South Africa’s trailer market: The land in between

From an investment perspective, the African continent is somewhat of a ‘wait-and-see’ case many in the industry have been observing closely for quite some time now without taking considerable action. But while a lot of international businesses still bypass the up-and-coming region due to economic or political instability, South Africa has always been an exception.

The reason being that the country has proven able to reinvent itself politically and economically time and again, even though it had to face some unique and often divisive social and economic challenges along the way. 

In fact, it’s only been a year or two since people started adding an ‘S’ to the end of the ‘BRIC’ acronym to include South Africa in the illustrious circle comprising Brazil, Russia, India and China as well. Some also named South Africa as part of the ‘young and wild’ CIVETS group – including Colombia, Indonesia, Vietnam, Egypt and Turkey.

So, how come Africa’s poster child is now on the verge of collapsing, as many a media outlet has it? According to The Times of South Africa, the main problem is political procrastination, especially regarding the debate on shale gas fracking.

Fracking, or hydraulic fracturing, is the process of extracting natural gas from shale rock layers deep within the earth that used to be unreachable with conventional technologies by creating ‘cracks’ in the ground to release the gas into wells on the surface. While there is hardly a more controversial topic on the current political agenda, the stimulating effect of fracking on the transport equipment industry is undisputed. In fact, it has been visible in the US last year, when it gave flatbed, liquid tank and bulk tank production a significant boost.

But South Africa is still undecided whether or not to allow companies to burrow deep into the ground to extract shale gas. “With no decision in sight, investors are likely to move on,” The Times wrote in July, indicating that, “though the Government needs to be cautious and act within the parameters of the law, it also needs to be bold and move with urgency.”

Given the fracking example, it is hardly surprising that the African National Congress (ANC), South Africa's governing political party, has recently called on President Jacob Zuma to consider establishing a task team to take action and look into the nation’s sluggish economy.

If it is to be implemented, improving South Africa’s relationship with the EU will be high on the agenda of the task force. About 77 per cent of foreign direct investment in South Africa is coming from the EU, making it South Africa’s single largest trading partner. Total two-way trade has grown by about 128 per cent since 2004, largely due to a bilateral Trade, Development and Co-operation Agreement (TDCA) finalised in 2000. But according to business journalist John Maré, there has been “much frustration and turbulence” on a political level since the EU and sub-Saharan Africa re-established economic negotiations in 2007, with the EU pushing for an October 2014 deadline.

“The changing scenario in North Africa opens new doors of opportunity for trans-Mediterranean relations, as has happened for intra-African relations, but comes with new fears about security and instability,” he says. “This should give both the EU and sub-Saharan Africa yet more reasons for appreciating and building on existing traditional ties, where the role of business to drive sustainable development in Africa is an even more pressing necessity than before.”

Just as the fracking debate, however, the negotiation of a new economic partnership agreement (EPA) is still in limbo. On top of that, stakeholders in the sector face problems linked to the country’s road infrastructure and government service delivery, as well as a lack of policies and the implementation of these.

One key issue in that context is the transport industry’s growing cost problem. A recent study found that the contribution of transport costs to overall logistics costs in 2012 is pinned at 61 per cent – the highest it has been in the past nine years and far higher than the global average.

And with 70.1 per cent of South Africa’s inland tonne-km on road, challenges and cost escalations in the road freight sector are likely to affect all South Africans – trailer manufacturing businesses and consumers alike. “Reducing the relatively high cost of logistics in Africa, approximately double the equivalent costs in Europe for containerised freight, [therefore] remains a major challenge,” says Paul Nordengen, President of the International Forum for Road Transport Technology (IFRTT) and Research Group Leader at the Council for Scientific and Industrial Research (CSIR) in South Africa.

In the wake of that cost crisis, there has been a change in the long-term downward trend of rail freight market share, effectively increasing competition for road transport and related manufacturing businesses. “Albeit small – less than one per cent – there has been a slight but consistent increase in rail market share since 2010, both in terms of tonnes and tonne-km,” says Nordengen.

In this vein, the most recent State of Logistics survey for South Africa was launched in June. According to the CSIR survey, “South Africa must make great strides in addressing critical issues relating to the road freight sector” to maintain competitive and end the current econo-political deadlock.

Unfortunately, it’s not all doom and gloom at the Cape of Good Hope. Moody's maintained the country's sovereign debt rating of Baa1 in July, causing business analysts across the country to comment that both Mandela and the South African economy in general are still holding on, possibly even bouncing back stronger than before.

Underpinning that verdict, inland freight volumes have risen across the board in 2011 (+4.9 per cent in tonnes, +10.1 per cent in tonne-km) and 2012 (+1.8 per cent in tonnes, +2.1 per cent in tonne-km) according to the CSIR survey.

But while the trailer building community should be happy about such data, the potential effects of deteriorating road conditions in South Africa are likely to cause the industry a headache. Rising tyre, maintenance and repair costs could make transport companies opt for lower capital expenditure and short-term solutions like refurbishments – effectively limiting cash flow and delaying order activity on the manufacturing side.

As a result, the trailer manufacturing industry is now under growing pressure to provide sturdy, yet cost-effective transport solutions for the young nation. But what is widely regarded as a challenge could also become an opportunity for savvy businesses that are willing to think outside the box. For example, cargo imbalances still result in millions wasted on empty trips in South Africa, so versatile, multi-purpose equipment could fill a yawning gap in the market.

