In September 2011 President Zuma raised his concern about the lack of black industrialists in South Africa and called for the economy to produce “authentic black entrepreneurs” who own factories. A few months later in his 2012 State of the Nation Address, President Zuma introduced government’s plans to make a massive investment in infrastructure. The aim, he said, is to “industrialise the country, generate skills and boost much needed job creation.” A few days later, during his budget speech, Finance Minister Pravin Gordhan announced that R845 billion is to be spent on energy infrastructure, transport, logistics, housing, telecommunications and water, budgeted for the next three years.
The role of B-BBEE
In December 2011 new procurement regulations as well as proposed amendments to the Broad-Based Black Economic Empowerment Act were introduced, in terms of which tenders can no longer be awarded to black intermediaries who then pass on the skilled work to non-compliant companies. Sub-contracting of worth more than 25% of the value of the project now must go to a contractor with an equal or greater B-BBEE status or to an exempt micro enterprise.
This is aimed at encouraging the development of capacity within black-owned companies. Local production is also given more support with the ‘China Clause’ which requires tenders to stipulate a minimum threshold of local production and local content and obliges contractors to honour these terms. Contractors may not change their minds and procure cheaper materials from China.
The B-BBEE amendments also propose a controversial requirement that states that, in order to score BEE points for Enterprise Development, companies will be expected to provide practical support to their beneficiaries, in addition to the funding support that was originally required.
But are any of these measures sufficient to boost the development of black-owned manufacturing companies?
Walking the talk
My colleague, Deon Oberholzer, CEO of Gestalt Fund Managers, believes that it’s all very well to introduce procurement regulations, but government itself must walk the talk. He cites the example of the Gautrain busses which were imported instead of being manufactured locally. South Africa’s manufacturing sector has suffered due to competition from other emerging markets. Manufacturing now only represents 15.6% of the South African GDP.
Some commentators believe that government is the guilty party – it has the greatest buying power in the country but is itself not sufficiently committed to local procurement. The concern is that government will repeat its old ways in its proposed infrastructure projects. “Will they still contract the bulk of the work to larger international companies that only employ temporary construction workers, or will they find a solution to bring the black medium-sized businesses into the projects on a sustainable basis?” asks Deon.
Some local authorities are being proactive in this regard. A notable example is the Rustenburg Local Municipality in the Northwest Province, which has embarked on a R3 billion investment in a rapid bus transport system to serve the entire Rustenburg region, including the surrounding rural settlements and the mining operations in the area.
The municipality has stipulated that 25% of the money paid to contractors has to be spent within the community. The result is that contractors are engaging with local suppliers, transferring skills and building capacity. The system will be run by specially trained professionals selected from within the community and support services (such as bus and infrastructure maintenance and manufacture of materials and uniforms) will be sourced locally, supported by procurement agreements with the local authorities.
But even with a nationwide drive to involve local suppliers and build local manufacturing capacity, we still have the challenges of our critical skills shortage, along with a serious lack of understanding in our emerging sectors of the complexities of entrepreneurship.
The reality of working in SA
In October 2011, Deon conducted a study of a group of Soweto-based entrepreneurs and found a number of constraints; a poor understanding of financial systems (such as the difference between income and cash flow), a misperception of how the tender system works compounded by a belief that all are entitled to a fair share of tenders, an inability to market their products, a limited grasp of paying suppliers, collecting payment, applying for funding or the purpose and content of the business plan, a poor understanding of or compliance with labour legislation, little ability to manage customer relationships, no functional understanding of health and safety requirements, and neither the tools nor the skills to develop strategies for growth or manage a bigger business. Overall, the test group perceived the role of government as a required enabler and yet an unwelcome restraint in terms of regulations and compliance.
According to Deon, other studies have also shown that emerging entrepreneurs are constrained by mindsets of entitlement, self pity, a focus on short-term gains and the inability to move from thinking like an employee to thinking like a business owner. He concludes that, given these challenges, the policy of giving blanket support to all SMEs is not the answer to fostering the rise of black-owned industrial companies. To meet this specific target, we need to identify high potential businesses early and give those selected businesses the right support.
