Unpacking some sectoral drivers of growth

Five Touch Points and Value Chains

Abdullah Verachia

Tuesday, 10 November 2015

Gordon Institute of Business Science, University of Pretoria

“ALL OF THE GREAT LEADERS HAVE HAD ONE CHARACTERISTIC IN COMMON: IT WAS THE WILLINGNESS TO CONFRONT UNEQUIVOCALLY THE MAJOR ANXIETY OF THEIR PEOPLE IN THEIR TIME.

THIS, AND NOT MUCH ELSE, IS THE ESSENCE OF LEADERSHIP” JOHN KENNETH GALBRAITH

South Africa’s Competitiveness

*R = Rank Source: WEF, 2015

0

1

2

3

4

5

6Institutions

Infrastructure

MacroeconomicEnvironment

Health & PrimaryEducation

Higher Education &Training

Goods MarketEfficiency

Labour MarketEfficiency

Financial MarketDevelopment

TechnologicalReadiness

Market Size

BusinessSophistication

Innovation

South Africa Competitiveness Scores , 2015 (R*)

R:36th

R:60th

R:89th

R:132nd

R:86th

R:32nd

R:113th

R: 7th

R:66th

R: 31st

R:25th

R:43rd

0 5 10 15 20 25

Inadequately educated workforce

Restrictive labour regulations

Inefficient government…

Inadequate supply of infrastructure

Corruption

Political instability

Access to financing

Crime and theft

Poor work ethic in national labour…

Insufficient capacity to innovate

Foreign currency regulations

Tax rates

Tax regulations

Inflation

Poor public health

Perceptions of the Most Problematic Factors for Doing Business in SA

Drivers of Sectoral Competitiveness

Value Chain Analysis

Five Touch Points

•Multinational Investment

• JSE-Listed Companies

•Local Large Companies

•SMMEs

•Labour

•Unemployment

Today’s Immersions

•Tourism

•Agriculture

• ICT & Future Technologies

•Housing and …

… Manufacturing

Private Sector

South Africa in the Global Value Chain

Source: http://reports.weforum.org/africa-competitiveness-report-2015/chapter-2-3-tapping-the-potential-of-global-value-chains-for-africa/

Five Touch Points

1. Multinational Investment 2. JSE-Listed Companies 3. Local Large Companies

4. SMMEs 5. Labour 5. Unemployment

The Five Touchpoints of Local Economic Development

Focus Key Areas Impact

Multinational Investment

FDI from South Africa’s largest investor countries

JSE Listed Firms Listed South African companies with a regional or national footprint

Local Large Companies Local champions

SMMEs Small, micro and Medium Enterprises

Labour and the unemployed

The State of Multinational Investment in SA

Recent Investments

• 2014: Unilever opened its R1.4 billion Indonsa Plant in KZN

• 2014: First Automotive Works (FAW) Plant opened at COEGA

• 2014: Jinko Solar opened a R600million factor in Epping, Cape Town

• 2014: Mercedes Benz launched its R5.4 billion investment to produce the C-Class

• 2015: Unilever opens Khanyisa Factory in Boksburg

Source: DTI, 2015

Multinational Investment: Investor Confidence

“More than 130 foreign firms either entered South Africa or expanded their investments in 2013”

– World Trade Institute

BUT…

SA falls out of Top 25 of 2015 Investor Confidence Index

“…the biggest need is to develop a coherent economic policy and to get everyone to sing from the same hymn sheet. Foreign investors need to take away a consistent message: we want your money, we want you to create jobs in this country, come join us and we’ll look after you.”

– Koos Bekker

Source: AT Kearney

AT Kearney Annual FDI Investor Confidence Index 2012 1. China 2. India 3. Brazil 4. US 5. Germany 6. Australia 7. Singapore 8. UK 9. Indonesia 10. Malaysia 11. SA 12. Russia 13. Turkey 14. Vietnam 15. UAE 16. Thailand 17. France 18. Taiwan 19. South Korea 20. Canada 21. Japan 22. Switzerland 23. Poland 24. Spain 25. Netherlands

2013 1. US 2. China 3. Brazil 4. Canada 5. India 6. Australia 7. Germany 8. UK 9. Mexico 10. Singapore 11. Russia 12. France 13. Japan 14. UAE 15. SA 16. Spain 17. Thailand 18. Switzerland 19. Poland 20. Taiwan 21. South Korea 22. Chile 23. Argentina 24. Indonesia 25. Malaysia

2014 1. US 2. China 3. Canada 4. UK 5. Brazil 6. Germany 7. India 8. Australia 9. Singapore 10. France 11. UAE 12. Mexico 13. SA 14. Switzerland 15. Malaysia 16. Sweden 17. Chile 18. Spain 19. Japan 20. Italy 21. Belgium 22. Netherlands 23. Denmark 24. Turkey 25. Indonesia

2015 1. US 2. China 3. UK 4. Canada 5. Germany 6. Brazil 7. Japan 8. France 9. Mexico 10. Australia 11. India 12. Italy 13. Netherlands 14. Switzerland 15. Singapore 16. South Korea 17. Spain 18. Sweden 19. Belgium 20. Denmark 21. Austria 22. Turkey 23. Poland 24. Norway 25. Finland

The State of SMME Development

Source: SEDA and the Department of Small Business Development

Barriers to Entry

• Lack of business planning during start-up

• Access to finance

• Access to markets

• Lack of experience

• Lack of entrepreneurial skills

• Research limitations

• Fragmented and uncoordinated support from SMME development entities

• Difficulty accessing Land

• Red Tape

• SMMEs in SA have a 37% chance of surviving first four years

• SMMEs in SA have a 9% chance of surviving first ten years

• 70% - 80% of SMMEs fail in first year

But SMMEs are essential in promoting growth and development at the local and national levels.

