UPS for the cup

With a booming economy pushing South Africa firmly into the 21st Century the growing use of information technology systems and the demand for Uninterruptible Power Supply systems is inextricably linked.

Fabrice Essono, Frost & Sullivan, South Africa

In 2010 South Africa will host the FIFA World Cup. Many will judge the progress of the rainbow nation by the success of this global event and organizers will be paying special attention to the provision of adequate power supplies to ensure that the floodlights remain on.

The World Cup is one of the major factors behind the growth of South Africa’s economy and the expansion of its infrastructure but the national grid is struggling to keep pace. Energy intensive industries and technology firms are increasingly looking to focus on uninterruptible power supply (UPS) systems to minimize their risks and both domestic and international suppliers are rising to the challenge.

Economy drives UPS

The positive economic growth being experienced in South Africa coincides with projections of growth of the market for UPS systems, and the link is clear. As the effects of globalization edge the frontline battle to capture competitive advantage further afield, countries are driven to adopt reliable technological processes. And, after a slow start, South African businesses are quickly closing the digital gap that separated them from their international counterparts.

This higher reliability electric power is being met by the cheapest electricity prices in the world, which speaks volumes for the country’s productive competitiveness. But the supply of this power has its constraints as a lengthening national grid implies an increase in vulnerability to power anomalies. Disturbances in a reliable source of power have become a critical issue because they inhibit normal business functions and sometimes result in the loss of vital information. As public and private enterprises seek to minimize this risk, they turn to corrective power technologies to back up their systems. In this way, technology both initializes and catalyzes growth in the UPS market.

Recently, uncertainties in the availability of electric power have been a topical issue in many parts of the country. This should come as no surprise when considering the fact that the demand for electricity is increasing at an average rate of 1000 MW a year. As a consequence, the electricity grid reserve margin in South Africa has been decreasing at a startling rate, resulting sometimes in untimely blackouts.

Power outages in various parts of the country have created a perception of incapacity for Eskom, the national electric utility, to meet the increased demand for electricity. In an economic climate of uncertainty, investors might display some reluctance in investing in energy-intensive sectors and, as an effort to allay these fears, Eskom has embarked on a $13 billion infrastructure development plan over the next five years, including the construction of new power stations. Even so, companies are investing massively in back-up power systems, although the South African UPS market is not expected to reach maturity until the end of 2012, the forecast period shown in Figure 1.

Figure 1: South Africa UPS market revenues as percentage of maximum future market size
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The growth of the UPS market is accentuated even further by the appreciation of the Rand, against international currencies. The Rand has almost doubled its worth compared to the US dollar over the last few years, moving from the 2002 annual exchange rate of 10.53 to 6.38 in 2005. It follows then that distributors are enjoying a greater amount of purchasing power, which explains the increase in the number of UPS imports destined for South African shores. Secondly, the subsequent increase in labour costs has made local production of UPS systems more costly to manufacturing firms. It is for these reasons, that partnering with foreign companies has become a more viable option to local suppliers.

International interest

Anticipated growth of the South African UPS market has prompted responsive international companies to adjust their strategies to give more attention to this market.

Formerly, most international companies selected a local firm to distribute their products in the region. Thus, established brands such as Powerware, Liebert, and Riello, to name but a few, have been selling in the country whilst these companies had no direct representation there.

Additionally, local manufacturers are facing competition from lower-cost Asian competitors as UPS products from any origin can be imported into South Africa without the constraint of custom duties. This advantage makes this market enticing for Asian exporters who find it easy to target the South African market because of its lack of trade barriers. The domestic market for UPS systems has shown acceptance of products of Asian origin as the standards of quality used in manufacturing them improve.

Market analysis

A salient feature of the South African UPS market is the shift in the buying patterns characterized by an increased demand for larger systems above 50 kVA. However, the small segment up to 5 kVA is expected to remain the largest contributor to total market revenues until the end of this decade. This is despite the fact that small UPS systems are not usually sought after by customers but are instead generally bundled along with PCs or peripheral equipment such as printers and scanners. For that reason, manufacturers prefer using IT distributors to sell small UPS units as the simultaneous availability of equipment is convenient to prospective customers. The role of re-sellers is thus crucial as they help customers understand the utility function of UPS systems. Furthermore, the dramatic increase in the demand for back-up power systems has attracted numerous companies to the UPS market although manufacturers are often reluctant to integrate these newcomers in their sales channel as many lack the expertize to sell sophisticated UPS systems. Thus, for these new market participants, selling directly to mass merchants or final end-users is the most practical option. However, these buyers are generally unacquainted to power quality issues and may end up buying the wrong UPS solution.

Buyers of medium UPS systems are generally more aware of power quality problems. One of key drivers of growth in this segment is the gap between demand and supply of high quality power in South Africa. Medium UPS systems generally support critical applications such as medical facilities, life-supporting systems, data storage systems, emergency equipments and on-line management systems, among others.

Typically, a manufacturer will develop a network of dealers which enjoy selective distribution from manufacturers, although some dealers reserve the right to sell UPS systems by competing manufacturers. The result is that dealers become more knowledgeable about UPS technology and market the product with more expertise.

However, few dealers would sell large systems simply because the sales process in this segment is more consultative in nature. There is a close interaction between the end-customer, the re-seller (unless it is a direct sales process), the UPS manufacturer and in many cases, an engineering consultant.

Service factor

Product uptime and the measure of service rendered are key success factors in this large capacity power range. The service offered by the vendor is critical in retaining the customer for future purchases and in generating additional revenues in the form of service contracts.

Sales typically occur through a series of technical consultations. Hence, engineering companies play a key role in awarding the contract to a specific UPS vendor.

A typical UPS system
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Consulting firms approach manufacturers of UPS systems on behalf of end users in the market. This presents UPS manufacturers with the opportunity of direct manufacturer-end user interaction.

Finally, some companies find it more convenient to establish direct contact with end users. This is partly because they cannot expect any loyalty from intermediaries and may believe that they are in a better position to provide after-sales service by being within close proximity of their customers.

Twin opportunities

In contrast to other countries where the market for UPS systems is also developing, the South African domestic demand is not limited to particular sectors of the economy. Opportunities originate from both the public and private sector. For example, the cities of Cape Town and Johannesburg have pledged to invest in back-up power systems as remedial action in the face of recent unexpected power outages while in the private sector, opportunities arise from the expansion of players in the telecommunications industry as a result of deregulation, among other initiatives.

However, while the South African UPS market offers significant opportunities, it is a highly competitive environment and only companies with finely-tuned strategies will be able to grab a sizeable share of this attractive market.

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