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Managing risk in car electronics prod'n through localisation

Posted: 15 Sep 2015     Print Version  Bookmark and Share

Keywords:automotive industry  offshoring  OEM  PFK Electronics 

Europe's automotive industry during the 1980s and 1990s underwent a painful process of change as volume production of sub-systems, components and even entire vehicles moved from high-cost production locations such as Germany and France to cheaper sites in the former Communist bloc. In particular, concerns about the quality, reliability and scale of the production facilities in Eastern Europe were critical at the time.

Looking back with hindsight, it now appears that those concerns were overplayed, and that the industry was well able to manage the risks inherent in the move.

Automotive electronics design engineers and production engineers in South Africa are now experiencing what their counterparts in Eastern Europe went through 20 or more years ago. Here too, automotive OEMs and Tier 1 suppliers can benefit from very substantial savings on the cost of production of electronics systems and sub-systems. These savings are due to: competitive labour costs; an exchange rate that is favourable to European currencies such as the Euro, Pound Sterling and Swedish Krona; and in some cases, generous incentives from the South African government to produce locally components or vehicles that would otherwise be imported from Europe, Asia or North America.

But how can European OEMs and automotive suppliers shift production to South Africa while maintaining ultra-high quality standards and avoiding high management expenses?

This article shows how the business environment in South Africa and proven technology-transfer processes can in tandem ensure that European automotive suppliers and manufacturers can benefit financially from moving production without incurring excessive costs or facing unwelcome commercial risks.

Familiar business environment

South Africa has proven to be an attractive environment for automotive offshoring because of the striking similarities between the business environment here and in Europe. Just like Eastern Europe 20 years ago, South Africa benefits from a large pool of educated, highly skilled engineers in the fields of electronics and factory automation. Local engineers are generally the product of one of South Africa's world-class universities, with which the automotive industry has built productive links to enable manufacturers to draw on specialist scientific and engineering expertise and research.

In addition, a robust legal system based on European models ensures that there is a culture of respect for contracts. The framework of rules and regulations governing the conduct of business in South Africa is similar to that of the European Union, and adherence to the rules is in general just as widespread as in nations of the European Union.

University of Cape Town

The University of Cape Town, South Africa's top-ranked university, has a strong faculty of engineering (Source: commons.wikimedia.org)

The difference between South Africa and Europe is in the cost of production: the relative weakness of the South African rand means that the purchasing power of the Euro and of other European currencies is strong, tending to reduce manufacturers' BoM costs for items bought locally in South Africa.

In addition, while the business environment and skills in South Africa are of a First World standard, the factory labour costs are more like those of a Third World country. Manufacturers operating in South Africa, therefore, have the skills and infrastructure to be able to deploy advanced production equipment for automated tasks, while benefiting from cost savings, compared to European producers, on the labour-intensive parts of the assembly process.

Adding to the commercial benefit of offshoring to South Africa, the government runs an incentive scheme open to all automotive manufacturers: the scheme benefits any automotive OEM that assembles at least 50,000 vehicles per year in South Africa, providing a rebate on import duties that it would otherwise pay.

The incentives are scaled up depending how much of the content of the vehicle (by value) is procured locally from a South African supplier.

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