How a small factory in Port Elizabeth conquered the world

Rhodes>Perspective>2013 Archive

Across the lake from the Nelson Mandela Bay Stadium in Port Elizabeth’s North End stands a factory that proves the conventional wisdom about South African manufacturing wrong.

The odds are stacked against the Eastern Cape. Years of government neglect have resulted in schools collapsing, the public health system plumbing the depths and roads deteriorating.

An audit report last year showed that R9bn earmarked for education over the past nine years could not be accounted for. That is a billion a year “lost” by officials in South Africa’s least-competent bureaucracy.

None of this deterred Stephen Saad, CEO and a co-founder of the Aspen group, from creating a globally competitive business.

By going against the grain, he has over 15 years built one of the world’s premier pharmaceutical manufacturing facilities in the heart of Port Elizabeth. In 1998, Aspen listed at R2.40. These days it trades around R190, giving it a market capitalisation of more than R80bn. This makes it one of South Africa’s top 40 companies by size.

You would expect to find Mr Saad presiding over his company’s global production, distribution and sales operations from one of Sandton’s gleaming towers. Instead, he works from a modest two-storey block in an office park in Umhlanga Ridge, north of the Durban CBD.

If you put aside the exclusive address, it is the sort of office that a start-up desktop publishing business might choose after landing its first big contract.

 In the head office boardroom, Mr Saad is quick to smile, quick with a joke and easy to get along with. But the facade conceals a driven, even predatory mindset. Where others see obstacles, Mr Saad sees competitive advantage and opportunity.

 “If you look at the world, if you look at Japan — it’s got nothing. It’s a tiny, resourceless place with too many people on it. If you look at Africa with all its resources and its size — 20% of the world’s land and 15% of its population — do we think we can’t compete with them?

“You’ve got to be very clear in life about where you are going. If you want to lead people, you need a vision. People need to know there is hope. But to have that vision, you’ve got to face your reality. You’ve got to say: ‘I’ve actually got no skills in South Africa, so what am I going to do? Do I give up or do I develop the skills?’” he said.

A graduate of Durban High School and the then University of Natal, Mr Saad trained as a chartered accountant. He entered the pharmaceutical business through Quickmed and began a journey of restless acquisition and expansion. Quickmed merged with Covan to form Zurich, which was sold for R75m in 1993.

He served out his restraint-of-trade period by transforming the lossmaking Varsity College. It sold for R100m. Then Mr Saad returned to pharmaceuticals with the launch of a new company.

He wanted to give it a name that spoke of the future. Mr Saad liked the association that his old company, Zurich, had with snow and skiing. He wanted to bring the same fresh, clean image to his new company. He decided to call it Aspen.

His first move was to buy the moribund SA Druggists business for R2.4bn in 1999, a move he describes as “the biggest risk we ever took”. The makers of the Lennon range of homely remedies, it was a dinosaur of the apartheid era.

The traditional saw-tooth roof of the Lennon factory still stands on the Aspen precinct in Nelson Mandela Bay, a reminder of more Dickensian times when production took place using antiquated equipment for a small local market.

It is dwarfed by two new state-of-the-art facilities, known to the Aspen management as Unit One and Unit Two, which were constructed to take Aspen from small local producer to fierce global competitor. Between them, they produce 10 billion tablets a year for the world market.

Both units meet the highest global production standards. In addition to accreditation by the local Medicines Control Council (MCC), it has been approved by the US Food and Drug Administration, the UK medicines control authorities and a raft of other global bodies.

The tablets and medicines Aspen produces will be sold in 150 countries across the globe.

How Port Elizabeth came to be home to one of the world’s premier drug-manufacturing facilities is a story Mr Saad relishes telling.

After acquiring SA Druggists, it was decision time. “What we inherited was something so antiquated and out of date that it would battle to pass an MCC inspection.”

The possibility of renaming the group after the Lennon line of products was tossed around and rejected with what can only be described as “Durban boykie logic”. In the post-communist world, the association with “Lenin” was old-fashioned and negative, Mr Saad said with a chuckle.

The real challenge was how to make Aspen globally competitive while building a reputation for quality, a non-negotiable in the pharmaceutical industry. Though it was possible to produce in South Africa at 20% to 30% cheaper than in Europe, the real threat came from the East.

Mr Saad made regular trips to India, visiting Hyderabad, Delhi and Bangalore. The numbers were intimidating. “It’s quite daunting at first when people say they make tablets at X dollars a thousand and I know I can’t even turn my machines on for that.”

The Indians were manufacturing at $3 or $4 a thousand and packing for an additional $3 or $4 a thousand. Mr Saad pointed out a little-known fact about pharmaceuticals: the packaging — blister packs, inserts, boxes and so on — costs about the same as making the tablets themselves.

“You’ve got to put a tablet into a blister pack, you’ve then got to seal that blister pack, you’ve then got to put a package insert around it, then you’ve got to put it in a box. And that’s where all the expensive machinery is.”

