South Africa’s trading environment

Despite the years of economic sanctions, South Africa has historically had an ‘open economy’ in the sense that foreign trade has been equal to a relatively high percentage of GDP, between 50% and 60%. As a developing country, South Africa is dependent on industrial imports, and therefore any upsurge in domestic activity tends to have adverse effects on the balance of payments.

South Africa’s main exports are linked to the mining and, to a lesser extent, to the agricultural sectors, and especially to industries that benefit from low-cost electricity. Gold is still South Africa’s largest single foreign exchange earner, although its contribution to physical exports has dropped from over 50% during the 1980s to just over 25%, platinum, diamonds, coal, chrome, manganese and iron ore are the other major minerals, accounting for a further 24% of export earnings. Exports of iron and steel and ferro-alloys account for 15% of South Africa’s physical exports by volume.

Agricultural products, in the form of fresh fruit (citrus and deciduous), wool, hides and grains (mostly maize), together account for 9% of physical exports. Exports of manufactured engineering products also account for a further 9%, of chemicals and related products more than 6% and of other manufactures for a further 10%.

Capital goods and industrial inputs make up some 80% of South Africa’s physical imports. While the country is rich in mineral wealth and is a significant producer of base metals and metal products, there are certain special minerals and metals that are not found locally and have to be imported. In addition to machinery and transport equipment, chemicals are an important import sector.

Product profile of South African trade

Value: South African Rands millions

January to December 1998 % Change over
previous year
Section Imports %age Exports %age Imports Exports
Live Animals, animal products 1,101.2 1% 1,949.3 1% -25% 25%
Vegetable Products 2,882.5 2% 5,592.1 4% 0% -4%
Edible fats and oils 1,415.5 1% 276,195,782 0% 18% 8%
Prepared foodstuffs, beverages & tobacco 3,179.6 2% 5,929.5 4% 3% 8%
Mineral products 12,928.8 9% 19,024.1 13% -23% 2%
Chemicals 15,648.8 11% 9,281.2 6% 13% 3%
Plastics & rubber & articles thereof 5,836.7 4% 3,062.6 2% 8% 56%
Hides, skins & leather products 820.6 1% 1,164.2 1% 2% -8%
Wood and articles thereof 877.9 1% 1,417.8 1% -10% 26%
Pulp, paper & paper products 3,224.6 2% 4,147.6 3% 7% 17%
Textiles & textile articles 5,213.5 4% 3,221.2 2% -96% -7%
Footwear, headgear, umbrellas etc 1,061.3 1% 143.4 0% 2% -6%
Articles of stone, cement, asbestos, mica, ceramics and glass 1,997.4 1% 928.7 1% 16% 16%
Precious & semi-precious stones & metals 2,172.6 2% 35,135.3 24% 3% -16%
Base metals & articles thereof 6,581.7 5% 22,684.3 15% 18% 6%
Machinery & mechanical appliances, electrical equipment 51,888.0 36% 10,271.1 7% 26% 17%
Vehicles, aircraft, vessels & transport equipment 8,822.2 6% 8,023.6 5% 9% 21%
High precision instruments and apparatus 5,677,526,212 4% 829.4 1% 18% 4%
Miscellaneous manufactures 2,315.2 2% 2,717.6 2% 27% 19%
Works of art 58,715.8 0% 93.0 0% -4% 84%
Unclassified 274.5 0% 12,078.2 8% 8% 35%
OEM 9,377.4 7% 23.7 0% 4% 89%
TOTAL 143,356.1 100% 147,994.0 100% 10% 3%

Key trading partners

South Africa’s trading partners have remained fairly constant with the USA, the UK, Germany and Japan amongst the top five. South Africa’s trading partners have diversified significantly since the lifting of trade sanctions in 1992 with countries such as India, Malaysia and China enjoying increasing levels of trade. Partners closer to home include Zimbabwe, Zambia and Mozambique although the balance of trade with African countries remains strongly in South Africa’s favour, a fact that is cause for concern to South African and regional authorities.

