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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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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How Schindlers Attorneys Became Involved In The Landmark Cannabis Case
Everything you accomplish accumulates and eventually comes back to assist you further along in your career. This is how a final year LLB assignment became the basis for a Constitutional Court case.
Schindlers Attorneys are the law firm that were involved in the landmark Constitutional Court judgement on cannabis use within a private space. Paul-Michael Keichel, Partner at Schindlers Attorneys shares how they came to be the foremost legal experts on cannabis and how they became involved in the Constitutional Court case:
How the journey began
“In 2005, my first year at Rhodes University, whilst studying for Intro to Law, it occurred to me that there were strong constitutional points that could be raised to objectively justify the decriminalisation of cannabis in South Africa,” explains Paul-Michael Keichel.
“In my final year LLB, 2009, I took Constitutional Litigation as an elective (largely motivated by the creation of a timetable clash, which meant that I’d not have to sit another semester of lectures for a module that I had failed the previous year). This provided me with the opportunity to write an assignment titled “A Critical Analysis of Prince and an Objective Justification for the Decriminalisation of Marijuana in South Africa”, in which I composed my argument (based on the right to equality in our Constitution).”
The start of the partnership
“Fast forward to 2013 and the Dagga Couple find themselves at Schindlers (where I am a first-year associate) to register their NPC, “Fields of Green for All”. The attorney handling the registration (who I’d also bored with my argument) suggests to the Dagga Couple that they speak to me. It turns out that they already knew of me, because my assignment had (unbeknownst to me) done the rounds on the underground cannabis networks. We get chatting and I rope-in my brother, Maurice Crespi, the managing partner of Schindlers,” explains Keichel.
“We are the only firm out of many approached by the Couple who are willing to take on their trial action against 7 state departments and Doctors for Life to push for a declaration of constitutional invalidity of the laws prohibiting cannabis use/possession/dealing in South Africa. We decide to run the challenge for them pro bono.”
The Cape ruling that started it all
“Prince and Acton et al have their matter heard in the Cape, which resulted in the 2017 Judgment. We run a portion of our trial (including expert evidence from international scientists and doctors – the best in field), but it is rendered part-heard. We then heard that Prince and Acton et al’s matter will be heard by the Constitutional Court in November 2017 and we decide, with the Dagga Couple, to intervene in that matter, upon which it is confirmed that my 2009 assignment forms the on-record basis of a major chunk of Prince and Acton et al’s arguments in support of legalisation.”
“Our involvement in the Constitutional Court was such that we provided clear legal argument and authority to support and expand upon what Prince and Acton et al were trying to say to the Court. Ultimately, much of what we submitted has found its way into the judgment of the Constitutional Court.”
How a final assignment became the foundation for a Constitutional Court case
“So, an idea (bolstered by wanting to create a timetable clash) resulted in an assignment, which provided certain credibility and impetus to cannabis activists. Two of these activists ended up being our clients, which, despite being handled pro bono, has brought Schindlers immeasurable positive publicity, and which, ultimately, contributed to the decriminalisation (and potential future legalisation and commercialisation) of cannabis in our country.”
“Schindlers now has a dedicated “Medicinal and Recreational Cannabis Law” department, through which we will continue to make submissions to parliament, apply for licenses on behalf of our clients, support those who have been arrested and charged.”
6 Ways To Win A Better Deal
Be proactive not reactive by working through these six critical elements of your strategy.
By far, the majority of our clients start the journey of selling their business by working on a very reactive basis. Most business owners going to market say they just want to ‘see what happens’. But this means you are starting the process on the back foot.
This approach automatically takes the control of the business sale out of your hands and puts it into the hands of the market. Keeping control is a critical element in selling your business for maximum value.
Letting the market tell you what they think about your business and what they want from you means that straight away the acquirers set the hoops that you need to jump through.
They tell you what they want. Any engagement is on their terms.
You have not defined terms or standards to use as a yardstick for what the market is saying. So you are much more likely to find yourself boxed into a corner, forced into the role of price taker rather than price maker.
Taking the time to define your ‘go to market’ strategy is a critical factor in achieving success for yourself, what you want for your business and how the market aligns to this.
Be proactive not reactive by working through these six critical elements of your strategy:
1. Define your non-negotiables
We all have certain non-negotiables in our lives and you must think through those that you want to apply to the sale of your business.
Spend quality time working out what your personal and business non-negotiables are. Then make sure that they feature prominently in your deal strategy. Examples could be:
- I am prepared to stay on for only 18 months after the sale conclusion.
- My staff need to be looked after as they have been with me for 20 years and are like family.
- I want to sell 100% of my shareholding on Day 1.
- I am not prepared to warrant future profits.
