IBUS3510Paper

Business Opportunities, Challenges & Strategies
in South Africa
IBUS 3510 - 01 | Team 1
Zixing (Lisa) Shen
Zukky Ohameje
Daniel Eikeland Rod
Abijah Gupta
Emily Bouthot

Abstract
South Africa, officially the Republic of South Africa (RSA), has 2,798 kilometres
(1,739 mi) of coastline that stretches along the South Atlantic and Indian oceans. It
is the 25th-largest country in the world by land area, and with close to 53 million
people, is the world's 25th-most populous nation (South Africa, n.d.). The
government system is a republic and the chief of state and head of government is
the President. It has the developing economy and the stable politics. There are
numerous opportunities on this land; on the other hand, there also are challenges,
so we need strategies to solve issues in order to make business in South Africa
more successful. This article examines the Opportunities, Challenges and the
related strategies for businesses in South Africa.
Table of Contents
Abstract
About South Africa
Opportunities
Strategies
Summary
Bibliography
Business Strategies, Opportunities and Challenges in South Africa
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About South Africa
South Africa is a country located at the southern tip of the African continent.
It is bordered by the Atlantic Ocean on the west, the Indian Ocean on the south and
east (South Africa , n.d.); thus, this special geographic position makes South Africa
become one of the busiest seaway around the world. In addition, South Africa is
the diverse country with mixed races which is one of the characteristics in this
country. 75% of the population are black Africans and about 15% white
Europeans, with the remaining 10% comprised of people of mixed white, Malayan,
black descent, and Asian descent which is mostly Indian descent (South Africa ,
n.d.).
South Africa’s politics is steady, and the government system is the republic.
The chief of state and head of government in South Africa is the president, Jacob
Gedleyihlekisa Zuma. He was elected by parliament following his party's victory
in the 2009 general election and re-elected in the 2014 election (Jacob Zuma, n.d.).
South Africa has one of the largest economies in Africa, and its economy is
mixed. It is also a member of the African Union and African Economic
Community (Introduction, n.d.). South Africa trades with so many countries, and
among these countries, China, United States, and Germany are the top three trade
partners (Economy, n.d.). China, becoming the biggest trade partner, indicates the
developing country is becoming a significant trade partner country to South Africa,
and the cooperation with developing countries is becoming more important.
Because of the geography of South Africa, its top exported goods are precious
stones, metals, ores, oil, and mineral fuels, with its top industries being mining
(platinum, gold, chromium), automobile assembly, metalworking, and machinery
(Economy, n.d.). These characteristic goods have a high output for them to become
the brace of South African economy and the reason to attract other countries’ trade
cooperation. Although the economies in South Africa went into recession in the
mining and manufacturing sectors from 2009, its construction industry was
benefited because of the 2010 World Cup (Africa , n.d.).
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The majority of the enterprises in South African economy are the small and
medium-scale enterprises, which are SMMEs. The government identified the
small, medium, and micro enterprise sector (SMME) as one of the potential means
of creating an enabling environment by improving job creation opportunities and
wealth distributions necessities (Industry, 1995). The SMME will let China and
other developing countries invest easier and give them more opportunities.
Diversity is the key point of South Africa; it has 11 recognized official
languages. There are so many different kinds of languages, leading to more
opportunities and challenges. Besides, South Africa is famous for its art, dance,
music, beadwork adornment, and tribal cultures (people & culture, n.d.). People in
South Africa are good at arts because of their enthusiasm and active personalities.
The beadwork adornment in South Africa is famous, and it is important for both
men and women. Specifically, traditional beadwork adornment is meaningful as it
represents history, and the beadwork today is becoming more active with the
modern art idea. Not only is it the characteristic culture in South Africa, but also
the method to help improve South Africa’s economy. In addition, the tribal culture
can be the symbol of South Africa and attract more interests from people around
the world. As more people become interested in South Africa, the country is able
to gain more opportunities.
