While the western world complains of losing jobs to China, India and other countries in the East because of the low cost of wages and doing business in these areas, South African manufacturers in the security industry are quite happy to keep their operations where they are.
In fact, for most of these companies there is little, if any reason to move their operations anywhere else, and many reasons to stay at home.
While patriotism plays a role in many companies’ decisions to keep their manufacturing operations in South Africa, patriotism does not pay the bills or keep the orders coming in. What keeps companies local is the reality of doing business in this economy.
Betafence’s head of production, Gene Wegener, says the country is cost-effective when manufacturing a variety of products. From this company’s perspective, this is mainly due to “the fact that China has not yet developed these products, nor the expertise” to meet local needs.
Wegener says it may be cheaper to go to China for certain products, but not all of them. This especially applies to companies that lead their markets. He adds: “The cessation of export rebates on steel and steel products in China (and other countries) will hurt their competitiveness in the short to medium term and this will make South African products an even more viable alternative.”
Graeme King, CEO of the QD Group, agrees that it is still cost effective to manufacture in South Africa and he believes it will remain that way. He also adds that keeping it local has the additional benefit of allowing the manufacturer to make design and technical changes quickly.
If manufacturing operations are outsourced to another country, there is a lag during which time the previous version of the product needs to either be sold or dumped before the latest updates are incorporated into the process. Local manufacturers can make changes almost immediately.
King adds it is important for any company to retain its competitive advantage. In this context local research and development, local technical support from the people who make the product, and local manufacturing makes an enormous difference. How many foreign companies have a decent stake in the South African market without local representation?
Another reason it is more than viable to stay at home is because of volume. DigiCore International’s MD of manufacturing operations, Stuart Aberdeen, says that when a company produces around 10 000 units of a product per month, it is not cost-effective to outsource to the east. The volume is simply too low.
Specialisation and sophistication are some ways to combat low volumes in the South African market. Developing state-of-the-art solutions is therefore a must for Protoclea director, Bennie Coetzer. When it comes to electronic components, Coetzer notes that price is important to the local market, making it critical to be able to keep costs down and in development this means not unnecessarily re-inventing the wheel. Fortunately, the manner in which Protoclea operates enables it to be very competitive in terms of price and quality without looking beyond the country’s borders.
Inhep’s Roy Innes agrees that the low volumes local companies in the security industry produce make it very cost-effective to keep operations local. This especially applies to products that involve a substantial amount of machine assembly – sending this work overseas is not viable unless producing mass-market volumes or there is a reason for using labour-intensive manufacturing techniques, which would not be productive anyway.
Volumes, flexibility and quality also play a role in Impro’s decision to keep its manufacturing local, however, marketing manager Barry East notes that the company’s international customers indirectly demand local operations.
East explains that Impro exports to 60 countries and there are always quirks or special issues that a particular country requires. Having all its operations on the premises means Impro can address these instantly and make any changes required without going through lengthy change management processes.
In addition, East notes that local manufacturing when not producing a mass market product means a company is able to add value to its products, providing an additional differentiator to mass produced goods.
Keeping it at home is also beneficial in terms of flexibility. Digicore’s sales vary from month to month and a large order may come in which demands double the number of units of a particular product. “With one’s own manufacturing under your control these fluctuations can be dealt with and production ramped up almost immediately. A factory in the East would not be able to cater for changes so easily,” notes Aberdeen.
On the opposite end of the scale, Turnstar’s Sid Sacks says the company has not concerned itself about China. Sacks says it may well be cheaper to manufacture a product there, but there are quality issues to consider. International clients will not accept poor quality and the risk of losing clients is great if you cannot control your own production.
In any case, Turnstar seems to be very competitive with its local operations. It is doing business in various countries around the world and doing well. “As a global player we need to produce a high-quality product as we will be compared to the best out there,” he explains. “To date we have been very successful and see no reason to change.”
Competition with newcomers
Moreover, King says South Africa can still produce goods at a competitive price while paying its workforce a good wage. He adds that while there are foreign competitors, they do not have the knowledge and have not done the local R&D needed to meet the demands of this market, putting them at a disadvantage.
Betafence’s Wegener believes South Africa has the potential to compete effectively with anyone in the world when it comes to the manufacture of medium to low technology products. “Our industry is quite well advanced here in South Africa due to the exacting demands for high security products.”
The quality issue is naturally top of mind for all local manufacturers.
Of course, companies in China, Vietnam, India and the rest of the manufacturing centres of the globe can produce the quality of products local companies require. However, it is more difficult for South African companies to monitor the situation remotely and it therefore takes longer to identify and rectify errors.
Many customers in the local market have tried to opt for cheaper imports, but have burned their fingers when using them in South African conditions – especially when needing support. The local market is therefore price sensitive, but not to the extent that it will buy junk.
Innes adds that applying the appropriate quality control for Inhep means that the production process must be kept local to allow the company to keep an eye on the products produced at all times.
The company’s maintenance policy is to replace PC boards if they are under warranty and send those that are not damaged beyond repair for remanufacture. This would be a little more complex if the company’s factory was thousands of kilometres away.
At the same time, Inhep, along with other security manufacturers is finding the international market for its products growing. A focus on manufacturing and quality control locally allows it to provide systems that compare with the best in the world. Especially when it comes to places with the threat of lightning, South African products stand their ground.
A sad reflection on the lack of education in some First-World countries is that labelling a product as made in Africa still has a stigma attached to it. Impro’s East says this is changing, albeit slowly, making it difficult to expand in certain countries. However, the effort pays off as people see the quality of goods produced here.
A great help for local companies wanting to grow beyond the borders comes from the Department of Trade and Industry (DTI). East says the department tries to open doors for local manufacturers, giving them a chance to take part in trade shows and so forth internationally to expand their horizons.
Labour blues
Most people assume the labour situation in South Africa is a burden on manufacturers because of restrictive and punitive legislation. Wegener, bringing a note of reality into the debate says we have a willing workforce and “although some South Africans may disagree with that statement, it is our contention that we have a higher level of effort in the workplace. In addition, our labour costs are low and we have very good infrastructure across various sectors, ie, telecommunications, road, rail and harbour infrastructures.”
QD’s King agrees and disagrees. He says there are highly skilled people available locally who can do the jobs required, but one has to pay a premium for them. Digicore attracts and retains skilled staff with more than money, it makes the work environment as flexible as possible. As a relatively small company, the business can make a plan and offer more freedom to specific types of workers.
Another benefit of local operations for Digicore is that it has a loyal workforce with good experience, many of whom have been with the company for years. Aberdeen says that as a black empowered and socially responsible company, it would simply not be right to shut down its operations and move it somewhere else.
As long as the country’s universities churn out engineers of good quality, Protoclea’s Coetzer will be happy. Especially as we head to 2010 and he hopes the increased security needs the World Cup will bring will filter down to local operations.
Future’s so bright
While Innes says Inhep’s growth will remain well into double figures this year and in future, he also expects 2010 to open a few more doors with new projects that are being planned. He is positive about the future generally and currently has no plans to consider offshoring manufacturing.
And while everyone hopes for a boost in business from the 2010 Soccer World Cup, the economy seems to be managing well on its own. Soccer or not, the South African security industry is growing well and finding increasing traction internationally. The fact that these companies are expanding while still keeping their manufacturing centres at home ably demonstrates that competing with the East, at least in certain areas, does not mean moving to China. Perhaps manufacturers in other industries can take note.
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