Manufacturing / Production Technology, Hardware & Services


Things are tough for electronics contract manufacturers in SA

23 October 2019 Manufacturing / Production Technology, Hardware & Services

The factors leading to these issues are varied and numerous. We asked two manufacturers to unpack the challenges they’re facing; although they both happen to be based in the Western Cape, the issues they highlight apply equally to the entire industry right across the country.

Here’s what they had to say:

Andrew Connold, CEO of Tellumat Group

The contract manufacturing side of our business, Leratadima Tellumat Manufacturing (LTM), is still running for now but the shareholders have decided to shut it down in an orderly shutdown process.

The reality is that manufacturing in this country has declined substantially, particularly on the electronics front, and despite government’s policies of designated products being locally manufactured or required to have a high percentage of local content, they really haven’t followed through on that very strongly.

I think part of it is a lack of understanding of the complexity of what goes into manufacturing. Referring to the big set-top box (STB) tender and our digital migration, government had very honourable intentions to have those millions of STBs manufactured locally and in so doing to create local jobs, and they contracted a few companies to manufacture and supply some 1,5 million STBs.

But nobody at USAASA (Universal Service and Access Agency of South Africa) appears to have had the background and understanding of what was involved for the industry, in that when you trigger electronics manufacturing orders of this size it triggers a huge global logistical exercise. Components are gathered from right around the world - they might get aggregated in China or somewhere else, but they come from many places like Europe, Malaysia, Vietnam, India, USA and other countries.

During the production, USAASA stopped the STB manufacturing process over an internal dispute about whether it should fall under the Department of Communications or the Department of Telecommunication and Postal Services. That sort of thing costs manufacturers absolutely millions, because they’re committed once they place their orders on overseas suppliers, the suppliers commit their production capacity to produce the components ordered, and once the train starts, to stop it is very expensive and to start it up again is also very expensive.

Government far too readily succumbs to the temptation to take the easy road and allow imports to be brought into this country. Take, for example, two-way radios. They are used by the likes of the police, municipalities, Eskom and others, as they are a very cost-effective way of internally communicating to get technical and service processes underway and completed. As Plessey, before we were Tellumat, we manufactured two-way radios in the 80s, and Altron also manufactured its own two-way radios.

So we have the capability in this country of making two-way radios locally and yet the Department of Trade and Industry (DTI) allows for the importation of these radios through the issuing of concessions. We understand there are OEMs who get a concession almost every month to import radios for sale to government departments without any local content being required, and they come from places like Hungary.

What we effectively end up doing as a country is outsourcing and exporting our jobs. The second pain to the country is that government lands up paying social grants to keep its many unemployed fed, and there’s no skills development and dignity for our communities in that route either. So I do think government has quite a lot to answer for as far as not enforcing its designated product policy is concerned.

That said, our manufacturing business was set up prior to the isolation years, and in the 80s and into the 90s we manufactured our own products which were developed locally and manufactured for local conditions in reasonable volumes. And subsequent to our own product development declining, we have continued to contract manufacture SA-developed products for export, but on a much smaller scale.

So electronics manufacturing was a reasonable business niche for a medium sized manufacturing outfit for a while. With the weakish Rand and with unique products we were able to do something reasonable, but the volumes were never sufficient to make a ‘sustained profit’ if I can put it that way, and furthermore to earn the income necessary to replace the equipment that we need to be competitive with the rest of the world.

We have also seen, through the DTI’s policies of attracting foreign direct investment, local television manufacturers go to the wall because the DTI has given huge incentives to the likes of Samsung to come into the country and set themselves up with tax breaks in Dube Trade Port in Durban. In the process they killed off a brand new TV manufacturer in Johannesburg – Anyview – which was contracted to Samsung to produce its TV sets locally.

As such, well-intended policies perhaps to bring direct foreign investment into this country and create jobs, but with the unintended consequence that they killed off a local business. And the taxpayers largely funded the establishment of that new Samsung plant. So there are some policies that really haven’t supported local manufacturing.

At the end of the day, unless you find a niche in which you can make good profits, electronics manufacturing in this country is just not an attractive business to investors.

There is still some PCB manufacturing capability in the country but a lot of that is now outsourced and imported. The components are all imported and assembled; however, there is a fair bit of local manufacturing of things like wiring looms and enclosures that are part of the overall ecosystem, but by far the majority of work is really assembly, and modular testing, and then complete integration and test.

Government has engaged with us from time to time, through the ITAC division, and certainly around the STBs there was a lot of engagement from the localisation department at the CSIR to confirm that there was the appropriate level of local content to meet the designated product policy requirements for STBs, which I thought was very positive. But it would appear that politics trumps common sense when it comes to protecting the local industry and the jobs it provides to South Africans, at least it certainly has done in the past - I hope it will change.

TV and computer monitor local assembly seems to be the one product line that’s been consistently assembled locally, due to the duties on the importation of fully and partly made up units. The components are imported and locally assembled for local consumption. This is consistent and it does work to some degree for the local electronics manufacturing industry. But the major TV manufacturing is now with the OEMs who are set up locally, such as Hi-Sense, LG and Samsung. Hi-Sense in the Western Cape has expanded beyond TV sets into white goods and we’ve heard recently that because of their exports from here into Africa, they have purchased more machinery and are expanding their electronic manufacturing capability.