BRICS
BRICS is an acronym of the five major emerging national economies:
Brazil, Russia, India, China and South Africa. All the members are developing or
newly industrialized countries.
BRICS and Africa
One of the key drivers to the African growth in the past decade has been the
demand of African commodities in fast growing markets, mainly in China and
India. In the last 5 years the trade with African countries jumped 70%, China’s
share of this was 61%, India 21%, Brazil 8%, South Africa 7% and Russia 3%. The
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trade with Africa was $350 Billions, just from the BRICS members. This equaled
to 15% of the BRICS total import. In 2013, South Africa’s stood at $25 billions,
mostly in manufactured goods.
The main advantage of what BRICS offers the African countries is their
provision of new markets and sources of development finance at a time when
finance sources in the EU and North America struggle with the aftermath of the
global financial and Eurozone crises.
BRICS and South Africa
Despite South Africa’s size, compared to the other BRICS countries, they
manage to secure a position because it’s been seen as bridgehead to Africa, and
also its influential private sector and global financial institution.
There’s still a debate on how South Africa should use its involvement in BRICS.
There are two main parts to the debate, first is that South Africa should use the
BRICS alliance to secure new markets for the country’s products, for new
investors in South Africa, and to speed up engagement with BRICS countries as an
alternative to Western investors and governments. Second one are those who
oppose the BRICS strategy saying that, if they let China and India into Africa on
their own, they will find that it’s not only their minerals/resources that are
dominated by foreigners, but also the infrastructure. South African business
community strongly support the current BRICS strategy, as do black business
interests, but South Africa’s trade unions have been strongly critical.
BRICS and South Africa: Opportunities and Challenges
South Africa’s participation in BRICS offers allies in lobbying of the
reconstruction of the global trade and the economic and political landscape, and the
potential for a transfer of new ideas on social development, sustainable
technologies, and institutional innovation. It also leads to participating countries
the space to resolve disputes, related to trade, either political or diplomatic.
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What could be challenging is that BRICS might erode the South African
domestic economy, because many products from BRICS countries directly
compete with its own. Some BRICS countries already export manufactured goods
to Africa, including the inputs to the African infrastructure, such as railways. This
will hurt the manufacturing sectors identified as a key to job creations.
(Opportunities and challenges)
Opportunities
As an investor, South Africa presents numerous opportunities for
investment. Even though the country is made up of mostly small and medium
enterprises, there are also large investment schemes available in the country. The
Oil and Gas Sector, vehicle productions, and Industrial Development Zones (IDZs)
provide excellent investment opportunities.
Oil and Gas
The upstream Oil and Gas sector in South Africa is built on the legacy of
their gas developments in Mossel Bay and has expanded in the last decade towards
areas like the offshore areas of Saldanha Bay in the countries west coast, to target
the big opportunities in Africa and beyond. As one of the major economies in the
region, underpinned by good infrastructure, an attractive living environment, a
solid base of engineering capabilities and effective institutions, South Africa is
well positioned to become a major hub for the supply of oil and gas services and
equipments and materials to the region and beyond.
A R9.65-billion (approx $806million) investment in infrastructure projects
at the Saldanha Bay was announced by the Transnet National ports Authority
(TNPA) in January 2015. The aim is to enhance the deep-water port’s ability to
service the offshore oil and gas industry. TNPA, a division of state owned entity
Transnet, is mandated to control and manage all eight commercial ports on South
Africa’s 2954 km of coastline. The project falls under the government’s “blue
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economy” plans of it’s operation phakisa initiative, announced by president Jacob
Zuma in 2014.
The aim of the project is to clear infrastructure bottlenecks that may be
constraining economic growth. The Saldanha Bay industrial development zone was
designated in 2013 as a zone dedicated to serving the oil and gas industry. It has
attracted strong interest, mainly from fabricators. Saldanha bay supports the export
of iron-ore mined in the northern cape province, which currently stands at around
57-million tons a year. According to Willen Roux, Saldanha Bay port manager, as
reported by the Business day, the TNPA sees an opportunity in serving the oil rigs
operating on the west and east coasts of Africa, He also implied that if they do not
use this opportunity to capture this market, other ports in the southern hemisphere
will gear themselves to capture it.
