miscellaneous products into seats and parts of.
• The increased share of SA manufacturing taking place in KZN, in a context of relatively stable proportionate contributions to SA exports, suggests that KZN producers are meeting domestic demand at an increased level. Production for the domestic market should not be ignored.
• Sub-Saharan Africa (SSA) is a small market of destination. This is as expected given the resource based composition of the province’s exports.
• KZN exports do secure new orders. One notable shift has been one in favour of countries in East and West Africa: though these regions absorbed 2% of the top five exports from KZN in 2002, the share increase to 4.2% in 2003 and to 5.3% in 2004.
      Technological composition
• KZN displayed a distinct structure and changes in the technological content of her exports over time. Exports from the province were dominated by resource-based products other than agro-based and primary products and, from 2001, by primary products. In other words, the latter sector started to expand sharply only recently according to this distinct product classification.
• Whilst KZN has an important share of agro-based products, her exports have been progressively displaced over time. The data also points to the growing importance of ‘textile, garments and footwear’ in spite of recent and substantial difficulties. The province also emerges as a non negligible base for electrical and electronics exports: more than 10% of South Africa’s goods exported in this sector are from KZN. As for the ‘high technology items other than electronic goods’ segment, it exhibited an erratic pattern over time. Yet, KZN’s share is that sector is small. 70% of South Africa’s exports in that sector originate from the Gauteng area.
• At the more disaggregated level, it appears that, at least, exports of medium-technology products have expanded sharply in KZN and South Africa. Though these primarily reflect the expansion of the automotive sector, KZN appears to have taken up new opportunities in the engineering segment since 2001 (products from various electrical, optical, machinery and mechanical segments). This is a feature specific to KZN. However, worryingly, KZN’s exports of high technology goods have been in relative decline.
      Value added and trade:
• When looking at the 10 most dynamic products in world trade (high growth and high value) KZN has a fair presence in two of the primary comities but in the remaining eight, these only comprise 0.94% of KZN total exports from 2000 to 2004. These products have strong demand characteristics and require significant value added and could present opportunities in the future. For example pharmaceuticals appear on this list but remain negligible in terms of KZN exports and where there is domestic production it is largely in generics where value added remains relatively low. Projects such as those around HIV vaccines could help create the knowledge platform to increase value-added prospects and ultimately exports.
• Contrasting the performance of South Africa with that of KZN yields some interesting findings in terms of the province’s specialisation in dynamic products. Reiterating the observation that the small sectors are the ones that grow the most rapidly, KZN would appear to specialise (relatively) in some pharmaceutical (bandages) and cocoa products. Relative to the world, South Africa and KZN are specialising in fur, essential oils and cosmetics and in nickel products. Since these are very small sectors however, exports might have occurred on an ad-hoc basis.
• Whereas the Gauteng province experienced the fastest growth of gross value added (for all sectors) from 1996 to 2003, that of KZN has also grown consistently over the period. It is clear from the more detailed figures that the sectors that have performed better in KZN are those that have a strong foundation in South Africa’s traditional resource competitiveness. The key players here are pulp and paper, food and beverages, wood products and metal products. Whilst the metal products category is significant it should not be read to mean that associated activities such as machinery manufacturing and household appliances (which form part of the same statistical group) are of no importance. With the exception of food and beverages these sectors have actually grown in importance to KZN whilst other categories have been stable or shown some relative decline in importance.

Some key findings from the interviews: opportunities and constraints for KZN firms
      Opportunities:
 SA’s competitiveness in lower technology resource intensive/primary processing is well established (power, raw materials).
 SA’s (and possibly SADC’s) growing levels of economic activity make for a more attractive operating base for MNCs that drive global trade.
 Trade reform processes are generating new opportunities.
 The recovery of margins on some (note currency impact) commodity exports can generate a surplus to invest in new forms of capacity and new processes (e.g. Sappi-Saiccor/Borregaard).
 In spite of a large number of constraints, firms that we interviewed were fairly optimistic about the potential for growth in value-added exports in KZN. However, firms argued that it is often very difficult to ‘unlock’ these potential opportunities.
      Constraints:
 Although the Rand has been relatively stable in the past 12-18 months firms are not sure what it might do in the following 24 months or so. Additionally, there is some concern about the risks associated with other currencies, such as that of China, and the likely impacts of the changes on commodity prices.
 The declining capacity and service capability at the DTI and other government departments.
 Access to export markets was curtailed by a lack of access into multi-national global value chains.
 Distance to market, inland transport leg costs and congestion and parastatal inefficiency hinder competitiveness.
 Entry barriers can be high when testing the market requiring preparedness to make losses initially. It is not easy to get someone to finance this.
 Exporting is not easy – the difficulties confronting the firms in this regard should not be under-estimated. Government policy seems to gloss over exports as a simple choice by firms but it takes a range of activities and a sustained commitment by firms to make exporting a viable option on a longer term basis.