The aerospace and defence sector is among a range of industries cherry-picked by the South African government as part of its new three year Industrial Policy Action Plan (IPAP). The sector has previously been so graced, leading government to invest in the Airbus Military A400M airlifter programme as well as the Centurion Aerospace Village.
Announced by trade and industry minister Rob Davies late last week, the plan, dubbed IPAP2, builds on the National Industrial Policy Framework (NIPF) and the 2007/08 IPAP. “It represents a significant step forward in scaling up our efforts to promote long term industrialisation and industrial diversification beyond our current reliance on traditional commodities and non-tradable services,” Davies told Members of Parliament Thursday.
The minister added aerospace and defence forms part of a cluster of industries that his department believes has “the potential to develop long-term advanced capabilities”. Also in this group is nuclear technology and advanced materials manufacture: titanium, nanotechnology, advanced composites and bio-ceramic applications.
“Its purpose is to expand production in value-added sectors with high employment and growth multipliers that compete in export markets as well as compete in the domestic market against imports. In so doing, the action plan also places emphasis on more labour absorbing production and services sectors, the increased participation of historically disadvantaged people and regions in our economy and will facilitate, in the medium term, South Africa’s contribution to industrial development in the African region,” the minister continued.
“As a country, South Africa has no alternative to the course of action we propose. Manufacturing and other productive sectors of the economy are the engines of long-term sustainable growth and job creation in developing countries such as our own. However, South Africa’s recent growth was driven to too great an extent by unsustainable growth in consumption, fuelled by credit extension.
“Between 1994 and 2008 consumption driven sectors grew by 7.7 percent annually, compared with the productive sectors of the economy which grew by only 2.9 percent annually. This has meant that even at the peak of our average annual growth – 5.1 percent between 2005 and 2007 – unemployment did not fall below 22.8 percent.
“Manufacturing – which constitutes a sizeable chunk of our value added production – has not enjoyed sufficient dynamism,” Davies added. This is mainly because the relative profitability of manufacturing has been low as a result of a number of factors that include avolatile and insufficiently competitive currency; the high cost of capital relative to SA’s main trading partners, particularly that channelled towards value-added sectors such as manufacturing, resulting in a too limited allocation of capital to these sectors; the monopolistic provision and pricing of key inputs into manufacturing; an aged, unreliable and expensive infrastructure system; a weak skills system; and the failure to adequately leverage public capital and other large and repetitive areas of public expenditure.
Davies says the negative, unintended consequences of this growth path are manifold. “They include large and unsustainable imbalances in the economy, continued high levels of unemployment and a large current account deficit. These weaknesses have been exacerbated by the global recession.”
The minister says the 2010/11 to 2012/13 IPAP rests on four cornerstones:
“First, government intends to develop proposals to enhance access to concessional industrial financing for investment in IPAP priorities and other productive sectors on terms comparable to those of our major trading partners. Increased investment in these sectors will generate a mix of import replacement and exports which will help to lower the current account deficit and reduce balance of payments risks. Increased supply in productive sectors will help lower price pressures and hence will assist in moderating inflation. It will also contribute to the medium-long term objective of diversifying the structure of our economy.
“Second, government will revise procurement legislation, regulations and practices to enable the designation of large, strategic and repeat or ‘fleet’ procurements in a range of sectors. This will aim to sequentially increase competitive local procurement and supplier development opportunities, minimise ‘leakages’ from the domestic economy and support meaningful Broad Based Black Economic Empowerment (B-BBEE) in all three spheres of government and in state owned enterprises (SOEs).
“Third, government will deploy its trade policies more strategically. This includes intensifying the campaign led by South African Revenue Service (Sars) against practices such as customs fraud, under-invoicing, smuggling and illegal imports – all of which profoundly undermine productive capacity and employment in the economy. Trade policy instruments such as tariffs will be deployed on a strategic basis underpinned by the imperatives of our sector strategies. Standards, Quality Assurance and Metrology (SQAM) institutions and practices – otherwise known as technical infrastructure – will be strengthened to support the development, accreditation and enforcement of standards and bolster other measures to create, scale up and resuscitate certain industries.
“Fourth, anti-competitive practices will be targeted, particularly where these concern intermediate inputs to downstream labour absorbing production as well as consumer goods to low income households. This applies especially to products such as carbon and stainless steel, chemical polymers, fertilisers and aluminium, amongst others and will build on the very positive achievements of the competition authorities in the recent past.”
These cross-cutting interventions will underpin focussed and significant interventions in three clusters of sectors.
“First, sectors including metals fabrication, capital and transport equipment, green and energy saving industries and agro-processing, will be qualitatively new areas of focus of industrial policy.
