BAT plant closure highlights crisis in manufacturing, says BLSA

South Africa’s industrial base is under growing threat as weak enforcement and slow policy responses allow illegal trade and unfair competition to flourish, Business Leadership South Africa (BLSA) has warned.

This comes after JSE-listed British American Tobacco South Africa (BAT) announced it would shut its only local cigarette factory in Heidelberg, Gauteng, later this year, while the automotive sector struggles with a surge of low-cost vehicle imports.

According to BLSA, the two crises may look different, but they share the same root causes, namely the government’s inaction and poor co-ordination, which are putting local manufacturing jobs at risk.

“The government has been slow to respond to clear and present threats to domestic manufacturing. Business has sought engagement on this issue repeatedly, but we have yet to see the level of urgency the situation demands. Protecting domestic manufacturing capacity must be recognised as a strategic economic priority,” BLSA CEO Busisiwe Mavuso said.

BAT said it could no longer keep its Heidelberg plant open as legal cigarette sales have collapsed under the weight of the illicit market. The factory has been running at just 35% capacity. About 230 direct jobs will be lost, with knock-on effects that could reach as many as 35,000 jobs across farming, logistics, distribution and retail.

Worsened during Covid-19 lockdown

Illicit cigarettes now make up about three out of every four cigarettes sold in South Africa. In 2019, this accounted for roughly one-third of the market. BLSA says the problem accelerated during the Covid-19 lockdowns, when legal cigarette sales were banned while enforcement capacity was diverted elsewhere.

Illegal producers filled the gap and built distribution networks that never disappeared. Steep excise tax hikes since then widened the price gap between legal and illegal products, making the illicit trade even more profitable.

Illegal cigarette packs are often sold for less than the R26.22 in tax that should be paid per pack. This costs the state an estimated R30bn a year in lost revenue, money that could have funded hospitals, schools and policing, the organisation said.

Independent research highlights the scale of the crisis. An Ipsos study published last year found illicit cigarettes were sold in 76.6% of stores nationwide, nearly triple the level recorded three years earlier.

Tax Justice South Africa (TJSA) has called for stronger action, demanding that the Fair-Trade Independent Tobacco Association (FITA) publicly name criminal manufacturers operating within its ranks.

TJSA founder Yusuf Abramjee said claims by FITA that it had expelled non-compliant members “ring hollow” without transparency.

“These criminal manufacturers are at the heart of what has become the world’s biggest black market in cigarettes. It’s a menace that is depriving South Africans of at least R30bn a year that should be funding hospitals, schools and policing,” Abramjee said.

Research from the University of Cape Town’s Research Unit on the Economics of Excisable Products has also warned that some local manufacturers under-declare production, paying tax on only a fraction of what they produce.

BLSA says the illicit economy is not limited to tobacco. Illegal alcohol, counterfeit medicines, fake clothing, electronics and even food products are flooding the market. Estimates suggest the illicit economy may now account for about 10% of GDP, according to BLSA.

In response, BLSA says it has joined an Illicit Economy Task Force led by the Consumer Goods Council of South Africa. The task force aims to develop cross-sector solutions, including product authentication systems, public awareness campaigns and closer co-operation with law enforcement agencies such as SARS, the police and the National Prosecuting Authority.

But BLSA says business cannot solve the problem alone.

“Government must match business commitment by providing resources for SARS investigators, specialised police units, prioritised NPA prosecutions and tighter import controls — the infrastructure exists, but political will to co-ordinate action is needed now,” the organisation said.