eBusiness Weekly
Zimbabwean industry, with some few exceptions, has low and declining productivity when compared to similar international and regional businesses and consequently produces goods that cost more to make, with the pricing made worse by a belief that the way to increase revenue is to raise margins, not volumes.
Zimbabwean manufacturers and business people have often complained that labour costs, for example, are higher than in many competing countries. That is despite the fact that Zimbabwean workers are not very highly paid and that in real terms, taking into account inflation, are paid quite a lot less than six months ago. There are similar gripes about capital costs.
What they actually mean is that these overheads are spread over far too few sales. Owning a machine that can produce 1 000 widgets a day and using it to produce 100 a day is going to multiply your capital cost assigned to the cost of each item 10-fold. At the very least you will require a single full shift a day to operate that machine, although you could have three shifts if there were the sales. But that still multiplies the labour costs for each widget more than three-fold. So your widgets have basic costs far greater than your more efficient competitor.
The obvious way around the problem is to increase volumes, and by doing so cutting prices so that more people can afford the stuff you make. To take one famous historical example, the motor car. For 20 years after Karl Benz and Gottlieb Daimler in 1886 independently invented the motor car using Nikolaus Otto’s invention of the four-stroke engine, modest numbers of the new vehicle were made by an increasing number of manufacturers. The cars were expensive, each one basically handmade.
Then Henry Ford had the very bright idea of making far higher volumes at a far lower price and building a mass market rather than a luxury market. He put together a number of readily available technologies — his innovations were in systems not technology — including the idea of rigidly standardised parts first developed by Samuel Colt for his guns and the moving meat hooks used by Chicago meat processors. His resulting Model-T broke the mould. And Ford kept up the pressure.
His last Model-T cost about a third the price of his first, yet the workers who made it were paid more than twice as much, and Ford himself became very rich. What he did by breaking the mould was create a new market and he did that by pricing and he could manage the pricing by pushing productivity into hitherto unknown heights.
The other path was followed by Henry Royce and Charles Rolls. They decided to go for very small sales and very high margins. Rolls Royce succeeded because it produced a luxury item for a small but wealthy niche market without any pretence of even acknowledging a mass market could exist, although their company did go for mass production in other areas, principally aero engines. But we note that this approach only works where high margins are possible.
The trouble in Zimbabwe is that people making very mundane consumer goods are trying to implement a Rolls-Royce model of small production runs and large margins for goods that basically need the Henry Ford approach of large production runs and tight margins.
Faced with higher costs of imported materials and components, or even the victims of some Zimbabwean scalper, their first reaction is to increase margins in nominal terms at least, and often in percentage terms, and accept lower volumes. This puts them into a spin, as volumes fall so their unit costs rise as overheads must be spread over fewer items, then margins are raised again, and so volumes fall again and eventually they will fail, but in a whimper rather than a bang.
If volumes can increased, or at least be held steady, then a different pattern emerges. The inflation correction, bringing into the open the last nine years of inflation that was hidden by a fake exchange rate, means that staff costs as a percentage of total costs have fallen, even for decent employers who have tried to cushion their staff. So have utility costs. Even with imported materials rising in price, and taking a larger percentage of the total costs, the final cost of the item in real terms, that is tracking inflation not the exchange rate, is lower.
That in turn should make both local sales higher, especially when competitors have chosen the high-margin low-volume route. It should also help those with a decent local base to continue expanding into neighbouring territories with products that can compete on quality and price. That in turn strengthens the manufacturer, and gives a useful source of forex for inputs, allowing even tighter margins.
The low-volume high-margin manufacturers are making a serious mistake in assuming that consumers track the parallel exchange rate as arduously as they appear to do. When filling a shopping basket they do not even think in US dollars, they look instead at their bank balance or Ecocash balance. For many they cannot spend more on, say, food. So they look for the cheaper brands, they switch products and in the end buy less, which hits both manufacturers and retailers. But not equally. Those who sweat to keep costs down, and that really requires keeping volumes up, are now moving into the winners enclosure.
The others are trying to apply the lessons they successfully learned in the hyperinflation of the 2000s when they managed to keep their business open and in some cases even grew by being able to acquire other concerns whose owners were less calculating.
Unfortunately the circumstances are now different, the major difference being that the supply of RTGS dollars is fixed, unlike the 2000s when in the end hundreds of trillions were printed in a day. This means there is no limitless pool to dip into and so ordinary economic laws work well.
All economic turbulence accentuates the gap between winners and losers. It will be interesting to see who guesses right this time.
