Should You Start a Manufacturing Business in South Africa?

When you decide that you want to start a manufacturing business the very first question 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.  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 a 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, maybe have to put down a deposit) 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.

So the question is should you start a manufacturing business?

The answer is it depends, it depends on your skills and resources. Here I cover manufacturing businesses to start as a small business. Even if you have resources and business management skills there are some industries that are probably best avoided. One question I got the other day was instant noodles or two-minute noodles.  These things are made by the millions in China and Indonesia and imported for less than a rand. Obviously, it is going to be very challenging to compete in the low-cost ramen noodle business but if you can make stirfry or chow mein noodles that sell for a bit more money, but cheap instant noodles are everywhere and will be a hard business.

For the individual entrepreneur manufacturing, high-margin products are the way to go, there is some stuff, bar stools, for example, it is so expensive it does not use a lot of wood it does not take a rare skill.

The biggest challenge facing a manufacturing business is that is like starting two businesses: the hard work of manufacturing and the hard work of selling. So unless you have money for sales reps try to do contract manufacturing, get offtake agreements, get sales channels lined up. But with South Africa’s problematic workforce and onerous labour laws, it brings me back to my first paragraph. Should you take the risk? When you can outsource manufacturing as well.

Is it possible to be a successful manufacturing upstart?
Yes, but you have to pay close attention to your business and avoid common manufacturing pitfalls.
Within your value chain, there is the equipment and materials (the input), there are the skills and labour (the process) used to produce the product (output).
Try to visualise, a business usually has 8-hour shifts, are you going to run 1 shift, 2 shifts, or 3 shifts (24 hours) or 1 or 2 shifts with overtime. You need to know how much of a product a person or machine can produce in an hour and if you know that you can make a profit from that you must make sure to keep up that productivity. Look at how muchy a person earn an hour, how much electricity does a machine use an hour and how much does it cost to run with both Eskom and generator. If Eskom is offline is it viable to run a generator or should you shut down production. From a personnel perspective, you are going to need to make sure that you have a motivated workforce that is keeping up production even not bein monitored. There is a lot of variables that go into a successful manufacturing business.