SMEs in South Africa

How many SMEs?

2011-03-17T13:49:00.000-07:00

Everyone would like to know exactly how many SMEs there are. Do you include micro enterprises in this question? In South Africa the numbers bandied about vary from 1,000,000 to 3,000,000. There is no definitive answer however. The Cipro data is badly skewed due to political interference, with numerous dormant cooperatives, closed corporations and companies. No one knows how many sole proprietorships exist in the formal sector, and even less idea of informal sector "businesses". Many cities and towns have discontinued licencing of businesses, and so no one can do a census. From a research and economic development perspective it is a nightmare. The only realistic assessment of the number of economically active businesses possibly lies at SARS, the tax man for the uninitiated. However, they have steadfastly refused to divulge this information or provide access to researchers. So much for transparent democracy, which obviously contributes to the general failure to create jobs. Researchers cannot design interventions without an insight, which we cannot get. However, there a host of other reasons that contribute to the lack of information, such as the large number of state employees with sideline businesses.

Botswana were very organised with a database of just over 13000 businesses classed as SMEs. If you assume, without any real research or statistical validity, that Botswana, Namibia and Lesotho have similar population numbers, and Swaziland approximately half that number, a fair estimate for all these countries would be 45000 SMEs. Mozambique, Zambia and Zimbabwe all have bigger populations but do not necessarily have economies that are as developed, and i would therefore hesitate to make a guess for these countries. If you assume they have double the number of businesses you would estimate 135,000 in total for the countries surrounding South Africa. But this is guesswork and not research.

However, it does help to contextualise South Africa with business numbers in the millions compared to 135,000 to say 250,000, with approximately equivalent populations of say 50 million people.

I hope this answers the reader question in this regard. However, further input would be welcome in refining this response.
Rob

SMEs – SMEs struggling in South Africa. Why?

2011-01-03T09:11:00.000-08:00

Many white-owned businesses have struggled since 1994. Many new businesses owned by all races since 1994, have found it difficult to establish themselves and grow.

Obviously the pre-1994 white-owned businesses allocate blame to the change of government. While this is a logical conclusion to draw, how accurate is it? There is no doubt that this had an impact on those businesses who had previously been a supplier to government, as government made an attempt to make their purchases reflect the country’s demographics.

However, what many of these business people have forgotten is that soon after 1994 South Africa rejoined the WTO. Furthermore, many businesses that had previously not been trading in South Africa due to anti-Apartheid trade restrictions, suddenly appeared at the front door to trade in South Africa and to use South Africa as a stepping stone into the rest of Africa.

Yes, globalisation had arrived! The problem is that very few South African SME business people have realised this. They still think they can continue to run businesses suited to lifestyle entrepreneurs without changing their businesses. They are still trying to understand why their profit margins have dropped and remain low. This is purely about globalisation. Thanks Walmart. While consumers may be happy with lower profit margins, SMEs are not. Low margins demand much higher volumes to stay in business.

The questions that this raises are whether these SMEs have increased sales volumes, have they tried to bypass the volume solution by becoming niche players in order to reduce the impact of the high volume/low price competitors? While my comments are based on anecdotal research, it appears to me that not many have changed how they do business. They all seem to be focused on the good old days instead of the future.

SMEs need to accept that they need to carve out a niche for themselves or scale up. The problem is that South Africa offers an incredible lifestyle opportunity, and this can distract attention away from the important issues. The problem is that our new SME owners have arrived bearing similar attitudes and expectations, and are wondering why they cannot make it. We all need to change our thinking going forward, because whether we like it or not we are part of the global village.

SMEs - SMEs and labour market rigidity

2010-12-31T08:05:00.000-08:00

Left wing governments often resort to protection of their labour forces. This is generally necessitated by political rather than economic imperatives. This leads to rigidity in the labour markets and has a number of negative consequences.

SMEs are generally unable to pay top prices for their staff members, and by default feed from the bottom of the labour barrel. They cannot offer perks such as pensions, medical etc. Therefore when it becomes too difficult to acquire, retrench or fire staff, they simply keep it tight. They try and reduce staff before the new legislation comes in. They tailor everything to existing revenue streams. They simply do not have any of the assets necessary to handle the situation. They do not have money for legal employees, or legal advice. They cannot pay minimum salaries.

Rigid labour markets have a negative impact on economic and job growth. SMEs are equally affected by this situation. As they close ranks in order to reduce staff, so they reduce their ability to grow their businesses. Everyone is a loser, including SMEs.

South Africa has been particularly heavy handed in this regard and are about to add even more to this hamfisted approach to economic development. The new round of labour legislation is a potential nightmare for SMEs and large businesses.

