sa’s auto components industry in international comparative perspective: lessons from a global...

SA’s auto components industry in international comparative perspective: Lessons from a global benchmarking study

Prof Justin Barnes

SA auto components industry in historical context Benchmarking methodology Profile of benchmark comparators An assessment of the industry’s:

◦Competitiveness◦Productivity◦Growth

Findings implications

Presentation outline

• 2014 marks 20 years of SA’s “new auto industry”• MIDP launched September 1995• Industry rapidly integrated into GVCs – MNC

dominance established (“death of the local firm”)• Massive upheaval in the South African production

and market space:◦ Domestic market from 2% imports in 1990 to

14% in 1997 to 40% in 2005 and 58% in 2012◦ Domestic production from 100% domestic

market to over 50% exports• Forced major restructuring of the SA auto

components industry – necessitated substantial industrial upgrading, as evident in SAABC benchmarking findings since 1998/9

Industry in context

MIDP impact (1995 to 2012)

Market

driver

KPI South African performance standards Interna

t. std

2012,

n=26-59

SA vs.

Internat

. std,

2012

1998/9,

n=23-

27

2001

n=23-

27

2006

n=61-

75

2012

n=29-

36

Change

to 2012

Cost

control

Inventory holding (op. days) 62.6 42.0 33.3 26.2 58.1% 24.5 -6.5%

Quality Customer return rate (ppm) 3,270 1,240 254 226 93.1% 199 -11.9%

Internal reject rate (%) 4.9 3.9 2.6 1.7 65.3% 1.6 -5.9%

Internal scrap rate (%) 4.2 3.5 2.8 1.7 59.5% 1.5 -11.8%

Reliabilit

y

OTIF customer delivery

reliability (%)

92.2 92.7 93.5 97.7 6.0% 97.9 -0.2%

OTIF supplier delivery

reliability (%)

78.7 82.2 90.0 92.5 17.5% 93.3 -0.9%

HR Absenteeism – lost hours

(%)

4.4 4.0 3.3 3.0 31.8% 2.6 -13.3%Source: Barnes and Morris (2014)

•OEM competitiveness:Vehicle output per employee:1995=9.7, 2005=14.5, 2012=16.9

•Component industry competitiveness:

Firm Value Chain Model Market Driver Methodology Performance Analysis Tools

Customer Demands

Operational Competitiveness

Inter-Firm Organisation

Supplier Requirements

Intra-Firm Organisation

Cost

Quality

Flexibility

Reliability

HRD

Innovation

Qua

ntita

tive

and

qual

itativ

e as

sess

men

t

1

2

3

4

5

6

Competitiveness

Productivity

Growth

Conclusions

Benchmarking methodology

Performance criteria SA (n=44) Developed Countries (n=127) Less Developed Countries (n=27)

Sales (Rands)0-30mil: 7.3%

30-100mil: 39.0%100-250mil: 24.4%

250+mil: 29.3%

0-30mil: 20.8%30-100mil: 39.6%

100-250mil: 26.4%250+mil: 13.2%

0-30mil: 63.0%30-100mil: 18.5%100-250mil: 0.0%250+mil: 18.5%

Employment1-150: 51.3%

151-250: 10.3%250+: 38.5%

1-150: 85.5%151-250: 12.7%

250+: 1.8%

1-150: 84.0%151-250: 0.0%250+: 16.0%

Automotive Sub-Sector

Trim: 16.0%Harness/Electronics: 6.0%

Foundry/Forge: 8.0%JIT Assembly: 6.0%

Metal form/press: 16.0%Metal fabrication: 18.0%

Components: 12.0%Precision Machining: 2.0%

Plastic Moulding: 6.0%Other: 10.0%











AccreditationsISO 9001: 73.2%

ISO 14001: 68.3%ISO/TS 16949: 85.4%

N/AISO 9001: 72.7%

ISO 14001: 18.2%ISO/TS 16949: 47.8%

Market focusOEM: 42.7%AM: 16.1%

Other: 41.2%N/A

OEM: 62.0%AM: 0.3%

Other: 37.7%

Ownership profile

Locally Owned: 63.6%Multinational: 36.4%



Imports 24.9% 18.2% 0.7%

Exports 19.4% 16.6% 7.4%

Profile of benchmark comparators

Growth

Competitiveness

Productivity

Analysis

Benchmarking results

All data courtesy of the South African Automotive Benchmarking Club, and hereby gratefully acknowledged

Growth

Competitiveness (four pair matched firms)

Productivity

Conclusion

• SA suppliers have a notable cost competitiveness disadvantage versus their Thai counterparts.