When you start out on the selling journey, this list will probably be a lot longer. Usually, it will reduce as you travel further and further down this road but you may even add new non-negotiables once you climb into the trenches and take control of the process.
Don’t be shy about presenting your list of non-negotiables to prospective buyers. They will certainly be putting forward their own list as well.
Related: Savvy Business Sale Spells New Life
2. How ready and committed are you to sell your business?
Selling your business is one of the biggest decisions that you will take in your life. It is an emotional rollercoaster. You will face more questions than answers as you progress down this road. Nobody can ever be 100% ready but you can help yourself prepare as much as possible by asking yourself the following questions:
- Do I know what my business is worth?
- Is my business ready for acquirers to see?
- Am I ready to let go of my business?
- Can my business run without me?
- What makes my business attractive and enticing to an acquirer?
- Do I have the time and skills to embark on selling my business myself?
As you work through these questions, a whole host of other questions will probably occur to you. Be decisive, objective and critical in asking and answering all these questions.
3. Put a plan together
Like any other business or strategy implementation, selling your business is a project. All projects need a plan of the objectives, timing, resources and risks required to succeed.
Selling your business is by far one of the most important projects that you will ever drive and also one with the least room for error. Your planning cannot control the biggest variable of all – how the market will react to your business. But being as well prepared as possible will help you cope with this.
4. The market wants a serious seller
The way that your business and personal brands show up in the exit process is critical. Buying or selling a business is a very time-consuming process, with both seller and acquirer committing quantities of effort, energy and resources.
The market therefore wants to deal with a committed and serious seller. Any business owner just dipping his/her toe into the water to see what happens will frustrate them and potentially damage future transactions if that toe is removed from that water.
5. Be ready for the experts
You are brilliant at running your own business, which is why you are considering selling it for maximum value. The acquirers on the other side of the table are, of course, also experts at what they do and how they do it.
Expect them to speak a different corporate language, exude negotiation and transaction skills and have mastered the ability to control the transaction. If you do not have a strategy or blueprint to default to when the heat gets too high, you will lose your way and could be blindsided into the wrong transaction.
6. Bring it all together
Work through the various steps identified above and craft your deal strategy. Let this framework be your compass during the transaction.
Always lean on it when there are too many variables being thrown at you. Having your strategy is the first step. Sticking to it will be your biggest test when the pressure is on.
Hooked On Ethics
The business that puts ethics at the forefront of its culture is the one that will shine in a landscape littered with dishonest behaviour.
There is significant research into how the work environment influences ethical behaviour. Study after study has shown how the ethical values upheld by management filter down to all employees, affecting behaviour and business practice. The biggest influence on a person’s ethics is their environment. In South Africa, the after effects of the recent political regime continue to shake both country and citizen. Corruption has seeped into almost every part of the government and in some of the country’s most prominent private organisations.
The old saying that the ‘fish rots from the head’ has never been truer, nor more obvious.
The ethical dilemma
The reality is that the government’s flagrant disregard for ethics saw corruption become a part of everyday life. This makes almost everyone ask themselves questions like – why should I pay X utility bill? Why should I pay my TV license? The money is being clearly used fraudulently. Sure, it is the law, but leadership has proven that ethical behaviour isn’t rewarded or recognised.
But it is. The value of building an ethical business and upholding a culture that promotes honesty and integrity cannot be understated.
Here are five reasons why…
- Those who skirt the edges of ethics almost always get caught. There has been a steady shift in the country’s moral compass as leadership has taken a far stronger stance on rooting out corruption and already some of the country’s biggest names have been found guilty. KPMG, McKinsey, Bell Pottinger and SAP have all had their names tarnished by the scandals that have rocked the country.
- Employees are more engaged and better behaved. A weak ethical culture filters down from the top, influencing behaviour and attitudes. If employees feel that they can get away with bad behaviour that benefits them, or if they feel that their environment encourages this, then they will.
- A strong ethical influence will dictate how employees treat customers and one another. If your company enforces and rewards honesty and integrity, then these will be the qualities that clients will perceive. Their lack may also see you lose market share and your reputation.
- Like attracts like. If you create a culture that rewards employees that work all hours, deliver the goods and commit themselves then you will attract more people with these qualities. The same applies in reverse – reward bad behaviour and the results will rapidly speak for themselves.
- Your business reputation. Trust can’t be bought. It is hard won and easily lost. If you lose your reputation then it is very unlikely you will win it back and it will follow you for the rest of your life. The same applies to your staff. If their behaviour is questionable it could damage your company. Make sure you set the rules of what is or is not tolerated by your company culture and consider investing into ethics courses that allow your teams to stay ahead of the curve.
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