The TNPA has issued tenders to invite public-private sector participation in
the projects. According to Business day, these include the construction of a new rig
repair quay, 380m long and 21m deep, to serve modern rigs that require extra dept.
The quay will be able to serve two rigs simultaneously; lengthening of the mossgas
quay from 38m to 500m, with a depth of 8.5m. this will allow it to accommodate
floating docks; building of an offshore supply base which will serve as a one-stop
shop oil rigs with services such as food, materials and waste management. The
TNPA said the projects would create an estimated 6300 new direct jobs and 25000
new indirect jobs, contributing an estimated R.74-billion (approx $400million) to
South Africa’s gross domestic product.
There are numerous great benefits in investing in Saldanha Bay, which is in
the process of becoming a one-stop-shop(OSS) for the oil and gas service industry,
which aims to reduce administrative delays, red tape and regulatory hurdles that
investors face in South Africa. The Saldanha Bay is unique because it is:
● The first IDZ in South Africa to apply for full Customs Control Area (CCA)
licence.
● IDZ activities are sector-specific and focus on the Oil and Gas sector.
● The first IDZ in South Africa to include port land in the designation.
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The strength of Saldanha Bay is based on the following key success factors,
namely;
● The geographical proximity to West and East African offshore oil and
gas fields.
● Increased demand for South Africa’s engineering expertise and strong
support base in services such as rig and marine vessel maintenance
and repairs, engineering and fabrication activities and logistical
services.
Challenges that the Oil and Gas sector faces
The major challenge you might face in the oil and gas sector in South Africa
is the lack of skills. As a lot of other countries South Africa has shortage of the
mid-tier level, those with 10-15 years of experience, largely because of the oil glut
in the 80s. Not only is there a shortage of mid-tier level workers, but also in the
lower level due to lack of specific oil and gas training programs at university level.
the shortage relates mostly to engineers, but the shortage also extends to other
workers such as welders and pipefitters.
Another challenge that you might face is specific to its labour market. Its
constitution gives unions a large amount of power, and the relations between
unions, employers and government have an aggressive history with strikes with a
relatively regular occurrence. The gas and oil industry does not have an union
currently, but this will change in near future, and it’s something one have to be
aware of. (Oil and gas challenges)
Vehicle Production
South Africa has recently approved guidelines for the new Medium and
Heavy Commercial Vehicles-Automotive Investment Scheme(MHCV-AIS),
expected to stimulate investment in the production of vehicles. The MHCV-AIS is
a sub-component of the Automotive Investment scheme, an Incentive administered
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by the department of Trade and Industry designed to grow and develop the
automotive sector in South Africa. According to the minister of Trade and
Industry, Rob Davis, the broadening of the scope of the AIS to include medium
and heavy commercial vehicle manufacturers is in line with the broader objectives
of the AIS program. The medium and heavy commercial vehicles sector value
chains are highly under-developed and there are opportunities to deepen their value
addition and potential for employment creation.
By April 1 2014, the MHCV-AIS will be made available to investment
projects. These projects commissioned period are not expected to exceed 18
months prior to to the start of production. The minister also emphasised that the
extension of the programme to these manufacturers was required to achieve the
development objectives that were set to increase investments, encourage
technological transfer, increase market size and boost employment.
Some of the benefits of Investing in the AIS are:
· It provides for a twenty percent (20%) non-taxable cash grant of the value of
qualifying investment in productive assets and also twenty five percent (25%) of
the value of qualifying investment in productive assets by component by
component manufactures and tooling companies as approved by the Department of
Trade and Investment.
· Also, an additional five percent (5%) could be made available for projects that
maintain their base year employment figure for the duration of the incentive
period, and also if the project achieves any two of the following; tooling, Research
and Development in South Africa, Employment Creation, Strengthening of the
Automotive value change, value addition and Empowerment.
