SA becoming "a follower" in Africa
In 1995, South Africa accounted for more than 50% of the GDP of Africa. Today that figure stands at 33%. While the South African economy chugs along at 3% growth, more than a dozen other African countries are achieving more than 7% growth. South Africa is rapidly losing its economic edge on the continent. A more innovative approach is needed to turn back the tide and time is running out for South Africa to do so.
The facts are startling. "Essentially a country that grows at 7% for a decade doubles the size of its economy. Today, more than a third of the 37 countries in the world achieving this are African. Within the next decade, at least half a dozen countries on the continent will be bigger than SA. In absolute terms, Nigeria will overtake South Africa by 2016 and Egypt will follow. Kenya and Ghana are not far behind."
According to Bell, the early gains of the South African companies who pioneered the push into the rest of Africa are being lost. "From mining and construction to banking, hospitality and retail, corporate SA was the first to invest where others where not investing. Yet, today many of these companies have been eclipsed.
"The Tsogo Sun group was one of the first hotel companies to expand into the rest of Africa. Today it has a six hotels in five African countries; but the Radisson group which only started to expand into Africa a few years ago has more than 15 hotels in 12 countries (excluding SA), and plans for several dozen more."
Bell cites another example: "If you travel to South Sudan, Liberia or Sierra Leone, it is Nigerian, Kenyan and Ethiopian banks who are most visible, opening branches and entering those markets.
"The impression is that companies from other countries are doing the running and setting the agenda in other parts of Africa. SA looks like a follower rather than a leader."
Competitive advantage
For Bell the number one sustainable competitive advantage for SA is its presence on the continent.
"The analogy I use is how Hong Kong relates to China. Hong Kong companies have been successfully expanding to other parts of the world, but their fundamental source of competitive advantage is that they are the gateway to China. A vast amount of the activity in China – the financing, the training, the design, the thinking - is still happening out of Hong Kong. I firmly believe that is what SA Inc. should be doing, how they should be positioning themselves. It is the one clear competitive advantage for South African companies."
Informal market potential
One challenge is that South African companies seem to be less comfortable serving lower income consumers, says Bell.
"Banks from Kenya and Nigeria, not SA, are coming up with the most innovative models on how to create lower cost financial products and distribution systems and tailor them to lower income consumers and SME entrepreneurs.
"Indian companies are another case in point. They are bringing all the lessons they have learnt about serving the bottom-of-the-pyramid customer to Africa. Even Western multinationals like Unilever, Nestle, P&G and Cadburys are realising that the majority of their growth for the next few decades, is going to come from lower income consumers and hence their focus is on markets like Africa.
"Meanwhile, many South African companies are stuck in a different mindset. One of the legacies of apartheid is that companies were structured to serve the middle class. In general, they are not geared towards producing lower price points like the Kenyans are doing.
"Take the Mpesa mobile money revolution sweeping the world. A South African company was involved from the outset but the true value of the concept has been most eagerly adopted and replicated by companies elsewhere in Africa. There are numerous examples like this. As a whole, South Africans are not at the cutting edge of the economic innovations that are changing the face of the African economy."
Localisation
According to Bell, one of the keys to coming up with creative solutions relevant to the African environment is the localisation of management and capital.
"Developing local ownership and management is key to adapting to changing circumstances and maintaining operations no matter what happens. An excellent example of this is Coke or Pepsi. Wherever they operate in the world, they have tended to localise the ownership and management of their distribution networks. That is one reason why you find a Coke in every village in the world no matter what civil war is going on…
"In general, South African companies have had less confidence in the capacity of local entrepreneurs and have tried to do everything themselves rather than create these distributed networks. It may be one reason why they are losing out to others who are tapping into the power of localisation."
Cannibalisation
A further complicating factor is "cannibalisation".
"All over the world, as soon as a company has created a lower price-point bank account, diaper or hotel room, the concern is that higher-paying consumers will start demanding the same level of service for that price point.
"European and American multinationals face the same concern, but the successful ones are waking up to the fact that they either cannibalise themselves or someone else will do it for them. They have learnt the hard way that if the innovation exists, it will take over the market.
