Market Entry Advisors – South Africa

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South Africa

Foreign companies should always maintain close contacts with their local embassies should they need assistance in avoiding extortionate demands.

Trade commissions, chambers of commerce and local business councils also may offer support in this domain.

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South Africa is ranked 10th out of 183 countries for good practice in protecting investors in business, according to the World Bank.

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World leader in mining and minerals with nearly 90% of all platinum metals on Earth and around 41% of the world’s gold.

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In 2014, South Africa ranked among the top 10 countries worldwide for harnessing solar energy.

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Overview

Jean-Bernard Ruggieiri

Chief Representative, Africa,
EDC

“South Africa is quite developed and diversified economically, so it’s usually a good surprise for the first-timers.”

What are some key obstacles in the South African market?

There is a lot of competition from the European Union, China as well as other emerging countries like Russia, India and Turkey. You won’t succeed if you are not committed. This means you need to come often, find a local agent or partner, and invest in the market. The price and the value of the product/service you bring are important.

What are some misconceptions about doing business in South Africa?

Because the country has a significantly “European flavour,” some suppliers might forget it’s not a part of the western world and try to follow the same business and cultural rules they use in North America and Europe. But timelines, connections and the focus are really African and not western.

What surprises foreign businesses most about South Africa?

How developed it is compared to other part of Africa. Some say this is not how they imagined Africa. They also realize South Africa has a very diverse population and, depending of the companies they want to deal with or sell to, they need to understand the cultural background of their interlocutors. South Africa is quite developed and diversified economically, so it’s usually a good surprise for the first-timers.

In one sentence, how would you describe the South African market for Canadian companies?

Promising and strategic, but more complicated than expected.

Market Entry

Nuala Lawlor

Senior Trade Commissioner, South Africa
Canadian Trade Commissioner Service

“South Africa is Canada’s most significant political and commercial partner in Africa. The country is a sophisticated and promising market with well-developed economic infrastructure and opportunities in its emerging markets.”

What is the first thing a Canadian SME looking to break into the South African market should do/know?

South Africa is Canada’s most significant political and commercial partner in Africa. The country is a sophisticated and promising market with well-developed economic infrastructure and opportunities in its emerging markets.

Strengths of the South African market include abundance of natural resources, a modern infrastructure and a well-developed financial and legal services sector. South Africa is known as the ‘gateway to Africa’ for investors due to its comparative sophistication, continental expertise and base for critical services for doing business in the rest of the continent. There are also challenges: high unemployment, poverty, skills and capacity shortages, infrastructure improvements needed for energy, transport and water, high crime rate, corruption and complex legislation for Broad-Based Black Economic Empowerment (B-BBEE).

Tell us more about B-BBEE?

Broad-Based Black Economic Empowerment (B-BBEE) is the South African Government’s set of policies intended to bring about the involvement or participation of previously disadvantaged communities (PDCs) into the mainstream economy. The definition of PDCs is people of colour, women of all races, and the disabled. B-BBEE is all about good corporate governance. It does not apply to those who are just exporting goods to South Africa or manufacturing goods for export from South Africa. However, if you intend to set up any kind of business or acquire a running business in South Africa whose annual revenue is likely to exceed 5 million Rand (approximately $480,000 CDN), and which will carry out business with government departments, public entities or enterprises or with companies who supply goods and services to them, you will be asked to provide your B-BBEE status. B-BBEE should be seen as a positive lever to achieve business success in South Africa and not as a deterrent.

Any specific locations in South Africa that are better points of entry for Canadian businesses?

Johannesburg, in Gauteng province, is one of Africa’s economic hubs with a large multicultural workforce and market. There is access to both human and capital resources. Johannesburg is geographically well positioned for access to southern African economies and Africa as a whole. The most powerful corporate centre in Africa, Johannesburg generates 16 per cent of South Africa’s GDP, employs 12 per cent of its workforce, and houses 74 per cent of corporate headquarters.

Johannesburg has the benefit of location, and attracts some of the largest infrastructure projects on the continent. About two-thirds of South Africa’s ICT companies are located in the Gauteng province.

For some businesses, Cape Town also has its advantages, including the size of the city, its well-integrated public transport system, (and) talent from the University of Cape Town and the University of the Western Cape.

Financial

Gary Dodge

Associate Director, Clients and Markets Development,
Africa, PwC

“Some companies have chosen the wrong in-market partners, and have incurred losses and delays in achieving their business objectives.”

What key information should Canadian companies know about the South African market?

Do your homework to set realistic expectations regarding risks, timelines and returns. Business can move much slower here due to a number of regulatory, commercial and social reasons.

Start early in your evaluation cycle with an on-the-ground market investigation. Invest the time to make friends and build networks that you can rely on.

What pitfalls have you observed?

Some companies have chosen the wrong in-market partners, and have incurred losses and delays in achieving their business objectives. South Africa also suffers from its share of red tape in setting up a local office. Currency risk must also be carefully managed as there has been significant volatility over the past five years. Building a local workforce can also be difficult due to skills gaps and local employment regulations.

How can you help Canadian companies with their entry into the South Africa?

PwC has a fantastic network of over 5,000 partners and staff across the country – we are the largest accounting firm in South Africa. Our client base covers most industries, and we help companies on a regular basis with their market entry strategies.

I’m responsible for business development across PwC Africa. I can quickly connect prospective companies with the right people from the PwC network to provide the necessary local insights and advice.

Legal

Avril Cole

Partner,
Gowlings

“New Canadian entrants to the South African market need to be aware of and navigate the complex legal regime governing Black Economic Empowerment.”

How would you describe South Africa’s legal and regulatory environment for foreign businesses?

South Africa’s legal and regulatory regime is well established and sophisticated, as reflected by the fact that the country is a major destination for Canada’s Africa-bound investment.