“Second, we will build on and broaden interventions in sectors which were identified in the first Industrial Policy Action Plan, namely, automotives and components, medium and heavy vehicles, plastics, pharmaceuticals and chemicals, clothing, textiles, footwear and leather, bio-fuels, forestry, paper, pulp and furniture, cultural industries and tourism and business process services (or call centres.)
“The third cluster focuses on sectors in which we have the potential to develop long-term advanced capabilities: nuclear, advanced materials and aerospace.
The IPAP2 document notes the aerospace and defence sector “is a critical and pervasive generator of new technologies and is key to future innovation in SA. It also enhances Government engagement across substantial parts of manufacturing, services and primary sectors of the economy to achieve long–term intensification of the country’s industrialisation processes and movement towards a knowledge economy.”
The document says significant progress has been achieved in developing recognition and confidence from global original equipment manufacturers (OEMs) in aerospace that South Africa has capabilities to extend components and parts manufacturing as well to enter the high-value global supply chains on advanced materials such as titanium, avionics and electronics.
Key opportunities include government procurement, including that by state airline SAA, direct offsets and competitive supplier development programmes as well as airports development and the upgrading of activities including services.
Constraints identified are:
- Loss of critical skills
- Rapid technology changes
- Development of a sustainable supplier base
- Lack of infrastructure funding
- Lack of financial assistance or incentives regarding non – recurring costs in aviation manufacturing
- Lack of investment in airport capacity resulting in reduced baseline level of passengers
The document describes the purpose of the Centurion Aerospace Village (CAV), adjacent to Air Force Base Waterkloof – as the development a sustainable supplier base, adding the economic rationale is to create “high tech industry clusters through the selection of higher levels of sub-tier supply on the basis of established core competence, and established supply to the higher tier suppliers, with subsequent phases increasingly offering opportunities for new SMME [small,medium & micro enterprise] entrants in the aviation sector.”
The CAV will support the sustainability of lower level SMME suppliers through:
- Resource sharing,
- Mentoring of lower tiers of supply by higher tiers,
- Directing of commercial base load to common sub-tier suppliers,
- Direct assistance of emerging lower tier SMME suppliers, and the
- Selective support re redeemable supplier financing for SMME`s.
The expected outcome, the document says, is a “strong and sustainable local supplier base and creation of new companies and SMME`s”. The key milestone is the fourth quarter of this financial year – the first quarter of 2011 – when the first three SMME tenants occupy newly constructed buildings. The IPAP2 paperwork notes the CAV, a registered company, will be the lead agent for this venture, with the DTI, the National Treasury and the departments of science & technology (DST), defence, public enterprises and public works in support.
The DTI also forsees SA producing advanced materials for the aerospace industry, this building, in part on an existing DST-led engagement with Airbus and Boeing for supply of aerospace grade titanium; aerospace components and materials and systems engineering (aeronautics).
The economic rationale is explained as an endeavour to build “a new and competitive titanium industry and a naturalfibre composites materials industry. This will take advantage of increasing global demands for green, light and strong materials.” The expected outcome is SA-owned advanced materials intellectual property as well as manufacturing contracts for a new industry base in titanium for SA companies with global aerospace aircraft manufacturers; an extension of titanium manufacturing into industrial applications in large, piped infrastructure such as oil rigs; and, manufacturing contracts for a new industry base in natural fibre composite materials to be used in interior parts and components (secondary structures) for aircraft manufacturers.
Key milestones include leveraging “patents under development to secure interest in supply contracts for titanium production and development of the titanium beneficiation for aerospace applications” by the last quarter of this calandar year and the finalisation “of the first prototype of the natural fibre project for Airbus application as funded by DST” by end-March next year.
The expected economic impact includes employment and investment:
- Employment: Titanium production with a twenty thousand ton plant in 2018 will generate 700 to 1000 jobs and higher projections if the titanium applications are extended to industrial applications. The job creation potential for the Natfibio DST intervention on natural fibre composites in partnership with Airbus will extend beyond manufacturing to the agricultural sector as the fibre is extracted from plant material.
- Investment: Investment in the 500-ton plant for 2013 is projected at R750 million and the commercial scale 20,000 ton plant is R4 billion. A critical mass of engineering capabilities is being established through the DST funded Titanium Centre of Competence. Investments are also at the R&D stage with technical performance blueprints provided by Airbus to the DST funded Natfibio Centre of Competence.
For this the lead department will be the DST, supported by the DTI and the departments of defnce, transport and public enterprises.
Full document at: http://www.info.gov.za/view/DownloadFileAction?id=117330
Pic: Top shells for the Airbus A400M in production at DenelSaab Aerostructures. Archive picture.