Catalyst for change        
While recessions are inevitably painful, they can also provide the opportunity for a much needed re-evaluation of company strategy, as Alan Swaby learns.
When you can claim to be as competitive as any manufacturer anywhere in the world, then you know you must be doing something right. And when the quality of output is sufficient to keep the best names in the automotive business happy, then you know you must be doing everything right.
ThatÔÇÖs the position South African manufacturer Formex Industries finds itself in. With two plants in Port Elizabeth and a third in Pretoria, Formex Pressings and Formex Tubing make component parts for vehicles built locally and many that are built overseas. ÔÇ£Around 80 per cent of the work we do,ÔÇØ explains managing director Werner van Rensburg, ÔÇ£is for exhaust systems and catalytic converters. That makes us the countryÔÇÖs largest automotive consumer of stainless steel, with the three plants using about 1,000 tons a month. The exhaust parts we make go into a wide range of local and overseas plants covering the full range from Audi to VW.ÔÇØ
The business we know today has its roots way back in the past, in the grandly named British United Engineering, established in 1915 in Port Elizabeth to support the thriving shoe industry. Initially output centred around far less grandiose tacks and nails but throughout its history, the business has changed and adapted according to circumstance. In 2003, ownership settled in the hands of HCIÔÇöa black empowerment investment organisation, 46 per cent owned by two unions and with a bewildering spread of interests from clothing to casinos. ItÔÇÖs a very hands-off relationship, leaving Formex to run the business as it best knows how.
Although the automotive industry in South Africa has been hit by the recession, it has perhaps done a little better than many other countries. ÔÇ£Last year,ÔÇØ says van Rensburg, ÔÇ£volumes were around 70 per cent of historical highs. It was necessary to very quickly get costs in line with sales but it also provided us with the opportunity of reshaping the business.ÔÇØ
Five years ago, just after the HCI acquisition, Formex had sales of R100 million. Last year they were R900 million but much of that came from non-core activities. One of the decisions that has been made is to divest any interest outside of pressing and tube forming. As such, the sale of Baisch Engineering, a world player in the supply of automotive door lock mechanisms and assemblies and poly-V-pullies, should have been completed at the time of reading. In the short term this will have the effect of halving FormexÔÇÖs turnover but will enable greater focus on core activities and help to finance future development plans.
The two Port Elizabeth plants have been set up for completely different purposes. One manufactures a wide variety of part numbers but in lower volumes. ItÔÇÖs labour intensive and thus benefits from South AfricaÔÇÖs low wage structure. The other is for a limited number of parts but made in much higher volumes. The factory is highly automated but has to cope with more complex componentry and more involved tool changeovers.
What gives Formex its edge is the quality of its tool room which, according to van Rensburg, is second to none. In fact, during the recession, when the total labour force was reduced by around half, the company went to any lengths possible to protect its engineering skills. ÔÇ£At one stage we had experienced charge hands and supervisors manning the presses,ÔÇØ explains van Rensburg. ÔÇ£Another tactic we employed was to send personnel on secondment to other companies within the HCI group. Not surprisingly, we had plenty of volunteers to go to the leisure interests!ÔÇØ
Ensuring the availability of good quality engineers, toolmakers and fitters is one of the challenges Formex faces in its bid to continue growing. As such there are numerous programmes designed to speed up the personal development of staff and give them opportunities to progress through the ranks, either in an engineering or operational capacity.
The other niggle is the cost of steel. With a monopolistic supply, there is a feeling within the industry that manufacturers are being exploited to some degree. ÔÇ£We have made many analyses,ÔÇØ says van Rensburg. ÔÇ£Importing steel would involve a much more complex supply chain and create many logistical problems. Our suppliers very carefully pitch their price at a level which doesnÔÇÖt quite justify the extra work involved.ÔÇØ
Nevertheless, Formex is taking a serious look at a radical approach to overcoming the one unavoidable cost to all South African manufacturers wishing to export. The majority of Formex components that are exported are done so indirectly, via a tier one supplier. Consequently, Formex is paid in rand and sheltered from exchange rate fluctuations. But one way or another, any costs which deter export will have an impact on its business.
ÔÇ£Shipping costs are high,ÔÇØ says van Rensburg, ÔÇ£and often cancel out any advantages local suppliers might have. The Motor Industry Development Programme has been a big help to exporters and has the effect of negating shipping costs. But we would prefer a strategy where control is in our hands.ÔÇØ
For some time Formex has been looking at attaching mini plants next to principal customers in Europe and the United States that would continue to be provided with engineering backup from Port Elizabeth. The plan would be to manufacture a small range of high volume parts with highly automated machinery.
ÔÇ£The main point of difference between Formex and competitive pressing suppliers,ÔÇØ says van Rensburg, ÔÇ£revolves around our tool making abilities and of course itÔÇÖs much cheaper and easier to send a set of dies to Europe than whole shipments of components.ÔÇØ
In the meantime, prospects continue to look good for Formex, which has won orders for the new Ford pickup to be built in South Africa from 2011, as well as securing 80 per cent of the exhaust systems for VWÔÇÖs new South African built Polo.
