Using an Agent or Distributor to Expand

One of the first steps that an exporter may wish to take in locating an agent or distributor in South Africa is to contact the U.S. Commercial Service in South Africa and register for one of the services specifically designed to meet the needs of U.S. client companies. South Africa offers foreign suppliers a wide variety of methods to distribute and sell their products, including using an agent (also known as a Commission Sales Representative, or CSR) or distributor.

In South Africa, the terms "Agent" and "Distributor" have a very specific meaning: “agents” work on a commission basis after obtaining orders from customers; distributors buy, carry stock and sell products directly to customers.

Agents often distribute durable and non-durable consumer goods, as well as some industrial raw materials. They may be particularly appropriate when products are highly competitive and lack a large market. It is common to appoint a single agent capable of providing national coverage either through one office or a network of branch offices. In addition to their role as the local representatives of U.S. exporters, agents should be able to handle the necessary customs clearances, port and rail charges, documentation, warehousing, and financing arrangements.

Local agents representing foreign exporters, manufacturers, shippers, or other principals who export goods to South Africa, are fully liable, under South African import control law, for all regulations and controls which are imposed on the foreign exporters. Local agents are required to register with the Director of Import and Export Control of the Department of Trade and Industry. It is important for a U.S. exporter to maintain close contact with the local agent to track changes in importing procedures and to ensure that the agent is effectively representing the sales interest of the exporter.

Typical commission rates for agents, (also known as a Commission Sales Representative, or CSR) CSR’s in South Africa depend upon the contract concluded and upon the representative's responsibility. These rates can range from 3 to 25 percent commission per concluded transaction. Companies sometimes pay a retainer fee plus costs plus an incentive scale on deals.

Distributors who buy for their own account and carry a wide range of spare parts often handle capital equipment and commodities such as chemicals, pharmaceuticals, and brand new products on an exclusive basis. Leading distributors often have branches throughout South Africa and sell to both wholesalers and retailers. In some cases, the distributor is also the principal with sub-agents or as a major user of the products.

When appointing a South African distributor, U.S. exporters should take care to find out if the distributor handles a competing product. In some instances, major South African corporations whose holding companies market products competing directly with American products have approached some U.S. Exporters.
In South Africa's competitive marketplace, it is essential that the U.S. exporter provide adequate servicing, spare parts, and components, as well as qualified personnel capable of handling service inquiries. In most cases, after-sales service should be available locally since potential delays often lead purchasers to seek alternative suppliers.

The U.S. Commercial Service has found that the most successful ventures entered into by U.S. companies have been preceded by thorough market research. This is an important first step before engaging in a search for agents or distributors. Once contacts are established, U.S. companies should visit South Africa since first-hand knowledge of the market and society is an advantage. Such a visit provides an opportunity for a personal appraisal of the prospective agent or distributor. U.S. exporters should carefully investigate the reputation and financial references of a potential agent or distributor and establish a clear agreement delineating the responsibilities of both the exporter and the agent.

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.

Global and local policy framework

Clothing factory in South Africa

Multilateral agreements

Multi-Fibre Agreement (MFA): On December 31, 2004 the MFA came to an end and with it the termination of all quotas on textiles and clothing trade between WTO member states. This is likely to significantly affect the apparel industries in southern Europe, as well as those developing economies’ apparel and textiles industries that have grown as a result of access to quotas, rather than genuine competitiveness. One of the major concerns is how China will behave after the removal of quotas. There is consensus that China is the nation that is most likely to benefit, with its clothing exports having already increased significantly since it joined the WTO in 2001, whilst it has the ability to produce a growing range of items, and has improved its capacity to meet international quality standards. In a quota-free world, experts predict that China’s share of world clothing exports may double in less than five years. Along with India, China is therefore expected to dominate global production, with preliminary evidence from early 2005 confirming their threat. India’s overall clothing and textiles exports increased 33% in January 2005, when compared against January 2004 figures, whilst China experienced an even more astounding 546% increase.

African Growth and Opportunities Act (AGOA): This is a US programme that allows certain non-reciprocal tariff preferences to 37 Sub-Saharan African (SSA) countries covering 6,000 product lines to 2015. Clothing is governed by a separate set of conditions and rules of origin. These rules stipulate that clothing has to be made from US fabric, yarn and thread, or from fabric, yarn and thread that is produced in an AGOA-beneficiary SSA country. However, a special rule applies to LDCs, allowing these countries duty-free access for apparel made from fabric originating anywhere in the world until September 2007. With the single exception of South Africa (and Mauritius until mid 2004), all 19 AGOA-beneficiary SSA countries that qualify for the clothing provision also qualify for this rule. Therefore, while clothing exports to the US from South Africa require triple-stage transformation to qualify for AGOA, all other eligible countries are only subject to a single-stage transformation 12 . This places South Africa in a disadvantaged position. Rules of origin tie the domestic textiles industry into the clothing production process and therefore any weaknesses in the textiles sector have a marked impact on the success of clothing exports.

National government policy

Duty Credit Certificate Scheme (DCCS): This is an export-incentive programme for the textiles and clothing industries that ostensibly ended on the 31 st of March 2005, to be replaced by an Interim Clothing and Textiles Scheme to run until the 30 th of September 2006. The DCCS was designed to encourage the outward orientation of the clothing and textiles industries by allowing firms to claim a remission of duty for proven exports 13 .

Alternatively the rebates earned could be sold to any other importer of garments or textiles. This resulted in the majority of credits being sold to retailers who paid as much as a 30-40% discount, which they then used to import garments, thus reducing demand for domestically produced apparel and ultimately hurting domestically oriented clothing firms. Despite DCCS benefits, the appreciation of the Rand through 2003 placed enormous pressure on clothing manufacturers, resulting in most firms being uncompetitive in their principle export markets by 2004. Additional pressure was also placed on the local market due to the surge in garment imports – facilitated in small part by the access of retailers to DCCS benefits. Prior to the expiration of the DCCS on the 31 st of March 2005 the clothing and textiles industries submitted a joint proposal requesting that the dti put in place a two-year Interim Development Programme for the two industries, with this programme retaining the core elements of the DCCS. The response thus far has been confusing, with verbal agreement given on the introduction of an Interim Clothing and Textiles Scheme that replaces the DCCS and terminates on the 30 th September 2006. To date, however, no official confirmation has been given to the two industries, creating widespread uncertainty as to whether it will, in fact be implemented, and what particular form it will take.