Why is Manufacturing Locally Expensive for Small Businesses

Have you ever wondered where the retailers in the country get their products from? What percentage is manufactured locally, and how much do they outsource? Truth be told, it’s pretty expensive to manufacture locally, especially for small SA businesses. But why is that?

For the last two decades, China and other Asian countries such as Taiwan and Japan have been known as the world’s factories. In fact, according to the United Nations COMTRADE database on international trade, South Africa imports from China was US$14.31 Billion during 2020. And this was during a pandemic!!

So, what attracts so many businesses to look outside for products and supplies? The answer is two-fold.

Firstly, China (where most of SA’s imports come from) has made it ridiculously cheap to buy products from them. This is due to several factors such as:

  1. There are lower wages in China because of the millions of workers that are available for cheap labour. This huge labour market in China helps the country produce in bulk, accommodate any seasonal or industry change, and even cater to rises in demand.
  2. China has built an unrivalled business ecosystem that includes multiple suppliers, manufacturers and distributors. It has built and maintained vital infrastructure that supports the export business.
  3. China has a zero VAT policy for all exported goods, which keeps production and purchase costs low.

Secondly, the South African manufacturing industry is facing a lot of challenges that make it expensive to produce goods locally. These challenges are as follows:

  1. Skyrocketing energy costs and constant load shedding. Eskom tariffs have been increasing steadily over the years. Combined with the regular load shedding, most manufacturing businesses cannot compete with China’s low cost of production.
  2. The labour force in the country is somewhat inflexible, more costly and less productive. Unlike China, the South African people are protected by various laws that stop the abuse of workers. While this is a good thing, it also drives up the cost of labour. Certain economic reports have noticed an increasingly low output from the South African labour force.
  3. South Africa has an ageing critical infrastructure that slows down the manufacturing processes in some key industries. For example, some areas do not have functioning rail tracks that could easily transport goods and products back and forth.
  4. Unlike China, South Africa charges VAT for all goods and supplies produced within the country. This also drives up the cost of local products, making it harder for South African products to compete with the exported goods from China.

The bottom line

The South African manufacturing industry faces significant challenges resulting from poor government policies, neglect, and economic hardships. This makes it hard for small businesses to profit if they choose to source their goods from local manufacturers. Outsourcing makes better business sense for these cash-strapped small and medium enterprises.

Outsourcing has made it possible for even small, local businesses to create consumer products at a reasonable cost without having to build the manufacturing and distribution infrastructure themselves. When deciding whether to outsource your product’s manufacturing, you must consider the opportunity cost and if your business has the communications and distribution infrastructure to handle overseas production.

Outsourcing manufacturing is common, not just small business but for big companies and your favourite brands globally. For example, outsource manufacturing is a top strategy for US businesses in the 21st century.

This article is in no way trying to justify outsource manufacturing over local manufacturing. The purpose is rather to try and give clarity to why goods from small businesses seem to be higher than outsourced goods.

While outsource manufacturing has some advantages, there are many more benefits of local manufacturing that make it the superior option.

 

 

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