Where did South African manufacturing go?

Before play comes work

“The way the government goes after places like Clark Foam is by an accumulation of laws, regulations, and subjective decisions they are allowed to use to express their intent. Essentially they remove your security, increase your risk or liability, and increase your costs. They simply grind away until you either quit or they find methods of bringing serious charges or fines that force you to close.”

The words are those of Gordon “Grubby” Clark, whose company, Clark Foam, once produced 90% of the world’s surfboard blanks. He closed it abruptly in 2005 citing a deliberate campaign by agencies of the government of California to shut him down.

California is regarded as having the most dysfunctional politics in the US. Unemployment is America’s highest, at 9.3%, and is blamed on exceptionally high taxes, anti-business legislation, and militant unions. The Golden State is at the heart of the US housing bubble. All of this has led to some 100,000 people a year moving out of the state.

Despite this, California had a GDP of $ 1.8 trillion in 2007, making it not only America’s most wealthy region, but – if it were a country – the ninth largest economy in the world.

When Clark Foam shut, it was a tremendous opportunity for his competitors to grab market share. So who won? Chinese manufacturers, some of which are 1,200 kilometres from the ocean in a nation not famed for having a surf culture, have come to dominate the industry.

Around the world, in the aftermath of the credit crisis, developed countries are rediscovering their manufacturing base. And they are extremely unhappy about what they see. Increasing labour costs, smothering legislation and high taxation have pushed manufacturers out of their countries.

Base manufacturing, that which requires a lot of unskilled workers, has moved eastwards and southwards. Countries as diverse as Mexico, Vietnam and India have become manufacturing centres, along with more obvious emerging markets like China and Brazil.

These are South Africa’s competitors to attract manufacturing investment. Yet, unlike many emerging markets, South Africa has a wealthy and cosmopolitan middle class.

How do Chinese manufacturers know to produce surfboard blanks unless someone goes there who knows a lot about surfboards and sets up production there? There is no local market for surfboards in China, but there certainly is in South Africa.

South Africa should be a tremendous destination for investors looking to escape oppressive legislative environments in Europe and America. We are an English-speaking country and, more than likely, there are people who have similar interests to international investors. Surfing is just one industry out of countless millions where South Africans are tremendously engaged.

An indication of just how engaged is given by our balance of payments, which is now touching 8%. This is one of the highest in the world and shows that South Africans import far more than we produce. We like what the rest of the world has to sell, we just don’t seem interested in producing it.

Unemployment is 23% (at its most conservative estimate) and this vast ready-workforce should be a tremendous draw for manufacturing businesses. Even legislative overhead and social unrest is not particularly remarkable compared to other emerging markets.

Despite this, South Africa continues to be a place that investors like to come on holiday, but not to stay and set up shop.

Could it be that South Africa is like a beautiful, but high-maintenance date? Someone who is very nice to look at and flirt with, but whose personality is so off-putting that you end up marrying someone else?

During the election period, politicians need to consider just how much the credit crisis has changed things. Investment is now hotly contested and South Africa is going to need to reinvent itself in order to attract a new generation of investors.

Coasting along on looks alone will only get a country so far.