Fri | Jun 18, 2021

Manufacturing needs a saviour

Published:Friday | April 27, 2012 | 12:00 AM
William Lawrence

William Lawrence, Guest columnist

Data from the Planning Institute of Jamaica, spanning 1982 to 2010, shows that real growth of gross domestic product (GDP) averaged less than two per cent per year.

The Jamaican economy became more service-oriented with robust expansion in financial services and transportation. Contribution of the manufacturing sector fell precipitously from over 17 per cent to just eight per cent of total GDP.

High rates of interest, onerous taxation, high electricity cost, low capacity utilisation, low value-added, high labour costs, excessive waste, uncompetitive technology and weak export activities are often cited among reasons for the decline.

Urgent steps need to be taken for a turnaround of the Jamaican manufacturing sector, because to 'do nothing' is not a feasible option.

There is a moderately strong correlation between real growth of total GDP and real growth of manufacturing GDP (see graphic).

The sector explains nearly 40 per cent of the variability in real growth of total GDP. In other words, manufacturing determines whether there is real growth of the Jamaican economy.

GOVERNMENT POLICIES

Industrial policy is about investment, productivity and growth in real sectors of the economy. There may be merit in picking potential winners, because the manufacturing sector is comprised of a collection of industries with disparate demand and supply dynamics. Industrial policy should encourage not only export but also efficient import substitution to save foreign exchange and creates jobs.

Proper bankruptcy legislation is needed to help rehabilitate viable companies that become financially distressed.

Micro, small and medium-sized enterprises (MSMEs) can play an important role in rejuvenating the manufacturing sector.

Of note, five or 42 per cent of the 12 firms listed on the junior market of the Jamaica Stock Exchange are engaged in manufacturing. However, Global Entrepreneurship Monitor reports that, although Jamaica has a relatively high rate of new business formation, there is also an alarming rate of business closures because of financial hardship.

The MSME policy needs to facilitate better access to affordable capital.

The high cost of electricity is a matter of grave concern to the manufacturing sector. Jamaica Public Service Company has pledged to replace old generation plants with new units aimed at realising 30-40 per cent reduction in the cost of electricity by yearend 2014. Additional savings can be achieved by implementing an energy policy of fuel diversification using the optimal combination from sources such as oil, natural gas, coal, solar and others.

BUSINESS PRACTICES

The strongest manufacturing firms listed on the JSE keep total debt below 50 per cent of total book value of assets. This practice enables companies to meet financial obligations as they become due and offers protection against insolvency should interest rates escalate.

However, most firms need borrowed capital to pursue opportunities for growth. Therefore, special attention must be paid to the accuracy of revenue forecasts.

For success over the long run, companies must source from and sell to multiple markets under conditions of international competition and rapid developments in information communications technology that removes restrictions of time and place. This is achieved through effective strategy and innovation. For example, Desnoes & Geddes Limited pursues a strategy of product differentiation through aggressive brand promotion, widening its range of beverages and leveraging international partnerships to penetrate export markets.

Manufacturing firms need to compete on the basis of global supply chain productivity and not merely local factory efficiency.

Moreover, supply chains need timely adjustments to avert declining profitability. This can be challenging because the true configuration of a supply chain may be hidden amongst a myriad of shared resources.

Strategy, integration, logistics, capacity, incentives, information, inventory and financing must all be considered when aligning a supply chain with the mission of an organisation. Proper recordkeeping is crucial for business planning and solving problems.

Dr William W. Lawrence is director, Professional Services Unit of the Mona School of Business, UWI. Email william.lawrence@uwimona.edu.jm.