trade policy

CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF BUSINESS SCIENCES AND MANAGEMENT
DEPARTMENT OF
INTERNATIONAL MARKETING
GROUP PRESENTATION 1, CUIM 423
SURNAME NAME REG NUMBER
BHOSOPO TINASHE A C1111135C
CHIBHA VIOLET C1111440J
CHIREMBA COURAGE D C1110863G
DONDO RUVIMBO V C1111332R
GWENANGURUVE CSYNTHIA C1111446Q
MARARA TARISO P C1111262Q
MAZOE NYASHA E C1112104F
NGARA MASIIWA A C1111043C
PENI TYSON C1111201Z

11) In the latest budget, the Minister of Finance bemoaned the low capacity utilization by most Zimbabwean companies.
a) Explain what you understand by the term capacity utilization and the possible causes of low capacity utilization with reference to Zimbabwe.
b) Of what consequence is the 'low capacity utilisation' to Zimbabwe's investment and export initiatives?
Capacity utilization also called operating rate is the extent to which productive capacity of a plant, firm or country is being used in generation of goods and services. It is usually expressed as a percentage. Tejvan R Pettinger writing for EconomicsHelp.com propounded that capacity utilization expresses output as a percentage of total potential output, for example, a car factory could produce 1000 cars a week and output was 74 then utilization would be 74%. It is important for determining the elasticity of supply. However it should be noted that there is no company be it labour or capital intensive, can be 100% in capacity as there are some glitches that are circumstantial in the art of production which can affect the operating capacity. Acceptable levels of around 90% are pleasant but levels below 50% can be worrisome and in the case of Zimbabwe, the low levels riled the Minister of Finance CDE Chinamasa and he bemoaned the low levels in the presentation of the national budget on the 19th of December, 2013
The formula to calculate capacity utilization is
Actual output-potential output × 100
Potential output
Many reasons can be put forward as the possible causes for the declining levels of capacity utilization in the Zimbabwean economy and market. These are corruption, obsolete machinery, and lack of skills among others to be outlined below

Emigration of skilled labour
A lot of Zimbabweans are caught in the euphoria of the outside world. From the late 90s, a lot of skilled people have been caught in stampede for the diaspora. This has left the country vulnerable and with a challenge of training new people for the jobs. This derails production as it takes time before the new person is able to cover the actual output that would have been evident from the previous person. This problem spans across the whole economy. Companies mainly in the service industry faced this problem to a greater extent. Professionals like surveyors as well as engineers left the country for countries like UAE. Air Zimbabwe, the national airline, has low capacity utilization all because a lot of skilled labor in the form of pilots and aircraft engineers left the country to work in Dubai for the airlines like Emirates.
Increased interest rates
The interests rate in the country have been continually growing thereby making borrowing expensive. Faced with an inflationary environment, many firms could not finance themselves internally and hence were depending on the banks for sustenance. However with exorbitant interests prevailing in the economy, sustenance could not be achieved and hence companies had to scale down operations. From the year 2009 interest rate gradually increased from uu to uu in 2014. Farmers and companies in the agricultural sector were forced to cut down on operations as they could not obtain loans at preferable rates. Every business needs money as its lifeblood for survival
Lack of management coherence
Leadership provides the insight as to the channel that the organization follows. "United we stand divided we fall" so goes a proverb. A divided leadership is a hindrance to the performance of firms or parastatals. Leaders in Zimbabwe are divided on partisan grounds and political affiliations. Factionalism is rampant even at company level which has then meant that when these factions fight to outwit each other then production is affected. A case to note is the government councils running several towns in the country. There is diverse representation of the political parties and tension is always evident and many in-efficiencies are manifested each and every day. The full capacity of these councils in terms of service delivery is never achieved given that the authorities differ on political affiliations and are likely to pull against each other
Obsolete machinery
Most of the machinery currently being employed in the country is as old the nation Zimbabwe itself. At one point these machineries were as efficient as ever but however with time, taking into account the laws of diminishing returns, they have lost their luster and can no longer perform as they used to. The company can have other factors which pose a good fortune in terms of capacity if exploited well, but with breakdowns and other means associated with aging machinery, low capacity is being recognized. Air Zimbabwe and National Railways of Zimbabwe have the capacity to service the African region but with the aging planes and coaches, reliability has been greatly reduced and hence their capacity is at low level. If a plane breaks down, it takes weeks before it becomes air fit again and much is lost in terms of revenue when the plane is grounded
Policies not favorable to investments
Government policies on the other hand have had an impact on the way companies and country performs. A great insecurity swept across the industries and country after the enactment of the Indigenization policy. Many firms were forced to close operations after they could not succumb to the pressure of surrendering ownership. The uncertainty forced other firms to adopt a "wait and see" approach as noted by the Honorable minister in his budget. In this quest to reduce risk associated with seizure, confistication and or expropriation, foreign companies scaled down on operations thus reducing the national capacity of the country.
Environmental factors
World over, global warming has been taking a toll resulting in changing climatic and environmental conditions. Perennial changes have been noted in the rainfall patterns experienced in the country. The levels that used to be experienced in the Zimbabwean arid regions have drastically diminished. The effect of the rampant rainfall patterns is a low output in the agriculture sector. The most affected organization is the Grain marketing Board (GMB) which has notably underperformed in its mandate as the sole provider and marketer of cereal and other agricultural products in and around the country. GMB is performing well under average capacity as cases of cereal shortages have been noted recently
Corruption
Corruption refers to all the tendencies that are unsanctioned for which substitute above-the-board practices for the benefit of a party. A common challenge affecting the production capacity of many Zimbabwe firms and the country is corruption. A lot of cash supposed to be catering for the welfare of operations is siphoned through unscrupulous activities and fraudulent means. Company supplies and or cash are finding their way out without account thereby leaving the company with a shortage to curtail. In most instances failure to account for those has been shelved under the urge to cover up for the shortage in terms of quality but however many companies were not successful in this venture and have faced monumental failure in capacity utilization. CMED a parastatal responsible for vehicle maintenance hogged the limelight sometime in the year for fraudulent activities in a fuel scam involving leadership. A lot of finance is said to have been lost in corrupt activities. A resultant feature was reduced capacity utilization in terms of fuel supply
Poor corporate governance
The dynamics of the economy requires a focused and flexible leadership. Many firms are failing to cope up with the pace of changing times ostensibly on the bases of sticking to old rules. Every organization needs to align its corporate culture, structure and strategy with the changing times so as to perform in the current situations. ZUPCO is failing to perform to acceptable levels of capacity because it sticks to the old methods of doing business. A great low capacity is evident in the national passenger transporting utility. Also other issues of corporate governance like boardroom diversity are not being implemented in many sectors of the economy which have reduced innovation and capacity of many firms
Lack of transparency
Investors and partners do like transparency to partake in a dream of an entity. Failure to be transparent scares away the strategic partners who can be drivers towards the full implementation of a vision. The road tollgate programme has been not very successful all because of the lack of strategic partners to partake in the dream. There is lack of transparency on the management of the finances on the part ZINARA, the authorities responsible for the vision. Accountability has been lacking and partners like the authorities in South Africa who at one time wanted to embark on a knowledge sharing with the Zimbabwean company had to shun away all because of lack of transparency on the finances realized from the initiative
Sanctions
The so-called targeted sanctions have been a pain in the back for most Zimbabwean companies. Companies in the global world have been reluctant to engage the Zimbabwean firms on the bases of the economic sanctions. Nowadays successful companies are having a global perspective in terms sourcing materials and machinery. Expertise and strategies are shared among companies from various nations. However with the economic sanctions imposed on Zimbabwe, the global north firms are not sharing knowledge with firms in the country. This has meant that capacity is not fully utilized since the knowledge to improve and cope with changing times and processes if not spill over into the nation.
On that same note, sanctions are restricting financial access as the International Monetary Fund restricts borrowing to sanctioned countries. This has resulted in underfunded companies thereby compromising capacity utilization