SA’s top 40 trading partners – 1998

Value: ZAR millions

1998 Trade % Change over
previous year
Rank Country Exports Imports Total Trade Exports Imports Total trade
1 USA 10,326.6 19,447.7 29,774.3 30% 21% 24%
2 Germany 8,135.4 20,574.0 28,709.4 41% 18% 24%
3 United Kingdom 11,592.2 14,190.0 25,782.2 -33% -2% -19%
4 Japan 7,174.1 11,207.8 18,381.9 2% 16% 10%
5 Netherlands 6,213.9 3,745.1 9,959.0 47% 14% 32%
6 Italy 4,004.6 5,739.8 9,744.4 24% 16% 19%
7 France 2,780.0 6,241.9 9,021.9 53% 34% 39%
8 Belgium 4,544.2 2,484.1 7,028.3 29% 9% 21%
9 Taiwan 3,089.8 3,664.4 6,754.2 -18% 1% -9%
10 Zimbabwe 5,192.0 1,099.5 6,291.5 -9% -19% -11%
11 Switzerland 1,537.0 3,808.0 5,345.0 -49% 33% -9%
12 Australia 1,823.9 3,500.8 5,324.7 10% 7% 8%
13 Peoples Republic of China 917.8 4,330.7 5,248.5 -11% 33% 23%
14 Korea 2,466.0 2,711.7 5,177.7 -31% 0% -17%
15 Spain 2,662.1 2,265.0 4,927.1 -12% 73% 14%
16 Hong Kong 1,822.9 1,751.5 3,574.4 -16% -8% -12%
17 Iran 352.2 3,214.5 3,566.7 -21% -54% -52%
18 India 1,432.5 1,629.9 3,062.4 17% 4% 10%
19 Israel 1,971.5 1,050.4 3,021.9 6% 23% 11%
20 Sweden 446.1 2,477.5 2,923.6 215% 16% 28%
21 Canada 1,334.2 1,504.4 2,838.6 44% -8% 10%
22 Mozambique 173.3 2,646.9 2,820.2 -94% 1474% -2%
23 Saudi Arabia 623.1 2,181.8 2,804.9 -14% 69% 39%
24 Kuwait 109.3 2,425.8 2,535.1 13% 5% 5%
25 Singapore 806.0 1,581.4 2,387.4 -27% 28% 2%
26 Zambia 216.7 2,111.5 2,328.2 -90% 1046% -1%
27 Brazil 1,073.9 1,243.8 2,317.7 -25% -15% -20%
28 Ireland 383.0 1,912.4 2,295.4 33% 45% 43%
29 Malaysia 420.9 1,788.7 2,209.6 -64% 36% -11%
30 Thailand 620.9 1,312.4 1,933.3 -30% 50% 10%
31 Argentina 560.7 1,149.9 1,710.6 23% -8% 0%
32 Malawi 459.9 1,209.0 1,668.9 -59% 203% 9%
33 Austria 433.5 1,171.5 1,605.0 24% 37% 33%
34 United Arab Emirates 736.1 742.8 1,478.9 26% -5% 8%
35 Indonesia 517.2 902.7 1,419.9 -55% 37% -22%
36 Kenya 63.1 1,277.4 1,340.5 -96% 1388% -21%
37 Angola 14.8 1,083.0 1,097.8 -98% 419% 1%
38 Democratic Republic of Congo 24.9 1,043.6 1,068.5 -97% 155% -20%
39 Mauritius 28.0 1,028.6 1,056.6 -98% 3764% -13%
40 Denmark 359.2 585.7 944.9 -45% 16% -18%
Total Trade 147,994.0 143,356.1 291,350.1 3% 10% 6%

Market Entry Strategies

There are a number of different choices when considering the most appropriate method of entering the South African market. These include direct and indirect export (selling to a middleman such as a trader in your domestic market); licensing or contracting; joint ventures and wholly owned subsidiaries. Your choice of entry strategy will depend on the specific characteristics of the market for your product in South Africa including the route that your competitors have taken and the specific characteristics of your product.

Direct Exporting – Choosing the correct distribution channel

One of the most important decisions an exporter has to make when entering a new market directly is the selection of the correct distribution channel. The distribution channel is determined to a large extent by the product itself. There are two distinct categories of distribution channels. They are end users and representatives.

End Users

An exporter may sell his product directly to an end-user that could be one of the following:

  • Import house
  • Government department
  • Manufacturer
  • Wholesaler
  • Retail chain

Import house

An import house may be a trading house dealing in two-way trade and may buy an exporters’ product as a direct customer or it may act as an agent for a buyer. Sales through this channel are generally a single complete transaction.

South Africa has a number of large and well-established trading houses that service both the local and international market place.

Government department

Government procurement is important to the South African economy in that it provides a means of job creation. This is one of the reasons why national and provincial procedures favour purchases from domestic companies in general and companies owned by persons from previously disadvantaged communities in particular.