• Input costs:• Thai firms have a substantial

employment cost advantage• Supported by electricity and

water cost advantages

• Operational waste costs:• SA firms incur the largest

amount of waste costs, with inventory and reliability the major contributing factors.

• Limited improvement is however evident over the past two years.

• Government policy:• The APDP offers reasonable

benefit to SA firms.• But Thai firms have the best

market access profile.

• This tool unpacks factors of comparative advantages and disadvantages that emanate from being located in SA versus a low income and a high income country respectively

• A comparative output price is determined based on a the impact of the following on a hypothetical base price :

• Input costs (employment costs and utilities)• Operational waste• Government policy (incentives and trade tariffs)

• Key issues:• Set of four pair matched firms• Parity of material pricing assumed• Logistics to export markets not accounted for

Cost Competitiveness Tool

SA Thailand UK

Output Price 1,014.45 929.14 1,042.87

Disadvantage 9% 0% 12%

R 870R 890R 910R 930R 950R 970R 990

R 1,010R 1,030R 1,050

2%7%13%18%22%28%33%38%43%48%

1,014.45

929.14

1,042.87

9%

0%

12%

Valu

e

Perc

enta

ge

What it means

Competitive analysis

• The aggregate relative advantage of these input costs is calculated against a hypothetical base price of 1,000 and added to the tool

• Comparative input cost advantage is based on employment costs and utility costs

• Average water, electricity and rental costs are used to calculate relative utility cost advantage

• Average employment costs per category coupled with a productivity adjustment is used to calculate relative employment costs against salary and wage bill as a percent of sales

Factors SA Thailand UKA. Base Price 1,000 1,000 1,000 B. Input Costs - -68.80 37.94C. Waste Costs - -31.23 -14.08D. Government Incentives -60.55 -32.08 -56.00 E. Market Access 75.00 61.25 75.00 F. Output Price (A+B+C+D+E) 1,014.45 929.14 1,042.87


Input costs

SA Thailand UK

Employment 0.124520812542804 0.0602408409272701 0.106816468975456

Water 0.0216303815814318 0.018346093333391 0.0370363997440086

Electricity 0.0235724642531363 0.0135541669455534 0.0589311606328408

Rental 0.0239522161509126 0.0327312129918424 0.0288363023538128

3%

8%

13%

18%

23%

% o

f sa

les

19.37%

12.49%

23.16%

Key Points

• The difference between operational waste performance compared to comparators’ average performance as a percent of sales is calculated against the 1,000 hypothetical price and added to the competitiveness tool

• These figures are the direct costs (or waste) that firms incur as a result of their operational performance.

• This is achieved by analysing the waste costs associated with inventory control, quality management, production flexibility and reliability, as well as absenteeism

Factors SA Thailand UKA. Base Price 1,000 1,000 1,000 B. Input Costs - -68.80 37.94 C. Waste Costs - -31.23 -14.08D. Government Incentives -60.55 -32.08 -56.00 E. Market Access 75.00 61.25 75.00 F. Output Price (A+B+C+D+E) 1,014.45 929.14 1,042.87


Operational Waste as % of sales

SA Thailand UK

Absenteeism 0.00648026589317222 0.00853135011755618 0.00685960492940335

Production re-liability

0.0284621812803205 0.0158829229079431 0.0323311985335719

Production flex-ibility

0.0181417614364741 0.0146251097316451 0.0133878884315705

Quality man-agement

0.0143523608994732 0.0154694111209636 0.0150909244371627

Inventory con-trol

0.0307114474484292 0.012407536259576 0.0164020626900212

1%

3%

5%

7%

9%

11%

Wa

ste

as

% o

f Sa

les

9.81%9.81%

6.69%

8.41%

Key Points

Government Incentives: SA Thailand UK

PRCC benefit -5.38%

PRCC + AIS benefit -5.83% Avg

PRCC + AIS + 25% SMD benefit -6.05% -3.21% -5.60%

PRCC + AIS + 50% SMD benefit -6.28% Max

PRCC + AIS + 75% SMD benefit -6.51% -4.70%

Market Access:

