CHAPTER 3: REPRESENTATION OF DATA
3.3 CONTRACT MAINTENANCE INDUSTRY ENVIRONMENT
such as lubricating oil, grease and consumables used in cleaning the lubricating oils (Eskom Tender documents, 2005). The company has been unable to develop and implement a hazardous waste management system. Most of the power stations are ISO 1400 1 compliant and require the contractors working at the power stations to adhere to these regulations. Some power stations have indicated immediate termination of contracts due to non - conformance to the Environmental Conservation Act of 1989 (Eskom tender documents, 2005).
3.2.6 Global Segment
According to the South African government, there are approximately 90 companies that want to build and operate new power generation capacity in South Africa (Jackson, 2005). This is the first time that government will allow private international companies to build and operate power stations in South Africa, thus breaking Eskom's monopoly (Jackson, 2005). The two new gas fired power stations that are fired by kerosene will be built in the Eastern Cape and K wa-Zulu Natal. Governement has indicated that these independent power producers will have to have 33% equity participation of black economic empowered companies (Jackson, 2005).
provision and also determining the scope of maintenance work performed, very few respondents have indicated any interest in utilizing maintenance contractors for the entire plant maintenance (internet 14).
Secondary data on the firm's marketing initiative has revealed that many of the power stations are reluctant to contract some of the generic maintenance functions such as mechanical and electrical maintenance due to currently large complements of labour resources. The secondary marketing data has also indicated that specialist control and instrumentation engineering and maintenance tasks at Matla and Camden power station have been outsourced completely to Siemens South Africa. This is due to the lack of skills on the new Siemens TXP distributed control system. The maintenance function within many power stations is becoming a focal point due to many of the power stations entering their thirty year life cycles. This creates huge expenditure on upgrades and maintenance due to the decreasing reliability created by the wear out of equipment (Visser and Pretorius, 2003)
3.3.1 Threats of New Entrants
Interviews performed with the Amalahle management have pointed out the low barrier of entrance for the Majuba power station coal and ash plant maintenance contract due to AMS being provided with most of the capital equipment, specialised tools and spares.
The financial resources required is almost negligible with the major resource required being labour, skills and knowledge. The companies marketing documents have indicated that most of the other power stations have started to contract some of the maintenance functions to their existing employees to increase productivity and reduce labour costs. The original equipment manufacturers such as Siemens, ABB, and GEC have started to target the maintenance services industry by providing these services to the equipment they manufacture. Siemens already has contracts with Camden and Matla power station, whilst ABB has maintenance contracts with the Amot power station.
Interviews with the directors have indicated that GEC has tendered for the Majuba power station mills maintenance contract and for which it was 30% cheaper than competitors. Many of the maintenance functions have been contracted to employees at
some of the power stations which create future competitive problems among these small enterprises. The maintenance manager and C&I maintenance managers are of the opinion that contracting the maintenance functions is the way forward.
According to Peter Murphy, a specialist maintenance consultant, maintenance outsourcing will continue to grow. The drivers for this growth will be the current cost to productivity ratios of Eskom employees which is 2, 5 times more than the required productivity. Government's strategic objective is to stimulate growth by not privatising Eskom. The government also aims of ensuring that Eskom continues to be a low cost producer of electricity so as to attract foreign manufacturers to South Africa. The strategy of not privatising Eskom assists in stimulating employment, growth and training and development among small to medium enterprises by outsourcing non - core business functions. Outsourcing of the maintenance functions would increase if it were to provide a cost advantage to power generation.
3.3.2 Bargaining Power of Suppliers
AMS does not rely on suppliers as most of the spares required are provided by the Eskom Majuba power station.
3.3.3 Bargaining Power of Buyers
Documentary data on the firm's sales has indicated a total reliance by AMS on Majuba power station. The company currently provides a generic maintenance service which has a low switching cost for the customer. The Eskom procurement department utilises sophisticated supplier price assessments software packages by performing probability statistical analysis on the supplier tender prices. These prices are closely linked to market related prices. Interviews with the directors have indicated that the Eskom procurement department evaluates contracts on prices. In most cases when AMS tendered for short contracts they were awarded the contracts on the basis of price.
Figure 3.4: Income Summary by Customer, from May 2004 though to April 2005
Income Summary by Customer, from May 2004 through April 2005
0.56%
0.05%
98.68%
Source: Data analysis of the AMS financial records (2005)
11 Maiuba
•
TurnkeyD Roshcon 0 Other
Figure 3.4 indicates almost a total reliance of AMS on the Majuba power station for its revenue. The company generates 98,68% of its income from the ash and coal plant maintenance, operating and cleaning, and laser alignment contracts with Majuba power station. Turnkey Projects which is a competitor of AMS relies on the firm for alignment services which contributes 0.71 % of the company's income. The company also provides a laser alignment service to Roshcon and other companies.
1 1 6031
Figure 3.5: Income Summary from April 2004 through to May 2005 by account type.
Income Summary April 2004 - May 2005
IIMJ Coal
Il3Supplies I!!!IMJ Ash
• Interest IiiIMJC&1
G1Travelling o Sevices • Alignment
• Miscellaneous
Source: Data analysis of the companies' financial records (2005)
Figure 3.5 displays the high percentage of income from Majuba Power Station.
Category 1, Majuba (MJ) Coal: 57.01%
Category 2, Majuba Ash (MJ): 28.45%
Category 3, Majuba C&I (MJ): 11.15%
Category 4, Sevices : 1.32%
Category 5, Alignment: 0.93%
Category 6, Supplies: 0.80%
Category 7, Interest: 0.18%
Category 8, Traveling: 0.14%
Category 9, Miscellaneous: 0.02%
3.3.4 Threat of substitute products
Conditioning monitoring techniques have improved drastically in the past years (internet 6). Companies such as Siemens, Rockwell Automation, and ABB have manufactured technological advanced equipment which can predict failures (internet 7).
Increased expenditure on maintenance by manufacturing companies will create new opportunities for original equipment manufacturers to improve technologies to reduce maintenance expenses. The new techniques adopted by the Japanese of utilising operators as the maintenance crew will substitute AMS in the near future (Stevenson, 2002). A technological development with online condition monitoring equipment which predicts failures before they occur helps operators to prepare for maintenance tasks.
These techniques will reduce the amount of preventative and breakdown maintenance tasks required and achieve cost savings on spares and equipment required for breakdowns. Eskom has shown their low propensity to substitute the current maintenance technologies due to the high switching costs. In the interviews with the directors, Eskom managers and supervisors have indicated the threat of other small to medium enterprises entering the contract maintenance industry. This has been created by other power stations contracting the maintenance functions to Eskom employees.
Roshcon is also a threat, as they have penetrated the contract maintenance services industry at the previously mothballed power stations which are currently returning to service. Roshcon is a subsidiary of Eskom and is therefore a preferred supplier of contract maintenance services.
3.3.5 Rivalry among existing competitors
The existing contractors at Majuba Power Station have entered into non - formal gentlemen's agreements to avoid tendering for each others contracts. Imperfect market conditions exist, with Eskom contracting some of the maintenance service work to Roshcon which is a subsidiary of Eskom. Some power stations have also contracted maintenance functions to previous employees.