The Government has a specific policy with regard to affirmative procurement on state tenders. The basis of the policy is embedded in section 217 of the Constitution that states that the provision of goods and services needs to be fair and equitable and that preference needs to be given to previously disadvantaged communities. The state Tender Board and the large parastatals are establishing strategies and procedures that will favour procurement from small and medium enterprises owned by previously disadvantaged persons. Procedures include price preferences and the waiver of sureties to these companies when tendering on government contracts.

It is possible for a foreign company to partake in the bidding provided it has an agent or partner in South Africa acting on its behalf. Most of the purchasing is done through competitive bidding on invitations for tenders. The bids must be on a c.i.f. basis and should include rail charges inside South Africa to the point of delivery.

Further Information on government procurement can be obtained from:
Department of Public Works
Private Bag X65
Pretoria 0001
Tel: (012) 337 2000
Fax: (012) 337 2000

Manufacturer

Large industrial companies or specialist manufacturers will often purchase their requirements directly from producers. This is especially the case for specific machinery or equipment or for bulk users of raw materials.

South African industry is dominated by a few very large, diversified groups, although the current trend towards smaller, more focused groups of operating companies has seen the unbundling of many of these large corporations. These companies are however very important, not only because of their size and diversity but because they are significant end-users of raw materials and capital inputs. Each group will have their own procurement systems to deal with imports. This could be an in-house import department or the existence of an import company for the group that operates independently to supply the parent company and other customers.

In addition to the large groups, there are numerous smaller manufacturing companies who may engage in direct procurement of certain raw materials and machinery.

Wholesaler

Where there is no specialist importer or distributor for your specific product, you may need to sell directly to a wholesaler who services your market. A wholesaler does not usually have exclusive selling rights.

Wholesalers play a very important role in the South African distribution system, in particular in supplying independent retailers and informal operators. Certain of the larger wholesalers in South Africa are also utilised extensively by retailers in neighbouring states who will visit South Africa on a monthly basis to procure their requirements. For certain product groups, particularly in the food sector, the major importers also operate as wholesalers. A further feature of the wholesale sector is that the large wholesalers are often owned by one of the major retail groups.

Retail chain

Large retail stores may also buy products directly from an overseas supplier. This is most often the case when there is exclusivity on a line such as a particular range of linen, clothing or kitchenware. Of growing importance in the South African market is the existence of house brands that are manufactured specifically for a retailer under their own label. A number of house brands available in South African retail outlets are imported.

A feature of the South African retail sector is that it operates within a very competitive marketing environment. As a result, a few large groups dominate the retail sector. For example, there are four major retail groups that dominate the foodstuff business, accounting for well over half of the formal retail sector.

In addition to the major chains, there are a large number of independent retailers who cater to their own segments of the market.

Representatives

There are two types of representatives:

  • Agents
  • Distributors

Agents

The term ‘agent” should be used in the direct legal sense to refer to a person who, for and on behalf of a principal, either introduces a third party to the principal by soliciting orders from the third party, or concludes contracts on behalf of the principal with the third party. The normal reward for an agent is a commission, which is received from the principal.

The key considerations in appointing an agent in South Africa are:

  • You need to appoint an agent who knows your market well. The South African business sector is relatively small and companies have established methods of procurement that differ from sector to sector. One tends to find that there are relatively few agents who serve a particular sector, but, because they are well established within the sector, they have the support of their customers.
  • You need to consider the aspect of national distribution. South Africa is a large country with nine provinces. The smaller agents will tend to operate provincially, as they do not have the infrastructure to support operations in other provinces. If you decide to go this route you may need to appoint an agent in each of the larger cities namely Johannesburg, Cape Town, Port Elizabeth and Durban to cover each of the respective provinces. The larger companies who take on agencies will often have an office in each of the major centres making any agency agreement easier to control.
  • For certain product South Africa is a trading hub for the southern Africa region and you need to consider whether your South African agent should handle business in these countries on your behalf.

Distributors

A distributor buys and holds stock of a product. In return, he is usually granted an exclusive right to sell the product in a particular area or to a particular type of customer. The agreement with a distributor will be similar to an agreement with an agent except that price and delivery terms will be different because the distributor is a principal.

When appointing a distributor in South Africa, the same considerations apply as to when appointing an agent.