Import duties on CIF value 7.50% 6.13% 7.50%

Factors SA Thailand UKA. Base Price 1,000 1,000 1,000 B. Input Costs - -68.80 37.94C. Waste Costs - -31.23 -14.08D. Government Incentives -60.55 -32.08 -56.00E. Market Access 75.00 61.25 75.00F. Output Price (A+B+C+D+E) 1,014.45 929.14 1,042.87

• For the purpose of the cost competitiveness tool it is assumed that a PRCC and AIS benefit is derived, plus a SMD benefit for 25% of materials

• The various support schemes for firms operating in Thailand provide these firms with an average benefit of 3.21% and a maximum benefit of up to 4.7%. For the purpose of this tool, an average of 3.21% is assumed.

• Included in the tool is also a 5.6% project grant available to firms in the UK

• Moreover, market access takes into account import duties based on the assumption that the producing economy produces 50% of production for their home market, and exports 25% to each of the two comparator markets


Government Incentives

Key Points

Growth

Competitiveness

Productivity

Conclusion

• SA firms have the weakest productivity profile of the three comparators:• Value added per employee

levels have improved, but substantially less than the improvements recorded at LDC firms

• Value add per unit of employee cost has declined marginally off an already weak position relative to Indian firms

• Key noteworthy points:• SA capital expenditure (capex)

levels, while improving, remain behind the LDC firms.

• The local industry’s operating profit profile is concerning.

• LDC firms have a stronger training profile than SA firms.

• Performance in terms of commitment indicators is relatively undifferentiated.

CPI Adjusted value added per employee indexed

VA per unit of employee cost

105

115

125

135

145

155

% G

row

th

2011 2012 2013India 5.87SA 2.87 2.67 2.76

0.01.02.03.04.05.06.07.0

Productivity Analysis

Note: Pair matched firms

SA2011

SA2012

SA2013

DC2013

LDC2013

Cost 2.96 2.82 3.07 2.33 1.63Quality 1.92 1.74 1.72 1.08 1.26Flexibility 2.12 1.78 2.01 1.50 0.95Reliability 3.75 3.48 3.16 4.41 1.26HRD 0.87 0.87 0.82 0.79 0.47

0

2

4

6

8

10

12

14

% o

f Sal

es

Average waste as % of Sales

11.6210.69 10.79

10.11

5.57

Operational waste analysis

• Capital expenditure (capex) provides insight into the level of investment taking place at firms in terms of creating future benefits

• The investments can be in relation to machinery, IT software/hardware, buildings/fixtures and other capital equipment

• While issues such as an OEM model life-cycle and types of technology used can influence investment expenditure cycles, firms must continually focus on capex to ensure that future growth opportunities can be realized, especially as technology challenges increase

• In addition, achieving healthy operating profit levels is a necessary firm focus, arguably closely linked to capital expenditure..

Key PointsCapex as % of sales

Operating profit as % of sales

1

2

3

4

% o

f sal

es

1

3

5

7

9

% o

f sal

es

• The only certainty about manufacturing requirements is that they will become more onerous. Goal posts are continually shifting and new demands emerging. Unless firms adapt to these changes and their associated challenges, they will fall behind competitors

• There are four dimensions to this - manpower, machines, materials and methods

• Whilst all of these dimensions are related, the first : manpower, determines the capability to deal with the other three

• To assess firm’s ability to effectively manage manpower, an area to consider relates to the extent to which firms are investing in their most important asset, namely their employees

Key PointsTraining expenditure as % of total remuneration bill

Formal offline training days per person

0.3

0.8

1.3

1.8

2.3

% o

f rem

unde

ratio

n bi

ll

0.5

1.5

2.5

3.5

Day

s

• To further assess firms ability to effectively manage manpower and bolster productivity, it is crucial that a strong worker commitment culture exists, and that sound morale levels are fostered and maintained

• Absenteeism levels are considered a good proxy measure for evaluating commitment and morale levels of firms, with comparatively strong and improving levels of absenteeism an indication of this

• Employee turnover is also considered to be a good proxy to evaluate commitment and morale at firms. It is important to note that low turnover levels are healthy in so far as they contribute to introducing new skills and fresh ideas into an organisation. However, if turnover rates become too high then the retention of skills and knowledge becomes serious concern

Key PointsAbsenteeism

Employee Turnover

1

2

3

4

Perc

enta

ge

1234567

Perc

enta

ge

Growth

Competitiveness

Productivity

Conclusion

• The LDC firms achieved healthy growth in recent years, reflected in both sales and employment levels, well in excess of what is noted for the SA firms

• Customer ratings:• Price remains the biggest issue

and could be placing pressure of local firms ability to grow.

