Doing Business in South Africa

South Africa is a country of about 50 million people that is rich in diverse cultures, people and natural heritage. Enjoying remarkable macroeconomic stability and a pro-business environment, South Africa is a logical and attractive choice for U.S. companies to enter sub-Sahara Africa. The country covers 1.22 million square kilometers and is the world’s largest producer of platinum, vanadium, chromium and manganese.

South Africa’s success in holding the world’s single largest sporting event, the 2010 FIFA World Cup, with virtually no incidents involving security or logistics, has shown that the country is capable of undertaking – and successfully completing – major projects on time.

South Africa is the most advanced, broad-based and productive economy in Africa, and had a gross domestic product (GDP) of $287.2 billion in 2009 and is expected to grow by about three percent in 2011. South Africa accounts for 31 percent of Sub-Saharan Africa's GDP in 2010.

The South African economy is characterized by standards similar to those found in developed countries. Its service sector is well established and growing, and the economy is increasingly well managed with slow but steady industrial productivity gains. The banking system is stable and was largely immune to the worldwide financial crisis. The country boasts a well-developed physical infrastructure comparable to OECD standards. South Africa boasts a sophisticated financial sector with well-developed financial institutions and a stock exchange in Johannesburg (JSE) that ranks among the top exchanges in the world.

The United States plays a prominent role in the South African economy and is placed as the third largest trading partner behind China and Germany. The U.S. ranks third as a source of South African imports in 2009 at 7.7 percent, after China and Germany.

Bilateral trade decreased in 2009, reflecting downturns in both economies. U.S. exports to South Africa declined by 31.4 percent from 2008 to 2009, while South Africa shipments to the U.S. fell nearly 41 percent during the same period. The trade deficit with South Africa also declined substantially, from $3.4 billion in 2008 to $1.4 billion last year. (Source: U.S. Census Bureau)

The mature nature of the South African economy is reflected in the mix of economic sectors:

o primary (including agriculture, fishing and mining): 7 percent,
o secondary (manufacturing, construction and utilities): 20 percent; and
o tertiary (trade, transport and services): 73 percent.

Tourism may experience continuing growth in coming years, given its prominence on the world stage with the 2010 World Cup.

South Africa is integrated into the regional economy through its membership in the Southern African Development Community (SADC). In addition, the Southern African Customs Union (SACU) agreement with Botswana, Namibia, Lesotho, and Swaziland, first established in 1910, has also been renegotiated and ratified by all members.

The recent recession has weakened consumer and business confidence, although many of the sectors are improving off their 2009 performances. Consumers continue to concentrate on paying off their debt rather than making major new purchases. At the same time, structural reforms in general have increased the economy’s diversification and openness, bolstering its resilience to external shocks. The banking sector has managed to avoid any serious disruptions, due to its limited exposure to the U.S. and other foreign markets.

Constraints and challenges in African Countries

From a national perspective, the broader regulatory environment does not directly affect the manufacture of clothing, as it is a non-intrusive manufacturing process. However, the highly regulated labour market has a marked impact given the industry’s labour-intensiveness. In this regard wage rates, as well as the oft-cited ‘inflexibility’ of the labour market, appear to have a constraining effect on the sector. Many clothing firms are relocating to non-metro and decentralised areas (particularly in KwaZulu-Natal) where they are able to pay lower wages. This relocation has occurred in an attempt to compete with cheaper imports as a result of global trade liberalisation and lower wage rates in competitor countries. As Table 4 shows, South Africa has high labour rates when compared to competitor countries 15 . Furthermore, South Africa is not only competing with countries that have lower wage rates, they also have more flexible labour markets in terms of additional labour costs (such as overtime and shift pay, sick leave and pension contributions). These factors increase costs, decrease flexibility and reduce the ability of firms to compete effectively, particularly when competing in standard, commodity markets.

Other constraining elements include the South African textiles industry’s lack of competitiveness (with clothing firms forced to source from them due to high tariffs on imported fabric and AGOA’s three-stage conversion rule), the apparent indifference to local sourcing amongst major domestic retailers, the failure of clothing manufacturers to adhere to world class manufacturing standards, the failure of the industry to employ state of the art technologies; and skills deficiencies created by the perception of many professionals that clothing is a ‘sunset industry’ and hence a sector to be avoided when entering the corporate arena.