So to me Hi-Sense has been one of the success stories in terms of bringing in foreign direct investment and creating local jobs, but as far as supporting local manufacturing on designated products and enforcing local content, we’ve seen very little of that. This despite our efforts to engage directly with government around the local content required for two-way radios, STBs and electricity meters.

As for the opportunities in electricity meter manufacturing, one has to take into account that Eskom is going through an extremely bad time financially, doesn’t appear to have the money to invest in the new generation of smart electricity meters, and seems to have delayed its tender which it puts out every three years for the supply of electricity meters. The major municipalities are in similar dire straits, so they haven’t been placing substantial enough orders to make local smart electricity meter manufacturing readily viable.

To set up something like electricity meter manufacturing, one needs to find an OEM designer of a product, or range of products, and set up equipment for the local assembly and manufacture of a fairly high volume of units to make the setup a viable proposition for the OEM.

One also has to set up substantial test and calibration equipment, and unless you’re making 200 000 to 300 000 or more meters a year, it’s very hard to justify that investment in equipment. One would need to be doing that consistently for 3 to 5 years typically to justify such a setup cost and get a return. It’s really economics at the end of the day and we’re not seeing a lot of opportunities in support of this designated product to see investors wanting to make the commitment.

LTM has kept itself alive by taking on the manufacturing of products of other local OEMs who have shut down their internal manufacturing capability. In these cases, their manufacturing staff have typically lost their jobs, particularly at the operator level, and it’s really those people who are going to struggle. Our middle management staff who know how to run plant, or stores, or the engineering and test side, I think have a better chance to find opportunities, but even these are limited.

Rob Steltman, director at Barracuda Holdings

It is deeply worrying to see the distressed state of some of our peers and we truly wish this was not the case. I believe the core reasons are most likely different in each case, but significantly amplified by the local and macro-economic challenges being faced by everyone.

As an industry, I truly hope that we can establish a higher level of cooperation, looking at securing business outside our borders and not wrestling over the limited business that exists within our borders. Here I am not referring to only direct foreign manufacture, but also working closely with South African companies exporting their technology – ensuring they are globally competitive, but manufacturing here.

It is important to maintain critical mass in the country, from the component level to machinery support. We are all interlinked.

Manufacturers are highly exposed due to a variety of factors. Margins are at an all-time low due to intense competition, both locally and globally. What’s more, long-term and capex-intensive decisions have to be made with only a very short forward view of work. Continuous investment in equipment and process capability is essential – this is relentless as the technology is continuously changing – and these upgrade cycles are now shorter than ever.

Customers are themselves under pressure and are looking for better ‘deals’ all the time. This is understandable; however it is often incredibly destructive when one manufacturer is ‘traded’ against another to the point of unsustainable business and the inevitable outcome of closure, where everyone loses.

A proper understanding of the product costing and processes required to achieve the desired outcome is essential. Customers need to ensure they interact on a very deep level with the manufacturer and the manufacturer is open enough to expose the costing methodology in order for the customer to understand if they are getting a sustainable price that is fair and equitable to both parties. The short-term ‘good deal’ may in the end lead to significant problems on many fronts, one of which is the potential demise of the manufacturer.

With sufficient interaction, it is relatively easy to determine if the price being charged vs the investment in appropriate infrastructure and sustainability makes sense. If the customer wants a long-term, reliable partner this needs to be recognised.

Taking materials out of the equation, a significant part of the manufacturer’s cost is labour. This is most commonly paid on a weekly basis (in an industry where wage rates are regulated by the Metal Industries Bargaining Council and are one of the highest rates compared to other sectors) and therefore the manufacturer is out of pocket well ahead of being paid for the work by the customer.

When payment terms agreed on at the outset of the project are disregarded and payments for work done is delayed, it places the manufacturer under severe pressure, not only from a cash flow perspective but also in terms of the erosion of an already very thin margin due to the manufacturer having to incur the interest costs on funding. Even if this funding does not come from a third party and is internal, there is still a material impact as that cash could have been used to drive further investment in capex, etc.

There is hope

Of course, there is hope, but complaining and waiting for solutions to be served up on a platter will do nothing to solve any of the challenges. One of the best things about living in this country is that, as an individual, one can actually make a tangible difference. It is going to take people with hardened resolve to navigate the challenges – we are all frontiers people in an emerging world which is really exciting. There is great hope with collective direction.

We are really happy to be in a sector that is relevant to the world today. Never before has so much technology been incorporated into everyday products and activities, with this driving even more opportunity. A mindset of adaptability and flexibility with continuous learning will allow a company to leverage on new opportunities.

We have received next to no support from government and it would be fantastic to receive practical support, perhaps in the form of tax rebates on employment targets, etc. The rigid operator remuneration, based on very outdated grading criteria dictated by bargaining councils, is in my view one of the biggest impediments to competitiveness and ability to tackle opportunities and employ more people. This really needs urgent attention and intervention with regards to revising the grading criteria.

Thanks to our very supportive customers, suppliers and great team, now 150 strong, we have grown year on year with this past year being our best yet. We have and continue to setup to offer more than just PCB assembly and have a number of value-added services.

We are challenged by what I have described above and we do not have the predictability in business we would hope to have, but are focussed on what we do know and what we can control, and do our utmost to make it work as best as possible.

For more information contact

• Barracuda Holdings, +27 21 851 3357, rob@ivorygroup.co.za, www.barracudaholdings.co.za

• Tellumat, +27 21 710 2911, https://tellumat.com


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