In this series, we will look at the businesses in the various stages of the Supply Value Logistics Chain, instead of looking at specific businesses, we will take an abstract look at the value chain in this link of the supply chain. This can be used as a guideline or framework to choose a business idea.
This is part of a series on How to Start, Run, Grow & Fund a Business in South Africa. These pages have to be read in order:
- How to Start, Run, Grow & Fund a Business in South Africa (using what you currently have)
- Choosing the right Business Idea for You
- Writing the Business Plan
- Supply Value Logistics Chain – Research and Understand Your Industry
- Raw Materials Business
- Equipment Business
- Skills Business
- Manufacturing Business (This page comes here as the first stage of the Supply Value Logistics Chain)
- Test if Business Idea is right for you
Today we will look at the manufacturing business. A simple Supply Value Logistics Chain will look something like this:
Manufacturing is the making of goods by hand or by a machine that upon completion the business sells to a customer (distributor, wholesaler, retailer or even direct to consumer, I will get to that in the business model below). This can be anything, we classify food production under this category as well. Here is where the Raw Materials are processed by Skills using Equipment.
Starting a Manufacturing Business
When you decide that you want to start a manufacturing business the very first thing you have to ask yourself in South Africa is “should you manufacture?”.
Manufacturing is usually the most labour intensive, capital intensive part of the supply chain. We will get to budgeting and forecasting in the next stage, but if there is existing competition whether via local players with economies of scale or Chinese imports that you cannot compete with, then you might be better off going further down the chain such as importing, distribution or wholesale. This is because you will need significant amount of capital before you have even made a single cent, money for equipment, materials, premises, then you have to still sell that product. You will wait a while to break even and start making profits. Whereas if you were to become a distributor or agent or reseller you can start making a profit from day one. Take for example the coffin manufacturing business, you can buy a coffin from the manufacturer put a R500 markup and resell. R500 in your pocket now. But if you want to manufacture you need tools (equipment) and know how to use them (skills) and the wood (materials) the coffin is made from. Then you need premises (space or facility) then you need to start making it and start selling it (both of which is not easy). A lot of people don’t fully understand business think “I want to manufacture”. I know business and I don’t want to manufacture I would rather position myself between the manufacturer and the consumer. Most South African large-scale manufacturers are up to their eyeballs in debt and one bad move away from insolvency and liquidation. Take for example the iconic cement manufacturer Pretoria Portland Cement (PPC), 128 years old, the first cement plant in South Africa, market cap under R1 billion, losses of over R2 billion and debt of almost R6 billion. These guys have revenues of R10 billion but their costs are so high they can’t compete and like the chicken guys, they are complaining about cheap imports. But the macro costs to do business in SA is just too high and not even economies of scale and over a century of experience in chopping up little pieces of stone can help PPC, what chance do me and you have with a startup, more complex, labour-intensive manufacturing models? When the people who made the cement used to build most of South Africa’s buildings is flirting with insolvency.
Which brings me to my next point…
Some people want to manufacture because they have fallen in love with the idea of manufacturing. South Africa is a very challenging place to manufacture, the macro environment is very bad. You have the dual problem of both problematic labour laws and high wages. Let me be clear: South Africa’s minimum wage of R20-odd per hour is not too low, it is comparable with its peers for unskilled labour, the cost of living in SA is too high and that is the fault of the people over at Luthuli House. This creates a problem where you have to pay a lot of money to get decent workers – something that is available for far cheaper in other countries. Ask yourself how are you going to compete with those countries without significant capital to build economies of scale? If you are reading this then you are probably not in a good position to start a large scale manufacturing enterprise.
There is gonna be no Foxconn here in SA. The only reason the car manufacturers are here is that they get paid (with taxpayers money) to be here ostensibly to create jobs. Then taxpayers pay another premium to buy vehicles. It’s not a very sustainable way of manufacturing. I think large-scale manufacturing in SA is a sunset (declining) industry.
But what manufacturing business can you enter as a small business?
Best manufacturing small business
The best manufacturing business for small business, most lucrative, least skills required, least manpower involves moulds: porcelain moulds, lead moulds, wax moulds, chocolate moulds. Where you pour in a liquid it sets and you have a product.
Porcelain moulds – Used to make ornaments
Lead moulds – Used to make fishing sinkers, car balancing thingies (I think its called a wheel weight?)
