The EU’s carbon border adjustment mechanism (CBAM) poses a huge challenge for SA manufacturers but also offers them the opportunity to reshape their business strategies and steal a march on international competitors, according to a new report.
The report, “Manufacturing Analysis 2024: Resolute. Resilient. Adaptable”, published by PwC on Tuesday, said high carbon intensity and the lower prices of SA exports had until now given local industries a competitive edge on their international rivals.
But it warned that with CBAM and similar policies emerging in other markets, this advantage would erode, potentially becoming a disadvantage.
CBAM, which imposes a tariff on carbon-intensive products such as steel and cement imported by the EU, takes effect in 2026 and is destined reshape the nature of SA’s exports to one of its biggest trading partners.
CBAM requires suppliers to disclose their carbon emissions and will increase taxes on carbon-intensive items exported to the EU. The US has a similar policy known as the Inflation Reduction Act; and Australia, Turkey and Japan are considering implementing their versions of the tax.
Business Times reported that as many as four in five original equipment manufacturers (OEMs) in SA’s automotive sector aren’t ready to meet the requirements of CBAM.
Carla Perry, PwC SA tax reporting & governance director, said goods exported from SA will face higher costs, lower demand and increased pressure to lower their carbon footprint.
However, through proactive and smart measures, the local manufacturing industry could transform the obstacles into opportunities and generate value for stakeholders, she added.
In preparing for the cross-border taxes, companies need to start measuring and monitoring greenhouse gas emissions throughout the value chain, from raw materials to final products, to identify carbon hotspots and benchmark their performance against competitors.
The companies can then evaluate where they can reduce their carbon use, Perry said.
“The business case for decarbonisation is a commercial one. SA manufacturers have a limited time to reduce their exposure to CBAM and other carbon border adjustment policies,” she added.
Competitive advantage
“Decarbonisation can help gain a competitive advantage in the global market, access new customers and markets, improve reputation [and] brand value, and contribute to the global fight against climate change.”
Imported inputs and coal-fired energy remain among the most significant barriers to decarbonisation in SA.
To reduce emissions, boost efficiency and switch to greener energy sources, Perry urged producers to consider best practices and harnessing technologies. By implementing eco-design concepts including durability, modularity, reparability and recyclability, she said items would last longer, use fewer materials and produce less waste.
Carbon taxes will force manufacturers to rethink their business models and embrace a circular economy that minimised waste and maximised resource efficiency, said Nqaba Ndiweni, PwC’s Africa consumer, industrial products and services industry leader.
PwC SA smart manufacturing head Vinesh Maharaj said that given the recent weak performance of SA manufacturers — aside from the packaged food sector — businesses could reduce expenses and boost productivity by introducing sustainable and smart manufacturing.
The sector’s total combined revenue fell 2.53% last year and operating profit was down 21.04%, masking the sector’s true potential, he said.
“So, cost management and efficiencies can become critical for turning about that financial performance,” said Maharaj. “You can attract more customers by being more sustainable, and have an advantage from this by getting ahead of your competitors.”
According to the report, SA exported R403bn worth of machinery and complex manufactured products, including medical and transport equipment, in 2023, accounting for 19.7% of total goods sold abroad.
Heidi Barends, head of sustainable finance at Absa Corporate and Investment Banking, said CBAM’s implications could extend beyond national boundaries and reshape global trade.
“Historically, low-cost production drove competitiveness,” Barends said. “In this new world, the combination of cost and carbon intensity” would drive competitiveness.
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