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The China Effect: The Good, The Bad and The Ugly

China’s meteoric growth has destroyed local industries – but it has also opened new markets.

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There’s no doubt about it – China has changed the way the world does business. And with its increasingly massive clout and the state’s growing closeness to the South African government the Asian giant is likely to play an even greater role in the lives of business owners here in future years.

In just over two decades China has catapulted from its spot as the 10th biggest economy, to become the second biggest economy in the world. It’s now also the globe’s biggest exporter and its hunger for resources has made it the third biggest importer in the world, after the US and Germany. Estimates are that it will overtake the US to become the world’s largest economy in the next seven to 15 years.

In the meantime, China will continue growing at  breakneck speed, albeit at a lower forecast average of 7,5% over the next four years. This is more than double South Africa’s expected growth over the next three years, but down on the 11,2% a year China recorded between 2006 and 2010.

Local manufacturers suffer

In the last decade cheap Chinese imports have wiped out large swathes of local industries. There is already evidence that fewer South Africans are setting up factories. Figures from Business Partners reveal that between March 2004 and March 2007 (the year before the recession), the SME financier’s investments in manufacturing grew from just 107 a year to 119, bottoming out to 105 the following year.

During this time the manufacturing sector, as a percentage of the financier’s total number of deals, shrunk from 20,9% to 17,9% of its portfolio, before falling to 15,7% in 2008. This was at a time when the local economy was pumping, but these figures suggest that not many South Africans were rushing out to set up factories.

On top of this, vacancy levels for Business Partners’ industrial properties had moved from 5% five years ago to 10%, says managing director Nazeem Martin. He adds that many of the properties which were once filled by small factories are now filled by businesses with repair shops or suppliers of goods to the services sector.

In the furniture sector where manufacturers have been hard hit by cheap imports, Michael Reddy, chief executive of Seda furniture incubator Furntech, says the only way for furniture manufacturers to stay in business is by supplying fewer goods at higher prices.

In Brazil, the South American country is ratcheting up support for small firms. But cheap Chinese imports only make up 3% of consumption in the Brazilian market, according to Lawrence Edwards, associate professor in the School of Economics at UCT.

Edwards, who is studying the effect of Chinese imports on South African businesses, believes that Chinese imports make up a much greater percentage of the market here – easily 5% or more. The penetration of Chinese imports into South Africa will be higher because the country has a small economy with a small scope for manufacturing, he says.

Yet, it’s only in recent months that the government has appeared ready to step in to assist local firms hit by the China effect, with the Minister of Finance Pravin Gordhan’s announcement in the 2012 Budget Speech that billions would be given in incentives to improve the competitiveness of local businesses.

Edwards believes that despite SA’s more defensive trade policy approach, following the stalling of the Doha round of World Trade Organisation (WTO) talks, South Africa won’t be bringing down tariffs, which are as high as 40% to 45% on clothing.

This might be good for some local factories, if it continues this way, but it won’t stop Chinese entrepreneurs from coming to South Africa. More local companies are being approached by Chinese companies that want to sell them raw materials.

Colin Mkhonta, the chief executive of Seda’s chemical sector incubator, Chemin, says he receives “almost weekly” requests from Chinese firms to sell raw materials for cleaning products to incubatees.

Now, as they have done in other parts of Africa, Chinese firms are steadily moving into South Africa to take shares in mines and manufacturing companies. Chinese investors are also likely to keep an eye on infrastructure projects announced by President Jacob Zuma in his State of the Nation address in February.

Already three Chinese automotive manufacturers are set to move into the country soon, according to Martyn Davies, emerging markets analyst and chief executive of Frontier Advisory. But Davies, who is helping the South African government to bring Chinese investors to the country, says local businesses won’t necessarily score big, as many Chinese firms will bring their own suppliers with them when they set up here.

Peter Draper, a trade analyst and senior fellow at the South African Institute of International Affairs (SAIA), believes China’s demand for commodities will be key. He argues that China’s enormous economic might presents certain opportunities for local entrepreneurs, including a quest for land, as the Chinese are looking for land from which to export goods or foodstuffs to China.

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New opportunities

Yet it’s not all bad. The China effect, as some have termed it, has helped spawn new businesses, such as suppliers and importers, and opened up a large new market in the Asian giant itself.

The Johannesburg Chamber of Commerce and Industry (JCCI) has set up a matchmaking programme with chambers in Sao Paulo, Brazil; Shanghai, China; and Delhi, India, to allow local entrepreneurs to interact with one another over the Internet.

