Thirty percent of firms face collapse

Source: Thirty percent of firms face collapse | The Financial Gazette October 26, 2017

By Shame Makoshori, Senior Business Reporter

THIRTY percent of the country’s manufacturing companies are on the brink of collapse due to a vexing foreign currency crisis and a “pervasive lack of confidence that is hurting new investment”, the Confederation of Zimbabwe Industries (CZI) warned yesterday.

The CZI released its annual manufacturing sector survey, published in partnership with The Financial Gazette.

The survey shows that the manufacturing sector had lost 15 percent of total jobs over the past year.
Capacity utilisation declined to 45,1 percent in 2017, from 47,4 percent last year. Utilisation peaked at 57,2 percent in 2011.

Overall manufacturing output did increase by 5,5 percent over the period, mainly driven by firms with equipment below 10 years old. The survey found that 40 percent of equipment currently in use by firms is more than 20 years old.

Reflecting a deep crisis in the industrial sector, CZI said about a third of manufacturing firms were on the brink of collapse.

“Thirty percent of the companies categorised as small were deemed large but on the verge of collapse, thus employing a few individuals just to tend to the machinery with very little or no production,” the survey said.
The CZI said more than half of 300 respondents interviewed for the survey called for a rescue package from President Robert Mugabe’s government, which they said should be aimed at stemming further deterioration.
The CZI said 50 percent of respondents said the manufacturing industry had failed to respond to ad hoc State interventions deployed in the past year.

In a frank assessment of the factors that have stunted growth and driven hundreds of industrial firms into liquidation, the CZI noted that policy failure had jeopardised chances of recovery.
As a result, idle capacity in industries had increased to 55 percent this year, from 52,6 percent in 2016, according to the survey.

Hundreds of firms slid deeper into a viability crisis, the survey noted.
The survey showed that despite an optimistic picture presented by government and captains of industry since May this year, Zimbabwe’s industrial sector had declined, with firms coming under pressure from an escalating banking crisis, policy instability, restrictive foreign currency regulations, inefficient government bureaucracy and severe raw material shortage.

The report said researchers had to reclassify a significant number of large scale manufacturers to small firms because their staff levels had declined below their size.
It said there were 30 percent firms in this class, who were now employing skeleton staff to take care of plants after scaling down or calling off production. About 250 chief executive officers and manufacturing sector leaders were interviewed.

“We see a deterioration in business confidence,” the report said, stressing that the coming 12 months could be painful.

“Weighted capacity utilisation has declined by 2,3 percentage points from 47,4 percent last year to 45,1 percent in 2017. Expected average capacity utilisation after 12 months if things were to remain the same is 43,6 percent. This shows that companies expect to slow down on production. The decline has been driven by sectors such as non-metallic mineral products, wood and furniture, transport and equipment production and petroleum products. What is worrying business is that the fiscal deficit will persist and inflation might be much higher than the three to seven percent SADC target. The economy is still way off the mark in terms of the desired and deserved levels of industrialisation,” the survey report said.

The survey said even through capacity utilisation declined, the volume of output increased by 5,5 percent. Captains of the manufacturing industry yesterday tried to digest why volumes increased.
Industrialist, Tracy Mutaviri, said the decline in capacity could have been caused by significant investment in new capacity this year, which will only begin to increase production more than a year from now.
The survey said 47 percent of firms invested in new capacity.

“For now, capacity will come down because 47 percent have invested in new capacity. When you invest you don’t invest for the first year but for the future,” she said.

Among the industries hardest hit by falling production levels were the chemical and petroleum products subsector, which lost average capacity utilisation by 7,5 percentage points to 36,1 percent this year, from 43,6 percent last year.
The CZI cast a grim outlook of the non metallic mineral products subsector, whose average capacity utilisation slowed by 24,3 percentage points to 33,2 percent this year, from a high of 57 percent in 2016.
The drinks, tobacco and beverages subsector’s average capacity utilisation declined to 51,2 percent this year, from 52,4 in 2016, while the wood and furniture subsector retreated to 45,2 percent this year, from 57,8 percent last year.
Only three of 11 industrial subsectors tracked by the CZI survey registered growth in average capacity utilisation, the survey noted.
Thirty two percent of respondents said viability had remained at the same levels as last year, while only 19 percent said viability had improved.

Capacity utilisation, the most important factor tracked by the annual survey, is a firm’s total level of output or production that it could produce in a given time period.

Capacity utilisation is the percentage of the firm’s total possible production capacity that is actually being used. Thus, it refers to the relationship between actual output against installed equipment.
The CZI listed the hard currency crisis among the biggest hurdles undermining industries.
It said 37 percent of companies had been stifled by difficulties in accessing their funds from banks, even after the central bank last year established a foreign currency allocation priority list, which is supposed to give exporters preferential treatment.

But a year after the foreign currency management system was announced, at least 50 percent of industrial players had been forced to hike prices by over 10 percent because they were sourcing their foreign currency from the black market to import inputs, the CZI revealed.

It warned against the risk of a fresh crisis unless authorities, traditionally ill-prepared to tackle any form of economic crisis, swung into action. Short of that, the country could experience the worst downturn since a hyperinflationary scourge shattered the markets in 2008.
The CZI said 22 percent of industry had to contend with a frustrating three-month wait to access foreign currency from banks.

The results of the Manufacturing Sector Survey could result in national soul-searching, particularly given that national institutions had been giving glowing accounts of the state of the economy, with many suggesting that the industrial sector was growing, resulting in an increasing demand for foreign currency for imports.
In reality, industries downsized, retrenching about 15,2 percent of staff in the past year in line with declining capacity.

There have been serious cutbacks in overheads, the report showed.
Industrialists across subsectors were forced to hike prices, according to the report, despite public denials that prices were heading north.

Twenty three percent of respondents said they had offloaded staff during the period, while 77 percent did not retrench.
In the report, CZI members acknowledged hiking prices.

“The majority of respondents (74 percent) who retrenched indicated that this was due to the decline in business as well as low orders. They also cited operational challenges and the need to cut labour costs, which in themselves are high. The total employment in the manufacturing sector declined by an average of 15,2 percent in 2017. The proportion of permanent employees vis-à-vis non permanent employees is close to one-to-one. When companies’ costs increase, they are likely to pass the additional costs to the consumer…

“Selling prices increased due to the additional cost of accessing foreign currency. The results indicated that 36 percent have not increased their prices while 28 percent have increased their prices by above 10 percent,” said the CZI.