The legal system is based on Roman-Dutch law, is heavily influenced by English law and is subject to the constitution of the Republic of South Africa as the supreme law.

The legal framework for settling disputes is well established and respected. Enforcing contracts is relatively efficient as compared with other countries in the region.

The country is very open to foreign direct investment. Investment approval processes for greenfield foreign investments have been removed subject to a few remaining exceptions. Merger and acquisition transactions may be subject to review under the country’s Competition Act.

From regulatory and legal perspectives, what should Canadian companies be mindful of?

South Africa maintains exchange control regulations, which restrict the free flow of capital in and out of the country and which, under certain circumstances, may have implications for non-resident companies. These regulations are administered by the financial surveillance department of the South African Reserve Bank. Parties to cross-border transactions should consult with an adviser or authorized dealer prior to entering into any transaction, to ensure compliance with exchange controls.

How does South Africa facilitate/support trade with other African countries as well?

South Africa’s Headquarter Company Regime (HQC) is designed to facilitate such investment structures. This regime gives relief from certain taxes that would otherwise apply to a South African holding company that has invested abroad. However, the regime is somewhat complex and generally seems to be less attractive than other alternatives such as investing through Mauritius.

South Africa is often referred to as a potential gateway to the rest of Africa. Are you seeing investments from Canada into other African countries being structured through South Africa?

South Africa does have a regime referred to as the Headquarter Company Regime (HQC), which is designed to facilitate such investment structures. The regime gives relief from certain taxes that would otherwise apply to a South African holding company that has invested abroad. However, the regime is somewhat complex and generally seems to be less attractive than other alternatives such as investing through Mauritius.

Anti-Corruption

Robert Clark

Manger, Legal Research
TRACE International

“While bribery in South Africa may not be as problematic as it is in some neighboring countries, it is still a concern for businesses operating in the country.”

How would you characterize corruption risks in South Africa?

The 2017 TRACE Bribery Risk Matrix, which measures business corruption risk by country, ranks South Africa among the top third of least-corrupt countries, with an overall moderate risk score of 39 out of 100. South Africa ranks best among African nations, closely followed by Senegal, Rwanda, Mauritius, and Botswana.

South Africa is a moderate-to-low risk for frequency of required interactions between businesses and government officials and has relatively strong transparency measures in place. But while bribery in South Africa may not be as problematic as it is in some neighboring countries, it is still a concern for businesses operating in the country.

This year, bribery involving government contracting that benefits high-level officials, including President Jacob Zuma, has emerged as a particular hazard for foreign companies; in May, Zuma admitted to receiving bribes. Specific risks exist in public procurement, as evidenced by ongoing investigations into allegations of bribery and money laundering in business deals between state-owned enterprises and companies linked to the Gupta family, friends of President Zuma who have been accused of improperly influencing government contracts.  Several multinational companies, including McKinsey, KPMG, SAP, Bell Pottinger, Liebherr-International AG and China’s Shanghai Zhenhua Heavy Industries Ltd. have become embroiled in ongoing investigations of corruption involving improper contracts. Goldman Sachs recently indicated that, in part because of such corruption scandals, state power utility Eskom poses the biggest single risk to the South African economy.

Due to inherent corruption risks in the extractives industry, companies in this sector are advised to use precautionary measures. South Africa has also struggled with allegations of corruption in the aerospace and defense sector. As demonstrated by recent investigations into potential anti-bribery law violations, corruption risks also exist in finance, real estate, manufacturing and government services.

How are foreign businesses typically affected by these corruption risks?

Foreign businesses are affected by corruption in South Africa in primarily two ways: first, as an operational issue, and second as a legal issue. Operationally, corruption within the business can damage a company’s bottom line. Businesses unaccustomed to dealing with these risks may encounter bribery in the job-hiring process or in the form of illicit discounts and kickbacks, and may suffer reputational harm over the long term.

The legal consequences for paying bribes can also be serious. South Africa’s Prevention and Combating of Corrupt Activities Act 12 of 2004 imposes criminal penalties against a company guilty of paying bribes and up to life imprisonment for its employees. Entities may also be blacklisted for up to 10 years from doing business with the government. Foreign companies may also be subject to legal liability under the laws of their home jurisdiction, such as Canada’s Corruption of Foreign Public Officials Act, the UK Bribery Act, or the U.S. Foreign Corrupt Practices Act.

How can foreign companies operating in South Africa best protect themselves against corruption risks?

Companies operating in South Africa are advised to put in place robust compliance programs to deal with bribery risks. Not only should they implement policies and procedures to prevent bribery, but they should also conduct regular training of their employees and provide them with opportunities to report any suspicion of wrongdoing through whistleblower hotlines or “helplines”. In addition to ensuring that internal controls are working, internal and external auditors should review transactions to detect instances of corruption and fraud. All suspicious activity should be fully investigated, and any major issues should be reported directly to the company’s board of directors.

Companies should also manage their third party risk by conducting due diligence on all potential business partners, especially those involved in public procurement. Working with TRACE Certified companies can provide companies with the assurance that their third parties have completed a rigorous due diligence process based on international standards, although companies must nevertheless review the reports in light of the specifics of their proposed deal. Companies may also wish to refer to TRACEpublic, the first global register of beneficial ownership information, which allows companies to share and search for beneficial ownership information at no cost.

Canadian companies should always maintain close contacts with their embassies should they need assistance in avoiding extortionate demands. Trade commissions, chambers of commerce and local business councils also may offer support in this domain.

Export Development Canada does not endorse or favour any organizations listed above and is not responsible for the actions of those parties.

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Market Entry Advisors – South Africa was last modified: June 19th, 2018 by Export Development Canada.
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