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Localising automotive electronics production in South Africa: how to manage the technical and commercial risks successfully

Localising automotive electronics production in South Africa: how to manage the technical and commercial risks successfully

Technology News |
By eeNews Europe



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 which is favourable to European currencies such as the Euro, Pound Sterling and Swedish Krona
  • 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 proved 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 (see Figure 1).

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.

Fig. 1: 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’ bill-of-materials (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 which assembles at least 50,000 vehicles per year in South Africa, providing a rebate on import duties which 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.

Confidence in quality?

The world’s top car makers, then, have a strong financial incentive to build in South Africa cars that are designed in Europe, the US or Asia. These OEMs benefit even more when the components and modules in the car are also built in South Africa.

This calls for a transfer of technology from an overseas manufacturer to a South African assembler. For suppliers of automotive components, such as Continental Corporation, Delphi, Eaton or Valeo, this requirement generates risks: above all, a quality risk. Their reputation and standing in the automotive industry depend on the performance of their products on the road, in many cases for the whole life of the vehicle. Quality and reliability are underpinned by both the design and the production process.

When a technology transfer to South Africa takes place, therefore, the product’s originator wants to eliminate as much risk as possible, and to be sure that the quality of the South African version of the product matches or exceeds that of the original. As is shown below, a phased transfer following a proven process can safeguard quality in a highly controllable way.

But the first, essential step in the process is the selection of the South African assembler. In fact, South Africa has a thriving industry of automotive systems suppliers, a happy legacy of the painful apartheid era, when trade sanctions forced South African industry to be highly self-sufficient.

Automotive suppliers from outside South Africa can therefore choose from a large number of local suppliers which offer two crucial markers of quality:
• a long track record of supplying parts for the world’s biggest car makers. Mercedes-Benz is the largest exporter of finished vehicles from South Africa. Volkswagen, BMW, Ford and Toyota have also been assembling cars in South Africa, for local sale and for export, for more than 20 years. Many local systems assemblers have supplied these OEMs reliably throughout this period.
• independently verified compliance with international quality standards. All reputable South African assemblers will be able to demonstrate that they comply with standards such as TS 16949, ISO 9000, Ford Q1 and VDA 6.3.

Overseas automotive suppliers will also typically conduct their own, independent audits, comprising factory visits, inspection of documentation, and tear-downs of sample production units.

Fig. 2: the C Class passenger car, manufactured in South Africa by Mercedes-Benz, South Africa’s biggest car exporter by value. (Source: www.mercedes-benz.co.za)

In fact, many past examples of technology transfer show that the quality management and quality assurance processes of reputable South African assemblers, and the reliability of the products they manufacture, are on a par with those of their European, Asian or American originators.

Phased transfer process

Of course, a proven track record provides some comfort for the overseas automotive supplier concerned to protect its brand’s reputation. But every new project brings its own risks. By describing an example of a technology transfer involving the author’s company, PFK Electronics of Durban in South Africa, it is possible to outline a generic process for quantifying and managing these risks.

The product in question is an instrument cluster, a unit originally designed and manufactured by an automotive supplier in Europe for one of the big global car makers. The cluster is a relatively large item, roughly the size of a shoebox, and consisting of a plastic housing, cabling and connections, dials and an LCD, and the electronics system on a PCB.

For vehicles assembled at its factory in South Africa, the car maker required localisation of the instrument cluster. Together, the supplier and PFK Electronics instituted a three-phase transfer process: at each phase, the size and nature of the risk was known and manageable.

In the first phase, PFK Electronics assembled the unit from components supplied entirely from overseas by the original manufacturer. In phase one, therefore, the risk was in the assembly process alone.

In the transfer of production technology, the local assembler is responsible for meeting the originator’s specification for the finished product. It may assemble the specified product using either production equipment selected and configured locally, or by exactly replicating the production and testing set-up of the originator. The latter is the lower-risk option, and this was the method chosen for the instrument cluster project.

In phase one, then, PFK Electronics operated in Durban a replica of the original European production operation. The original manufacturer’s engineers provided PFK Electronics with pre-production training in the configuration of the production and testing process. After intensive quality inspection of the initial production units confirmed that high quality standards were being met in the PFK Electronics production units, the original manufacturer was content to rely on PFK Electronics’ own quality reports as the production run continued (see Figure 3).

Fig. 3: many South African factories, such as PFK Electronics’ facility pictured here, comply with the same global quality standards as European and North American automotive assembly plants

This first phase minimises risk, but it also fails to capture all of the financial benefit of offshoring to South Africa. In particular, the freight cost for the bulky housing was more than 5% of the total BoM cost. In addition, shipping a plastic housing from Europe, for instance, to South Africa takes around seven weeks. This means that the working capital tied up in a piece of plastic spends seven weeks floating on the sea.

Phase two of the technology transfer, then, involved localising the plastics production, meaning that only the PCB (an air freight item) now needed to be shipped into South Africa, resulting in a dramatic reduction in BoM and freight costs. By emulating the original tooling and raw material specification, PFK Electronics could readily reproduce the shape, look and feel of the original housing.

In phase two, then, there was an incremental increase in the risk of the product transfer, but also a considerable cost reduction.

The final, third phase brings a further cost saving, involving the localisation of the PCB assembly from electronics components procured locally. Here again, risk management follows the same path as before. The original manufacturer:

  • verified the track record of the supplier in the field of PCB assembly
  • replicated the production and testing set-up
  • transferred the board’s Gerber files, technical specifications and BoM under a non-disclosure agreement to the assembler
  • trained local engineers to understand the tolerances and constraints specified in the assembly process
  • audited the quality of the initial production units.

In the case of the instrument cluster, both the car maker and the original manufacturer can monitor the quality of the production units by reviewing PFK Electronics’ own quality reports, which are themselves generated in conformance with the specifications of independent quality standards such as TS 16949.

This phased process, then, provides a model by which European, Asian and North American automotive manufacturers can transfer the production of finished products to South Africa in order to benefit from very substantial cost savings, while easily and predictably managing the risk to quality and their brand.

Until now, the transfer process has largely been driven by the commercial demands of global car makers, but it is expected that the growing strength of the partnerships between overseas automotive suppliers and South African assemblers will result in a new wave of offshoring, with South Africa coming to be as highly a valued destination for automotive outsourcing as eastern Europe was in the 1990s.

About the author: Gary Biggins is Business Development Manager at Contract Manufacturer PFK Electronics of South Africa.

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