Small business development minister Khumbudzo Ntshavheni wants to enforce ‘local content’ in manufacturing by prohibiting the import of entire categories of products. That’s how you build really terrible stuff.
For over thirty years, communist East Germany produced a car known as the Trabant. Eschewing imports from the decadent West in favour of developing its own manufacturing capabilities, East Germany had the Trabant designed and built by a state-owned company.
When it was introduced in 1957, it sported a number of innovative ideas. It had a plastic body made of recycled cotton waste from the Soviet Union and phenol resin wastes from the local dye industry. It also had front-wheel drive and independent suspension, both of which were rare in the 1950s.
Even at the start, it was a piece of junk, though. Its noisy 500cc two-stroke engine smoked like a coal-fired boiler. It produced all of 13,5kW, and couldn’t quite make it to 100km/h.
It ran on a fuel-oil mix which had to be administered under the hood. Besides a speedometer and a few clunky, multicoloured switches, the dash was empty, lacking even a fuel gauge for the gravity-fed fuel tank positioned above the engine.
It never really improved. By 1989, more than 30 years later, it had a 600cc engine producing 18,5kW, which took it to its top speed of 100km/h in a leisurely 21 seconds. It was only in 1990, a year before production finally ceased, that East Germany was able to import a 1 043cc Volkswagen engine to give the last model a modest power increase.
By the time it went out of production in 1991, over three million Trabants had been built, and every single one of them was terrible. It was badly designed, badly built, and notoriously unreliable. It made, and often topped, many lists of the worst cars ever made. It was, as Time magazine would have it, the car that gave communism a bad name.
The car cost a year’s wages, but the waiting list to buy one was ten years long, so it traded for twice its purchase price on the second-hand market. Due to a lack of materials, it could never compete with Western European cars.
After the fall of the Berlin Wall, thousands of East Germans poured into West Berlin in their Trabants, where many promptly abandoned them. Some of the wrecks were converted into street furniture, as flower planters.
Banning imports
This is what happens when you restrict competition and insist on local production. And this is exactly what the South African government is proposing to do with a list of products, according to a report in BusinessTech.
Speaking in the National Council of Provinces, small business development minister Khumbudzo Ntshavheni said the department was talking to the Department of Trade, Industry and Competition to designate an unspecified list of products under the 100% local content category to support local small, micro- and medium-sized enterprises (SMMEs) in the manufacturing sector.
Contradicting herself terribly, the minister reportedly said that South Africa ran an open economy, in which local manufacturers competed with international manufacturers and imports were permitted. Yet that clearly doesn’t go for all products. In some product categories, imports will not only be subject to punitive tariffs, but will be prohibited altogether, to ensure that only local manufacturers can supply these to the South African market. So much for an open economy.
She goes on to say that the role of her department is to ensure that SMMEs in this country who are operating in the manufacturing space can produce products that are of good quality which are also competitive in terms of pricing, to ensure that products that are made outside of the country do not find traction with our consumers.
Except that they don’t have to be competitive with imports, because imported products will be banned. Besides, putting ‘government’ and ‘quality’ in the same sentence must be a violation of the basic rules of grammar.
Anti-competitive
It is also unclear why a department named ‘Trade, Industry and Competition’ would consent to such a blatantly protectionist, anti-competitive proposal.
No producer likes competition, but competition is great for customers. It is what drives companies to improve. Those that fail to keep up with rivals, and cannot find ways to produce products at quality and price points that customers find attractive, go out of business in favour of those who can profitably supply customer needs and wants.
This is why the free markets of the West produced a wide variety of awesome cars, while the closed, state-controlled economies of the Communist Bloc produced lousy Trabants and Ladas.
Without competition, there is no pressure on companies to produce the best product they possibly can, at the best price they can muster. It is a seller’s market, and customers are entirely at the mercy of the oligopoly that controls the market. This is just like the time when the unfortunate citizens of East Germany had little choice but to wait ten years for their overpriced, under-powered plastic cars.
What minister Ntshavheni is proposing will condemn South Africans to buying sub-par products at excessive prices. This does not enrich anyone except the lucky producers who aren’t good enough to compete on an equal footing with international rivals.
This anti-consumer protectionism hurts the poor the most, and will ensure that South Africa will always remain a third-rate country where nobody can have nice things.
Woolly thinking
An illustration of Ntshavheni’s woolly thinking on small-business support is that she celebrates the fact that the Department of Small Business Development helped 737 manufacturing SMMEs that generated R268 million in total revenue, through its Small Enterprise Development Agency (SEDA).
That is a measly R364 000 in revenue per company per year. Ntshavheni claims that all this ‘enterprise’ sustained 527 manufacturing-based jobs, and created another 1 364 new jobs, presumably not based in manufacturing, for a total of 1 891 jobs.
If all the revenue were paid out as wages, which it obviously isn’t, those jobs would pay an average of less than R12 000 per month. If you first subtract the cost of premises rental, electricity, raw materials, machinery depreciation and maintenance, computerised accounting and production information systems, insurance, taxes, and administrative overhead, you’re left with pay packets that cannot possibly be much above minimum wage. I’ll bet very few of those enterprises run at a profit.
And at what cost to the taxpayer does Ntshavheni’s department achieve all this proudly South African manufacturing enterprise? Let’s add up the minister’s numbers.
First, the SEDA Technical Assistance Programme spent R15 million to help 684 manufacturers with product and process technology. Second, the Small Enterprise Finance Agency paid R68 million to youth-owned enterprises, and another R167 million to women-owned enterprises. (Note the nod to identity politics.) Third, the Cooperatives Incentive Scheme supported 118 cooperatives with R34,5 million.
That adds up to R284,5 million, which exceeds the total revenue generated by all these enterprises. Of course, capital should not be mistaken for revenue, but government has a poor track record of picking entrepreneurial winners.
No quality control
Start-ups are extremely high-risk investment options, in which even specialised angel investors and venture capitalists very often fail. At least the private sector only risks private capital, however.
The government risks taxpayer money that could have been spent on institutions or infrastructure that actually support free enterprise in general, instead of supporting only a handful of lucky ‘entrepreneurs’ hand-picked by the government.
The minister claims that SEDA ensures the continual production of high-quality products through its Conformity Assessment Programme, which supports product-testing and certification to meet national and international standards.
Standards compliance, however, is no guarantee of quality. A standard is merely a minimum requirement to ensure safety and functionality. It is no substitute for the much higher bar typically set by vigorous competition.
Moreover, only 207 of the manufacturers supported by SEDA took advantage of this standards-compliance programme. That leaves 530, or 72% of the supported SMMEs, with no quality assurance at all.
That is how you get to produce Trabants. Surely, South Africa deserves better.
[Photo: jdblack / 342 images for Pixabay]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
If you like what you have just read, support the Daily Friend