Wax moulds – Used to make candles
Block moulds – Used to make building bricks
Chocolate moulds – Used to make chocolate slabs and Easter bunnies and little chocolate coins
Concrete moulds to make – Planters, palisades, concrete furniture, balustrades
Moulds to make soap
Another manufacturing small business to look into is something that can be manufactured by welding. We know welding, the basic equipment is not expensive, the skill is not very hard to learn, but it can be used to make things that can be sold at a profit. I covered car ramps and burglar bar and safety gates and I covered screen-printing frames for SideBusiness.co.za.
Manufacturing Business Financials
You probably think I am joking when I say this business is a challenge.
Let’s do some basic financials here. In this business, your budgeting and forecasting needs to be optimised to the max.
There are 24 hours in a day. And 8 hours per shift. A 24 hour business will have three shifts (24/8).
Let’s assume you paying minimum wage here. R20 an hour. This is even below minimum and it gets you a very unmotived worker but I am doing it to show you the problem.
In an hour there are sixty minutes. How many products can a person make in that time?
You are paying 33c per minute of work. Now you know the average worker they don’t work every minute they talking or on Mxit etc. But let’s assume they work every minute.
Your labour cost is 33c per person per minute. That person has to manufacture something that can be sold for a profit. Now obviously you not going to get an R20/hour worker to manufacture anything complex.
Let’s say you are making packets of sweets and the person is filling and sealing it. The sweets retail at R5 a packet if it takes the person 2 minutes to fill and seal the packet that is 66c more than 10% of the retail price, so if your cost price is R2.50 for the sweets, that 66c is a significant amount and has to be kept as low as possible. For more complex things it’s even harder, you have the factor in the things mentioned below as well as the other costs to company (CTC).
You know your value chain:
Labour (R20/hour) + Equipment + Materials = Manufactured Goods
You have to factor in the wear and tear on the equipment, the raw materials and this persons labour. We went on the lowest amount, most workers want more, the ANC’s labour arm COSATU would like it to be multiples of that. The problem is we have very unproductive workers in SA who are protected by very strict labour laws.
Ask yourself if you paying a person Rxx an hour, how many goods can that person make? Remember you have other input costs, electricity, water. I think small owner-operated large margin businesses there is still a chance.
In my opinion, there is no future for large scale manufacturing in SA. I have said before our future is going to look like our African peers: many small businesses employing few rather than a few big businesses employing many (the only big business in SA will be the government). The macro problems are beyond the ability of the government to fix. If Africa wasn’t so lawless, the African Continental Free Trade Agreement (AfCFTA) would’ve done for us what NAFTA did in the US & Mexico. We would have been building factories in Lesotho, Swaziland and other neighbouring countries outside the reach of the socialist laws that govern SA. But even that is a challenge, if you thought SA was corrupt, you should see our neighbours. And that is why China is China.
So if you are still in love with manufacturing just be aware of all these challenges. Due to the macro challenges, it is also viewed in a dim light by investors. In COSATU you have a labour federation so powerful they can run roughshod of any laws shutting down your business and losing whatever collateral you put up to fund the business. Small scale high margin manufacturing is probably your best bet of success in this industry.
Manufacturing Businesses on Khoi Capital
Make and Sell Magnetic Photo Frames
Make and Sell Biltong
Make and Sell Indigenous Board Games
Make and Sell Laser Cut Toys, Models and Puzzles
Make and Sell Bakkie Mattresses
Make and Sell Briquettes
Make and Sell Paaper Bites
Make and Sell Memory Foam Pillows
Make and Sell Custom CD Clocks
Make and Sell Anti-theft Brackets for Gate Motors
Make and Sell Tarpaulins
Start a Mattress & Bed Making Business
Make & Sell Paving Bricks
Make & Sell Gourmet Popcorn
Make & Sell Car Ramps
Make & Sell Concrete Furniture
Make and Sell Perspex Products
Start a Generic Perfume Manufacturing Business
Start a Frozen Food Manufacturing Company
Make and Sell Pet Accessories & Toys
Start a Сoncrete Block Making Business
Start a Clay Brick Manufacturing Business
Start a Steel Roof Sheeting Manufacturing Company
Make & Sell Easy to Assemble Furniture
Make and Sell Trestle Tables & Desks
Make & Sell Pipe Furniture
Make & Sell Soft Play Equipment
Start an Expanded Polystyrene (Styrofoam) Manufacturing Business
Start a Satin (Hair) Product Business
Start a Burglar Bar & Security Gate Business