What ‘South Africa Inc’ Needs to do to catch the boat in Africa – June 2012
Paul Runge, MD, Africa Project Access
Duncan Bonnett, Partner, Whitehouse & Associates
The following editorial was motivated by the report “SA is missing the boat in Africa” that appeared in the Business Times supplement to the Johannesburg-based Sunday Times of 5 June 2011.
June 2011: A South African company with a historic export record in Africa requested us to undertake an HS code study on the import of their products into selected African markets. The results revealed that while the company’s African exports had grown, they have in fact, lost considerable market share to their foreign competitors. What needed to be appreciated was that the market had grown and our client had not taken sufficient advantage of this. African countries have been growing at well over five percent per annum for a good number of years and the cake has simply grown bigger. South Africa’s exports of iron and steel products to the rest of Sub-Saharan Africa have thus grown from just under US$400 million in 2005 to peak at US$840 million in 2008, and levelling off at US$800 million by 2010, but the share of the market dropped from 11% to 9% over this period as new suppliers entered the marketplace. Moreover, exports from South Africa (excluding trade into the Customs Union) were concentrated in the SADC region, which accounted for 73% of total exports of these goods – with only Nigeria and Ghana outside of this being significant destinations, with 16% of the total between them. Globally, however, they account for around 25% of Sub-Saharan Africa’s iron and steel imports. East Africa’s key markets outside of SADC – Sudan, Kenya, Ethiopia and Uganda – accounted for a combined 3% of South Africa’s exports, whilst representing 13% of the regions’ market. This scenario – of very strong exports into the immediate region and isolated pockets of activity in Anglophone Africa – is repeated again and again, across virtually every sub-sector from food products to electronics.
The relative boom in Sub-Saharan Africa and the sharp increase in the sub-continent’s project flow is being driven by marked and sustained improvements in world resource and commodities prices from oil to copper to gold to coffee to cotton. Thus, in addition to other countries in Africa growing at a far faster pace than South Africa, their economies have rebounded far quicker than South Africa’s has. By way of example, a basket of agricultural, industrial, metals and energy raw materials that has an average index of 100 in June 2005, when the surge in commodity exploration and development took off in Africa, rose to 178 by July 2008, before falling back to just over the 100 mark in early 2009. What is instructive though is that unlike previous commodity cycles, prices did not plummet for a considerable period – indeed by mid-2009 prices were already recovering and by late 2010 they had exceeded the peaks of 2008. The impact of this is that not only do countries have a better cushion than in previous cycles, but project developers are operating in a far more comfortable pricing environment, which should ensure continued investment. Thus, the decade from 2000 to 2010 saw exploration activity in non-ferrous metals in Africa rise by a compound annual rate of 17% to reach US$1.4bn by 2010. Whilst the 2010 figure is down on the 2008 peak of around US$1.9bn, it still represents compound annual growth of 10.5% over a period of global uncertainty.
This is the treasure trove to which the Chinese, Indians, Brazilians, Koreans, Canadians and others are now flocking. A wide variety of companies from all over the world are investing here and the situation has rapidly globalised. Tete in Mozambique’s Zambezi Valley is a good example of this globalisation. This is one of SADC’s fastest growing areas based on the major coking and steam coal deposits there. It is less than two hours flight from Johannesburg but when the interested South African operator arrives, he will find the Brazilans (Vale) and the Australians (Riversdale) extracting the resource while the Portuguese (Mota Engil, Teixeira Duarte) are building bridges, roads and other required infrastructure. Support services are being supplied by a wide range of non-African companies such as uti of France and Odebrecht of Brazil. The Chinese through for example, Wuhan Iron and Steel are waiting in the wings. There is a South African presence (WBHO, Macsteel, Shoprite, Stanbic etc) but the major role players are from elsewhere despite the advantage of geographic proximity. This has a major knock-on effect with supply of capital goods, industrial inputs and other supplies: if foreign investors or contractors are not aware of South African suppliers and their capabilities, they simply source from their traditional suppliers or home markets, further entrenching the position of these companies in Sub-Saharan Africa. Once again, South Africa’s exports (including re-exports) of capital goods (excluding transport equipment) to the rest of Sub-Saharan Africa have grown steadily in recent times, up from US$2.4bn in 2006 to reach US$3.5bn in 2008, before slipping to US$2.7bn in 2009 – the last year that relatively complete trade is available for. But in market share terms, this slipped from 9.7% of the total, to 7.6%, with over 85% of these goods destined for other SADC markets.