Value for money is key in that context, according to local Focus journalist Claire Rencken. “The trailer industry, much like most others, is changing with the times. And times are tough, so the solutions have to be too,” she says – referring to Paramount Trailers, an Alberton-based manufacturing business that chose to diversify to weather the storm.

Managing Director Warren Marques told Rencken that a current trend in the industry is towards more ‘multi-purpose’ trailers. “The current focus is on manufacturing trailers which can be used for a wider range of applications, thereby providing the customer with greater variety of use. Paramount is currently involved in the research and development of several new products which we hope to introduce to the market before the end of the year,” he told Focus.

Focus is also naming Serco as an example. Like Paramount, the refrigeration equipment specialist has identified the need to expand its product offering, albeit on the component/ technology side. “In March it bought a 49 per cent stake in specialist technology company Ikhaya Automation. The company produces temperature monitoring systems for refrigerated transport, distribution centres, cold rooms, chillers, freezers and pharmaceutical laboratories,” according to Rencken.

Despite the successful diversification strategy on both product and service level, the industry is facing a somewhat two-sided development, as highly specialised equipment is on the rise as well. 

As a result, manufacturing businesses have to cover a very broad product spectrum from multi-purpose equipment through to fit-for-purpose gear. “We have been able to approach customers from various industries and offer them a variety of products to meet their requirements across numerous trailer type,” Marques said. “Meeting our customers’ needs is important so, besides manufacturing standard trailers, we build trailers to fit the specific needs of customers in terms of the type of trailer and the load they will be carrying.”

That specialisation trend is not only driven by the classic trailer clientele, for example the car transportation industry, but also by more “adventurous” haulage firms that are looking for new, more efficient ways to transport freight. Under the Performance-Based Standards (PBS) research programme, which is also being implemented in Australia at the moment, South Africa is trialling ‘smart’ truck and trailer combinations that are able to carry more load per run without compromising on road safety.

Paul Nordengen presented the concept at the HVTT symposium in Sweden last year, revealing that the PBS programme is still in its infancy. “[In the beginning] we knew we needed to design, manufacture and operate a PBS demonstration vehicle in order to gain practical experience in the smart vehicle approach and to quantify and evaluate the potential infrastructure preservation, safety and productivity benefits for road freight transport,” he told the audience in Stockholm.

According to Nordengen, the positive performance of that demo truck has now resulted in the approval of 56* additional permits for PBS-style vehicles in the forestry segment, some of which now incorporate additional modifications that were made to optimise performance even more. “Initial monitoring of these vehicles and their respective baseline vehicles indicate that although longer and heavier, PBS vehicles are showing improved safety performance, improved productivity and a reduction in carbon footprint, while at the same time reducing road wear per tonne of payload and not compromising the safety of bridge structures, for instance.”

Speaking of specialised transport equipment, there is no avoiding mining equipment in South Africa. The country is one of the world’s leading mining and mineral processors, with roughly three-quarters of the world’s platinum production and a significant share of others including palladium, gold, manganese and diamonds, according to Johan Meyer of Franklin Templeton Investments in Cape Town.

Strikes in the mining industry have been receiving a lot of press coverage recently, but the government now managed to stabilize the chaos through an agreement compromise between mining firms and unions. As a result, trailer manufacturers from around the globe are currently trying to secure a slice of the pie, and the renowned Bauma trade show will also come to South Africa for the first time in 2013.

Elaine Crewe, Chief Executive Officer of event company MMI South Africa, says that, “as investors and businesses look towards developing countries for new growth, the mining and construction industries are set to profit from this move.

“The need for infrastructure presents a growing opportunity for those present in these sectors to provide services and products throughout developing countries and benefit from this burgeoning growth. The growing pool of international entrants into the African market is a telling sign of just how important Africa is becoming and the need for specialised players in the industry, we trust that Bauma Africa will highlight new products in these sectors.”

Australian brand Azmeb, for instance, is currently trying to get a foothold in the market. Part of the MaxiTrans conglomerate, the business is specialised in sturdy side-tippers and has a solid reputation for finding robust transport solutions designed to tip anything from blast rock to concentrate.

The positive development in the mining sector, especially the slowing of labour unrest, is a welcome change from a glut of negative news, such as escalating electricity, labour and raw material costs as well as growing pressure through imported trailer kits from the Far East. According to steel supplier Robor Baldwins, those imports negatively impact demand for locally built equipment – a development that is also affecting the component and building materials industry.

“Under these circumstances, it is difficult to stay competitive with imports from India and the Far East. These foreign manufacturers have infiltrated African markets and are able to export products such as complete trailer kits cheaper than what South African manufacturers can produce them,” Robor Baldwins MD Andrew Winter told local magazine Engineering News last November.

But South Africa has proven that it can handle both social and economic turmoil, so chances are it will take on that new challenge wholeheartedly as well. Plus, the country’s wealth in natural resources, low-cost labour and a rapidly growing consumer market in combination with the weakening of the Rand make for immense potential and business opportunities.

“While significant social and economic problems still persist today, I believe South Africa and its people appear potentially well positioned for greater long-term prosperity,” Johan Meyer of Franklin Templeton Investments in Cape Town said in a recent interview.

And Mandela? The nation’s most prolific personality celebrated his 95th birthday in a hospital in Pretoria last month, and was described as in 'steadily improving' condition by his family. And if you believe in the global media echo, that’s a good sign for the economy too.

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