By contrast, making tablets is relatively simple: “You take a powder, you wet it, you dry it, you compress it.”

“When we compared ourselves with Asia, we were more than twice as expensive. It was a real, real problem for us. We had to come up with a model. It’s no use being half competitive — you don’t want to be stuck in no-man’s land.”

The answer lay in volume — Mr Saad did the maths. A facility scaled up to produce a billion tablets would still not be competitive. “We needed 10-billion tablets. At five billion or six billion, we break even. To do that, you had to mechanise, you had to build for much more capacity than you had,” he said.

Unit One and then later Unit Two were built with the capacity to grow rapidly. “We built a very big building. We put in one machine, another machine ...”

The genius of it was that the costs — of the buildings, of the installation of air conditioning and of the basic machinery — were sunk up front. After that, new lines could be introduced based on demand without requiring fresh infrastructure.

The end result was a highly mechanised and flexible facility that Aspen has been able to constantly expand. “We are still adding machines as we speak — each time we add another machine with seven operators. It’s not hugely labour-intensive any more.”

To accomplish this, Aspen needed to develop an organisation that could jump through the many hoops to meet stringent quality expectations, but remain agile and adaptive.

Mr Saad counts leadership as Aspen’s primary resource. “And,” he added, “there is a very big difference between management and leadership. Leadership means you have to roll up your sleeves and work.”

He paused. “I’m going to say something very controversial here. Corporate South Africa is just a huge disappointment to me. I think corporate South Africa is hugely overpaid. If you’ve got to run a restaurant to make a million bucks and these guys are making R20m — I’d like to see them run 20 restaurants successfully before they ask for the R20m.”

He cannot hide his contempt for bureaucracy. “Take our factory of 10-billion tablets. To compete with us, a multinational will have 10 factories with a billion tablets from each, split across all sorts of geographies. They will have regional managers, managers of the regional managers at central and a huge head office structure.”

Mr Saad’s disdain for corporate management comes from his time working the street. “I started from nothing — I’ve dealt with entrepreneurs, guys who trade, guys who sell bottles, guys who sell cardboard, and I’ve always been impressed by their level of entrepreneurship. The way they trade, they know their businesses and they feel passion.”

General manager Chris Stubbs leads the team managing Aspen’s Unit One and Unit Two facilities. Sitting with his leadership team in his very ordinary office on the factory premises, he projected an intensity which seems to infect those around him.

The production facility succeeds, he said, because managers work together. “We just don’t fight.”

Seated around the table were key members of his team: operations manager Branson Bosman, quality assurance manager Karien Dutton and demand and operations planning manager Janine Mauritz. It is their job to align factory output with the constantly changing demand for new medicines. In his office, bureaucracy is a swear word. “There’s no hifalutin MBA quadrant analysis. We do what’s in front of our face,” said Stubbs.

“I can’t run a structure out of power, I have to run it as a collective. Inside Aspen, while there is respect for authority, there is no respect for structure,” he said.

Later he points out that at the factory, there is no boardroom and, he adds, “there is no executive dining room — bring your sarmies”.

There is an acute awareness of the fierce competition they face. Each manager works towards defined targets, which they know as “the number” — the point at which their output meets or exceeds that required to stay ahead of the competition.

“The philosophy here at Aspen is: get the job done,” said Mr Bosman, who is disarmingly young for someone charged with running a major industrial operation. Stubbs added quickly “and don’t wait for a medal”.

What Mr Stubbs strives for is “getting a consistent drumbeat going”.

Operational since 2004, Unit One was purpose-built to produce tablets according to the drumbeat with the help of gravity.

On the building’s top floor, the powdered ingredients of the drugs are poured into huge stainless-steel containers, which are mated to steel-lined holes through to a lower level. There they are mixed with other powders, wet and transformed into granules before going through to the next floor, where they are compressed into tablets. From there they are moved to the packaging facility. It operates 24 hours a day, using three shifts.

Between each floor is a “hidden” floor where the heavy technology to maintain air purity and temperature and to mix the powder is housed. It is accessible only from the outside to keep the sterile production facility away from the tramping boots of maintenance workers. On the morning that I visited, the night’s output of 17-million tablets wa s awaiting transport from the facility.

The staff who run this hi-tech operation were locally recruited. They have to have at least a matric qualification, and other jobs require technikon or university certificates. To fill the gaps in education, Aspen embarks on intensive on-the-job training.

Mr Saad said the quality of graduates was declining. “There was always a gap between theory and the real world. What we are finding is that the gap is bigger than in the past. There are guys who can’t even put the machine on. They don’t even know where the on-button is.”

What the staff lack in high-level skills they make up for in critical thinking. “That’s where South Africa is very strong — the ability to make a plan,” said Mr Stubbs.

He encourages creativity at the factory. “They are not human robots. Eastern Cape people want constant improvement and change. There’s a lot of creative passion.”

Aspen’s level of technical competence has risen dramatically. Mr Stubbs recalled that managers used to attend international conferences with wide eyes. “Most of our managers hadn’t been to Joburg, never mind London.”

