South Africa - Market ChallengesSouth Africa - Market Challenges
- There is serious, growing concern about a host of political, economic, and regulatory factors that affect foreign businesses adversely. These include persistent reports about corruption and mismanagement in high government circles that reached a crescendo in 2017 under the administration of then-President Jacob Zuma, significant unemployment, violent crime, insufficient infrastructure, and poor government service delivery to impoverished communities.
- U.S. firms entering this market must contend with a mature and competitive market marked by well-established European and Asian competition. A trade agreement between SADC and the European Union enables many European products to enter South Africa duty-free or at lower rates than U.S. products.
- The volatile rand-dollar exchange rate can complicate planning, especially for smaller or new-to-market firms. Although forward cover is readily available, and the rand is one of the most heavily traded currencies in the world, the cost does reflect interest rates, which tend to be higher than in United States and developed markets because of South Africa’s relatively higher historical rates of inflation.
- Government instituted Broad-Based Black Economic Empowerment (B-BBEE) policies aim at redressing economic imbalances among historically disadvantaged communities to facilitate socio-economic transformation through granting procurement preferences on government contracts (including state-owned enterprises (SOEs) based on a company’s level of B-BBEE achievement. B-BBEE requirements demand due consideration by all firms planning to do business with the South African Government, SOEs, and within the general business community, including as a provider within the supply chain of companies doing business with the government and SOEs. The South African Department of Trade and Industry introduced new, more ambitious “affirmative action-like” requirements in 2013 that among other things induce improved economic opportunities by awarding more points in the equity/ownership requirement than previously. As in the past, entities gain credits if they include in their upstream and downstream supply chain partnering with other entities that qualify as being compliant on employment equity and other criteria. B-BBEE fronting that creates the appearance of regulatory compliance is a criminal offense and may lead to a fine of up to 10% of an entity’s turnover or up to 10 years’ incarceration by directors and complicit staff. A few foreign companies have addressed the ownership element of B-BBEE by negotiating “equity equivalency” programs with the dti that emphasize training and development of local companies. Also see Selling to the Government below.
- For new-to-market U.S. exporters, these affirmative-action like trading requirements have encouraged use of low-exposure market entry modes by teaming up with qualified local importer-resellers and service providers who act as the prime contractor to the South African Government and large economic players. The South African Government is continuously changing the mandatory industrial localization requirement for foreign suppliers that often view this as a cost and risk factor for doing business in South Africa.
- Since 2012, the South African Government has continued to tighten labor and foreign ownership laws and mandated industrial localization. Sectors of specific concern have included the extractive industries, security services, and agriculture. It remains uncertain in which direction government will go to address rigidities in labor regulations in the face of popular discontent around unemployment, poverty, and inequality. Since 2017, the initially populist rhetoric of expropriation of land without compensation has become mainstream and has the potential to become a defining element of future politics.
- Skilled labor can be difficult to find in many, if not most, technical and professional segments despite increasing unemployment (while the nominal rate is 26%, most observers look to the broader definition including those who have given up looking for a job, which is currently 37%), due to the poor state of the public education system. In addition, HIV/AIDS affects approximately one in ten South Africans with unfortunate implications for labor availability, productivity, and healthcare costs. Annual labor negotiations have been marked by violence in previous years, although the last three years have been relatively peaceful.
- 2016 saw a 104-year record drought in the central and northeastern part of the country come to an end, but water scarcity will remain a major concern for agriculture, power generation, and human consumption. The Western Cape still has a significant water deficit that has led to a declaration of emergency that severely limits water supply.