If private businesses are indeed required to be hands-on in supporting black-owned enterprises in terms of the proposed amendments to BEE legislation, this could go a long way in identifying potential industrial stars. But then government has to come to the party as well by committing to procurement from new local suppliers and directing practical resources to specifically help establish such new manufacturing companies.
Land ownership is a critical factor in empowering a new black industrial sector. Government land should be allocated for the development of industrial clusters, with ownership rights built into the deal. Once ownership of the land and its infrastructure is in the hands of the people who are working on it and there is a stable market for their products, along with knowledge transfer coming from established businesses, then much else can fall into place, such as; leveraging of funds, accountability for success and retaining the flow of money within that community.
The R845 billion infrastructure building programme has the potential to create a platform for sustained industrial development and transformation. But government will need to be vigilant about the structure of its tenders and will have to do as much to empower its suppliers as it is asking of the business sector.
Medium-Sized Businesses Reap Greater Rewards In Tough Times
With prominent industry names being added to business rescue reports almost every week, risking it all in times such as these may sound ludicrous.
We’ve said it before: Diversifying, streamlining and investing in new ventures during the tough times is vital to a company’s survival.
Running a successful and diverse business requires resources, passion and an unwavering vision. Poised for continuous growth, a company looks to its team of forward-thinking, calculated risk takers to help prepare and invest for the future, now.
Investing in the future and creating wealth means doing things right – right now. With headlines such as ‘real estate investments in SA increase by R28 billion’ and ‘the industrial sector is the top performer in the SA property market’, it makes sense to put your money where your mouth is in 2018.
Bartlett Construction is one such company. Wayne Bartlett, Contract’s Director for Bartlett Construction says that the company opened its property division several years ago in a quest to gain more market share and use its expertise to cultivate a robust property portfolio.
“Accelerating our economy through investment is key. While there are still high hopes for SA in 2018, applying a long-term strategy to property investment allows you to reap the real rewards in future,” says Wayne.
Acquiring, building and renovating factories and industrial spaces has been a focus for the company over the past few years. “We have all seen the headlines about the industrial sector performing well in terms of property and this is true. It’s truly sad to see some of the big names (in all industries) undergoing business rescue but ultimately, waiting for times to change and focusing on one strategy is never advisable – especially not in a market such as this one” he continues.
Creating a scalable business in times such as these is key. Wayne notes that medium-sized companies have remained notably robust by ensuring just the right amount of resources to remain lean, yet effective.
“The economic downturn has had significant impact on both big and small companies. Companies with high overheads, many employees and massive contracts on the line have been most affected. Small companies, on the other hand, with very little business and resources who rely on business from big and medium businesses have also taken a knock.”
Established more than half a century ago and with Wayne having 30-plus years of experience in the industry, it’s fair to say that he has seen it all. “What’s helped our company through the years is remaining scalable and finding balance. Times are tough, and everyone is feeling the pinch – success is dependent on how the industry performs but we try our best to never over invest or under invest; we diversify whilst maintaining high-levels of competency in our current projects, we are fair and reward long-standing, loyal employees who give us that competitive edge and we adapt according to industry and client needs.” Wayne concludes.
How To Leverage Partnerships, Industry Associations & Endorsements
Nobody can succeed in business entirely on their own without personal as well as professional support. ‘Signing up’ can be a deciding factor in the growth of a company, says the Proudly SA CEO.
Leverage by association can be a great business tool. Hitching your wagon to an industry associated body, joining a local chamber of commerce, or seeking a respected contemporary’s endorsement can change your brand recognition struggle to an opportunity. Becoming part of a whole new entity can be one of the best decisions you will ever make.
How to choose your partner or affiliation?
