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Advice for local manufacturers to thrive
03 February 2017
Dataweek

Duncan Pollock, business development manager at Grand Tellumat Manufacturing, shares his thoughts on how the local electronics manufacturing industry can prosper.

Unlike highly digital industries, manufacturing offers both skilled and unskilled job opportunities – if correctly managed. Sadly, though, this sector is showing flat growth due to multiple competitive challenges.

Local vs. BEE

South Africa focuses strongly on black economic empowerment (BEE), which economically liberates indigenous individuals and groups. Together with ‘localisation’ of products and services, it can also liberate local ideas and inventions, bringing a much needed growth dividend to transformation.

Let’s take your typical international manufacturing company with a South African subsidiary. It can be wholly black-owned locally with a large BEE staff component and consider itself empowered, but if it doesn’t include locally manufactured components, intellectual property or skills in its processes, products and/or services, it doesn’t foster innovation. This kind of manufacturing doesn’t create anything new, it merely assembles.

The South African government designates certain products it purchases to require a percentage of local content in order to support local manufacturing. The set-top boxes required for South Africa’s television broadcast digital migration is such a product. If more electronic consumer products such as cellphones, computers and communication network elements are designated by government to require a defined percentage of local content, much dormant SA manufacturing opportunity will be unlocked, leading to job creation, local industrial capacity development, innovation and wealth creation.

However, true ‘localisation’ should not only be focused on local content, but also drive greater local innovation and entrepreneurship with the desired result an increase in locally developed products – from design through to the manufacturing process.

Can-do and make do

South African innovation and entrepreneurship exists – just look at Ronnie Apteker, Elon Musk and Mark Shuttleworth. And there are many more of their kind, even if the specific skills of the latter two figureheads of SA innovation are lost to us. When the next Shuttleworth or Musk comes to the fore, no amount of hardship will quell their innovative drive. It comes down to making the best of what is available.

Build with BRICS

South Africa is part of the BRICS trading group, but the opportunity for exporting duty-free products into other BRICS nations is limited. For example, if a South African company exports slot machines to Brazil there is no duty break-even, even though both countries are members of BRICS. This is a potential area for the SA government to explore if we are to create an international trade arena that works in favour of local innovation.

DIY – with friends

In the end it is all about innovation, with increased local innovation bringing with it the knock-on increase in local design which would result in a much needed boon to the local manufacturing industry. Developing local inventions, manufacturing and exporting them is the only way to compete.

And being South African, we are of course inclusive. I’m looking forward to the day when more contract manufacturers will work with small entrepreneurs and promising students through incubation programmes and scholarships, thereby unearthing the next big South African innovation.

Three ways to beat the odds in contract manufacturing

It is no surprise that South African manufacturing is generally thought of as uncompetitive. After all, we must put up with some pretty serious challenges and restrictions. But perhaps it’s time to dust ourselves off and make our own luck.

Challenges

So what are these challenges, and how do we beat them? High input costs in the form of expensive raw materials, components, labour and electricity are largely to blame. A high cost base across the board leads to a relatively small market share for most South African manufacturers.

With enough volumes, local manufacturers would be able to start competing on cost, but without investing in the right technologies and skills they cannot deliver the required volumes, and so they stay small – a vicious circle that is very tough to break out of.

Bite the bullet

But as tough as things are for the industry, the fact remains that investments in market development, quality, efficiency and the attainment of volumes are not negotiable. They guarantee survival.

Systems-related investments, for example, eliminate time and material wastage, whether it is more sophisticated surface mounting robotics, more efficient supply chain management, better inventory management or more intimate customer relationship management.

Pick your battles

So what should smaller manufacturers do if they cannot stomach the risk of high investments to support predominantly contract-based work? In our experience, picking your battles is the first step to overcoming that.

Use existing strengths to carve a niche in a promising field with good volumes and margins that presents a higher barrier to entry. It can be as obvious as televisions, telephones or energy devices, or it can be a simpler, more visionary focus, such as the Internet-based technologies used to monitor and control devices in the cutting-edge field of the Internet of Things.

Begin by picking one or two winning products and pouring heart and soul into developing them and your capacity and capability to produce them – beyond the reach of anyone within a thousand-mile radius. After that, go about process improvements incrementally and within your current means, getting ever closer to zero waste.

Developing markets

Once you have the capabilities that will let you compete on equal terrain, tell the world about them. Effective marketing is the simplest way of maximising volumes. As businesses mature, black economic empowerment is another sure-fire way of increasing your share of the addressable market in South Africa.

Survival of the fittest

With economic conditions worsening, we foresee significant market attrition and consolidation. The winners will be those with the foresight to pursue the right investments and business directions, constantly improving their efficiencies and opening up ever greater addressable market areas.

A balanced risk approach

In order to be sustainable, South African contract manufacturers should serve a mix of consumer and high-end niche markets, allowing themselves to be led by market intelligence to ensure a reasonable chance of success.

Risk and reward

Consumer and niche markets present very different risks and rewards. Ultra-competitive, fast-moving consumer markets offer high volume opportunities at lower margins, whereas slower-moving specialised niche and industrial markets are less cut-throat and offer lower volume opportunities but can have higher margins.

The inherent risks in these markets should tell manufacturers whether they are more suited to one or the other. In that regard, there are two kinds of contract manufacturers – the risk averse and the risk-hungry.

Risk-averse

Many will balk at the risks of consumer markets, instead focusing on manufacturing one or two high-end products very well and serving a captive market in that way.

Niche markets prize quality over anything else, which raises the barriers to entry and takes the pressure off the manufacturer to produce goods fast and at high volumes, or to hold large amounts of stock at high risk of orders not coming through.

But with margin comes the drawback of lower volumes. In these instances, in order to build a sustainable business, manufacturers must focus on increasing their value-add in the form of excellent customer service, trusted advice and a close business partnership.

Risk-hungry

On the other end of the scale are manufacturers for the consumer market. Despite the promise of high volumes in this game, many bite the dust due to low margins, fierce competition, working capital pressure and the high risk of stock losses.

Whereas niche manufacturers have the luxury of producing goods to order, consumer manufacturers produce commodity items amid fierce competition, often winning or losing a deal on price or availability. This means footing the bill for stock in the hope that it will be sold, and players must be super-efficient (low-cost) and responsive to customer needs.

Do both

So what can a company do to overcome the respective drawbacks of each choice? The answer lies in a clever blend of the two approaches.

On the one hand, manufacturers should maintain a solid niche focus to anchor the business. Customers paying for high-end expertise and quality assurance will tolerate make-to-order, and this leg of the business will provide the dependable income the company needs to keep ticking over.

But to reach the next level, manufacturers must increase their appetite for risk. The way to do so intelligently is to scope out reasonable opportunities, prepare potential customers and jump on the opportunity. This approach requires market intelligence, negotiating skills and hunger.

It’s a balancing act and companies will need to pick their battles wisely.

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