The globalisation has benefited South Africa in that Johannesburg/Pretoria is commonly viewed by investors as a good platform from which to launch operations into the rest of the continent. SAP of Germany has given its Woodmead, Johannesburg office jurisdiction over sub-Saharan Africa and the abovementioned Vale has an important decision-making office in Johannesburg. Most investors into South Africa are looking at the region too. Ironically, many South African companies (excluding the ‘flagships’ such as MTN and Nampak) are at this late stage, still deciding on their appetites and strategies for Africa. Research has identified over 50 cement projects in the SADC region alone that are either expansions or new plants and outside of South Africa, South African companies are only linked directly to two or three. Indeed, Nigeria’s Dangote Group is set to become one of the key players in Southern Africa – and the largest in Africa within five years. As such, and the situation is very similar in other key sectors studied recently, including steel, furniture, electronics, the broad electro-technical sector, food and beverages, civil engineering and others, South African companies are missing a key opportunity to expand directly into other African markets.
What are some of the concrete steps that South African companies and utilities need to consider to ensure that they do not miss the ‘Africa boom’ boat?
Better use of our financial instruments:
Export deals are sometimes lost not because of problems with price, quality or delivery but because the exporter is not able to supply financial terms to his or her trusted African buyer. Asian, American and European countries assist their exporters with a wide range of instruments supplied by their national donors, development finance institutions and export credit agencies.
A Chinese consortium won the tender for the huge Belinga iron ore project in Gabon against stiff French and Brazilian competition because they used their instruments (China Eximbank, Sinosure and their government ministries) to hand the Gabonese ‘an offer they could not refuse’. Not only are they extracting the resource but they are building a rail spur and a port bulk handling facility. French companies generally know and understand what the Agence Francaise de Développement, PROPARCO and COFACE can do to assist them in securing export supply deals. South African competitors often complain that they are losing deals due to ‘tied aid’ assistance to companies from developed countries.
South African exporters and investors have more facilities available to them than what many realise. The Development Bank of Southern Africa is a multilateral development financial institution with strong South African shareholding. It is involved in governmental and utility projects in SADC including public-private partnerships. (However, there is no guarantee that DBSA financing for infrastructure projects will ensure South African company participation in these projects – as the recent award of three roads projects in Zambia to Chinese companies through DBSA funding clearly illustrates.) The Industrial Development Corporation funds commercially-viable projects in SADC and beyond including PPP’s. The Export Credit Insurance Corporation provides both commercial and political risk cover for South African exporters. The ECIC has recently launched its innovative ‘Buyers Credit’ product which assists South African capital goods exporters as well as relevant consultants by providing credit to their qualifying African in-market buyers.
As a ‘regional’ (African) member state of the African Development Bank, South African suppliers of goods, contracts and services to AfDB projects theoretically enjoy formal margins of preference above contenders from ‘non-regional’ member countries. However, few are aware of this and the African host governments themselves seldom insist on implementing these margins.
South African exporters, operators and investors need to familiarise themselves on what assistance is available to them. Company business development managers must have some grasp not only of letter of credit transactions but also of development finance. A problems is that the donors, DFI’s and ECA’s are poor at marketing themselves to the business community and the latter does not make sufficient effort to inform themselves. Many of the major international development finance institutions such as the International Finance Corporation of the World Bank Group have given their South African offices jurisdiction over SADC countries as well as South Africa. It is no longer necessary to travel to Washington.
A useful tactic is to consult the DBSA and IDC prior to a market visit to identify projects and programmes in the particular country that have or are likely to have funds allocated to them. The company representative visiting the market will then know where best to focus his or her efforts.
Better use of our relevant government departments:
There are three central government departments essentially involved in South Africa’s export effort: the Department of Trade and Industry, the Department of International Relations and Cooperation (formerly Foreign Affairs) and Treasury at the Department of Finance.
The Department of Trade and Industry has a number of programmes to support South African exporters. Examples include a facility for the funding of feasibility studies for capital projects as well as an export marketing scheme that offsets some of the costs of visits and missions to foreign markets. One underutilised facility that has considerable potential entails financial support for inward missions from key countries. The time-consuming bureaucracy required to access these products can be onerous especially for small companies but there is no doubt that these assistance programmes are not being sufficiently exploited by South African exporters.
