Is South Africa the Gateway for Your Business in Africa?

Anyone browsing a statistical table on sub-Saharan Africa will see one country stand out in nearly every area.  While no longer possessing the continent’s largest economy (that honor now goes to Nigeria), South Africa is easily the continent’s wealthiest and most developed country.  Unlike oil-dependent Nigeria, South Africa’s economy is broadly diversified, with manufacturing, commercial agriculture, tourism, technology, and service sectors more robust than any others found on the continent.  Modern South Africa’s economic backbone for more than a century was its vibrant mining sector, but—while still important—mining accounts for only 6 percent of GDP.  A visitor to the country can often think he or she is in the United States or European Union, with solid infrastructure, Western retail operations, and modern housing, making it appealing for expatriates.  Combined with first-rate air links around the continent and generally low costs, it’s no wonder that a vast majority of non-African businesses doing business on the continent have headquartered their operations either in Johannesburg or (increasingly) Cape Town.

That said, most of the recent news out of South Africa is disheartening.  Handicapped by a host of factors—particularly poor political decision-making, massive skills shortages, and declining investor confidence—South Africa’s economy has been stagnant in recent years, with growth in the 1-2 percent range per annum since 2010, far below almost every other country on the continent.  This is not an entirely fair comparison, given the far lower base of most other African states, but the flat growth is nonetheless worrying.  There are no silver linings on the horizon.  Chinese demand for primary materials, a key growth driver in South Africa like most of the continent, looks to be stagnant for the foreseeable future.  South Africa’s schools are struggling to cope with the skills shortage, which predates the country’s pre-1994 apartheid system that robbed black South Africans of educational opportunities and is a key factor behind the country’s 25+ percent unemployment rate.  And President Jacob Zuma did the country no favors in firing the respected Finance Minister in December 2015 after he questioned dodgy government procurement decisions.  The move sent the rand tumbling (it was at a near all-time low of 16 to the dollar at the beginning of 2016 and continues to hover near 14) and threatened to push the country’s credit rating to near junk status. 

Overall, the picture is a mixed bag—South Africa remains far ahead of the rest of the continent in many ways, but everyone else is catching up.  What does it all mean for the potential investor?  It’s a tough question, and one heavily dependent on what a company or investor wants to do.  Below are a few key questions companies should ask in advance about their engagement in South Africa that will help them better decide what sort of exposure they want to have:

Do I want to put my African headquarters in South Africa?  As noted above, South Africa has many benefits as a corporate headquarters.  Crime is a concern, but it is by far the easiest place to lure expatriate (including African) workers due to the outstanding quality of life.  However, companies should pose several questions to determine whether a South African office is right for them.  First, does your company need a physical base on the continent for African operations?  It is worth considering the value added by such a move, which will vary by sector and your company’s goals.  Second, does a South African base work for your target markets?  South Africa has excellent air links to southern and central Africa; east and west Africa are broadly accessible but a longer haul.  And if you’re doing business in Francophone Africa, many countries are more easily travelled to via Paris.  Third, how easy will it be to hire the sorts of workers I need?  Companies in almost every sector report difficulties hiring skilled local staff, while South Africa’s bureaucracy in recent years has made it more and more difficult to bring in expatriate staff.  Companies over a certain size also may face hiring quotas or political pressure to take on local partners.  Lastly, it is worth remembering that there is a great deal of anti-South Africa bias on the continent; companies seen as “South African” often face hostility from politicians when competing with local firms.  Overall, there is no “right” answer, but all of these questions should be taken into account. 

Do I want to enter the local market?  South Africa’s relatively wealthy consumer base and respect for rule of law might make it appealing for some outside companies looking to enter the local market, but its diversified economy is likely to mean tough going.  Unlike most African countries where one or two companies dominate a given sector, South Africa usually has several, either competing against one another or acting as a sort of oligopoly.  Either way, new entrants into the market—particularly from the outside—will find entry difficult.  Also worth noting is that government procurement is a major revenue generator for many local companies, and it will be difficult for outsiders to crack this market without political support.  Lastly, the weak rand will hold down any corporate profits that would be expatriated—and even taking funds out of the country is regulated by law.  There are surely opportunities for companies to make money in South Africa, but outsiders need to take a critical look at whether these opportunities are worth the inherent challenges.

Do I want to export to South Africa?  Exports to South Africa are another area that is going to face tough going given the weak rand, as import prices are increasingly unaffordable.  That said, while South Africa’s economy is relatively diversified, there are a range of specialty products that are not widely available on the local market; exploring these niches is worthwhile.  Furthermore, American and European products generally have high levels of positive brand recognition, particularly compared to Chinese products.

Do I want to acquire a local company, either to access the South African or other African markets?  While the weak rand is a bane to exporters, it poses opportunities for companies looking to acquire established South African companies, particularly those already with footholds in Africa.  South African assets are remarkably cheap right now, and the cost of doing business there—never high—is falling even further.  As a petroleum importer, South Africa also looks to benefit from low fuel prices, worth considering if local or regional transport is a concern.  Hence, companies thinking about establishing a ready-made African operation should give consideration to outright acquisitions. 

South Africa is a wonderful place.  We at ISI know it well and are broadly of the view that its possibilities far outweigh its drawbacks.  However, doing business there is not for every company—it will depend heavily on your sector, your goals, your risk profile, and a host of other factors.  ISI can help you answer these key questions, providing you with market analyses, company due diligence, political analysis, and many other services to help you go in with eyes wide open.  

ISI Consultants assists U.S. companies to enter or further expand their business in Middle East and African markets. From small projects to longer-term engagements, we put our knowledge and experience to work for you, saving you time and money and minimizing your risk. And our results-oriented approach means we don’t just advise you on what to do to be successful – we work with you to get it done.

As part of our commitment to the National Export Initiative (NEI), ISI Consultants offer a limited number of COMPLIMENTARY STRATEGY SESSIONS each month to qualified U.S. companies. 

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