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Doing business in South Africa

Sunday, 01 February 2009 00:00 Mohita Nagpal Strategy - Going Global

Page 1 of 2

The host of the FIFA World Cup 2010, South Africa offers immense opportunities in infrastructure development

When Ranbaxy Laboratories signed a US$ 70 million deal to acquire Be-Tabs last year, it became the fifth largest pharmaceutical company in South Africa.

It had already established a presence in the country in 1996, but this ensured that it developed deeper roots, used the brand equity of Be-Tabs to its benefit, and got local manufacturing rights as well. It expects to boost its earnings by more than double through this deal.

Earlier in 2006 it also formed a joint venture with Community Investment Holdings, South Africa, to market and sell Ranbaxy’s range of anti-retroviral (ARV) products there. In fact, Ranbaxy is just one of the many examples of Indian companies that capitalized on the business opportunities prevailing in South African markets.

The Tata group has been present in South Africa since 1997. Tata has identified SA as a major growth area in its plans and therefore increased the contribution of non-Indian businesses from 25 to 35% in 2006. Tata Steel constructed a R 650 million high-carbon ferrochrome plant in Richards Bay on the KwaZulu-Natal coast. Tata Motors formed a venture with the local Imperial Group for selling cars and light commercial vehicles in 2004. It sold around 11,000 units in 2005, double the number expected. Moreover, Tata’s hospitality wing, the Taj chain of hotels, is poised to capitalize on the growing number of tourists in South Africa.Then there is Lakshmi Mittal’s LNM Group that took over former state-owned steel maker Iscor in 2004, renaming the company Mittal Steel SA. Godrej Consumer Products acquired the South African hair color business of Rapidol, UK as well as its subsidiary Rapidol International in July 2006. The two companies had a combined turnover of ZAR 52 million (approximately. Rs 33 crore) the previous year.

Besides, IT has emerged as an important sector for Indian companies in South Africa. Companies like Tata Consultancy, Aptech, Satyam Computers, Zensar, and Ramco are well established in SA. Other Indian names in South Africa include the UB Group of India (beer manufacturer, hotels), Mahindras, Ashok Leyland, Cipla, Jindal Steel, and Kirloskar. Public sector enterprises include NSIC, CII, GOI Tourist Office, State Bank of India, and Bank of Baroda. According to Jardine Omar, Economic Councilor, South African High Commission who was present at India Food Exhibition 2008, “There are probably close to 200 Indian companies that have either a direct presence or have appointed agents or distributors in South Africa. So the economic relation is pretty buoyant at the moment.”

Jardine Omar
Economic Counsellor, South African High Commission

What makes South Africa an attractive destination for Indian businesses?
South Africa is currently considered one of the global centers of economic growth along with economies of countries like Brazil, India, Russia, and China. And the reason for that is, firstly, the South African government is focusing on infrastructure development, and with that comes a whole range of socio-economic benefits for a country and its people. The reason we are focusing on this is because South Africa is hosting a mega sporting event in the year 2010 that is, the FIFA World Cup. I don’t need to dwell deeper about what benefits a large sporting spectacle brings to a nation. We all have seen the success China enjoyed when it just hosted the 2008 Olympics. The beautiful infrastructure that came up, the jobs and other economic benefits that China received from hosting the event are just some of the examples. Similarly, a lot of infrastructure in the form of stadiums and public transport is being developed in South Africa. Hotels, restaurants, shopping malls are being created for the influx of tourists in 2010. These infrastructure projects are stimulating entrepreneurs who want to take advantage of these opportunities. Secondly, like India, South Africa has also been on a high growth in the last 14 years. A period of unprecedented growth has been experienced by the South African government. To sustain this, public sector infrastructure must also be upgraded; airports, railways, road networks —— they all need to be upgraded. Almost €40 billion is to be dropped into the economy to upgrade infrastructure. That requires public sector investment, so again there is an opportunity.

What are the key sectors that are attractive for Indian investors?
Areas of opportunity for Indian companies particularly are engineering, construction, and machinery. One can also look at joint ventures with South African companies to take advantage of sheer volumes of opportunities. Automotive is a key sector for Indian companies. The reason why South Africa is particularly attractive is because it is the gateway to Africa, and this market is estimated to have 150 million consumers. So companies like Tata and Mahindra have come and set up bases in South Africa to take advantage of opportunities emerging in the Southern African region as a whole. South Africa is traditionally a mining-based economy because it is endowed with natural resources like coal, gold, iron ore, manganese, and platinum. Therefore, Indian companies come to South Africa to acquire access to these natural resources. The IT sector is big, with the government department spending to improve their infrastructure and corporate governance. There is a huge opportunity for Indian IT companies to come and explore opportunities in South Africa. Pharmaceuticals is a natural sector for India, and some leading Indian companies like Ranbaxy, Dr Reddy, and Cipla have already established themselves here.

How does the South African High Commission help Indian entrepreneurs do business in South Africa?
First, we assist with informational services, information on doing business, business opportunities, and investment incentives in South Africa. Second, we work on behalf of the potential investor, facilitating access to the highest level in government to fast track and to make the investment decision-making process simpler.

We also facilitate visits to South Africa. For example, if a company comes to us and they are interested in traveling to South Africa to explore further opportunities, we facilitate a program for potential investors with our network of contacts at state as well a national levels in South Africa. We also bring South Africans to India to interact with business people in India. We also organize conferences and business exhibitions to provide a platform of opportunities for Indian entrepreneurs.

How stringent are the labor laws in South Africa?
Labor is very well organized. Unions are part and parcel of the history of development of South Africa. They also work very closely with the South African government to ensure that the objectives of the people of South Africa are achieved. So the labor movement is not destructive, it is constructive. It also wants to see economic growth and employment opportunities for South Africans. It is a good relationship between labor, business, and government. Hiring and firing of people is not as difficult as it is in India. But within the ambit of labor regulations, you cannot just fire a person for any frivolous reason. There is a due process that must be respected and followed.

How good is the level of infrastructure and R&D?
If you are traveling to South Africa, I won’t forgive you for thinking that you are actually in a country in Europe. The current infrastructure is fairly sophisticated and advanced. All it needs is an upgradation to sustain the current level of economic growth.

As far as R&D is concerned, quite a substantial expenditure goes towards it. We have R&D and technical institutions that have programs to stimulate and promote innovation. There is the Council for Certification Research program to promote innovation and new product development, new technology for manufacturing, IT sector, and services sector.

How easy or difficult is it to start a business in SA?
It is fairly easy to do business. In fact, if you look at the IMD Business School’s competitiveness ranking and the ease of doing business, South Africa is probably ranked amongst the top 30. Certainly, it is higher than India. The process of closing the business is not much stringent either.