Industry opportunities 

Although the clothing industry has not performed well recently, it is important to reiterate its labour-intensiveness and the fact that it employs over 150,000 people. It is thus essential that policies and interventions be put in place to secure the sector’s growth and development, or that at least limit the losses that are likely to occur over the next few years. In this regard policy needs to be directed at first stabilising the industry, second re-establishing its foundations, and third providing an enabling environment for its future growth. The recent completion of a Customised Sector Programme (CSP) for the South African clothing and textiles industries holds significant promise in this regard, with the sector development strategy developed through the process identifying 26 Key Action Programmes (KAPs) capable of crisis managing the clothing and textiles industries’ present tenuous positions, re-establishing their foundations and then maximising the numerous opportunities that still exist. These KAPs are presented in Table 5, under each of the levels (critical, foundational and developmental) outlined above, as well as the seven strategic themes that capture their particular intent. For example, the two critical (or crisis management) strategic themes are recapturing domestic market share and maintaining exports. These two strategic themes then have seven and four KAPs respectively. The seven domestic market share KAPs encompass:

(a)Government engagements with multilateral forums to secure appropriate developing economy responses to the importing of distressed and under-invoiced goods, the implementation of customs’ regulations to eliminate under-invoiced and illegal imports, firm-level support for customs in respect of identifying under-invoiced and/or illegal imports, the establishment of a partnership between SACU member states to ensure policy and monitoring consistency, the maintenance of tariffs at existing levels, the aggressive implementation of already enacted country of origin labelling legislation and the associated establishment of a buy South African clothing campaign, and finally the close monitoring of duty credit certificate use through the lifespan of the Interim Clothing and Textiles Scheme. In terms of the maintenance (and even future growth) of exports, the four KAPs are the confirmation and then replacement in September 2006 of the Interim Clothing and Textiles Scheme, the pursuit of new and the expansion of existing Preferential Trade Agreements with key trading partners, the establishment of a project that fully explores African export opportunities, and securing greater levels of EMIA support for the clothing and textiles sectors, particularly when endeavouring to access non-traditional markets.

Not only will the realisation of this vision salvage the clothing and textiles industries, along with the 50,000 to 75,000 jobs that are likely to be lost if present trends continue, there is a real opportunity for the two industries to create jobs once their foundations have been re-established. Based on the industries’ increasing their employment by 25,000 over the period 2005 to 2014 (which is a conservative estimate), this would secure 75,000 to 100,000 clothing and textiles jobs (the majority – 50,000 to 70,000 - of which would be in the clothing industry). Given the estimated R1,411 million cost of the KAPs proposed, and for which we have been able to calculate likely expenses over a five year period beginning 2005, the total employment return on investment from the implementation of the CSP would be exceptional. Based on the lower estimate of 75,000 jobs being secured (50,000 in the clothing sector alone), each job secured would cost a total of only R18,817 over the five year period.

Provincial government support

Clothing has been identified as a key strategic sector in the Western Cape and KZN. In light of this, both provincial governments have set aside funding to support the industry. In the Western Cape, the primary project at present is the funding of a Cape Clothing Cluster, which has as its objectives (1) the fostering of joint action between clothing firms to achieve economies of scale not possible individually, and (2) the facilitation of knowledge enhancement through the exchange of firm-level expertise. These objectives pertain to four areas, each with two-year business plans - human resource development, manufacturing excellence, supplier development and capital upgrading. The KZN provincial government has followed the example of the Western Cape and is in the process of launching a similar cluster, although its focus encompasses clothing and textiles. Following the successful completion of its pilot over the last five months, the KZN Clothing and Textiles Cluster will be formally launched on the 1 st of August 2005. In addition to these Clusters, both provincial governments have funded a variety of smaller projects and research to obtain a clearer understanding of sector dynamics and policy issues.

Regarding empowerment within the clothing sector, CloTrade recently undertook a survey on the demographics of its members. The preliminary statistics from this survey in which 50% of its members participated reveal that:

1. A full 96% of clothing industry employees are PDIs. In addition, PDIs hold 79.5% of management positions, 93.5% of supervisory positions and 39% of directorships.

2. Males make up 16.7% of total employment and females 83.3%.   White owned private companies account for 59%, BEE companies 12% 14 , and foreign owned companies 3% of CloTrade members. The remaining 26% are either directly listed or wholly owned subsidiaries of JSE listed companies.

3. Although the survey is not representative of the industry, the results reflect the industry’s positive BEE and employment equity profile. However, a lack of confidence in the future of the industry appears to have prevented further employment equity and BEE progress.

It is the general view of the clothing sector that government policy is not providing a macroeconomic environment conducive to industry growth. The current strength of the Rand makes South African clothing exports less competitive in their destination markets with many exporters losing international contracts. The strong Rand also fosters increased domestic market competition through the availability of cheaper imported clothing. Most notably, this emanates from China, which now contributes over 70% of total South African clothing imports。

In addition, the uncertainty surrounding the DCCS’ replacement programme places exporting firms in a difficult position with regards to the viability of securing future export contracts. A second significant threat for the South African clothing sector is illegal imports, through dumping and the under-invoicing of imported garments. The South African clothing industry is currently protected by tariffs of 40%, but a common opinion in the industry is that as a result of the inability of the customs service to effectively police clothing imports, real levels of protection are around half the advertised level. Finally, and perhaps even more importantly, the sale of distressed and over-run goods into the South African market at massively discounted values (primarily from China) is having a devastating impact on local manufacturers, with Customs’ apparently incapable of responding to this threat, due to present WTO rules and regulations.