You know the expression ‘Two heads are better than one’ so you should choose a partner or affiliation that exposes you to twice as big an audience as you can reach alone, preferably with a different customer base. Find an association that fits with your own business ethos and has the same goals as you, otherwise you will find you are working against each other rather than complementing each other.
What do you stand to gain?
By association you will appear in listings, on websites, you will be invited to related events where you can network your socks off, and in some cases, doors will automatically be opened for you. Visibly aligning yourself with an organisation that can propel your brand and/or product into the market place should be grabbed with both hands.
What does the partner stand to gain?
Your relationship with a partner should be symbiotic, benefitting from each other’s contacts as well as a platform for sharing ideas.
What are my responsibilities towards the other party in the relationship?
Perhaps you will have to add a logo to your marketing collateral or packaging, perhaps you will have to comply to standards even higher than those you set for yourself. Perhaps you will have to pay subs or a small joining fee, or even a large joining fee, so you need to decide what you can afford and when.
But you must view the relationship in a positive light even if it involves redesigning artwork or re jigging your material. There is no point in ‘signing up’ if you’re not prepared to share your brand affiliation with your customers and suppliers. It’s like getting married and refusing to wear a ring.
How long should I sign up for?
You really should take a long-term view of any marketing relationship. Your hook up may take time to filter down into the market place, you may have a lot of pre- relationship stock that doesn’t have the logo of your new partner on it, so you will need to give a fair chance to the whole exercise.
What happens if one party brings the other company into disrepute by association?
No one wants to be brought down if someone or something with which you are closely associated is found not to be quite as ethical or honest as you. Don’t forget this isn’t a JV, it’s a brand partnership, and so as long as you are operating separately, you will always be able to distance yourself from any scandal should the need arise. (But hopefully you chose your brand affiliation well!) , but by and large, being the single part of a whole can only be beneficial when you’re starting to build your brand.
How does using the Proudly South African ‘tick’ logo fit in?
The Proudly SA logo is the mark of an authentically locally grown, manufactured or produced item or service that is of proven high quality. It can be leveraged in the same way as any other brand affiliation and can assist in providing access to market and building trust with your buyers and suppliers.
The Differences Between A Supplier Relationship, Agency And Distributor
To a large extent I suppose it depends on industry, the vision of the business and how quickly you wish to scale.
Many businesses reach the point where they have to consider in which way to best expand its market share and reach. In many industries, a customer and supplier arrangement are sufficient, but in others different arrangements such as agency or distribution are preferred.
So, the question is – what is best and when?
Well, to a large extent I suppose it depends on industry, the vision of the business and how quickly you wish to scale.
1. Supplier / Customer
This is a typical arrangement of a willing buyer willing seller. In most instances this is the typical way in which business is run or at the very least to a large degree this is the starting point. Clients or customers are typically engaged by agreement usually a form of terms and conditions or perhaps even an agreement detailing credit.
An agency agreement could either relate to an individual or an organisation. This means an individual or a business could represent the supplier of the goods or services and earn a commission or remuneration for their efforts to sell the goods or services.
In this context an individual is often referred to as a “rep”, which is a typical arrangement for wholesalers marketing products to retailers. In many instances these agreements do not constitute employment contracts and further, the agent does not buy and on-sell the products.
The agent usually refers orders to the supplier and therefore is cost effective for both parties and further limits risk. This also means that the supplier benefits from a relatively low input cost and commitment but increased sale. An important portion of an agreement such as this is that the agent has certain powers in representing the supplier. It is therefore of crucial importance that the agent’s powers are constructed in such a way as to serve the needs and best interests of both parties.
A crucial difference between agency agreements and distribution is twofold – one: that the distributor does not have any power of representation as an agent would typically have. Secondly, that the distributor usually purchases the goods / products from the supplier and then stores, transports and sells, as the case may be. In most cases these agreements are confined to goods.
It is therefore important for the business to assess what would sell the most products or services in the shortest space of time. Then to seek professional advice to construct the most suitable agreement.
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