In 1993, when I was an undergraduate student in Cleveland, Ohio, I attended a UB40 concert with my friend and study partner, Yoichiro Endo from Tokyo, Japan. Endo now has a doctorate in robotics and is based in the United States. This UB40 concert was held inside a big warehouse that had been turned into a nightclub.
Amid the flow of red wine and music, I wondered why this nightclub was located in such a warehouse.
UB40 is the name of a British reggae group, derived from the name of a form that is issued to people who claim unemployment benefits in Britain.
As the drums of the fourth industrial revolution (4IR) beat on, we will increasingly see more UB40s or similar forms accessed by people who have been displaced from the workforce by the fourth industrial revolution (4IR). But Why was UB40 playing in a warehouse?
I would later find out the reason in 2006 when I met Professor Clayton Christensen (who was known for his theory of disruptive innovation) while I was on a fellowship at Harvard University.
He explained to me why UB40 was playing in a warehouse in 1993. In the 1970s and 1980s in the United States Midwest, the steel industry was strong and could be categorised into three segments: A, B and C. A was a high-end grade, B a middle grade and C low-grade steel. Then came the competition from Asian companies that targeted low-grade steel, which was poorly serviced because the customers were less demanding.
The management consultants advised companies in the Midwest to let C go so that they could focus on A and B, which were more profitable than C. The Asian companies consolidated their position in producing grade-C steel, and then they went for the B-grade steel market. Again the consultants advised the Midwest companies to focus on A, which was more profitable than B.
The Asian companies then focused on A and the Midwest companies had nowhere to run to but to close their businesses. It was a bloodbath, and many warehouses like the one where I attended the UB40 concert were abandoned to be turned into nightclubs.
The way the steel industry in the Midwest was decimated is called “destructive innovation”.
The decline in the steel industry in the Midwest US because of destructive innovation led to the deindustrialisation of the region, and the area being derogatorily called the “rust belt.”
The loss of a competitive edge is crucial to the decline in manufacturing because of destructive innovation. US companies in the Midwest declined because of increased competition from Asia.
This was possible because of the cost of labour, which was high in the US compared with Asia. A similar trend happened in South Africa, where industries such as steel manufacturing and textiles declined, leading to deindustrialisation.
From 2008 to 2017, South African steel production dropped from eight million tonnes a year to six million tonnes a year. South Africa imported cheap steel because of the relatively high competitiveness of the international steel market compared with the domestic one.
Similarly, textiles manufacturing declined by 15% from 2014 to 2019. The number of people employed in the textile industry declined from 108 000 people in 2010 to 87 000 people in 2019.
The contribution of the manufacturing industry to gross domestic product declined from 21% in 1994 to 14% in 2019. The manufacturing industry is clearly on the decline. Gauteng Premier David Makhura has been talking about the reindustrialisation of the economy of the province.
China industrialised using the cheap cost of labour as a competitive advantage. The country reached its Lewis turning point in 2009 and ever since then its cost of labour has been steadily increasing.
The Lewis turning point is a period when a country’s cost of labour begins to decline as a competitive advantage.
The big question that requires our attention is: What is South Africa’s competitive advantage as far as reindustrialisation is concerned?
To answer this question, we need to identify the factors of competitiveness. In my opinion, there are three factors of competitiveness: labour, technology, and incentives.
The cost and quality of labour in terms of skills composition can serve as a competitive advantage. The cheap cost of labour as an instrument of competitiveness is how China, and now India, rose to the economic stratospheres.
Technology can be used as a competitive advantage. Technology was used by the US, Germany and South Korea to remain high in the economic league table. Incentives can be used as a competitive advantage, and this is how Japan, through its protectionist policy, grew to be the third-largest economy in the world.
Where should South Africa pitch its competitiveness? In 2018, President Cyril Ramaphosa announced that through the Presidential Commission on the 4IR, technologies would be used to augment South Africa’s competitiveness. The commission has made eight recommendations that will put South Africa’s fortunes on the upward trajectory.
In the past two weeks on this platform, I have addressed two of these recommendations.
The first is to build human capacity in the area of the 4IR; the second is to establish the National Artificial Intelligence (AI) Institute.
This week I address the third recommendation, which is to create the Advanced Manufacturing Institute (AMI), which will focus on improving South Africa’s competitiveness and will take advantage of the emerging technologies of the 4IR.
The AMI will explore how to deepen automation so that South African companies remain competitive. It will explore how to automate industries such mining, so that it becomes more productive and safe through 4IR technologies.
This automation should include areas such as volume measurement. For example, one can use drones and image-processing technologies to measure the size of coal stockpiles. This volume-measuring technique can be extended to industries such as food, for example Tiger Brands; drinks such as Coca-Cola; and pharmaceutical products.
At the University of Johannesburg, MinPet is a new technology that is being commercialised towards real-time 3D-imaging of locked diamonds. As the system is fed with more data, the results improve.
Another example is to use self-driving cars in underground mines, especially in areas that are dangerous for human beings. AI and sensor technologies can be used to monitor all aspects of operations in the mining as well as manufacturing industries.
In a decentralised fashion, the AMI should develop principles that are applicable in all types of industries, such as the vehicle manufacturing industry, fast-moving consumer goods and the aerospace industry.
The institute should also explore how the limited spectrum that the telecommunication industry requires should be allocated to companies so that they can use technologies such as the internet of things to improve their productivity.
How should the institute be structured? It could take on the model of a centre of competence and should:
Have a board with the necessary technical expertise in a broad spectrum of industries;
Be linked to agencies that have deep technical skills in the areas of manufacturing, such as the Council for Scientific and Industrial Research;
Have connections to institutions of higher learning with expertise in manufacturing, such as the universities of Pretoria, KwaZulu-Natal and Johannesburg;
Have ties to international centres of excellence in manufacturing such as Germany, China, Japan and South Korea; and
Co-ordinate ongoing conversations between the government, academia and industry.