Budget 2015 Sector Scan: Manufacturing focuses on SMEs to boost local economy
Today, AfricaMoney is throwing the spotlight on the manufacturing sector in Mauritius, which is leveraging innovation, availability of skilled labor, strategic location and a friendly investment and regulatory climate to boost high-tech manufacturing, making the island economy a location of choice in Africa to undertake high-end manufacturing activities. (Image: CIEL)
After the overview of economic pillars such as financial services, tourism, ICT and sugar sector over the last 2 weeks, AfricaMoney now brings you the review of the manufacturing sector, which is now turning to SMEs in a renewed focus on the local economy and employment generation.
Overview of the Manufacturing Sector:
A series of industrial strategies, which moulded the Mauritian manufacturing sector, date back to the 1960s, with the creation of import-substitution enterprises in sectors as diverse as the agro-industry, clothing, chemical and metallurgy. However, the industrial strategy was only a part success, as it did not bring the much hoped for reaping that the government expected, in terms of job creation and diversification.
Consequently, the successful adoption of an export-led approach in the 1970s along with the initial import-substitution strategy brought up the rapid growth and the major structural transformation deeply longed for by the economy. However, though the mixed strategy fully met its objectives, some weaknesses started to become apparent. Indeed, the business environment in which import-substitution enterprises were operating became difficult in the late 70s and the performance of the EPZ sector was not sufficient to resolve the disequilibrium problems the country was facing in its balance of payment.
The outward-looking approach relying on the country’s abundant and cheap labour force to attract foreign investors to the EPZ which was pursued in that respect proved to be a winning bet as output in the manufacturing industry grew at an annual average rate of 12% in the mid-1980s, overtaking the sugar sector as the main source of exports, foreign exchange earnings, GDP contribution and employment.
Yet, despite this remarkable performance, the industry was ultimately faced with whirlwinds that have severely shaken the foundation on which it has initially built its development path. The rise in labour cost which has eroded its competitiveness in the textile industry and the phasing out of its preferential market access, that were critical for the development of the garment industry were among others challenging developments for the sector. More recently the soaring international oil prices and the economic downturn that swooped down on the developed countries also caused much uncertainty in the industry.
Though Mauritius benefited from the sugar protocols, the government also recognized early on the advantages of diversification. As such, there was a policy thrust on Export Processing Zone (EPZ) to embrace new sectors.
The manufacturing sector of Mauritius has evolved into a technology intensive sector and offers investment opportunities in:
1) Textiles & garment making
2) Non-textiles comprising light engineering
3) Food and seafood processing
4) High-precision engineering comprising products such as watch &jewellery, medical devices, pharmaceuticals, electronic components and products, parts for the aerospace and automotive industries, amongst others.
Financial Contribution of the Manufacturing Sector:
The manufacturing sector contributed 16.9% to the Mauritius GDP in 2014 and generated more than 111,700 jobs. This is a marked decrease in the manufacturing’s contribution since 2006, when the manufacturing sector, not including sugar, contributed about 19% of the country’s industry GDP while the manufacturing sector as a whole contributed around 27% in the same period. This may in part be due to the manufacturing sectors exposure to the economic crisis and the accompanying decrease in the purchasing power of Mauritius’ trade partners in Europe.
In 2011, the manufacturing sector in Mauritius employed approximately 77,000 employees, roughly 26% of the Mauritian labour force, so the decline from 2006 to 2011 was marginal while that between 2011 and 2014 has been marked indeed.
However, industrialization, textiles and garments making remain the predominant manufacturing activity in Mauritius. The apparel industry has undergone significant transformation to make Mauritius a world player in the global textiles market. The industry has come a long way from a mass production sector to a mid-market clothing segment. In fact, Mauritius is now set to emerge as a global fashion centre on the strength of its apparel sector.
Whilst apparel production remains the principal contributor to the manufacturing GDP, the Mauritian manufacturing sector is moving into even more technology intensive and precision engineering activities.
Design innovation, availability of skilled labor, strategic location and a friendly investment and regulatory climate are the core components of the business environment that are enabling investment in high-tech manufacturing, and making Mauritius a location of choice in Africa to undertake high-end manufacturing activities.
Key Challenges Facing the Manufacturing Sector:
Depreciation of the Euro causing exports to plunge
Mauritius is a key exporter of goods to the United States and parts of Europe; the main products for export include clothing and textiles 20%; fish products 11%; and raw sugar cane 11%. Major products imported into the country include refined petroleum oils, which comprise 19% of the country’s total yearly imports, a vast majority of Mauritius’ imported goods, come from India, China and France. However, with the recent depreciation of the Euro on the Market, it is expected to affect manufacturing for the export market. Since the beginning of the year, the Euro has depreciated by 2.8% and by 10.2% on an annual basis against the Mauritian Rupee (MUR) and at least 60% of the export revenues of the island economy are in Euro.
Appreciation of USD makes imports costlier
Even as the Euro is depreciating, making export revenues fall, the USD is appreciating, making imports costlier. In fact, the USD has appreciated by 12.9% since the beginning of 2015 and by 18.8% compared to the same period of 2014. It is to be noted that approximately 60% of Mauritius’ payments are in USD. This has put exporters in a double bind, since they are being squeezed by both rising import costs as well as falling export revenues.
Dealing with intense global competition
With new global players in economic investment and international trade such as Brazil, India, China and Russia emerging in the global market, Mauritius will face difficulty in establishing its presence. Therefore, Mauritius should look out for new market ventures, sub-sectorial investment within the Manufacturing sector and emphasis on Branding and Advertising.
Build up sea and air connectivity to increase exports
Sea and air connectivity through major shipping lines and airlines form an important aspect of business and trading communication. Without a proper sea and air platform, international trade will have trouble in connecting with other countries for exports.
Promotion of local products and services
As one of the largest sectors of the island economy, the manufacturing sector has targeted mainly export prospects for overseas markets. However, with the expansion of Small and Medium Enterprises, manufacturing should also thrive in the Mauritian market to increase competitiveness and rejuvenate the local economy.
Potential Areas of focus for the Development of the Manufacturing Sector:
Focus on new international markets
With growing economies around the world, manufacturing sector has to re-orient its exports markets and strategies. Looking for international trading venues such as emerging Asian economies and African markets will create new synergies in this sector.
Investments in infrastructure for factories
The government is coming up with infrastructure projects even as foreign investors express keenness to invest in the manufacturing sector. With the right infrastructure and economic resources, this sector can lead from the front as one as one of the most important pillars of the economy.
Highly skilled, adaptable and bilingual work force
Work force is the most determinant factor for the success of any industry. A skilled force will eventually increase productivity, efficiency and generate revenues for the sector. Therefore, focus on formation, training and career guidance will enhance the skills of an already qualified workforce.
Focus on Small and Medium Enterprises
As one of the most versatile, adaptable and accessible sectors for SMEs to set up in, the manufacturing sector has the potential to boost SME’s in the long run. However, further incentives and strategies should be given to entrepreneurs for diversification of this sector.