“We are going to work with the new BRICS (Brazil, Russia, India, China, South Africa) thing, instead of fighting it,” concedes JCCI chief executive Keith Brebnor. “China is not going to go away, so we are embracing them. If you don’t embrace them these other countries outside Africa will go direct to African countries. So we should move in.”

China’s continued rise is likely to bring with it both threats and opportunities for South African entrepreneurs. Here are some predictions:

  • Chinese exports to move to high-tech

Chinese goods will continue to land on our shores in large numbers, but years ahead these are likely to include more sophisticated, high-tech products. Even if prices are expected to be a bit more expensive than before, local factory owners manufacturing high-end products will have to ensure they have cornered a niche market and can compete on price and delivery with Chinese products, by turning to just-in-time delivery or doing small runs.

Some say China is where Japan was in the 1960s – producing cheap goods which were often of dubious quality, before shifting to more technical electrical and computer products.

Under its current 12th five-year plan (2011-2015), China is looking to aid seven priority sectors as it moves to focus more on high-technology. These are: renewable energy, energy conservation, new materials (such as high-end semi-conductors), biotechnology, IT, high-end manufacturing in telecoms and aerospace equipment and clean-energy cars.

China is also making significant investments in the development of new products and between 1998 and 2007, the country along with Korea, showed the biggest increase in R&D spending, according to the Beijing Axis.

At the same time wages are set to rise. In February the Chinese government released a job market plan to set minimum wage levels at 40% of average local salaries within three years. Cheap labour, which up until now has been supplied by the country’s poorer interior, is also becoming more scarce.

Also, under the current plan the country is making a concerted effort to strengthen its domestic economy, or the share made up by private consumption, but Chinese exports won’t slack off. According to a KPMG report, exports will continue to grow – from ¥11,3 trillion last year to an expected ¥16 trillion in 2015. So expect more high-tech goods at higher prices to start streaming into South Africa in coming years.

  • Opportunities in Africa

Much has been made of Chinese businesses backed by easy finance, moving into Africa, particularly where infrastructure projects are rolled out in exchange for mineral resources. Some liken it to neo-colonialism, others say the Asian country’s projects are a godsend to a poor developing continent.

China’s growing presence on the continent may even create big opportunities for South African firms in financial and other services.

Barrie van Wyk of Beijing Axis points out in a September 2011 edition of Beijing Axis publication, China Analysis, that China’s increased business in Africa has also created demand for services, and thus opportunities for legal firms, banks and other service providers. These are areas of strength for South Africa, and more local companies should be exploring the African market.

Standard Bank economist, Jeremy Stevens says that while China’s focus is turning towards domestic matters, the Asian dragon is also eyeing Africa now more than ever – particularly with the uncertainty in traditional northern markets of Europe and the US.

Africa remains a key market for China, particularly when it comes to its demand for commodities,including minerals and oil. Last year China-Africa trade hit a high of $155 billion.

Africa is also growing fast, and has already been outlined by McKinsey and others as one of the most attractive markets over the next few years. Yet despite this, Africa is in need of an urgent infrastructure overhaul. Stevens estimates that the continent needs about $100 billion a year to build new roads, erect new powerlines and maintain and develop other key infrastructure.

And although it will mean stiffer competition for local firms operating on the continent as they struggle to compete against cheaper Chinese turnkey projects, Stevens, who has been based in Beijing for six months, believes it also means more opportunities for South African entrepreneurs.

He stresses that it makes “long-term structural sense” for China to partner with South Africa, the biggest manufacturing sector on the continent. Added to this, many larger South African firms have become household names across the continent. Stevens believes Chinese firms could also help with another South African problem – unemployment.

  • Prospects to enter the Chinese market look good

With over 1,3 billion people China has become a valuable market for entrepreneurs to tap into. Chinese consumers are on the rise and the country is already the biggest car manufacturer and second biggest energy consumer in the world, as incomes have tripled between 2000 and 2010, according to Beijing Axis.

China is set to become the largest market for luxury goods by 2015, when it will account for 29% of consumption of luxury goods, according to the Boston Consulting Group.

And China’s goal to increase technological capabilities in a range of sectors will mean that Chinese regulators will welcome advice and training from experienced foreign companies, according to public affairs global giant Apco.

South Africa is looking for a slice of the action and the Department of Trade and Industry last year presented the Chinese Ministry of Commerce with a list of ten key sectors that they would like to promote to Chinese consumers, including wine and vehicle manufacturing.

But, trade analyst Draper cautions that South African entrepreneurs who export food products to China will come up against health checks and have to compete with China’s heavily subsidised local agriculture sector.

