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The Eastern Cape’s engineering sector could be approaching a tipping point

The Eastern Cape’s engineering sector could be approaching a tipping point

The Eastern Cape economy has previously been a textbook case for a lost agenda that most observers never recognised it as a meaningful player in the

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The Eastern Cape economy has previously been a textbook case for a lost agenda that most observers never recognised it as a meaningful player in the country’s economic future. Reports of rampant poverty, high unemployment and poor infrastructure only deepened this pessimism. But the tide could be starting to turn – and the province’s engineering sector, which is linked to its manufacturing industry, could be at the heart of this renaissance.   

At a glance, rising wages and other factors start to erode China’s, and the Asia’s, once overwhelming cost advantage as an export base to global markets, making regions like the Eastern Cape attractive future gateway for global manufacturing and engineering. Already, we are seeing increasing private and foreign direct investments (FDIs) as well as more public infrastructure spending by government across the province.

Engineering was once a key sector when South Africa needed to manufacture all her needs during the years of economic isolation. However, new priorities on government spending and major changes in global production chains led to the readjusting of the provincial sector to become a lower-tier supplier to other related industries such as in the automotive sector.  

This is not to say there has not been growth in the Eastern Cape engineering sector over the years. A conservative research shows there are more than 450 light and heavy engineering companies spread across the entire breadth of province handling anything from the manufacture of vehicle components and locomotives to overseeing the servicing and building of public infrastructures as well as other private mega investment projects.

Besides the cost factor, the local engineering sector has a comparative advantage in terms of cost, market knowledge, technology and creativity.  

“The Eastern Cape has huge engineering potential; there are some very talented engineers and some dynamic firms with the ability to do some extraordinary work,” described Andrew Young, Engineering Director at eNtsa.

eNtsa is an award-winning Technology Station of the Technology Innovation Agency (TIA), situated at the Nelson Mandela Metropolitan University (NMMU) and is recognised as a prominent research, design and technology support unit for the advanced manufacturing sector – particularly automotive.

The automotive cluster, based in Port Elizabeth and East London, dominates manufacturing in the Eastern Cape with assemblies for General Motors, VW, Ford and Mercedes Benz as well as around 304 vehicle component manufacturers, 220 vehicle frame and equipment suppliers, 192 vehicle body builders.

In 2012, automotive exports comprised 12.1% percent of South Africa’s total exports. A total of R86.9 billion in vehicles and components were shipped to 152 various countries around the globe. Over 28 000 people are directly employed in automotive manufacturing, with 65 000 employed in the component manufacturing industry.

Often easily forgotten, Transnet Rail Engineering’s (TRE’s) workshops in Uitenhage, one of the largest wagon building and refurbishment plants in Africa employing over 1500, is also a major engineering player. The plant is currently fulfilling an order for 560 salt wagons for Botswana Rail, earning the country around R420 million. In June last year, the plant also completed a US$20 million contract to Brazil.

Several other downstream engineering activities, including in machine tools, electrical machinery and electronic equipment, exist in the local manufacturing space, albeit at a smaller scale.

Young said; “The local engineering sector has the ability to generate foreign investment, create jobs and other opportunities. Manufacturing has the ability to create value rather than simply creating turnover.”

According to the Eastern Cape Socio Economic Consultative Council’s Quarterly Economic Update for the second quarter of 2013, the manufacturing sector contributed 17.6% towards GDP in the Eastern Cape for that quarter.

Key developments and opportunities within this sector

Inevitably, critical mass for the province’s engineering sector in the province will result from the miscellaneous inward investments that have had a positive impact on the sector by increasing potential market opportunities.

Government, through various waivers and tax incentives, is hoping to boost the attractiveness of the East London and Coega industrial development zones (IDZs) to global manufacturers and engineering companies.

China’s First Automobile Works (FAW) is currently building a R1 billion truck and passenger car plant at the Coega IDZ. The development itself presents significant growth opportunities for the local automotive engineering cluster.

The construction of a R400 million steel plant by AGNI-Steels (SA) in the Coega Industrial Development Zone will not only create 800 jobs, once fully operational, but will also boost the metals and engineering products exports from the province. The same goes for a R4.2 billion ferromanganese smelter that is planned for the same IDZ by Kalagadi Manganese.

Industrial gas giant, Afrox, recently had a sod turning for its new R300 million air separation unit in the Coega IDZ. The 150-ton per day plant will produce a variety of industrial gases used in the automotive, food processing and medical sectors.

Another industrial gas supplier, Air Products SA, is hoping to commission its R300 million air separation unit, also in the Coega IDZ, in the third quarter of this year.

Elitheni Coal Mine, which is situated 90km north-east of Queenstown, is also looking to continue operations after sorting out its financial woes late last.