• Overall performance appears to have deteriorated slightly in recent years, mainly due to cost/price and quality slipping

• While the percentage of sales from new products at the SA firms is relative healthy and improving, and ahead of the DC firms, the LDC firms perform exceptionally here

• Note: SA OE relates to SA OEM vehicle production (sales graph) and employment figures (employment graph)

Inflation adjusted sales (domestic currency) indexed to 2011

Employment trends indexed to 2011

105

115

125

135

145

155

% G

row

th

105

115

125

135

145

155

% G

row

th

Growth Analysis

• The customer benchmark assessment findings consider firms’ performance ratings as provided for firms by their major customers

• The extent to which a criterion is rated (revealing its relative importance) must be considered. In addition, the difference between expectations and perceptions of performance must be understood as this indicates the ‘gap’ between customer requirements and performance levels

• Crucially, sales retention is ultimately about whether the customer is happy with the performance of suppliers relative to its requirements

• The Customer Benchmark Index (CBI) provides an insight into the longitudinal findings by category

Key PointsSupplier performance rating versus OEM demands

Customer benchmark index (CBI)

QualityPrice

Delivery reliability

Delivery frequency

Conformance to stds.

Comm. Flow

Lead time flex.Responsiveness

After sales support

New product dev.

Process innovation

Geographical proximity

AVG

4

6

8

10

OEM requirement Supplier rating

Gap Analysis Average Std. DeviationPrice -1.70 1.80Process innovation -1.30 1.78Comm. Flow -1.23 2.13New product dev. -1.23 1.45Responsiveness -1.13 1.50Geographical proximity -1.07 1.70Quality -0.90 1.18Delivery reliability -0.83 1.05Conformance to stds. -0.77 0.97

Lead time flex. -0.67 0.92After sales support -0.60 1.04Delivery frequency -0.50 1.25AVG -0.99 0.79

55

65

75

85

95

Perc

enta

ge (%

)

• The sale of new products is a sound proxy for assessing firms current and future health, and provides an indication of how firms are managing growth

• Thus, the ongoing introduction of new products must be a focus of firms to ensure a healthy product profile and sustainable growth

• Research and Development (R&D) expenditure provides an indication of whether firms are focusing on product development in an attempt to positively influence their growth trajectory. It provides an insight into whether firms are able to meet customers’ future product development requirements and thereby retain and grow sales

• While R&D often receives limited focus at local firms, it is nonetheless important that firms ensure that they are able to access the necessary technology required to be globally competitive

Key PointsSales from new products

R & D Expenditure

10

30

50

70

% o

f sal

es

1

2

3

4

% o

f sal

es

Growth

Competitiveness

Productivity

Conclusion

• The competitiveness, productivity and growth analysis highlights clear, interlinked challenges for SA firms, notwithstanding major progress over last 20 years

• Arguably most concerning finding relates to uncompetitive value add to employee cost ratio - in terms of current level and the absence of a recent improvement trend

• To address these concerns, four areas clearly require attention:

1. Work organisation: Lean production capability development, especially at lower tiers of automotive production activity will support reduction in waste costs

2. Localisation: Extended supply chains are a major reason for inventory and reliability costs, but only possible if lower tier firms globally competitive

3. Skills development: Training is required for the adoption of lean management practices. Level of investment needs to be elevated above that of LDC firms. Training needs to be closer to 3% of remuneration (from current 1.46%)

4. Technology upgrading: Current capex levels are weak and need to be elevated to a level above LDC firms if current competitiveness gap is to be closed. Capex to 5%-7% of sales

Competitiveness

Growth

Productivity

Key Points

Conclusion

OEM

20%T1

30%

Tn 50%

Conclusion

OEM 40%

T1 40%

Tn

20%

Global OEM auto supply chain

SA OEM auto supply chainValue addition

breakdown

Conclusion

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[email protected]

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sa’s auto components industry in international comparative perspective: lessons from a global...

Documents

sa firms

sa auto components industry

acknowledged slide

oem competitiveness

sa suppliers

thai firms

domestic market

sas auto components