The Department of International Relations and Cooperation has overall responsibility for the country’s embassies, high commissions, consulates and trade offices in Africa and elsewhere. It has country desks that monitor developments in specific countries and country groupings and liaise with political officers stationed abroad. It also has a number of divisions dealing with multilateral institutions ranging from the African Union to the United Nations to the World Trade Organisation. Desk officers as well as political officers abroad can be most helpful and company representatives who are investigating specific markets should call on the South African diplomatic representatives there to glean accumulated local market intelligence.
The Department of Trade and Industry has stationed commercial counsellors in a number of the missions in key African markets to promote South African commercial interests and assist visiting companies. Where there is no DTI representative, the DIRCO political officer assumes the role. They are sometimes supported by competent locally-recruited commercial officers who know and understand the dynamics of their countries. I once secured a vital meeting with a major group in Ethiopia directly through the commercial officer at our embassy in Addis Ababa.
The Department of Finance is the official member of the multilateral finance institutions such as the World Bank and African Development Bank and our minister of finance is a board governor at each. Support from the Department is vital to the success of investigative missions to their headquarters in Washington and Tunis. South Africa has executive directors placed at these institutions who can provide companies with early alerts of upcoming programmes and projects and advise on appropriate strategies for accessing these opportunities. Africa is still largely donor-dependent and the foresight and guidance provided by officials located within the structures of the donors can enhance our tenders.
Optimisation of high-level presidential and ministerial visits as well as trade missions
Business delegations are often invited to accompany high-level presidential and ministerial visits to foreign markets. While the nature of these visits is political, they provide an excellent opportunity to promote South African commercial interests. However, feedback from business participants is often that while they are adequately wined and dined, the visit programmes are not specific enough and opportunities for the conclusion of actual deals are insufficient.
Identification of current and potential opportunities being investigated and undertaken by South African companies should be undertaken in good time before the visit. Senior representatives of companies that require high-level lobbying to realise specific opportunities should be invited. Excessively large delegations may create much fanfare but these visits should produce tangible economic benefit. Heads of state and ministers from China and France are well briefed beforehand by their relevant business organisations on what projects contracts and deals are sought.
Trade missions or business group visits to key African markets are being undertaken by the export councils, private organisations and institutions such as the NEPAD Business Foundation. These should be as homogenous and as targeted on the relevant markets as possible. Initial market analysis should reveal which sectors and projects are likely to present the greatest chance of success and the companies and delegates should be selected accordingly. The days of general market investigations are over. Procurers in African markets want to deal with companies that have the appropriate products, skills and financial muscle. There are a number of reasons why exporters should consider visiting a new market in an organised group rather than individually: a delegation is taken more seriously by the host authorities and higher-level contacts are achieved, synergies between members of the group leads to them doing additional business between themselves and of course, the logistics are taken care of and time is optimally used.
Supply chain management and freight logistics are always major concerns in a continent with generally poor transport infrastructure. Specialists in these fields as well as finance should be included in our export initiatives. What is the good of trying to export a product when there is a prohibitively high cost in getting the product into the market? The globalising African market is becoming increasingly price-competitive.
Better use of export councils, industry organisations, Africa specialist service-providers and research houses
Some years ago, the Department of Trade and Industry initiated the establishment of sector-specific export councils. These include councils for capital equipment, built environment, electro-technical equipment and other key sectors. They are essentially joint ventures between government and business whereby the government provided initial funding and ongoing support matched by membership fees paid by participating companies. They are run by experienced professionals from the private sector. As they are a creation of government, they also have the government’s ear and can lobby most effectively for state support for the sectors involved. However, they are severely under-funded when compared to their counterparts in other countries, whether developed or developing. Brazilian agencies targeting Africa are happy to fly and host traders from all over the continent to meet sellers from Brazil – an enormous cost, done on a regular basis, whilst most foreign trade delegations in South Africa are developing a regional capacity to support companies from their home markets. The role, funding, mandate and capacity of the Export Councils surely need to be aggressively expanded. The DTI’s programmes such as export marketing are also most easily accessed through the councils. The councils are also undertaking effective export services for their members such as outward and inward missions and notification of opportunities especially in Africa. They are also represented in important pan-African business bodies such as the African association of consulting engineers. Given the effective status of the councils, it is surprising that key companies in some of the sectors do not opt for membership. Industry organisations such as Consulting Engineers South Africa (CESA) are integrally involved.