There also appears to be some government effort to give an impetus to engineering in the province through investments and mega infrastructure developments in the energy, petrochemicals and construction sectors.

Government, through the Department of Energy, has initiated the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) as way to generate 3 725 megawatts (MW) from renewable energy sources. Several companies have been awarded licences by the department and are setting up wind and solar farms across the province – investing well over R7 billion so far.

In a move to localise technologies, a R300 million, 23 000 m2 wind turbine manufacturing plant that is being built by engineering company DCD Wind Tower is almost complete in the Coega IDZ.  

PetroSA has also signalled its intention to build a mega oil refinery, project Mthombo, in the Coega IDZ. The $70bn refinery will pump about 360,000 barrels a day and is forecast to create 27 500 direct and indirect jobs at the height of its construction and 18 000 direct and indirect jobs when it starts operating.

National power supplier, Eskom, is also looking to get its R180 billion Thuyspunt Nuclear Power project off the ground.

Last year, Water and Environmental Affairs Minister, Edna Molewa, outlined an R8 billion first phase dam and water reticulation programme for the Umzimvubu catchment area. The first phase scheme consists of a large dam at Ntabelanga and a smaller dam at Laleni, both on the Tsitsa River upstream of the Tsitsa Falls. The estimated cost of these dams and the water reticulation project is just over R8 billion in 2013.

The proposed N2 Wild Coast highway, which has been held up by court action, will link East London with Durban at 69km less than the current highway. A total of 560 km will be redeveloped with an 80 km stretch being a greenfields development between Ndwalane and Mtentu. An estimated R5.1 billion will be spent for the greenfields section, while R2.1 billion will be spent on the bridges over the Msikaba and Mtentu rivers and R1.8 billion for upgrading of the existing N2 / R61 route.

In the Buffalo City, the construction of the multi-model OEM in the East London Industrial Development Zone (ELIDZ) will add to more opportunities as seen on the construction on the current construction of the R2 billion Baywest Mall in Port Elizabeth.

Transnet intends on investing R26 billion to expand infrastructure in the Eastern Cape over the next seven years, President Jacob Zuma announced in November last year. Investment in the province’s three ports is also set to rise. Total investment in the 2014/15 financial year will be R1.55 billion spread across the three ports, with R267.5 million being spent in East London, R376.3 million in Port Elizabeth and R909.2 million at the Port of Ngqura, which is adjacent to the Coega Industrial Development Zone.

Further, in December, the provincial Department of Economic Development, Environmental Affairs and Tourism (DEDEAT) launched the two-year, R16 million, first phase of shale gas exploration across four district municipalities – the Cacadu, the Amathole, the Joe Gqabi and the Chris Hani district municipalities.

Challenges in Eastern Cape

However, the Eastern Cape engineering sector faces several challenges that could derail growth.

Engineering is a highly skills and technologically intensive activity. Across South Africa, engineering is suffering from a chronic shortage of skills. Quoting a 2012 study, of the 511 564 enrolments in engineering disciplines from 1998 to 2010, only 70 475 graduated. Of these, 29 280 of the 183 529 enrolled in university engineering disciplines graduated – 16% compared with the international average of 25%.

Other social factors, such as the HIV/AIDS pandemic and the migration of technical skills, have also had a negative impact on the industry. 

“Challenges facing this industry also include the cost of raw materials and low productivity which makes our production costs high. Infrastructure development and support to maintain services to support industry by local government and metro’s are perceived to be poor by external stakeholders,” said Professor Danie Hattingh, Director at eNtsa.

Young added that “a labour market with a pre-disposition to strike will also influence success in this sector.”

Funding and support is also a major challenge for the smaller firms which struggle to gain access to the large automotive, construction and energy contracts – which are historically too large for one company to handle alone.

The road ahead

Prof Nottingh and Young urged government to pursue favourable regulatory policies and growth in manufacturing which would further propel the engineering sector’s growth. These policies include incentive programs and build better infrastructure as well as minimise incidents corruption as ways to ensure the competitiveness of the local engineering sector on the global stge.

Young said; “We are lucky to be situated close to the sea with a good harbour, I think our products and engineering skills, including project management, can be easily exported to supply the expanding Oil, Gas and Mining industries in Africa. I think Africa is the next big thing and the Eastern Cape is conveniently positioned to be part of it.”

Stakeholder partnerships can also have an immense impact on the engineering sector as a whole. eNtsa, an example, is well-equipped and has a number of highly skilled engineers who are available to support local industry with product development and design, advanced engineering support at very competitive rates.

The local industry can also take advantage and derive revenues from newer services and from newer geographies with Big Data, Cloud, M2M and Internet of Things, which are becoming a reality. These activities can be cheaply outsourced to the Eastern Cape.

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