The State of Labour in SA

• High levels of unemployment

• Union division

• Government – Union – Private Sector mistrust

• Lower levels of investor confidence

… And cities bear the brunt of this, as the country’s centres for employment and economic migration (both local and foreign)

The State of Unemployment in SA

Source: World Bank, 2015

-

10,00

20,00

30,00

40,00

50,00

60,00

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Unemployment, youth total (% of total labor force ages 15-24)

Unemployment, total (% of total labor force)

Long-term unemployment (% of total unemployment)

Unemployment, % of Total, 2003 – 2013 Employment, by Sector (2003 – 2011)

25,00

26,10

25,60

25,60

26,00

25,70

25,30

24,50

24,30

64,10

64,50

66,60

65,60

64,90

68,60

60,80

61,90

62,70

2003

2004

2005

2006

2007

2008

2009

2010

2011

Employment in agriculture (% of total employment)

Employment in industry (% of total employment)

Employment in services (% of total employment)

The State of Unemployment in SA

Source: World Bank, 2015

Unemployment, by Level of Education, 2003 – 2011

-

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

90,00

2003 2004 2005 2006 2007 2008 2009 2010 2011

Unemployment with primary education (% of total unemployment)

Unemployment with secondary education (% of total unemployment)

Unemployment with tertiary education (% of total unemployment)

… But Education Matters • Unskilled labour, particularly in the

mining sector, more vulnerable to SA’s political – economic conditions

Government as an Enabler of a Private Sector Development

Ease of Doing Business in South Africa

• 2 weeks to register a company, 1 day to open a bank account and 7 days to register for VAT

• 60 days to submit an application to Eskom and receive response, 1 day to receive external inspection, and 165 days to await completion of external works by Eskom

Government has a central role to play in…

• Simplifying registration procedures, E-Governance

• Developing alternative source of electricity, encourage IPPs

• Provide tax incentives for investment in under-developed areas

• Make provisions for skills development components in public sector

Source: World Bank, 2015

Topic 2015 Rank 2016 Rank

Starting a Business 113 ↓ 120

Dealing with Construction Permits 82 ↓ 90

Getting Electricity 168 168

Registering a Property 97 ↓ 101

Getting Credit 52 ↓ 59

Protecting Minority Investors 12 ↓ 14

Paying Taxes 19 ↓ 20

Trading Across Borders 130 130

Enforcing Contracts 117 ↓ 119

Resolving Insolvency 38 ↓ 41

Today’s Parallel Immersions

Tourism Agriculture ICT & Future Technologies

Housing Manufacturing

Manufacturing

Manufacturing in South Africa

Source: World Bank

Contributions to GDP, 2001 – 2014

19

19

19

19

18

16

16

16

15

14

13

13

13

13

4

4

3

3

3

3

3

3

3

3

3

2

2

2

13

13

12

12

12

13

14

15

15

16

17

17

17

16

64

64

66

67

67

68

67

65

67

67

68

68

68

68

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Manufacturing, valueadded (% of GDP)

Agriculture, value added (%of GDP)

Industry excl.Manufacturing, valueadded (% of GDP)

Services, etc., value added(% of GDP)

Manufacturing in South Africa

Source: World Bank

Recent Increase in Manufacturing:

Production increased by 5.6% between July 2014 and July 2015

This is largely attributed to:

• A 17.4% increase in basic iron and steel, non-ferrous metal products, and machinery manufacturing

• A 39.6% increase in the manufacture of motor vehicles, parts and accessories and other transport equipment

Manufacturing Imports and Exports, 2001 – 2014

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10

20

30

40

50

60

70

80

Manufactures exports (% of merchandise exports)

Manufactures imports (% of merchandise imports)

Manufacturing in South Africa

Strengths Weaknesses

• Relatively stable – downturns typically always followed by longer periods of recovery

• Well-developed supporting infrastructure around the country’s centres

• Increasing focus on green technologies

• Much of it built on the manufacture of non-essential goods (more vulnerable to economic downturn)

• Mature industry – saturated with little room for growth

• Adversarial relationship between government, unions and the private sector

Opportunities Threats

• One of the top three multiplier sectors in terms of value addition, job creation, export earnings and revenue generation

• Opportunities in the technology and bio-technology areas

• 300,000 manufacturing jobs lost / exported since 2008

• Electricity costs are rising, and supply constrained • Vulnerable to imports • Threats from low wage, high productivity emerging

markets

Source: Standard Bank

Guiding Questions What is the level of competitiveness within the sector that you visited?

Identify how each one of the touchpoints impacts on this sector and engagements you had today? How can we increase collaboration within and amongst the five touchpoints and local government?

How can local government play a role in enabling this sector?

What falls within our area of direct influence in driving the competitiveness of this sector?

What falls within our area of indirect influence in driving the competitiveness of this sector?

What falls outside our influence?

How can we increase collaboration within this sector?

Think of one example that we can play a role in increasing growth and development in the next 12 months. How can we practically and tangibly do this?

Abdullah H Verachia

E: averachia@thecollectivegenius.com

M: + 27 82 767 7700

W: www.averachia.com