For South African firms looking to invest in China, having expertise in a cutting edge technology or service is far more important than arriving with briefcases of cash, says emerging markets analyst Davies. China, with the world’s largest dollar reserves, isn’t short on funds.

Breaking into the market, he says, will also require good people skills, as doing business in China is a very human relations-dependent exercise. There is also the issue of language. Any meaningful transactions will require knowledge of Mandarin.

According to Davies, about a dozen or more South African companies have a presence in China. These include Kumba Iron Ore, Naspers, SAB Miller, Anglo American, Hollard, Old Mutual, earth compacting company Lanpac, Barloworld, FirstRand, Capespan (which invested 20% in a food distribution company in Shenzhen) and Discovery Health.

Despite this, Davies says the number of South African companies in China remains limited, particularly compared with Australian firms which have been there for some time.

“South African companies have been late to the party,” he says, adding that a small country like Switzerland already has 500 companies based in China.

This means that entrepreneurs will have to keep a watchful eye on China – be it exporters looking to expand into new markets or  business owners looking to roll out a new factory. The Asian giant offers both opportunities and threats, but, with careful planning, the opportunities can outweigh the threats.

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Stephen Timm is a freelance writer at Entrepreneur Magazine.

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2 Comments

2 Comments

  1. sugarequip

    Jul 11, 2012 at 08:05

    Its interesting that I recently learnt that in Pakistan that the government raises or lowers customs duties to earn foreign exchange and to protect local manufacturing / employment. Why do we not do the same seeing as employment read jobs is so widely discussed??

  2. Andrew Blaine

    Jul 11, 2012 at 12:27

    Unless South Africa initiates a serious programme for the beneficiation of both raw materails and small manufacturing organisations in the very near future the country is destined to become a vassal state to China who will control our raw materials. The evidence supporting this contention is everywhere in Zimbabwe but then we could not follow that example courld we?

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Business Landscape

How SMPs Can Support Businesses Looking To Internationalise

Key findings from a new global research report from ACCA suggest Small and Medium Sized Accounting Practices (SMPs) recognise many of the key challenges and opportunities that internationalising SMEs face in today’s global economy. This provides them with an excellent platform towards providing additional value-added support to clients.

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Much has been written in recent years about how SMPs are experiencing a growing number of commercial challenges that are disrupting the client services they have traditionally relied upon for revenue.

Equally, many have argued that more SMPs need to consider whether diversification into new advisory services could be the key towards the sector’s future success. However, such change can be difficult when talent flows in the sector are uncertain and competition is fierce.

Whilst not appropriate for everyone, ACCA was therefore interested to explore whether international trade is one area where SMPs’ unique experience and expertise might lead to the development of new service provision.

Our findings suggest that many SMPs are equipped with an excellent platform towards providing additional value-added support to clients. However, despite SMPs stating that most of their clients had been involved in some form of international activity over the last three years, their current provision of relevant support remains highly focused around a small number of limited areas.

The new report, Growing Globally – How SMPs can support international ambitions, also revealed the following about internationalisation and the relevant advice landscape for SMEs. 

Although the research was global, specific findings from five key markets have also been extracted and presented. These markets are Ireland, Malaysia, Nigeria, Singapore and the UK. They were selected on the basis of their representation of markets in various stages of economic development, and their global and regional importance to international trade.

SME internationalisation today

  • Just under half (45%) of SMEs said the main benefit of internationalisation was access to new customers in foreign markets. Increased profitability (35%), faster business growth (33%) and access to new business networks (30%) followed.
  • Both SMEs and SMPs considered ease of doing business and high growth potential as the most important factors when choosing an export destination. Geography was seen as less important, which may be a result of new technologies reducing its significance as a perceived barrier.
  • Both SMEs and SMPs recognised foreign regulations as the most significant barrier to internationalisation. For SMEs, the second most important was competition (27%) though for SMPs it was foreign customs duties.
  • In terms of the future, SMEs’ international ambitions are focused on building the capacity of their business (45%), building networks in foreign markets (45%) and introducing or developing more products and services to market (44%).

Related: Technology In Accounting – Race For Relevance

The advice landscape

  • A wide breadth of professional advice and support is used by internationalising SMEs, who tend to reach out to different sources as they move along their internationalisation journeys. Government or relevant public agencies (39%) are the most widely used source of professional advice, closely followed by lawyers (35%) and then banks (33%).
  • Accountants are most likely to be used by SMEs when looking for support on international tax, regulatory compliance, foreign exchange and accessing external finance.
  • Only 9% of SMPs said they had no clients who had been involved in any international trade activities over the last 3 years. Importing and exporting activities were the most common, as was participating in broader international supply chain networks.
  • SMPs mainly rely on internal and informal resources when advising clients about internationalisation. However, this gradually shifts towards a reliance on more external and formalised resources as practices grow in employee size.
  • Just under half (47%) were not members of any networking organisation, potentially missing out on valuable resources that could enable the development of more effective forms of international support.