SME - types of opportunities

2010-12-31T06:58:00.000-08:00

The starting point for me with writing this document was Prof Mark Casson from the University of Reading on the UK.

As an economist he wanted to know how many opportunities there were and who decided who got which opportunities.

I did a little desktop research as I found the question intriguing. My research revealed the following. Opportunities vary in complexity. Therefore the skills, knowledge and experience needed to sell fruit to people at a taxi rank in a developing country is minimal. However, at the other end of the scale, identifying two companies for a merger, and then succeeding in achieving a merger between the two, requires a high level of skills, knowledge and experience.

So the first thing to note is that opportunities can be graded from extremely simple through to extremely complex. Similarly, the simpler the opportunity, the more of them there are, and the converse is also true for complex opportunities.

The second thing to note is that as complexity increases so too does the profitability in respect of both % and actual value. While you may be selling oranges at the taxi rank for US $1, the merger could be a US $10bn deal.

Therefore the question must be asked as to whether you are looking for simplicity or complexity when looking for a new business opportunity?

Bear in mind that your ability to handle complexity will be informed by your education and experience.

How complex is your business or your new idea? Here in South Africa there are too many copy cat entrepreneurs. They are lifestyle entrepreneurs simply looking for an easy buck. I have seen very very few business plans that have made me sit up and say wow. However, we can do it, and this is evident when we look at the number of world leading products designed in South Africa.

SME - types of entrepreneur

2010-12-31T06:31:00.000-08:00

Research indicates a number of different types of entrepreneur. These include survivalist entrepreneur; salary replacement entrepreneur; lifestyle entrepreneur, small business manager, franchisee, copycat entrepreneur, franchisor, inventrepreneurs, serial entrepreneur, portfolio entrepreneur, angel funder and venture capitalist.

However these can be grouped into three (3) groups of people who act in a similar manner.

The first is the survivalist. The survivalist is often associated with informal sector survivalist businesses, but could also include the formal sector person forced through circumstances into self employment. This could be someone who has been retrenched.

The second group is the lifestyle entrepreneur. They vary in a number of ways, but generally are the same “animal”. For some the “lifestyle” is about working the hours they want, or the type of business (maybe a hobby) or about maintaining a lifestyle which includes holidays, and toys such as motorbikes, cars, caravans, boats etc. All of them have clearly defined “rules” on how they run their business. These rules are written in stone most of the time. Do not ask these entrepreneurs to work late or weekends.

The third group are the high growth entrepreneurs. These are the entrepreneurs who generate large profits quickly, normally create the bulk of new jobs in an economy, and are able to retire young. Notice I said “able to”; many do not and start the next business soon after they harvest from their business.

Where do you fit in?

The South African government has not recognised this current research, and consequently are not fine tuning their SME development strategies accordingly. This is a pity, as the job creation we so desperately need in South Africa is not being achieved as a result. It is time governments all over the world start consulting with SME specialists in order to understand the research findings in this area of expertise. This will assist in creating better SME development interventions.

Have we got over the global recession?

2010-06-21T05:43:00.001-07:00

The economist at KZN treasury presented evidence to show that South Africa generally lags the global economy by 6 months, and the KZN economy lags the South African economy by a further 6 months.

So if we assume that December 2009 was the estimated time when the global recession was turned around, then KZN can expect to turnaround by the end of 2010. So KZN business people, just 6 months more to suffer, or so the experts say. Watch this spot :)

SMEs - Will SMEs flounder or flourish in South Africa under Zuma

2009-10-24T14:32:00.000-07:00

South Africa is going through immense political turmoil at present. Labour and the Communist Party are wanting a greater say in government for bringing Zuma to power. Labour is demanding the end to labour broking, of which government is an enthusiastic user. Umkhonto we Sizwe are attacking moderates like Kader. The ANC Youth League and it's leadership, using the term broadly, are demanding the nationalisation of the mines. Netshitenzhe has resigned. Trevor Manuel is under pressure to go from these same players. Look at our FPI.

Talk about supping with the devil. Zuma must be regretting his choice of partners I should imagine.

Labour broking is a direct consequence of labour market rigidity that has its roots firmly embedded in the unbelievably complex and labour friendly legislation in South Africa, which is further complicated by the CCMA who believe it is their duty to always award money to labour, even when finding in favour of business. Never mind the impact on inward FDI.

The efficiency of SARS in tax collection is sadly not recognisable elsewhere, mores the pity. Policies are uninformed by reality, and becoming more and more socialist as the days progress. Purchasing by government does not focus on sustainable business creation. I could go on and on, but the message would remain the same.

The fragile embryo stage SME component of our economy is very much like the humpty dumpty story, sitting on the wall. The question is how it will land, soft or hard. There is ample evidence that entrepreneurship prefers a free market (or close as possible) in order to grow and create new businesses and jobs.

