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Johannesburg - South Africa's manufacturing industry is enduring massive upheaval, reeling from job losses with companies struggling to keep afloat in an anaemic economy, according to a report by Deloitte.
Statistics SA said some 188 000 jobs were lost in the manufacturing sector between September 2006 and March 2014, translating to a 14% decrease in jobs. This has triggered legitimate concern that South African manufacturing faces some crucial challenges, according to consulting firm, Deloitte.
The firm's research report on manufacturing suggests that the likely result of disrupting technologies will be a significant restructuring of existing product manufacturers.
SA manufactures more now, than ever in its history. The future of manufacturing will, however, not be about numbers of low-skilled jobs created, but about rapidly advancing technology.
Changes in manufacturing
Deloitte study - The Future of Manufacturing: Making Things in a Changing World - found that manufacturing “is no longer simply about making physical products. Changes in consumer demand, the nature of products, the economics of production, and the economics of the supply chain have led to a fundamental shift in the way companies do business”.
Karthi Pillay, Deloitte Africa's manufacturing industry leader, said manufacturing plants made to global best standards are today tooled with technology which is able to meet customers demand for personalisation and customisation as “the line between consumer and creator continues to blur”.
He noted that consumers’ rising power and unmet needs around personalisation, customisation, and co-creation are causing niche markets to proliferate.
New entrants
The report found that as technology continues to advance exponentially, barriers to entry, commercialisation, and learning are eroding. The result is that new market entrants with access to new tools can operate at much smaller scales, enabling them to create offerings which were once the sole field of the major incumbents.
Although large-scale production will always dominate some segments of the value chain, innovative manufacturing models - distributed small-scale local manufacturing, loosely coupled manufacturing ecosystems, and agile manufacturing - are arising which can take advantage of these new opportunities.
Technologies such as additive manufacturing are making it possible to cost-effectively manufacture products more quickly, in smaller and smaller batches. Digital technologies are narrowing the distance between manufacturer and consumer, allowing manufacturers to bypass traditional intermediaries.
Numerous factors are leading manufacturers to build to order rather than building to stock. In this environment, intermediaries that create value by holding inventory are becoming less and less necessary. Together, these shifts have made it more difficult to create value in traditional ways.
Accessing information
Pillay noted that at the same time products are becoming less objects of value in their own right and more the means for accessing information and experiences, and that creating and capturing value has moved from delivering physical objects to enabling that access.
“These trends have the capability of affecting different manufacturing sectors at different rates. To determine the speed and intensity of the coming shifts in a particular sector, companies should consider factors including the extent of regulation, product size and complexity, and the sector’s level of digitisation,” said Pillay.
The report advises manufacturers that as these trends play out within a growing number of manufacturing sectors, larger manufacturers should focus their strategies on concentration and consolidation, rather than fragmentation.
“Due to competitive pressures, large manufacturers may experience increasing pressure to focus on just one role, shedding aspects of the business that might distract from the company becoming world class in its chosen role. The likely result is a significant restructuring of existing product manufacturers,” according to the report.
“Rather than focusing solely on ‘make vs buy’ options, large players will have an opportunity to connect with, and mobilise, a growing array of new entrants, many of which will target fragmenting portions of the manufacturing value chain in order to deliver more value to their customers. Two emerging business models, ‘product to platform’ and ‘ownership to access’, seem particularly promising in terms of driving leveraged growth strategies."
Given the emergence of more complex ecosystems of fragmented and concentrated players across a growing array of manufacturing value chains, businesses that understand emerging ‘influence points’ will have a significant strategic advantage.
As the manufacturing landscape evolves and competitive pressure mounts, driven by the needs of ever more demanding customers, position will matter more than ever, the report found.
Africa
Much of the findings of the Deloitte report will be played out in Africa as new manufacturing plants will be enabled to leapfrog the technology divide. This is reflected in another Deloitte report - Africa Private Equity Confidence Survey 2015 - which found that manufacturing opportunities in Africa had long been favourites for private equity investors.
Of respondents, a high proportion said they were looking at manufacturing and industrial opportunities in Africa, on average the third-highest placed sector and one which also was the one common investment focus among all three territories: Southern Africa (41%), East Africa (43%) and West Africa (42%).
The report indicates that Africa’s middle class is expected to increase to more than half a billion people by 2030. The report stated that in Southern Africa, “the focus in 2015 among Southern African PE investors will also be in food & beverages and manufacturing... it stands to reason that activity in this area would likely be dominated by the production of fast moving consumer goods”.
“In all the decisions about where and how to play in this new environment, there is no master playbook—and no single path to success. But by understanding these shifts, roles, and influence points, both incumbents and new entrants can give themselves the tools to successfully navigate the new landscape of manufacturing,” the report concludes.