Licensing, Franchising and Contracting Agreements

Licensing

A licensing agreement is an agreement whereby the licensor gives something of value to the licensee in exchange for certain performances and payments. Usually what is transferred is some sort of industrial or commercial expertise such as a patent on a product or process; the right to the use of a trade mark or brand name; copyright; manufacturing know-how or technical or marketing advice and assistance. The benefits of a licensing agreement are that you can gain access to the South African market and your licensee’s local marketing and distribution infrastructure and customer base without the risk of direct involvement.

Agreements by South African companies to pay licence fees to non-residents in respect of the local manufacturing of a product are subject to the approval from the Department of Trade and Industry. Accordingly such companies must submit to the Department of Trade and Industry three copies of the draft royalty agreement as well as a completed questionnaire which is obtainable from the Department or any commercial bank. The Department of Trade and Industry will communicate their decision to the licensee, or the Exchange Control Department of the Reserve Bank where applicable, which will enable an approach to a bank directly to transfer the royalty payments.

Agreements by South African companies to pay licence fees to non-residents where no local manufacturing is involved are subject to the approval by the exchange control authorities. Any royalty payment eventually made to the non-resident licensor must be substantiated by an auditor’s report confirming the basis of calculation and that it is in terms of the agreement.

Franchising

Franchising is a form of licensing hereby the franchiser provides a standard package of components together with management and marketing expertise and the franchisee provides capital, market knowledge and personal involvement. A number of companies, especially in the fast-food sector have successfully accessed the South African market via franchise agreements.

Further information is available from:
The Franchise Association of Southern Africa
Private Bag X30500
Houghton, 2041
Tel: +27 11 484 1285
Fax: +27 11 484 1291

Contracting Agreements

Contract manufacture involves a formal, long-term contract between parties in two different countries for the manufacture or assembly of a product. The company that places the contract retains full control over distribution and marketing. Contract manufacturing is used in South Africa principally in the clothing and footwear sectors.

Direct Investment

South Africa’s trade and industrial policy is in the process of fundamental change, moving from a highly protected inward looking economy towards and internationally competitive open economy. The investment climate can be interpreted in terms of the goals of government’s macroeconomic strategy that is to lift the economy in the medium-term to the higher levels of growth, competitiveness and outward orientation required to achieve the Government’s social and economic objectives. Despite the challenge of balancing the need for an open economy with the process of industrial expansion aimed at creating employment and expanding productive activity, the South African government has made progress including:

  • A significant reduction in tariffs ahead of commitments to the WTO;
  • No restriction on the type or extent of investments available to foreigners
  • No government approval required on investments
  • The development of an industrial cluster programme
  • Abolition of exchange control on non-residents
  • A proactive strategy to attract foreign strategic equity partners into the process of restructuring state assets and infrastructure
  • The availability of investment incentives

The government has established a National Investment Promotion Agency (Investment South Africa) to provide investors with assistance. The details of ISA are as follows:

Investment South Africa
1st Floor Corporate Place
23 Fredman Drive, Sandton
Phone: +27 11 884 2206
Fax: +27 11 884 3236
Email: isa@isa.org.za
Website: http://www.isa.org.za

A number of foreign companies have made investments in South Africa ranging from a simple branch operation through to a complete manufacturing operation. The establishment of joint ventures is a popular method of investment with a number of investments based on technology and management transfers. The benefit of a joint venture is the value of local knowledge in a complicated market.

South Africa as a base for exports to Africa

South Africa can be a viable base for exports to many regions of the world, but is has a special advantage for the development of African trade. A fairly strong argument can be made for South Africa as a base for multi-national corporations to develop their business with sub-Saharan Africa.

South Africa is inextricably linked to Africa and a logical base for African operations for a number of reasons including:

