Doing business in South Africa

It's renowned for its gold and diamonds, but is also making a name for itself as a place to do business


E mail security software provider Mimecast is one of a growing number of UK companies seizing the opportunity to trade in South Africa.

It opened an office in Johannesburg in 2003, and has since won contracts from the likes of TransNet Group, South Africa’s largest transport and logistics company and gold resources business South Deep Mine.

“South Africa has a strong service culture and a can-do attitude, and there is good government support for entrepreneurs,” says Mimecast founder Peter Bauer. “There is a desire to achieve in the international market.”

According to Peter Katzenellenbogen, partner at the Johannesburg offi ce of accountancy and business advisers PKF, South Africa is now regarded as one of the world’s leading emerging economies.

“South Africa has world class banking facilities and is served by a developed national network of highways as well as a railway system. There are good air connections to all major business centres,” he says.

He adds that the country has enjoyed strong domestic growth in recent years. “The Johannesburg Stock Exchange has been one of the top performing exchanges in the world over the last two years.” The currency, the rand, has experienced wide fl uctuations in recent years, but is now relatively strong compared to other major ones.

Hot sectors

Nick Hood, senior partner at UK corporate recovery fi rm Begbies Traynor says the retail and business services industries in particular are experiencing fast growth. “South Africa is marketing itself as a business and financial services hub for the rest of Africa. Investment is also being made in call centres and tourism. However, industries such as manufacturing and textiles are tougher propositions because of rising labour costs,” he says.

UK Trade & Investment, the government body that helps businesses expand abroad, says the following sectors are particularly attractive: »

Automotive: South Africa’s Motor Industries Development Plan has opened up the market to UK automotive component manufacturers »

Sport and leisure: South Africa is hosting the 2010 FIFA World Cup, offering opportunities for equipment manufacturing and sports complex construction »

Education and training: There is potential for businesses specialising in vocational skills development »

Healthcare: The government is currently looking at international healthcare models with the aim of developing public-private partnerships » Power: There are opportunities for companies that specialise in coal, nuclear and carbon-free /reduction technologies »

Telecoms: South Africa has the largest telecommunications network in Africa and mobile phone take-up is predicted to triple in the next six years »

Transport: South Africa’s airport, railway and port infrastructure is undergoing renewal

One company benefiting from the potential that the transport sector has to offer is UK bus ramp manufacturer Compak Ramps, founded in 1999. Last year it secured an order worth £25,000 from a South African bus and coach manufacturer.

“If you have the right product, then the opportunities in South Africa are enormous,” says Tony Rodwell, sales and marketing director for Compak Ramps. “It is a developing country with considerable growth potential and a rapidly improving public transport infrastructure.”

Getting started

Several government-assisted initiatives and fi nancial incentive schemes are available to entrepreneurs. »

UK Trade & Investment: Runs workshops covering the logistics of setting up in South Africa, including taxation and cultural issues. It also runs ‘trade missions’ to the country focusing on particular sectors for export possibilities. As a result of one trade mission, professional leadership development business LeaderGen secured contracts worth more than £50,000 to provide leadership training to the South African government and eight African banks. For details, check out www.uktradeinvest.gov.uk »

Strategic Investment Programme (SIP): Provides tax credits of between 50% and 100% for qualifying projects » Small Medium Enterprise Development Programme (SMEDP): A grant paid to foreign investors starting new or expanding current operations »

Foreign Investment Grant (FIG): A cash incentive to assist foreign investors with the cost of relocating new machinery and equipment from overseas to South Africa. For more information go to www.thedti.gov.za for more information »

Tax breaks are available for staff skills development

Cultural considerations

South Africa has 11 official languages, and its major cities differ in their approach to business.

“Cape Town is more eurocentric, while Durban has had an Indian infl uence over many years. Johannesburg is the business capital and the capacity for making decisions is noticeably stronger there,” says Anne Thomson, from South African-based business development and management consultants Kilpatrick Thomson International.

With such cultural diversity, it’s not surprising that South Africa is one place where networking and personal contacts are valued. Ted Roczynski is MD of Accuro System, the South African arm of UK document management company Paradigm. The South African offi ce opened last October and Roczynski cautions not to underestimate the value of local expertise.

“Since re-entering the world after apartheid, South Africa is starting to move more in line with European practices and methods of doing business. It’s possible to expand to South Africa on your own, but at the expense of many delays. Persistence and local knowledge are key,” he says.

It pays to seek partnerships with local companies. “They will understand the culture and will speak Afrikaans and English – both of which are commonly used more often than not in the same conversation,” says Compak Ramps’ Rodwell. A UK Trade & Investment spokesperson adds that it is essential that British suppliers wishing to tender for business be represented locally.

Regulatory issues 

Labour regulations are fairly rigid as workers’ rights are well entrenched and there is a high level of unionisation. But one of the major factors having an impact on foreign companies doing business in South Africa has been the emergence of the Black Economic Empowerment (BEE) initiative.

“This is a government initiative requiring that 26% of the equity of a company or venture must come from members of historically disadvantaged groups,” explains James Picton, analyst at stockbrokers WH Ireland. “Anyone planning to do business in South Africa must be prepared to invest the time to find a BEE partner, and arrange that this 26% equity share is fi nanced.”

Need to know

One cause for concern is the high incidence of HIV and AIDS. According to the AIDS Foundation South Africa, the country has the fifth highest prevalence of HIV in the world, with some 21.5% of the population estimated to be affected.

Another issue is the current high level of unemployment – as much as 40% in some areas, and there is a shortage of skilled labour, although employment creation is high on the government’s agenda for 2006, with considerable importance being placed on skills development.

One area South Africa is making headway in is its entrepreneurial culture – the Branson School of Entrepreneurship opened last October in Johannesburg with support from Richard Branson. Crime levels have also decreased in recent years and the minimal time difference between South Africa and the UK is also an attractive option for business.

South Africa’s infrastructure, transportation, banking and legal systems are recognisably stronger than any other African territory and evidence that the country is fast establishing itself as an economic powerhouse. And with the country increasingly being seen as the gateway to the rest of Africa, businesses that trade there have the potential to tap into a community of more than 180 million people.

SOUTH AFRICA ? AT A GLANCE

Population: 42.6m

Currency: Rand

Languages: There are 11 offi cial ones, including Afrikaans, English, Nedebele, Xhosa and Zulu. English is the main language of business

Major Cities: Pretoria (the capital), Johannesburg, Cape Town, Port Elizabeth and Bloemfontein. The main port is Durban

GDP per capita: $11,900

Sector strengths: Manufacturing, tourism, fi nance, transport and communications

Economic growth: 4.3%

Unemployment: Between 30% and 40%

Taxation: Value-added tax is levied at a flat rate of 14%. Corporate tax rate is 29%, with a secondary tax of 12.5% on declared dividends

Political stability: South Africa became a full democracy in 1994 and is now seen as politically stable

Source: The Economist Intelligence Unit/ /IMF/CIA

Comments

(will not be published)