ENERGY CRISIS AFFECTING MANUFACTURERS OF HOME APPLIANCES
THERE IS A NEED TO CHANGE THE BUSINESS MODEL FOR OPTIMIZING COST OF PRODUCTION
SHABBIR H. KAZMI
Sep 3 - 9, 2012
One may wonder how energy crisis is affecting home appliances manufacturers and users. It is a fact that both the users and manufacturers are victim of energy crisis. Production of manufacturers of home appliances is badly affected to announced and unannounced load shedding. And consumers are suffering because even when there is electricity it is not free from surges, which is responsible for the malfunctioning of the appliances. However, manufacturers and vendors of UPS and stabilizers are doing thriving business. Beneficiaries also include manufacturers and vendors of candles and lanterns. Other beneficiaries are petrol pumps and generator dealers.
Manufacturers of home appliances can be divided into two major categories, first, those which operate under organized and second those which are clubbed under unorganized sector. While the working conditions for entities operation under unorganized sector are often not very favorable, but these do managed to stay out of the clutches of tax collectors. This situation is not unique in Pakistan because 'cottage industries' in almost all the developing countries face similar situation. However, some of the critics say that manufacturers operating in unorganized sector are better off.
Like all other small manufacturer, producers of home appliances also suffer from lack of financing and skilled workers. Since most of the entities fall under the category of owner cum operators they have to depend on the informal sector for meeting their financing requirements. The only problem is that even after decades these remain micro-enterprises and never get the chance to come out of their orbit. Having said that it is necessary to mention that there are many success stories which are not brought to limelight, may be because the owners don't wish to be known. Partly they are right because as soon as it is made public that someone is making earning good money, he/she becomes hostage of politicians, booty collectors and tax collectors.
One of the problems being faced by light engineering and manufacturers of domestic appliances is electricity outages. Either it is announced or unannounced load shedding these manufacturers suffer as there are no standby generation facilities. One wonders why these manufacturers are not locating their facilities to 'export processing zones, which offer uninterrupted supply of electricity at affordable cost.
It is also evident that now using in-house generation is more beneficial as compared to depending of public sector distribution companies. The unit cost may be slightly higher but it saves from loss of hundred of man hours and production. Many of the larger entities have established in-house power generation facilities. One of the classical examples is Karachi. According to sector experts electricity demand in KESC's franchised area now exceeds 5,000MW, whereas the utility find it difficult to supply even 2,500MW. This has happened only because many of the large industrial units are no longer depended on KESC.
Another serious problem is that many of the smaller manufactures buy raw material from the local suppliers, which cost them slightly more. If they have 'bonded warehouses' they could delay payment of duties till the finished products leave the factories. As stated earlier, may be locating home appliances manufacturing units provides a solution. However, appropriate amendments have to be made in the rules so that units located in export processing zones could sell their products to tariff areas more conveniently.
Another problem facing smaller units is non-availability of skilled labor. While Pakistan has succeeded in establishing dozens of business schools, there is acute shortage of vocational training centers. Most of the technicians have received training from an 'ustad' who has also learnt tricks of the trade through trial and error. Be it ironsmiths or operators of casting machines etc most of them are not only uneducated but have never received formal training. The result is high wastage, redoing and failure to achieve economy of scale.
For a considerably long time, government has been talking about 'cluster development' but little success has been achieved. Some of the critics say that if the government can't help, private sector must work on self help basis. Lately, one of the textile units operating in Karachi has started offering smaller facilities for the manufacturers of made ups. The owners guarantee uninterrupted supply of electricity round the clock. Those who could not install their own standby generation facilities have moved here. Usually, such a facility is called 'compound' and the added advantage is that dealers of garments machines and accessory suppliers have established their outlets there. The added advantage is that these outlets remain open round the clock and no one has to go out of the compound if ant thing is required. The second group of clusters has been developed by goldsmiths casting gold as well as imitation jewellery.
One may wonder if concept of cluster can be a viable option in case of domestic appliances or not. However, the concept of outsourcing has got popular in Karachi. Now many of the units belonging to different sectors can be classified as 'assembly units' rather than manufacturing facilities. Most of the components are supplied by entities specializing in one or a few products. For example one manufacturer of television casing serves a number of assemblers. There are suppliers of control panels, picture tubes etc. Therefore, effectively at an assembly unit components brought in CKD or SKD form are put together.
The advantages of this type of business model is achieving economy of scale, containing wastages and above all specialization which helps in reducing cost per unit. This could be best understood if one looks at motorcycle assembly units. At present more than 50 brands of motor cycles are sold in Karachi, most of these are assembled but the owner of brand. Some of the manufacturers have even gone a few steps ahead. Now brand owner could 'outsource' the job where products are manufactured by another entity and brand owner only focus of marketing. It is believed that outsourcing is also becoming popular in home appliance industry, which offers win win situation for all.