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Think demand

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Think demand

29th June 2018

By: Terence Creamer
Creamer Media Editor

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At any gathering where South Africans convene to deliberate on the country’s economic predicament, one well-worn narrative will inevitably arise. It begins with the statement that South Africa is endowed with natural resources that are second to none. What follows is a lamentation that these resources are simply being mined and shipped to the rest of the world for further processing. In other words, instead of the full value being captured domestically, it is being created and extracted elsewhere. Therefore, South Africa has to change its policies and production structures to ensure that this value is added domestically ahead of export. In the process, thousands of jobs will be created, the country will reindustrialise and poverty and inequality will be reduced.

It’s a perfectly logical argument, but one that also contains an important flaw. It fails to fully recognise that industrialisation and value creation are primarily a function of demand, not supply.

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South Africans remain fixated on the supply side and pay far too little attention to demand. As a consequence, microeconomic policies and, at times, even corporate strategies tend to focus on what the country can supply rather than what the world is hungry to consume.

By contrast, Switzerland’s coffee sector comes to mind as a case study of an industry that has responded to, and even shaped, market demand and appetites.

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The small land-locked country does not even grow coffee, yet it has emerged as a leading global coffee force, accounting for as much as 60% of the global transit trade. At the heart of its success is innovation. Switzerland introduced not only instant coffee to the world on a large scale, but also the increasingly ubiquitous single-serve coffee capsule system. It is also home to the largest global roaster in the form of Nestlé. By value, the country is the world’s largest exporter of roasted coffee, albeit only the fifth-largest by volume. What’s more, the country’s strong position in the global coffee trade is a relatively recent phenomenon. In 2005, Switzerland exported only $130-million worth of coffee, but, by 2015, the figure had increased to over $2-billion a year.

While not entirely comparable, the growth of solar panel manufacturing in China offers another example of what is essentially a demand-orientated industrial strategy.

Having assessed that demand would continue to rise as a result of the decarbonisation strategies being pursued primarily in Europe, China invested in panel manufacturing. It did so while panel prices were expensive and when demand was solidly underpinned by the policy actions being taken abroad. Quite brilliantly, the country then began consuming panels as prices fell. This has resulted in China becoming the leading solar market, a position that could come under some pressure this year as a result of China’s move to slash tariffs for utility-scale solar projects.

The point, for South Africa, is that security of global demand, rather than domestic supply, should be the key driver of industrial policy decision-making.

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