Challenges that the Vehicle Production faces
2013 had several weeks of strikes. this is something you have to consider in
the business of vehicle production in South Africa. Strikes in 2013 lead to
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production lines lost over 45,000 vehicles, which meant lost revenue of R20
billions(app. $1.8 billions)
Another challenge in the production of vehicles is the disposable income of
the consumers’ pockets. The fall from 2013-2014 is explained by this. They went
down 1.4% over that year. (Vehicle production challenges)
Dube TradePort
The Dube TradePort, located in the port city of Durban is now officially an
IDZ, among three other similar economic zones spread across the country. On
October 7, 2014, the South African President Jacob Zuma handed over an IDZ
operator licence to the Dube TradePort Corporation for the precinct, which has
already seen investments worth nearly R1-billion since it was established in 2012.
It is one of the latest in the nationwide creation of special economic zones
which are aimed at expanding the country’s economy to meet the target of 5%
growth by 2019. As the first IDZ for Durban, it joins similar projects in Port
Elizabeth, East London and Richards Bay that have generated about R5-billion of
combined Investments. The director General of Trade and Industry, Lionel
October, implied that more special economic zones will be created across the
country as the government intensifies its approach to industrialise South Africa’s
economy as demanded by the National Development Plan (NDP).
Some of the unique benefits of investing in the Dube TradePort are:
● A variety of Investor tax incentives, which includes a 15% corporate tax
rate.
● Relief from customs duties at the time of importation into a CCA, of any
goods for storage, raw materials and also machinery used in the manufacturing
process.
● Simplified customs procedures.
Fiscal incentives on goods and raw materials when imported for storage or
manufacturing.
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Challenge - Enforcing a contract
When going into business in South Africa you have to be aware of the legal
system and its time of enforcing a contract. The average time of enforcing a
contract in South Africa is 600 days. This includes 29 different procedures such as
filing and service, trial and judgment, and enforcing a judgment. One have to
consider the time it takes and what its cost is. The cost to enforce a contract is
33.2% of the total claim. and over the span of 600 days, this can turn out to be an
expensive procedure.
Strategies
1. Tax incentive for promoting research and development
As per the Income Tax Act’s Section 2.10.6 m, “A deduction, equal to 150%
of the expenditure incurred directly and solely on R&D undertaken in South
Africa, will be allowed if that expenditure is incurred in the production of income;
and in the carrying on of any trade. ”[1]
This incentive is available to businesses of all sizes and in all sectors of the
economy as long as they are registered in South Africa. All eligible R&D
expenditure automatically qualifies for 100% tax deduction with an additional 50%
available provided it is approved by the Minister of Science and Technology. The
objective is to help companies build capabilities and innovations by creating new
products, processes, devices and techniques, and/or significantly improving
existing ones. [2]
The Application process is fairly straightforward and the completed forms
need to be submitted to the Department of Science and Technology (DST). An
acknowledgement receipt is usually provided within 48 hours followed by
screening, eligibility checks, evaluation of R&D activities, committee presentation,
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recommendations to the Minister of DST and then finally an approval certificate is
issued. In case it is not approved, a letter will be dispatched stating the reasons and
then based on various interactions with applications it will be reviewed once again
and decided accordingly.[3]
2. Foreign Direct Investment
The National Infrastructure Plan (NIP) include plans to spend R4.3trn
($38bn) on new and upgraded infrastructure across the transport, energy, water,
sanitation, health and education sectors over a 15-year period. Major transport
projects expected to progress under NIP include a R16.3bn ($1.47bn) initiative to
revitalise the rail network, a R15.2bn ($1.37bn) plan to update and expand
provincial bus lines and a variety of other initiatives in the areas of maritime,
surface and air transport.[4]
Main Invested Sectors 2012, in %
Financial and insurance services, real estate and business services 36.0
Mining 30.9
Manufacturing 17.9
Transport, storage and communication 9.4
Trade, catering, hotel industry 5.3
Source: South African Reserve Bank, Quarterly Bulletin March 2014[5]
The table above shows financial/insurance services, real estate and business
services to be the most invested sector and with the NIP’s plans to revitalise and
expand the transportation means, investing in manufacturing and the transport,
storage and communication would be favorable.
