In a roundtable discussion Dataweek recently had with some executives from electronic contract manufacturer Omnigo, Rieël Schönfeldt (managing director), Pieter de Nysschen (operational financial manager), Pieter Fourie (production manager) and Eugene Vermeulen (SMT manager) discussed their views on some issues affecting the company and the South African electronics manufacturing industry at large.
Q: What has Omnigo been up to in the last year, and what does the next year have in store?
A: We have increased our SMT placement capacity in the order of 40% to 105 000 components per hour per IPC-9850. Although best known in the marketplace as a specialist in military products, we have become very competitive within the commercial market and are looking to aggressively expand our commercial market share. Some of this effort is already paying dividends, as evidenced by the fact that we have been manufacturing a number of products in quantities of 5000 to 50 000 units per month over the past five years.
However, the challenge in marketing a service, as opposed to a product, is that you cannot just set up a stand at a show and expect to get your message across. It involves more face to face interaction with potential customers, and in this regard our long standing and pedigree speak volumes. We are also busy implementing OMS (Omnigo Management System), a specialist computer system, tracking all enquiries from quotation through ordering and production, to the after sales phase for all clients.
Q: Are counterfeit components a problem?
A: Counterfeit components as such are not an issue, thanks to our strict policy of using only reputable and accredited component distributors. That does not stop people from trying though – we have been approached by several overseas organisations who have offered to supply us with components, but given our focus on quality and doing the job right first time, it is pretty easy to see these guys for what they really are.
More of an issue for us is obsolete components. We have had cases in the past where we have purchased components in good faith, from reputable distributors, which turned out to be refurbished parts, without us being aware of this. This has led to us instituting a policy that our suppliers must disclose to us if they have obtained a component from any source other than the original manufacturer of the component in question.
Q: How do you feel about the overall level of service you get from component distributors?
A: One of the problems with component distribution in South Africa is that in the past, silicon manufacturers based overseas, largely in the USA, used to deal directly with companies in SA. But the recent trend has been to open sales offices in Europe, who in turn service the European market as well as Africa. This loads the cost of components by adding shipping, logistics and administration costs, which are ultimately borne by the end customer. We do not believe these European operations really add anything to the product or to South African customers.
Another issue is that once a specific part has been designed into a product, distributors sometimes exploit this fact to squeeze us on pricing. As it is usually impossible to replace one manufacturer’s component with a drop-in alternative from another manufacturer, we have no choice but to pay up. We have seen a number of cases where suppliers have seen us coming – we order the component the first time around for one price and when we order it again it is much more expensive. This goes further than being a problem for us – and our customers, who are the ones who ultimately pay the price – it hurts the competitiveness of the entire SA industry. We estimate that we are paying 5% to 15% more for components than manufacturers in Asia, albeit that the smaller volumes here are also a contributing factor.
There has been a growing lack of technical expertise over recent years, from both our buyers and the suppliers’ salespeople. This problem manifests itself for example in a situation where a specific part might not be available, and neither our buyer nor the supplier’s salesperson has the technical knowledge to realise that there is a suitable replacement part. In this respect, we have created a dedicated process in our industrialisation department, whereby, as soon as our buyer raises the flag that a particular component cannot be sourced, a technical expert will look at the situation and advise as to a suitable course of action which is then tabled to our client. Having this service saves both ourselves and our clients precious time during the procurement phase. This does, however, add cost to the whole manufacturing process, which is ultimately borne by the customer. This would not be the case if better trained personnel were available.
Q: What about equipment distributors?
A: Since modern production equipment, particularly pick-and-place machines, is very advanced and therefore complicated, our biggest criterion is not just the technical specifications of the machines themselves, but also the technical support that we receive from the equipment distributors, which all contributes to providing a more efficient, consistent and high quality service to our customers. In this respect, we feel that we have excellent partnerships with our suppliers.
Q: How easy is it to find good technical staff?
A: There is a problem recruiting technical staff due to a countrywide skills shortage, especially for our technician positions. This is not merely a question of quantity, however, but also quality: there seems to be a growing gap in terms of the theoretical and practical training at the tertiary education level. This means that often extensive in-house training is required to get already qualified employees up to scratch. This situation has been worsening since the apprenticeship system was done away with.
Omnigo has a dedicated training department, which provides in depth training whereby we take students and give them on-the-job training. This not only contributes to the overall skills level in our area but also gives us the opportunity to evaluate each individual’s progress and potential, with an eye towards future employment with the company.
Q: What is your BEE status?
A: We are currently in the process of re-qualification of our BEE status. It is obviously becoming more and more of an issue in the industry that contract manufacturers are expected to be BEE accredited. The biggest challenge we have in this regard is not attaining BEE accreditation, but rather the conflicting requirements that comes from certain parastatals that have their own requirements, over and above BEE definition. This creates a problem for us because, although we might be fully prepared and committed to adopt the shareholding and other requirements for a broad-based BEE rating, certain parastatals have become even more diverse and varied in their demands in terms of black empowerment.
Q: How much of a threat is cheap manufacturing in Asia to the local market?
A: To be honest, this is not something that worries us very much. We have seen a boomerang effect over the last few years, whereby some companies have sent business to places like China, and have subsequently brought their business back home. To make manufacturing in places like China viable requires substantial volumes, and most SA customers simply do not need such high volumes. We have seen that in order to get the most out of outsourcing business to the East requires a good understanding of the language and culture, as well as having somebody on the ground to monitor production and to sign off before the product is shipped from there. This boils down to a huge capital investment, which can only be justified when manufacturing units in the tens of thousands per month.
Q: How can SA be more competitive globally?
A: Realistically, it is just not feasible for overseas designers to have their products manufactured in SA, for a number of reasons. Cost of manufacture is only one aspect – other issues include logistics, transport costs and time. It would mean that components are being shipped to SA, where their manufacture only contributes to often 10 to 15% of their price. Then, as the biggest markets for commercial products are abroad, the end products have to be shipped overseas, adding additional cost. This makes manufacturing in SA uncompetitive unless the government comes to the party with appropriate tax concessions.
Exacerbating the problem here is the number of engineers leaving SA. This brain drain has created a huge problem for our manufacturing industry, because before you can manufacture a product, you need a product to manufacture, and less engineers means less products being designed locally. We probably have not even seen the full extent of this problem yet.
Q: What does the future hold?
A: We do believe that local manufacturing will grow, especially with the growth in locally designed niche products. This would obviously depend on the overall growth in the economy and financial and other socio-economic factors that come into play with respect to the demand for professional products. We are somewhat concerned with the international credit crisis as this can have a negative impact on supplies of materials that mainly originate from overseas.
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