b) Of what consequence is the 'low capacity utilisation' to Zimbabwe's investment and export initiatives?
Low returns on investment.
Zimbabwe has been facing challenges in terms of maximising returns on its investments. Most companies are finding it difficult to maximise returns as a result of poor facilities and technologically backward machinery and equipment. Such obsolete equipment is less efficient as compared to the more advanced machines in other countries. It therefore reduces the productive capacity of any given company. Within the Zimbabwean economy, low returns on investments are also emanating from the frequent power outages which are now a common thing within the country. Some smaller companies who operate on heavy electrical machinery find it beyond their cost capacity to use generators for their production processes hence production levels largely depend upon frequency of power outages experienced.
For example, COSTIMBERS one of the leading door manufacturing companies in Mutare where the industry workers stop operations as soon as a power outage is experienced and only resume when the power is reconnected. Sometimes they have to work during the night in order to cater for the lost productive working hours of the afternoon. The more the power cuts, the less the number of doors produced, thus the less the doors exported to South Africa. These workers report for duty on a daily basis and therefore still expect their full salaries at the end of each calendar month. In this case there is underutilisation of labour resources resulting in low returns on COSTIMBER's investments thereby reducing the nation's overall number of exports.
Uncompetitiveness
Failure to operate at maximum capacity, also result in uncompetitivenes of the final products on the world market. Fixed costs will remain fifed costs.i.e if a company pays $250 for its factory rentals per month, these rentals do not vary according to the monthly outputs, thus they remain $250 whether the company has maximised on the factory usage or not. The unutilised capacity therefore places the company at a disadvantage as this can be referred to as loss to the company. Under such circumstances there is high production cost per unit produced and makes the whole production process quite expensive to the company. In order to counteract this problem, the company will need to charge higher prices for its products so as to cover up for the increased production costs and maintain the so much needed profits. As high prices are charged on these products on the world market, they become uncompetitive in the sense that they fail to compete with those from other countries who are operating at lower production costs and can therefore afford to charge lower prices on the same products. Our exports are then reduced to low undesirable levels as they become expensive.
Reduced Gross Domestic Products
Gross domestic products refer to the total number of products that are produced by any given country. Low capacity utilisation results in reduced gross domestic products. The remaining unutilised capacity in all industries means reduced volumes of stock produced within the country's industries. As a result, there is reduced GDP as fewer products are manufactured whilst other resources remain unutilised. This situation therefore means that there are fewer products left for the export market after satisfying the local consumers, thus reduction in goods available for the export market.
Low returns on investment
Reduced welfare for citizens
Reduced GDP
High production costs
Uncompetitiveness
Foreign direct investments
Unemployment