CHAPTER 4 Case Study of Smiths •••.•
5.2 Strategy Analysis
5.2.2 Analysis Using Porter's Diamond
There may be specific factor conditions which help explain the basis of advantage on a national level. Porter suggests that the national home base of an organization plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale. This home base provides basic factors which organizations are able to build on and extend to provide such advantage (l O'Shaughnessy, 1996:12).
• Factor Conditions: South Africa's large, well-developed metals industry, with vast natural resources and a supportive infrastructure, represents roughly a third of all South Africa's manufacturing (Internet 27). South Africa's non-ferrous metal industries comprise aluminium and other metals (including copper, brass, lead, zinc and tin). Aluminium is the largest sector but, as SA has no commercially exploitable deposits, feedstock is imported. South Africa is ranked eighth in world production of aluminium. Key players include Billiton (with two smelters In Richards Bay) and Huletts Aluminium who have an aluminium mill In
Pietermaritzburg (Internet 27). The European Aluminium Association (EAA) indicate in their report that automotive manufacturers face intense global competition and a growing environmental concern that they are committed to producing less polluting and easier to recycle cars, without compromising safety
and comfort, while maintaining efficient production and reducing running costs (Internet 28). Concomitantly, they also suggest assertively that the aluminium applications are on an exponential increase in automotive applications.
According to Organisation Internationale des Constructeurs D'automobiles (International organization of motor vehicle manufacturers), known as OICA, 2004 was the third consecutive year of a strong increase (by 5.8%) of the world motor vehicle production, following the increases of 3% in 2003 and 5% in 2002) (Internet 29). They also add that in 2004, this growth was largely attributable to emerging countries in which demand is developing.
An OICA report shows in their stats that the South African automotive production has been increasing by 4% from 2002 to 2003 with an 8% increase from 2003 to 2004 (Internet 30).
Smiths' core product is aluminium and their supplier base is strategically located in close proximity to Smiths' manufacturing operations (Naidoo, 2006). This has contributed to lower levels of stock holding as indicated in the previous chapter.
Smiths utilises continuous atmosphere brazing (CAB) furnaces which consume the bulk of the electricity. Considering that South Africa is blessed with the cheapest electricity in the world, Smiths have an advantage (Internet 31).
The figure 5.1 below shows graphically comparative costs of electricity in other parts of the world.
Figure 5.1: World Electricity Cost Comparison
Electricity Cost Comparison by Country fJkW hr. (in US Dollars)
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• Demand Conditions: The MIDP incentives have helped promote the export market tremendously; and the rebates granted towards imported materials give Smiths a cost advantage. According to WesBank which is a subsidiary of FirstRand bank, specialising in vehicle finance, as cited in I-Net bridge: 15/03/2006, the country's total number of new vehicles sold is likely to rise by 17 percent from last year's 618011 to 725000 this year. The article also adds that the industry projects a ten percent growth while McCarthy holdings, another motor retailer, anticipates a nine percent rise to a total of 675000 new vehicles. Furthermore, WesBank expects the figure to reach one million in 2010. The continued strong growth can be attributed to the sustained growth of the South African economy and the continued commitment made by government and the industry to the sector (I-Net bridge:
15/03/2006). Naamsa claims that during 2004, South Africa was one of the best performing markets internationally (Internet 32). They also assert that during 2005, South Africa was probably the best performing market internationally which represented another outstanding and record year for the South African new vehicle manufacturing industry with both domestic sales and production rising to all time highs.
WesBank CEO, Ronnie Watson, claims that the second factor supporting growth is South Africa's open market, allowing for a range of new entrants. He contests that for the first time, derivatives now have exceeded a thousand models and this has continued to increase (I-Net bridge: 15/03/2006).
Turning to the driving factors going ahead, Watson anticipates the local market to be fuelled by the growth of the black middle class, the rising number of female customers as well as the growing youth market.
These strong and positive demand patterns in the industry bode well for Smiths.
Naidoo (2006) adds that Smiths' strong and close collaboration with the most car OEMs is indicative of a promising future for enhancing and strengthening Smiths' growth trajectory.
• Related and Support Industries: The port of Durban is implementing a series of major capital projects to increase its capacity, improve operations, and maintain its status as Africa's busiest general cargo seaport (Internet 33). Smiths is located only about 23Km from the Durban port which provides a locational advantage and results in minimal logistical costs of getting goods from and to the port. SA ranks 23rd in the world in telecommunications development, with over 4.92 million telephones and 4.3 million exchange lines installed, representing 39% of total installed lines in Africa (Internet 34). Modem highways, trains and airways make travel in SA comfortable and convenient (Internet 35). South Africa has six ports which serve as conduits for trade with South Africa's partners in Africa and the rest of the world (Internet 35).
The Airports Company South Africa's (Acsa) managing director Monhla Hlahla announced a capital expenditure budget of R5.2-billion to be spent over five years to accommodate the 2010 soccer World Cup for all international airports (Cape Town, Durban and Johannesburg) and a further R132 million to be spent on upgrading all the national airports (Internet 36).
• Firm Strategy, Structure and Rivalry: South Africa's geographic proximity to its developing neighbours can be seen in a positive light for enhancing growth of the local motor industry. But Bames and Deghaye (2005:9) show that Africa's total car production is only 1 % of the world.