Sadly, anyone who thinks South African industry is immune from the effects of stock-market and finance sector turmoil around the world is mistaken.  Even though astute government regulation effectively saved the SA banking sector from the ravages seen in the US and UK, the fact remains that our economy is largely driven by export industries – such as mining and tourism – and the prosperity of these industries is, of course, subject to what happens in offshore markets, rather than conditions here in SA.

For the SA mining sector, the impact isn’t necessarily obvious to the man in the street, but plummeting consumer confidence in Europe, the US and Asia is already driving down demand for new housing and new cars in those regions. This in turn reduces demand for building materials and automobile components – both made of steel.  European and Japanese steel mills are hurting, and some have temporarily halted production altogether.  Guess where many of these steel mills get their raw materials? South Africa!

 So, no surprise that in the last 4 months, many SA suppliers to the Asian and European steel industry have been hit by a double whammy of falling prices and falling volumes.  One scarcely has to pick up a newspaper to read about yet more production cut backs in local steel-related industries like iron ore, manganese and chrome.  These cut-backs, in turn, have ‘trickle-through’ effects on the regional economies that surround the affected industries.

Simon Davies, Principal South Africa for leading international business consultancy, Partners in Performance, says the situation is not good – and neither is it likely to improve any time soon.  “We’re already seeing major cost reduction programs from mining sector clients in the US and Australia,” he said, “and remember, we in SA have to compete with these guys, so if they’re cutting costs and we’re not…SA industry has to pedal that much harder just to keep up.”

Davies reports that not all sectors of the SA mining industry have been hit as hard as the suppliers to the global steel industry – yet.  “Export coal volumes are still holding up but prices are declining – so SA’s coal producers are probably going to feel a profit pinch at some point in the future,” he says.  The same goes for the platinum industry, where dwindling demand in the automotive industry has had a big effect on platinum mines here in SA.

So what should SA industry do?  According to Davies, the only answer for commodity producers is to cut costs. “I’m not talking about superficial economy drives like making sure the office lights get turned out at night, or buying a cheaper brand of coffee”, he says.  “If you no longer have the benefit of high prices or high production volumes to keep your unit costs down, you have to fundamentally re-think the things that really drive your cost base in the first place – things like productivity, contractors, suppliers, overheads, overtime…and the way you manage them.”

“It’s easier said than done, unfortunately.  Most companies get complacent about productivity drivers and cost discipline when times are good,” Davies said, “and they then lose the ability to manage these things tightly when times get tough.”

And times can change in the blink of an eye, leaving some companies struggling. Davies says: “There’s no point issuing a sudden cut in your budget for overtime if the Foremen who actually control overtime don’t know how to manage the factors that cause it to start with – like poor roster planning, inadequate shift license coverage, high equipment breakdowns, or laxness on absenteeism.”

In another example of poor cost-driver management, Davies points to “overheads creep” and “grade creep” where, in the good times, companies can become complacent about allowing their ratio of overhead staff to operational staff creep up, and/or about allowing the average grade (pay bracket) of overhead staff to climb.  “Fixing overheads is anything but easy if you want to do it properly,” he says.  “Correcting overhead expenses usually takes months of focus and energy if you want to avoid having costs quietly creep back up a short time later.”

That’s why many companies turn to consultants for help where cost reduction is concerned.  Davies says that his firm, Partners in Performance International, is never busier than during an economic downturn.  “I know it’s counter-intuitive,” he said, “but the smart clients know they need help and it’s easy to justify using us when the payback on our fees, in terms of bankable cost savings, can be measured in a matter of weeks.”

Davies believes the message for SA industry is clear – and literally written on the pages of the daily newspapers.  “We’re just starting to see the tip of the iceberg here,” he says.  “Anyone who isn’t seriously managing the fundamentals that drive their big-ticket costs is in for a very hard time – and just choosing a cheaper brand of coffee isn’t going to make any difference.”