This would apply to provincial trade and investment promotion organisations as well. One regional trade and investment organisation in Spain, for example, has three technology parks under its management and assets of over €200 million. They have direct offices or trade consultants in over 40 countries globally that visit Spain at least twice a year to develop business for these Spanish companies around the world. Increasingly, their companies are reaching out to new markets in East, West and Southern Africa – and penetrating them too.
In the African context, the past few years have seen a major improvement in collaboration between the councils, the professional bodies, key institutions such as the NEPAD Business Foundation, specialist services companies such as my own Africa Project Access, experienced Africa research houses such as Whitehouse & Associates and legal networks such as LexAfrica. Again, South African contractors, consultants and suppliers have a number of competent and experienced organisations and companies that will supply them with the required Africa information and importantly, intelligence as to what is really going on one the ground in the markets. Again, insufficient use is being made of them.
Need for strategically alliances and consortia-building
Companies may compete in the local South African market but in the rest of the continent they need to pool resources to ensure success in difficult environments. There is more scope for synergies than competition. Companies may be separately approaching the same African buyers despite the fact that their products and services are complementary. If they shared their leads, they will achieve more. The consulting engineers have led the way by for example collaborating to produce the number of CV’s required for major African projects. ‘Piggy-backing’ on companies that have already effectively accessed markets means that the wheel does not have to be re-invented. A number of companies entered the Nigerian market on the coat tails of MTN. Foreign companies are included in this option. A number of South Africa-based consultants and suppliers are servicing the coal operations in Tete, Mozambique of Brazil’s Vale.
The networking that the services organisations provide at their client and member meetings as well as the conferences they help organise provide good opportunities to create efficient synergies for companies situated at various stages in the project food chain: suppliers feeding off contractors, contractors benefiting from consultants, and consultants benefiting from the early project entry of the pre-feasibility operators such as the environmental specialists. Johannesburg and Cape Town have become venues for major pan African conferences such as the World Economic Forum and Rail Africa. This means that African business can sometimes be initiated without even venturing into African markets. Opportunities in Africa have increased substantially and corporate strategies should be innovative, flexible and collaborative.
Overcoming the ‘What do you expect – it’s Africa’ syndrome
There is still a tendency in many South African boardrooms to look at Africa through the “Hopeless Continent” paradigm, when in fact, as illustrated above, it has begun to change and is changing out of all recognition. Too many South African business development managers are still stuck with a fairly primitive strategic outlook of the continent: disease, corruption, mayhem, small and fragmented markets. Much of this still applies, although far less than ten or fifteen years ago. A Brazilian building materials supplier, on being asked why they had decided to investigate Southern Africa for potential expansion, remarked that the region (outside of South Africa) was much like Brazil was 40 years ago – and that they had grown their company from a manufacturer of leather shoes to multi-billion dollar conglomerate over that period. They were thus in for the long term and saw the longer term potential that the region has to offer, whilst many South African companies retreat from markets as soon as there is a downturn. Not only does this cause resentment in the host countries, it reduces the ability of the company concerned to benefit from upswings that are currently underway.
Genuinely Understanding the Continent!
Asian traders and those from other emerging markets have a far more nuanced understanding of African markets than many South Africans. They understand the dynamics of informal trade – the need for a good agent with their pulse on the market; the need to understand consumer preferences and purchasing power at a basic level; and the need to produce goods that will be able to compete in these markets. Some South African companies have grasped this and are applying it in rural areas of South Africa as well, where informal trade and subsistence consumers are driving consumption of basic products, but too many take the Henry Ford line of ‘any colour as longs as it’s black’.
In conclusion, whilst the much talked about Chinese (and Asian) domination of Africa has not materialised to the extent that many would have us believe, South Africa Incorporated seems to be ill-equipped to take advantage of the increased opportunities that the region has to offer. There is too little co-ordination between government and the private sector as well as too little co-ordination with both of these as well. An overhaul of South Africa’s international trade strategy, and the instruments that are employed to ensure that South African companies have the best, realistic opportunities to engage in this exciting time, is overdue, but not too late. Companies, industry bodies, local, provincial and national government departments as well as their structures need to play a far more proactive role in ensuring that not only is South Africa able to maintain her presence in the region, but hopefully grow that presence – trade, investment and project – over the foreseeable future.