A model for SACU ?

| Friday March 4, 2011 00:00

 

These studies are meant to provide inspiration and information to Botswana policy-makers as well as businessmen and show how  successful and industrious businessmen  have managed to overcome the many known challenges of operating a profitable export oriented firm in a small landlocked country like Botswana.  

The market is a very strange beast that sometimes produces the oddest, most unexpected outcomes- ones that you would never imagine and ones are not necessarily the product of government policy and surpass even the wildest imaginings of government's  advisers.  Whereas chewing gum has been produced in  Botswana for a number of years production is set to treble as the country is rapidly emerging as the chewing gum capital of Southern Africa, where most of the region's chewing gum will be manufactured for export. This outcome is the result of  commercial business decisions and not government policy. Originally a chewing gum factory was established in Gaborone and its current owners, the giant food multinational Kraft Foods, cannot explain why it was originally located here. It was, they believe, because of investments by South African or Zimbabwean interests.

The original company was bought by Cadbury several years ago. Cadbury was in turn bought by Kraft last year - a classic case of the big fish eating the smaller ones. But the reason why the factory was purchased by Cadbury in the first place was because it was then a profitable operation with great potential to be even more profitable. 

What is particularly interesting about the case of Cadbury/Kraft, from the point of view of Botswana's industrial policy and the Southern African Customs Union is that our exports of chewing gum are rising rapidly and once the substantial investment by Kraft is completed the company expects to export  P300 million-P400 million in chewing  gum. The current management says that the company had a healthy turnover of approximately ZAR 120 million in 2010, all of which is exported. It has an employment level of 187 staff, which will be decreased to 160 once the company completes the upgrading of the Gaborone facility in 2011. Cadbury/Kraft  is planning a highly automated production facility that will allow the company to produce three times the current level of output of chewing gum. The expected investment in Botswana is P150 million. The company indicates that the advantages of operating in Botswana include relatively low taxes and low wages compared to neighboring South Africa. The traditional business model of the chewing gum factory was based on low wages. However, Cadbury/Kraft indicates that once the factory expansion and the resulting increase in productivity is done it intends to raise wages significantly by 100% as well as improving benefits for its workers.

What is unique about the Cadbury/Kraft business model is that Botswana is not alone and Kraft has operations in four of the five SACU countries- Botswana, Namibia, Swaziland and South Africa. In the case of each the facilities they specialize in one particular product or range of products. In Namibia for example Cadbury/Kraft has a production facility that produces specialty chocolates such as Easter eggs. Swaziland has another specialisation.

What then happens is that output from each factory is then sent to South Africa where it is exported all over the SADC region. Thus Botswana both imports and exports chewing gum, which returns in consignments to purchasers in the country. The issue of smallness is not relevant in the case of chewing gum because we have the whole SACU/SADC market to produce for.

The most important barrier to being landlocked is that it means that imports have to go a long way from the port of Durban by truck before they are processed here in Botswana. This in turn raises costs in Botswana and makes most exports uncompetitive. As a result,  trucks with imports come in full to Botswana and leave empty.

Our exports leave in suitcases ie diamonds and our imports come in containers. This means the importer is charged what is in effect double for trucking; ie the cost of the truck plus the cost of returning it empty for all imports. This is the vicious cycle of being landlocked and only those companies that find ways of overcoming this transport logistical issue tend to survive. Cadbury Kraft have overcome this transport problem because the same trucks that bring consignments of Cadbury products to Botswana leave full of chewing gum and the same is true in other  SACU capitals.  

For Botswana this is a brilliant business model that generates substantial and increasing exports of industrial products and provides what will be relatively well paid jobs in the coming year. Since independence Botswana has rightly complained that all the production benefits of its membership in SACU have gone to South Africa.

Everything is made in South Africa but Cadbury/Kraft has shown that economically efficient export oriented production can occur here. The alternative, to shut off our market and produce only for Botswana will only result in tiny inefficient firms that will never be able to compete.

What can be learned from this case? Can we build similar models that benefit all SACU countries? Possibly but what is true of chewing gum is not necessarily true of bricks because the former is a very high value to weight item and therefore the type of plant specialisation in different countries is possible. A similar business model may not be possible for other products.

However, what one finds in countries is that the very smart ones are linking in to precisely these sorts of global value chains that give them the economies of scale to make sure local processing is profitable as we find with Kraft.

Government does however have a very important role to play and while the history of the factory may be lost the  reason why we manufacture chewing gum at all in SACU is because of the protective SACU tariffs that are offered.

Chewing gum attracts a SACU tariff of 25 percent. Imported sugar confectionary is even higher at 37 percent and chocolate confectionary 21 percent.

What would happen if we liberalised and set tariffs at zero. Kraft has giant factories in the US and throughout the world and the small demand of southern Africa could probably be produced in a one shift in its factories in the US. Full liberalisation would mean the loss of hundreds of good jobs throughout the SACU region and the death of a model that serves the SACU region well.

These are the views of Professor Roman Grynberg and are not necessarily the views of any institution.