Using these findings, ACCA conducted a series of interviews and roundtables with SMPs and SMEs globally. The subsequent insights were used to develop recommendations on how practices can look to develop their international advisory provision.

  • Specialisation is key – For those developing their international advisory provision, it is vital to first identify an area of the market where you believe your practice has the opportunity to effectively develop its expertise, resources and intelligence to best suit the needs of your clients. SMEs’ demands for international advice vary according to sector and size of business. Building a market focus is more likely to make any future expansion of international support more achievable and successful.
  • Adopt a strategic mindset – Identifying where you could best add value in terms of international support requires SMPs to think strategically and embark on initial planning and research. The best place to start is with existing clients rather than prospective ones, as they provide a readily accessible (and more approachable) evidence base to explore where demand is likely to be greatest. Making efforts to understand your clients’ internationalisation needs can then help you shape your wider international advisory offering.
  • Expand your international network – Networks are integral for the development of new professional advisory services but particularly with regards to internationalisation. This is because global value chains often necessitate close and efficient coordination of activities between businesses. SMPs should therefore aspire to become the central referral point for clients looking to find the most appropriate source of professional advice.
  • Invest in professional development – Practices must have highly skilled staff with the appropriate intellectual knowledge for clients to recognise the value in the services offered. Creating a structured programme of learning activities for staff around international trade could be useful for SMPs looking to upscale their international advisory provision. This could involve introducing formal learning activities across more technical areas of international trade (such as tax, compliance and foreign exchange) as well as working with other firms to develop knowledge networks where staff can learn, collaborate and access good practice.

Related: Investing In Value Creation Tools Can Help Your Business Grow

As SMEs continue to seek new ways of engaging in international trade, partly brought about by developments in technology, practices are being presented with opportunities to develop and widen their international advisory provision.

For some SMPs providing additional support to clients involved in international markets will not be feasible or practical. Nonetheless it is important for all practices to continue recognising the changing realities of how SMEs are operating globally.

The key challenge in taking advantage of such opportunities is centred on the risks that inevitably come with the business model optimisation required to provide new and relevant client services.

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Business Landscape

Unlocking Optimism

South African entrepreneurs have one singular advantage that makes them stand out and succeed – optimism.

Howard Feldman

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Game drives. There is a remarkable similarity between the South African on a game drive and the South African entrepreneur. In both cases you’re driving through new territory on the lookout for that ultimate sighting or an opportunity. It’s the endless optimistic belief that around the next corner, after that last stretch of long, hot road, will be that crocodile eating that leopard that’s chasing a caracal. It’s an optimism that’s permeated the very fabric of our culture, our business personalities and the way we face adversity.

South Africans live with adversity every day. We face challenges and issues that our entrepreneurial counterparts in Europe or American don’t even realise exist. Adversity sits on every street corner, hangs out at every robot and reminds us of its presence whenever we stop and look around.

Yet the entrepreneur can take these complexities and harness them to be better at business and more positive in the face of failure. Here are five ways to re-examine what the world has on offer with the eye of the optimistic entrepreneur…

1. The tremendous challenges in our socio-economic and political landscape, from poor sanitation to the unemployment situation, can inspire us to do more and better the world we live in.

Today, many of the most impressive entrepreneurs on the African continent are those who stood up from within adversity and used it to create opportunity. From organisations that ensure children have sanitary pads so they can attend school to non-profit businesses that use the blind to detect breast cancer, optimistic belief in the future is the beating heart of entrepreneurial endeavour.

Related: 6 Of The Most Profitable Small Businesses In South Africa

2. Anyone can succeed

There are people standing at robots across South Africa who are using them as a shop corner, using the captive car audience to sell products and make enough money to get by. Some create works of art, some dance to an invisible beat, and some stand out in their ingenuity. There is a robot in South Africa today where a man stands selling life insurance. That’s the optimistic entrepreneur.

3. We are constantly surprising ourselves

South Africa’s transition from apartheid surprised the world. There wasn’t a bloody revolution, there was a peaceful shift. It was, and still is, imperfect, but it happened with far less brutality than many imagined. The same applied to the World Cup – the stories of doom were ready to be told, but the event was an incredible success. South Africans are capable of surprising themselves and this unexpected brilliance shines through in our ideas and our ventures.