As a further incentive, South Africa provides a Foreign Investment Grant up
to 15% of the value of new machinery and equipment. It also runs a Skills Support
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Program which provides up to 50% of training costs and 30% of workers’ salaries.
[5]
Summary
South Africa is a large country. With its multi-ethnic and culturally diverse
population, South Africa has a very diverse market. Business in South Africa faces
many challenges. These challenges include the possible economy erosion,
specifically in the manufacturing sector, with issues related to BRICS, unqualified
and skill-lacking labour market, and contract enforcement, along with many others.
Although, with these many challenges come opportunities. Businesses have the
ability to determine solutions for strategies to deal with the challenges they face.
These strategies include provision of new markets and sources of development
finance, reconstruction of global trade and the political and economic landscape,
and the transfer of new ideas. These strategies go hand-in-hand with some of South
Africa’s opportunities that include investment in oil and gas, vehicle production,
and Industrial Development Zones, tax incentives, programs implemented to
reduce their green footprint, utilizing the opportunity for foreign direct investment,
as well as much more. By implementing some, or all, of these strategies, South
African business will have more success in the economy.
Bibliography
Abstract:
South Africa. (n.d.). Retrieved from WIKIPEDIA:
http://en.wikipedia.org/wiki/South_Africa
About South Africa:
Africa . (n.d.). Retrieved from BBC NEWS: http://www.bbc.com/news/world-
africa-14094760
Economy. (n.d.). Retrieved from globalEDGE:
http://globaledge.msu.edu/countries/south-africa/economy
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Industry, D. T. (1995). White Paper on National Strategy for the Development and
Promotion of Small Business in South Africa. Govemment printer.
Introduction. (n.d.). Retrieved from globalEDGE:
http://globaledge.msu.edu/countries/south-africa
Jacob Zuma. (n.d.). Retrieved from WIKIPEDIA:
http://en.wikipedia.org/wiki/Jacob_Zuma
people & culture. (n.d.). Retrieved from our africa: http://www.our-
africa.org/south-africa/people-culture
South Africa . (n.d.). Retrieved from geographia:
http://www.geographia.com/south-africa/
Opportunities and challenges:
http://triplecrisis.com/the-brics-alliance-challenges-and-opportunities-for-south-
africa-and-africa/
vehicle production challenges:
http://edition.cnn.com/2014/09/22/business/south-africa-car-manufacturing/
Oil and gas Challenges:
http://theogm.com/2014/04/01/south-africa-the-rising-star-of-african-oil-and-gas/
Strategies:
[1] TAXATION IN SOUTH AFRICA 2013/14. (2014, March 27). Retrieved
February 23, 2015, from http://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-
Gen-G01 - Taxation in South Africa - External Guide.pdf
[2] Tax incentive aims to boost R&D innovation. (2014, April 25). Retrieved
February 22, 2015, from
http://www.southafrica.info/business/investing/incentives/tax-incentive-
250414.htm#.VOe7nPnF8pg#ixzz3SKRzcANG
[3] Scientific and Technological Research and Development Tax Incentive in
South Africa. (2011, December 19). Retrieved February 23, 2015, from
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http://www.dst.gov.za/index.php/services/the-rad-tax-incentives-programme
[4] South Africa’s increasing FDI appeal. (2014, November 3). Retrieved February
20, 2015, from http://www.oxfordbusinessgroup.com/news/south-africa’s-
increasing-fdi-appeal
[5] South Africa: Foreign investment. (2015, February 1). Retrieved March 3,
2015, from https://en.santandertrade.com/establish-overseas/south-africa/foreign-
investment
IBUS 3510-01 | Team 1
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