A would-be manufacturer shares the hard lessons he learned when a good idea went bad in the early 1980s.
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Entrepreneur: Ross Black, Partner
Company: Afrem Pty Ltd
Business type: Diesel air-filter re-manufacturing
Founded: 1983; liquidated 1985
Head office: Wodonga, Victoria (to 1985)
Contact details: +61 2 6024 3566
The Afrem Story
Ross Black has practised accountancy since 1967 but he says he always wanted to get into a business that made things - to be a manufacturer. So Black did his homework when - in early 1982 - an opportunity arose to establish a unique manufacturing business never tried in Australia.
The business was re-manufacturing air filters used in the heavy-duty diesel engines of trucks, buses and the massive earthmoving vehicles used in the mining industry. The process involved replacing the clogged filter’s paper core with a new core as well as cleaning and re-using the outer metal casing. The re-manufacturered units cost substantially less than a new filter in 1982.
In early 1983 Black visited a dealership of the Caterpillar earth-moving company based in Salt Lake City, USA. He learnt that they considered filter re-manufacturing their most profitable area. He says: “When I saw their operation, it was great – beautiful, clean and smooth. I thought: ‘This is a simple process. Why couldn’t we do that in Australia? This product will sell itself’.”
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Key learning points:
- Product quality - Must be first-class or customers will quickly learn not to buy from you.
- Product development - New products must be compatible with the customer’s culture.
- Product volume - Market size and ready access to it is critical to volume of product. Make sure you are located near the markets that will provide your cashflow lifeblood.
- Cost control - If you are dependent on imported materials, your costs will vary with exchange rates. Can you live with that variability? Sourcing raw materials locally rather than importing them can avoid exchange rate fluctuations.
- Management team - Manufacturing relies heavily on team, trust and shared perspective. The company structure and management must be cohesive. Sales downturns will test relationships among managers.
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Black saw an opportunity to start a filter re-manufacturing business in Australia and then sell it for a good profit. He had a financial partner who was prepared to invest as well as experts in engineering sales and filter manufacturing as partners who would manage the operation.
A factory was found in Wodonga and operations commenced in 1983, but within two years, the business was in liquidation. Why did it fail? Black identifies four factors:
- Underestimating product liability
- Insufficient volume of product
- Uncontrollable costs
- Uncohesive management
Black says: “People [in Australia] weren’t very keen to use re-manufactured filters at that stage whereas in the States they had been used to it for years. Local trucking organisations would use one of ours to try it, but they were never convinced. I underestimated the product liability substantially. All you needed was one filter to blow up an engine - because there was something wrong with it, or someone to accuse you - and you had a lawsuit on your hands.”
Even if Australian diesel operators had accepted the re-manufactured filters, the main market was in Queensland’s mining regions - a long way from north-east Victoria. Black says: “Replacing several hundred filters at a time was the sort of volume required. We never got to that stage.”
Perhaps the biggest problem was that the paper required for the filter cores could only be imported from the USA. Black says: “In 1983, the Australian dollar fell 45% in the time between doing our cost estimates and starting importing. That meant a huge increase in costs before we even started. If that paper [had been] made locally we would not have had that cost.”
With costs spiralling and sales struggling, cashflow soon became an issue. Black says: “As soon as you have money problems, other little things start eating into it. All of a sudden, you’ve got people at each other’s throats. That’s exactly what happened in our business. I could see that we weren’t getting anywhere from a cohesive management team point of view. We just couldn’t keep going that way.”