The South African contract manufacturing industry stands at a crossroads – to develop its value-add and skills base to carve out a niche in high-end delivery, or to specialise as outsourced labour.
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It is in fact a choice between investing in costly research and development (R&D) on the one hand and assembling at a low margin without the guarantee of viable volumes on the other. As a contract manufacturer, you’re going to have to decide on a part forward to ensure your revenues remain in the black in 2017 and beyond.
Owning the supply chain
Manufacturers going with the first choice are faced with the need to invest in more parts of the supply chain, such as distribution and packaging, and selling to customers in order to retain more of the margin from the selling price.
Related: The benefits of streamlining your supply chain with upgraded analytics
Many electronic, automotive and white goods manufacturers have built factories in South Africa. Here they utilise intellectual property (IP) from their ‘mother company’, procure labour and a portion of components locally, whilst still importing some components, and then proceed with local assembly.
They then advertise their product and sell to retailers directly. Owning the entire value chain is ideal, but remains a costly and long-term investment that’s arguably out of the reach of small manufacturers.
Owning the labour market
The second choice can work if you enjoy an equal partnership with your customers, in which both depend on the other and your risk is lower. Foxconn in the USA manufactures for household names like Apple and Amazon, but this kind of contract requires extensive capacity, which again seems unattainable for most small manufacturers.
Preparing for 2017
How then can you, as a low to medium capacity assembler, attain the scale, value-add or end-to-end delivery to meet the volume and quality requirements of global brands?
- Get customers to commit to sufficient and reasonably consistent volumes to justify the investment in equipment and mitigate your risk. No-one wants to put all their eggs in one basket, and a big customer may well decide to groom an eager, dynamic small supplier as back-up.
- Don’t put all your eggs in one basket either – and don’t focus on one or two clients or products when you can spread your risk. Include high-volume and high-margin items with lower volume higher value items where possible.
- Minimise your costs, for example by taking advantage of special economic zones with different tax, labour and resource dispensations.
- The manufacturing life cycle is long. Plan in advance and have several prospects going. Have new ideas in the pipeline and spend some money on R&D.
- Join industry associations and lobby groups to raise awareness of the local contract manufacturing industry.
- Be prepared for an economic downturn with a diverse pipeline of opportunities and diligent relationship management.
- Global markets remain a real opportunity for local assembly in the areas of smart metering – managing consumption of energy and harnessing natural energies.
Related: How you can do things a little differently in 2017
Pick the right horses and be innovative and you’ll thrive in the new year. If you stick to old ways, the chances are greater that you’ll lose out to more dynamic competitors in your contract manufacturing sector.