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ITWeb investigates: SA firm to buck trend with local devices

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CZ Electronics CEO Sagran Pillay with one of the semi-assembled tablets that will go into production next month.
CZ Electronics CEO Sagran Pillay with one of the semi-assembled tablets that will go into production next month.

Local electronics manufacturer CZ Electronics has shrugged off allegations of impropriety and shareholder problems, as it gears up to begin delivering locally-produced mobile handsets and tablets from next month.

The company, situated in Boksburg - on Johannesburg's East Rand - initially announced plans to bring home-grown devices to market as far back as 2012, but has since seen some delays in its planned rollout of the local devices. However, CEO Sagran Pillay says the company is finally ready to unveil several smartphones, tablets and feature phones from the end of March or the beginning of April.

The devices will be marketed under the Mint Mobile brand, after Mint Electronics - a subsidiary of Limpopo-based mining and energy company Sekoko Holdings - acquired a controlling 75% stake in CZ Electronics. Mint Electronics is headed up by former South African Revenue Service (SARS) commissioner Oupa Magashula.

Magashula resigned from SARS in July 2013 following an investigation into allegations of impropriety against him. Then finance minister Pravin Gordhan ordered the investigation into Magashula, after claims emerged he had offered a woman employment at SARS, without following procedure.

CZ Electronics initially announced it would partner with Seemahale Telecoms to produce the devices locally, but subsequently named Mint Electronics as its new partner in May last year. The move proved controversial at the time, as Seemahale Telecoms chairperson Thabo Lehlokoe said he had not been informed of the shareholder change, adding he learned about it through the media.

Lehlokoe noted he would take legal action and stated he was in talks with lawyers to resolve the situation, as he felt entitled to compensation for the work he has done marketing the handsets. This prompted industry speculation that the venture was under threat and that plans for locally manufactured devices would never come to fruition.

However, Pillay says there is nothing sinister about the shareholder change. He notes there were several performance-related preconditions Seemahale Telecoms had to meet in order to earn a 51% stake in CZ Electronics. "But the company didn't do so within the stipulated time period, so the agreement lapsed and we sought a new equity partner. It's as simple as that, and it never threatened to derail the venture."

Breaking the rules?

A second and more serious allegation levelled against CZ Electronics is that the company has no intention of manufacturing its devices locally, but plans to import complete units from China, which it would then market as locally produced devices.

It appears a competitor of CZ Electronics approached several publications with allegations the company is claiming to produce devices locally as a way of getting around having to pay the higher ad valorem tariff.

The Boksburg-based company employs more than 300 people, but expects to double its workforce once its mobile devices hit the market.
The Boksburg-based company employs more than 300 people, but expects to double its workforce once its mobile devices hit the market.

The ad valorem tariff is a tax levied on imports that is specified as a percentage of the value of the goods or service being taxed. This is a form of trade barrier intended to restrict imports into a country to protect the local market. Unlike non-tariff barriers and quotas, which increase prices and thus revenue received by domestic producers, an ad valorem tariff generates revenue for government.

According to SARS, ad valorem products include motor vehicles, electronic equipment, cosmetics, perfumeries and other products generally regarded as "luxury items", and are subject to the payment of ad valorem excise duty if used within the Southern African Customs Union.

Pillay says there is absolutely no truth to the allegations. "We have not circumvented any rules and we have no intention of doing so. I don't know why these allegations keep cropping up, but perhaps it is because we have a history of being successful - we have strong technically-minded directors and a plant that can compete with the best in the world.

"Perhaps it's because people don't really believe we have the factory and capabilities to actually produce devices locally."

Other ventures

He explains the 3 000m^2 factory currently employs more than 300 people and has been producing printed circuit boards for more than 10 years. It is also manufacturing electricity meters, and the mobile device venture would see it double its workforce to increase its manufacturing capacity.

CZ Electronics is also one of the 17 companies that submitted bids for the manufacture and supply of set-top boxes for the government's broadcast digital migration project. The tender closed in January and successful bidders are expected to be announced by the end of this month, or the beginning of next month.