“It’s not an arrogance, but we don’t buk (bow) any more,” he said.

South African workers are often described as unproductive. It is something that annoys Mr Saad. “I think there is more of a problem with South African management than with South African labour.”

In his experience, workers, “if treated properly and managed properly”, can radically improve their productivity.

“There are plenty of ways of improving productivity other than asking people to work harder — improved mechanisation, improved processes. Engineers need to be thinking and then you need to manage the whole chain to improve productivity,” he said.

When Mr Saad bought the old SA Druggists operation, his first meeting was with the trade union representative. It was an eye-opener.

“He said something to me which I will never, ever forget, because it was so foreign to me. He said: ‘How could I possibly ask the workers to be more productive? If they are twice as productive, you will need half as many jobs.’”

Mr Saad could not duck the reality, telling him: “Yes, there will be job losses, but if we get it right, we will increase and grow our jobs.” If his plan worked, workers who were laid off would return to a more successful company. And, he promised, workers would become shareholders.

Workers were given shares when they were priced at R4 each. Their value has grown 50 times. When the share hit R30, the union made a wise decision, using its provident fund to buy more shares. “The share price went up, so the provident fund went up and they had this huge equity interest. They’ve got billions in the company.”

The constant focus on productivity has led to a doubling of the number of employees. And, said Mr Saad, they are well paid, somewhere between the high pay of Europe and the low pay of Asia. “The problem with low-cost labour is that it makes you inefficient, no matter where you are,” he said.

His state-of-the-art factory in place, Mr Saad’s next battle was to find a market for the 10 billion tablets a year needed to be globally competitive. Aspen had to build a global market for “generics” — medicines made using expired patents, which suffered from a bad reputation with consumers. “You couldn’t get into private hospitals — the specialists just wouldn’t use your product,” Mr Saad recalled.

To fill the manufacturing capacity, Aspen began acquiring brands. Its competitive production costs offered multinationals such as GlaxoSmithKline an opportunity to extend the life of some of their products.

“Our production was so good here that we could buy products, reduce the cost of goods, increase the competitiveness of the product. We were able to extend product life cycles — even grow products that were previously dying,” Mr Saad said.

The breakthrough came when Aspen began manufacturing in co-operation with global pharmaceutical companies. The ace up its sleeve was its investment in building a facility approved by the US Food and Drug Administration.

When the US decided to invest billions in rolling out Aids drugs under its president’s Emergency Plan for Aids Relief — known as Pepfar — Aspen was able to offer cost-effective production located in one of the countries most profoundly affected by the epidemic.

“That changed the perception of the business and it really drove our business growth in South Africa. We could go in to specialists and they could feel comfortable using our products. We became a one-stop shop,” said Mr Saad.

By 2006, Aspen had become the biggest supplier of antiretroviral drugs in Africa, concluding distribution deals with Merck, Sharp & Dohme, Bristol Myers Squibb, Roche and Tibotec.

“We are globally competitive with Asia. We are right up there. Multinationals see this — ‘Gee, what’s Aspen doing, it’s worth partnering them.’” Success becomes self-fulfilling,” said Mr Saad.

After buying and turning around the Australian drug company Sigma, Aspen was able to brag that the name of one of its products was written on one in five scripts in Australia, second only to South Africa. At home, one in four scripts is for an Aspen product.

Getting Australian doctors to give his products a hearing was a battle. Then came a stroke of genius — multinational companies were forcing their reps to retire at 60.

Aspen hired the retired reps and suddenly the company had a way into surgeries across Australia. Mr Saad explained the logic. “Now you tell me, no matter how pretty the 19-year-old rep is — who are you as the doctor going to see first?”

Mr Saad’s approach is relentless expansion. Aspen is now involved in talks with the global giant Merck, which Mr Saad was reluctant to comment on because of a cautionary notice. But the same approach of analysing “detail, detail, detail” is being taken.

He has learnt something else from his dealings with Brazil. “South Africans are small change in corruption relative to Latin America. Of course, corruption’s bad, but the biggest problem here is competence. Incompetence is a bigger risk to this country than corruption.”

But Mr Saad does not dwell on risks. He has shown how, even in one of South Africa’s most economically depressed regions, it is possible to build a world-class manufacturing business that creates jobs. He expects his staff to work hard and constantly improve productivity. But, he said, there must be a balance between work, family and relaxation.

“When do you know when you’ve got it? When you laugh and you laugh out loud. You don’t want to look back in 10 years’ time and ask, ‘What did I do all that for? Did I do it for money?’ There’s got to be more to it than that.”

This article was first published in Sunday Times: Business Times

BY RAY HARTLEY, JUNE 16 2013, 14:00

RAY HARTLEY studied at Rhodes university

Source: Business Day

http://www.bdlive.co.za/business/healthcare/2013/06/16/how-a-small-factory-in-port-elizabeth-conquered-the-world

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