4. Sometimes you just have to laugh

The corruption, the political manhandling, the rage, the insanity on the drive to work, the rising cost of living – the pressures of living in a volatile country take their toll, but South Africans manage to find the humour hidden in the hardness. The adverts that poke fun at the insanity, the ability to laugh at mistakes – this nation’s sense of humour is a very powerful quality that allows the South African entrepreneur to stand up and face each day with a fresh sense of purpose.

Related: 27 Of The Richest People In South Africa

5. We bounce back

The one quality that every entrepreneur needs is resilience. Businesses fail, ideas crash, customers leave and bad times arrive, but through it all self-belief and the ability to see something positive in what’s happened will ensure that lessons are learned and new paths taken. It is perhaps one of the hardest things that any entrepreneur has to learn and yet in South Africa, with its ongoing failure to provide that crocodile-leopard-caracal viewing, has imbued its entrepreneurs with the enviable qualities of patient resilience.

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Business Landscape

Depressed Economy Leading To Business Bust-ups

Palmer looks at the most common causes of business bust-ups and how to avoid them.

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News that our GDP had shrunk by 2.2% in the first quarter of the year, coupled with downward revisions of growth forecasts, are casting a pall on the investment climate. Deals are not only drying up, but there has been an increase in business partnerships bearing the brunt of the economic pressure.

After the initial flush of economic goodwill post the inauguration of President Ramaphosa, we’ve seen a flurry of business owners looking for finance to buy out their business partners.

We have had a number of attorneys and accountants refer dissatisfied partners to us who are looking to exit partnerships. When the economy slows – as we have seen over the last few months – many partnerships begin to show signs of stress. All too often partnerships are seen as tools of necessity and those who rush into these deals without properly exploring the common values between parties will not fare well when things get tough.

What many don’t understand is that undoing a partnership is not as simple as they may think and will come with legal and other costs over and above the finance to buy a partner out.

Related: Government Funding And Grants For Small Businesses

The most common causes of business bust-ups (and how to avoid them) are the following:

1. Misaligned expectations

This occurs when potentials partners don’t share a common vision of where they want to go, how they want to get there and what each wants from the deal.

Misaligned expectations of a business venture will result in disagreements sooner rather than later as they impact every strategic (and even some operational) decisions. It is worth considering a mediated session between partners before the deal is even drafted.

2. Effort Resentment

Another problem creeps in when one partner feels like they are tasked with doing all the work. Resentment around how much effort is put into the success of a venture is not something to be taken lightly – irrespective of it being based on perception or fact. Most contracts will be clear on the value of the equity each partner has, but many ignore the value of sweat equity and how that will be measured and factored into the deal structure.

3. The Golden Rule

Many partnerships are based on one individual who puts in the lion’s share of the capital and another who is committed to doing the day-today work. Effort resentment extends beyond the deal negotiation. When a contract between partners is drafted it reflects a future which is not yet known. As the venture progresses, reality will set in and the division of labour agreed at the outset may not match day-to-day business in year three or four.

It is sometimes useful to draft partnership agreements as you would a lease. Give it a three- or five-year timeframe, with clear deliverables and then, at the end of the period, reassess the partnership and allow for renewals or re-negotiation. Having a sunset clause in your partnership agreement removes the soul-crushing feeling that you are trapped in an unhappy relationship with no chance of escape.

Related: How South African Small Business Owners Can Overcome Economic Uncertainty

4. Honour amongst thieves

Although seldom encountered, there are some partnerships which fall apart because someone is doing something blatantly untoward. Finding out your partner had their hand in the till can be devastating but in tough financial times, such as we are currently experiencing, some people will resort to desperate measures.

5. Absentee landlords

In many cases, a partner may have committed capital to a venture and even agreed to joint expectations. But other work commitments (or a lack of interest) means they disappear from operations for extended periods. No-one wants to work with people who are uninterested in the future of your company. However, the truth of the matter is any breakup has associated costs. Unwinding a partnership can cost more than setting it up and this should be considered before going down that road. Many investors are involved in multiple ventures with the same partners and exiting one deal may result in prejudicing the future of others.

While no-one can predict how long the economic slump may last, minimising the potential for partnerships falling apart requires a meeting of minds. This means agreeing to a common set of values and ethics which will govern how the business is run.

Partners need to agree on how they see the world if they hope to make a success of the business relationship. Thereafter, they should explicitly voice their expectations of how the venture will work, what they want out of it, and how they see their role in achieving that result. In some instances business partners have been together longer than they have been with their spouse. It makes sense to treat the relationship with the same care. More particularly, healthy partnerships will attract more investment and will be a key decision factor when it comes to raising future funding.

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