  • Africa is a logical trading partner by way of South Africa’s position on the continent. South Africa’s geographical proximity to major African markets gives South African suppliers a distinct advantage through shorter lead times.
  • There is a strong desire to grow intra-regional trade. The South African President, Thabo Mbeki has introduced the concept of the African Renaissance, a concept to develop a collective spirit in Africa and understanding that will allow Africans to solve Africa’s problems and develop a proud African identity into the new millennium. An important aspect of this will be the development of intra-regional trade.
  • South Africa’s development is linked to the development of southern African as a whole. The rationale of the SADC Free Trade Agreement is based in part on the need to develop the industrial capacity of the SADC region for the benefit of all parties.
  • South African products are created and adapted for African conditions.
  • South Africa has strong political relations with most countries on the African continent. On a practical level this translates into a number of South African missions and accreditation’s across the continent and, on a reciprocal basis, a number of African countries maintain missions in Pretoria. This makes the issuing of visas and assistance with the development of trade easier.
  • South Africa plays an important role in regional organisations. South Africa is a member of the South African Customs Union and the Southern African Development Community (SADC). The SADC Free Trade Protocol is due for implementation in January 2000 and will provide goods of South African origin with a clear preference. South Africa has taken a one percent shareholding in the African Development Bank and has been granted qualified access to the Lomé Convention which gives South African companies access to projects in sub-Saharan Africa.
  • South Africa’s exports to the continent have been growing strongly for the past eight years. In 1998, trade total trade was valued at some R25 billion (US$ 4 billion) with African destinations accounting for some 14% of total exports. The significance of South Africa’s trade with Africa is that it is principally in manufactured goods with over 60% of exports to Africa in categories of prepared foods, chemicals, base metals and articles, machinery and motor vehicles and parts. A further feature of South Africa’s African trade is that 75% of trade is conducted with countries in the SDAC region.

SA’s top 15 African trading partners outside of the SACU

Value of trade 1998, South African Rands % change 1998/97
Rank Country Exports Imports Total Trade Exports Imports
1 ZIMBABWE 1,099,585,239 5,192,047,402 6,291,632,641 -19% -9%
2 MOZAMBIQUE 173,369,243 2,646,952,337 2,820,321,580 3% -3%
3 ZAMBIA 216,723,327 2,111,543,869 2,328,267,196 18% -3%
4 MALAWI 456,906,223 1,209,006,644 1,665,912,867 14% 7%
5 KENYA 63,104,671 1,277,491,936 1,340,596,607 -26% -21%
6 ANGOLA 14,837,479 1,083,026,607 1,097,864,086 -93% 23%
7 DRC 24,903,220 1,043,678,768 1,068,581,988 -94% 13%
8 MAURITIUS 28,014,690 1,028,526,781 1,056,541,471 5% -14%
9 TANZANIA 25,465,486 998,568,654 1,024,034,140 35% 3%
10 NIGERIA 437,572,850 294,893,855 732,466,705 -48% 45%
11 GHANA 27,606,615 489,088,073 516,694,688 66% 25%
12 EGYPT 298,641,082 130,171,933 428,813,015 58% -12%
13 COTE D`IVOIRE 132,399,666 183,394,506 315,794,172 4% 67%
14 UGANDA 10,735,701 299,841,803 310,577,504 471% 88%
15 MADAGASCAR 339,541,268 256,540,726 296,081,994 124% -14%
  • Since South Africa’s political transformation, a number of multi-national corporations have transferred their Africa regional offices to South Africa and a number of others have made some kind of investment in South Africa on the rationale that South Africa is a sound springboard for their African business. In the same vein, South African companies are making investments across the continent in a number of sectors.
  • Successful business depends on the ease of movement of people, goods and information and South Africa’s infrastructural links with the rest of the continent make the physical aspects of conducting business easier. There is a good road network connecting South Africa to Southern Africa. This gives South Africans a distinct competitive advantage in the region as road transport is quicker and cheaper, especially when one considers that a number of these countries are landlocked. There are established shipping links with the rest of Africa and co-operation takes place on many levels for example, South Africa’s involvement in the port of Maputo. There are air links with all states in sub-Saharan Africa on a regular basis and South Africa’s national carrier, South African Airways, provides technical support to a number of African airlines including the leasing of planes. This makes servicing these markets from South Africa far easier as in most cases, the flying time is relatively short. For example, it is one hour flying time to Maputo from Johannesburg and four hours flying time to Nairobi. The South African rail authority, Spoornet, are working on connecting the South African rail system to southern Africa and one can now send cargo by rail from Cape Town to Dar es Salaam. South Africa has direct telecommunication links with all African states. There are a number of countries where communication is still very difficult but this is due to the bad state of internal networks in certain African states.

Shaun Bakamoso

Greetings. I'm Shaun Bakamoso, and I'm thrilled to be your guide through the dynamic world of business news in South Africa here at mbendi.co.za. With a passion for staying informed and a keen interest in the ever-evolving landscape of business, I've dedicated myself to providing you with timely, insightful, and comprehensive coverage of the latest developments impacting the South African economy. bakamoso@gmail.com / Instagram