"They are not alone, but SA corporates still seem to be relatively timid in targeting lower-end consumers. They tend to see it as a CSR experiment on the side and are not looking at the fundamental business process re-engineering required to cut out all the unnecessary costs in order to profitably service those lower price points."
Regaining the initiative
"The biggest issue is collaboration and productivity," says Bell.
"Some SA companies like MTN, Vodacom and SAB Miller are doing amazing pioneering work. However, almost all of them are doing it on their own. There doesn’t seem to be a combined strategy to develop and position SA as the gateway, the nerve centre for the rest of Africa.
"The South African government spends a lot of money in the rest of Africa. Between the direct spend of departments like Defence and Foreign Affairs and investment by agencies such as the DTI and the Development Bank of SA; billions are being outlayed by SA in the rest of Africa.
"Obviously each entity needs to pursue its own separate goals, but at minimum wouldn’t it be powerful to gather all these entities in a room once a year to assess how we are spending that money and how we can do so proactively to the benefit of the continent and to enhance our own competitiveness? It’s not a issue of narrow nationalism but rather an assessment of where we need to develop a good business environment in order to reinforce South Africa’s role as the Hong Kong of the continent - the financing, design, and training centre for the rest of Africa.
"This thinking should extend to parastatals. SAA, ESKOM and Transnet all have ambitions in the rest of Africa particularly the SADC region. ESKOM, for instance, could be helping to finance the work that helps other countries fix their electricity regulatory systems so that power stations can get built. The excess power will then not only be available to those countries where it is a restraint on economic development, but also to SA where it is becoming an ever-bigger constraint.
"In the case of the private sector one of the key challenges in all emerging markets is the lack of last mile infrastructure. Are there opportunities for SA-based Telco’s and FMCG companies like SAB Miller, Tiger or MTN to work together to come up with innovative last mile technology that would allow their distributors and customers to process orders and payments?
"In the mining sector the biggest challenge and opportunity facing all mining companies is the ability to create local sourcing networks. Mines all over Africa are under fire because, while they might be exporting minerals worth hundreds of millions of dollars, only a small fraction of that comes back into the country in the form of local wages, taxes and royalties.
"Instead of focusing on the taxes, why not rather focus on the 80% that flows out of the country to pay for imported inputs? If we could produce that 80% within the country – by producing locally the fuel, power, reagents, building materials and other supplies needed by the mine, rather than importing them – the economic impact of those mines would increase exponentially. In addition, it would put them into a much better relationship with the government and local communities."
New thinking
"The trouble is that the input requirements of any individual mine may not be sufficient to attract investors to develop a local supplier base. Imagine however, if several mining companies started working together to aggregate their demand and then collaborated to build a local supplier base for their shared input requirements.
"Fuel is a good example. Right now, most mines spend the majority of income they earn to import fuel to run their equipment and generate power. Imagine if they started using the same money to source their power and fuel locally – using bagasse and ethanol from sugar or biomass and bio-diesel from oilseed plantations. By doing so, they would create thousands more local jobs, they would help to reduce power shortages and they would reduce the import of the bill of the country by many millions of dollars. Not only would this ensure a huge amount of money stays in the country, it would ultimately make their supply chain more reliable and lower costs, while also winning more political and social support for their activities.
"Collaboration, collaboration, collaboration. I am not saying that South African companies are doing badly. They are all doing quite well on their own. But imagine how much more could be achieved if government and the private sector were working together to take a proactive lead in the rest of Africa instead of the follower stance that has developed."
"The fundamental issue is that South Africa’s economy is growing at 3%, while the economy of the rest of Africa is growing at 7% a year. It may be a lot easier to do business here in South Africa. There are a lot of risks and challenges doing business in the rest of Africa and, in the short term, companies may earn higher returns by focusing on the middle class in SA.
However, in the medium term, if the South African government and private sector do not become more creative in how they do business in the rest of Africa, we risk becoming the "has-beens" on the continent, while more nimble operators from countries like Nigeria and Kenya take over."