SA’s crucial industrialisation drive lies with all its potential in the doldrums, requiring public-private partnerships to resuscitate it, says Mergence founder and chair Masimo Magerman.
The former Wall Street analyst is also the executive director at the group’s holding Mergence Industrial Group (MiG) — a majority black-owned diversified industrial manufacturer offering composites and steel manufacturing capabilities.
Business Day spoke with him to get his view of the problems holding back SA’s industrial drive and to ascertain where the green shoots for manufacturing are.
Where does SA get manufacturing right and what are the most significant sector-wide challenges?
Disconcertingly, industrialisation has been in a state of decline over the past nine years, posing a threat to the fledgling black industrialist programme and requiring a multi-stakeholder push that includes government, industry, development finance institutions and organised businesses to help stimulate the sector through a package of short- and medium-term incentives.
Manufacturing is susceptible to extreme volatility on the macroeconomic front. This is worsened by protectionist government policies that shield the country’s only steel producer, ArcelorMittal SA (Amsa), with 20% import duties at the expense of downstream players, forcing manufacturers to pay crippling high prices for steel.
But we remain undeterred. At MiG, we have ramped up our investment in these sectors as we believe in their catalytic qualities for other sectors of the economy. It is a strategic play in our growth strategy and ambitions to be a black-led pan-African industrial group — complementing our investment management business with assets north of R35bn under management.
Do the state of the nation address and the budget announcements encourage momentum for the areas/sectors in which MiG plays?
The infrastructure spend of nearly R1-trillion announced by the president and finance minister over the medium term is welcome news. We are also keenly watching the state interventions to address the crippling energy crisis in the country — which will be critical for the revival and sustainability of the manufacturing sector.
The largest portion of this, about R448bn, will be spent by state-owned companies, public entities and public-private partnerships (PPP). The rail, automotive and energy sectors remain focus areas for our business going forward.
Can you give us a sense of the main issues occupying your mind with regard to your business and customers?
The sector faces numerous issues, most notably the continued lack of public infrastructure spending and not giving preference to local manufacturers and suppliers in government projects. Locally, a lack of investment and demand as a result of a slowdown in activity in sectors that the manufacturing sector feeds into, which is occasioned by the focus on containing inflation.
Also, multiple service delivery failures in energy, water and rail continue to scupper cost-effective manufacturing and investor confidence. Globally, it’s the disruptions in global supply chains, low confidence and increasing risk worldwide.
Given the complex and challenging environment, what growth strategy is MiG deploying?
Our strategy focuses on a range of industries nationwide including those in the motion industry, electrical distribution, shopfitting, automotive, defence, material handling and general engineering sectors. MiG aims to control the entire manufacturing process from design to raw material, through the various processes, to the finished product.
As a supplier to global original equipment manufacturers (OEM) such as Siemens, Alstom, Bombardier and GE, as well as Alstom and Gibela — with whom we have 10-year train set contracts through BFG Africa — we aim to extend our African footprint using a similar model.
We fully subscribe to the government’s localisation policy, firmly believing that increasing the country’s manufacturing capacity is the only way to accelerate economic growth and job creation. Localisation is one of several tools in the economic reconstruction and recovery plan to improve the dynamism of the economy, promote investment, develop new markets, transform the economy, promote equitable spatial development, and contribute to the development of a capable state.
Is MiG a signatory of the steel master plan, and what is your take on how the policy was developed and is being implemented?
MiG was not a signatory to the steel master plan. However, given the opportunity, we would love to be a signatory. The plan definitely does get some issues right, like the desire for more local content.
However, like with all sector master plans, it requires the industry and government to be committed and drive implementation jointly. Business is also in the best position, both financially and in skills, to make resources available for the plan to work. We are supportive of the plan and stand ready to provide any assistance that our colleagues in the industry, who head up the workstreams, or the department of trade, industry and competition require of us.
MiG increased its stake in Lasercraft to 100% in 2022. Will we see further acquisitions in 2023? What does MiG look for in businesses that it invests in?
With the recent 100% acquisition of Lasercraft, MiG now has the capacity and track record to offer products and solutions to SA’s rail and automotive sectors. We want to play our part in increasing SA’s manufacturing capacity which has been declining over the years. The re-industrialisation of SA is a prerequisite to economic growth and job creation, and that requires patient capital and entrepreneurs with the foresight to build for the future.
Our growth trajectory is both organic and acquisitive. To this end, we are continuously in search of opportunities and assets that complement our broader strategy and meet our investment philosophy. In the main, we love great management teams with deep knowledge of their chosen sectors. These are people we love to partner with.
What other attractive growth prospects is the group mulling over in the short to medium term?
The Southern African Customs Union is set to finalise the collective Southern African industrial offer for the African Continental Free Trade Area, presenting a considerable opportunity to deepen economic integration on the continent in line with our pan-African growth strategy. We are watching developments on this front closely.
What is your outlook for 2023? The current state is not good unless the government commits to infrastructure spending on rail, water infrastructure, energy and ports, and commits to private-public partnerships; this will be a double-edged sword for the industry. Public-private partnerships will remain the best solution to the above as the private sector will be able to provide resources that government simply does not have.
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