Pillay says the company is in the process of obtaining approvals from the Independent Communications Authority of SA and from Vodacom, MTN, Cell C and Telkom Mobile ahead of its mobile device launch.

"We have already concluded technical agreements with Qualcomm, Intel, Google and Microsoft," he says, explaining the devices will be available as Android and Windows versions. "We will be doing software customisation locally, as well as producing local apps and cloud services," he says, adding the products will have a GSM certification from Google and Microsoft.

I don't know why these allegations keep cropping up, but perhaps it is because we have a history of being successful.

CZ Electronics CEO Sagran Pillay

Pillay explains the initial delay, after producing a prototype in 2012, was costing. "We found the device was simply too expensive, so it was sent back to the drawing board."

The new prototype has gained widespread acceptance among local retailers, he says, adding production will be done via dual-stage process, starting with semi-knocked-down units - where components will be imported from China and assembled locally, to completely knocked-down units, where all components will be manufactured locally. This stage will be reached in September, he notes.

In addition, he says, CZ Electronics has a complete supply chain - from manufacture to distribution, which he believes gives the company an edge over its competitors.

Bucking the trend

The local electronics industry has seen a mixed level of success in the past, with ICT veteran Adrian Schofield stating previously there is a limited local industry with a proven record - Altech (UEC) being the notable example.

"It's not that easy to set up a responsive production line that can compete with the factories in China. Also, the local companies are more interested in 'taking the cream' than creating jobs - witness the Namec debacle over set-top box manufacture - and they haven't even started yet."

CZ Electronics fast facts:

* The company was founded in 2002, following the purchase of the production assets of the Alcatel factory, in Boksburg, on Johannesburg's East Rand.
* CZ Electronics is privately-held and is led by CEO Sagran Pillay and COO Rob Bruggeman.
* Former SARS commissioner Oupa Magashula holds a 75% stake in the company, via his company Mint Mobile.
* The company occupies 3 000m2 of factory space, which houses all functions from sales and marketing, to procurement, logistics, manufacture, test, final assembly, quality control and transport.
* More than 300 people are employed by CZ Electronics.
* The company expects to start producing 1 000 mobile devices per day, or 20 000 units a month.

Schofield also argues the local electronics manufacturing space does not really offer new entrants many opportunities to compete meaningfully with global players, as "we do not have the volumes to reach critical mass and our workforce is unlikely to compete with the Far East".

He believes government has not done enough to stimulate a local industry, saying the state's opportunity to kick-start this sector would have been linked to set-top box manufacturing, where commercially viable quantities of a standard configuration would have made for cost-competitive opportunities for local suppliers.

"I guess there is a certain amount of local manufacture for defence purposes, but that's not so easy to quantify. Think what government could do if they specified a local tablet for education purposes instead of relying on the iPad initiative."

World Wide Worx MD Arthur Goldstuck says the reason local manufacturers can't get their act together is that there isn't really a stage on which they can perform. "They are competing with two massive global forces: giant brands that spend billions on research and development and as much on marketing; and vast factories in the East producing millions of devices to order, as well as speculatively."

Goldstuck says it is probably rash to invest in a small local factory to produce a limited range of devices that will always be outdated and overpriced, compared to what is continually evolving across a wide range of formats and always coming down in price.

"It's only justifiable if you've won large contracts to produce the devices, but even then you won't be very competitive."

In terms of local manufacturers being able to compete on a global scale, Goldstuck argues there is little scope for competing in this sub-sector of electronics, since products are almost standard across the globe and massive economies of scale have kicked in.

It's not that easy to set up a responsive production line that can compete with the factories in China.

ICT veteran Adrian Schofield
"Local manufacture succeeds when the products have specific localised requirements, like set-top boxes and decoders; where they offer true innovation that meets a need, and where they have access to global markets. It's not a viable environment for start-ups, except in a limited context."

However, Pillay is confident CZ Electronics will be able to buck the trend. "While we are not expecting to compete with the Samsungs of this world, we are looking to take between 5% and 15% of the local affordable phone market."

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