Wage increases will shut down some automotive component manufacturers

Motor component manufacturers have warned that the current wage negotiations raises the risk of permanently crippling the viability of manufacturing facilities should the settlement award wage increases excessively above the inflation rate.

Manufacturers accept that increases in wages are an acceptable cost of doing business. However, this must be in the context of prevailing economic and market conditions. International business conditions are weak and competition is fierce. Already, Chinese and Indian competition enjoy lower labour costs in their domestic markets and are able to compete effectively in the South African market.

Already the local manufacturers have been placed at a major competitive disadvantage due to the strength of the Rand. There are no significant barriers to entry in the automotive industry, which is highly globalised. Assemblers are spoilt for choice as to where production is located and there is ample surplus capacity available around the world. As such, the viability of the industry is tenuous at best, even in more prosperous times.

The current trend of collective bargaining has placed the small manufacturer at the biggest disadvantage. Viability for small manufacturers is already problematic. Experience around the world is that small business is the key to job creation. In South Africa conditions are increasingly being stacked against small business and has been at the forefront of job destruction in this industry.

The combination of a 15% wage increase and 10% drop in work week will be devastating, particularly for small business. Economic conditions have already forced companies that have functioned with shorter work weeks to reverse those decisions. The shorter working week demand is particularly retrogressive in the context of global economic conditions and feuds in other major manufacturers.

The strength of the Rand, combined with the demands on the table implies a dollar cost increase in excess of 40%. This is industrial suicide given the global weakness and excess capacity.

An excessive wage settlement does not create extra money. The resources have to be extracted through job shedding and offshore sourcing. The implication is that the demands are creating victims. These victims include the unemployed who face fewer job opportunities as a consequence of these actions. The other victims will be retrenched workers who will inevitably follow and the customers who face higher product cost.

Over the longer term SA faces an increased risk of manufacturers sourcing production from countries that are more competitive. Industry investment will thus shrink as a consequence.

Written by Chris Hart

The views expressed by Chris Hart are his own and do not necessarily represent the views of Investment Solutions.