However, the closer we move towards socialism, the more like we will have omelette instead of boiled eggs.

This means that the SME sector is under serious threat from these people, and as businesses we need to understand the seriousness, and tell Zuma that he has our support to follow the capitalist line, as opposed to the socialist line. He can get the votes he needs without these living antiquities and uninformed posers that claim to be the leaders of various fringe organisations.
Rob

SMEs in South Africa - why is finance difficult to access

2009-07-12T14:33:00.000-07:00

SMEs in South Africa do struggle to raise start-up finance from banks. The question is why?

There has been little, if any, in-depth research into why banks are not lining up to lend to this large, risky, yet very profitable market.

I myself am hoping to research the following suggestion in order to see if it has any validity. The suggestion is that a major contributory factor is that SME and entrepreneur are being interchangably used in South Africa.

There is a continuum of entrepreneurial endeavour suggested by Burch, and I believe that the SME owner is not synonymous with being an entrepreneur. Some SME owners may well be entrepreneurial, but it is not a given.

Consequently, banks have no tools with which to assess these SME owners, which makes the loaning of finance to them extremely difficult.

SMEs - the new Companies Act

2009-06-21T12:09:00.000-07:00

There is a new version of the South African Companies Act on its way. This is a highly modified version of the previous Act, and is supposedly coming into action later this year.

A key change which is interesting from a number of respects, is an attempt to introduce the equivalent of Chapter 11 in the USA as I understand it. The intention is to help businesses that get into trouble to get through the difficulties they are experiencing by giving them some temporary protection from their creditors.

The current system is prohibitively expensive and not particularly helpful to SMEs.

I am busy reviewing this new version of the Companies Act and will hopefully be able to shed more light on this particular topic in the next week or two.

However, it will require that the business be an incorporated business, in other words a company, remembering that the Closed Corporation will also disappear and become a simple form of company, on which I will also provide more information.

SMEs in South Africa - is tendering good for SMEs

2009-06-14T03:41:00.000-07:00

How important is government business and large business for SMEs?

I believe it is very important, but there are riders here which must be considered. The purpose of government allocating business to SMEs, is to try and grow the SME sector, as growing SMEs are key players in job creation.

But how can these SMEs keep growing unless they receive continuous business. Sustainable SME creation and growth is completely dependent on continuous business from the buying organisation. But government and large businesses are strong believers that tendering is the best means to purchase the products and services they need. They feel the need to remain impartial in the purchasing process. Yet they espouse supply chain management as their credo. Supply chain management expressly guides the buyer to choosing suppliers that enhance the efficiencies of the buyer at every level. So surely tendering is in contradiction of this credo.

Is tendering an anachronism from the past? Is it not time for government and large businesses to treat the purchasing function in the true spirit of supply chain management, and stop resorting to tendering practices that “are objective” when in fact subjectivity is exactly what is needed.

If government policies are to achieve the goal of creating and growing SMEs, and large businesses are to find the efficiencies they desperately seek in their supply chain, through the use of SMEs, then we need to return to subjective purchasing practices.

Government and big business are equally as guilty in the South African context. I have heard senior people openly admit to simply keep changing supplier in order to supply orders to anyone who applies to be a supplier. This is counter-productive and in my mind counter-intuitive.

Let us create sustainable SMEs not one-order wonders!

SMEs in South Africa - the end of Closed Corporations

2009-06-14T03:20:00.000-07:00

The Companies Act is about to undergo a major review. This has a number of good aspects and as with everything else in life a number of bad. The questions is whether or not you have a clue about this Act and how it will impact on you?

Too many businesses simply allow the government to do what they like, without providing feedback, whether positive or negative. It is imperative that you read the legislation and decide for yourself what the impact will be on your business.

So go to the following website link and review the Act. http://www.michalsons.com/wp-content/uploads/2009/04/companies_act_71_2008.pdf

Understand the impact.

If you have any problems with the Act then let us know on rob@smorfitt.co.za and we can forward your input to the government.

SMEs in South Africa - the African opportunities

2009-06-07T08:50:00.000-07:00

As suggested in my blog 2 weeks ago, the African markets present a big opportunity for South Africa.

I saw some data which says despite the recession, Africa should still achieve 6+% GDP growth this year, albeit that it is off a low base. South African trade data show an increase in South African / Africa trade already, as well as the expected decline with USA and Europe.

The big corporates are already trying to penetrate these markets, but SMEs can do so as well.

There are a number of Africa oriented business magazines around. Have a look and get yourself informed. I purchased "African Business" and found a lot of useful information.

SMEs in South Africa - the recession challenge

2009-06-03T09:56:00.000-07:00

According to the economists, we should shortly see the recession slowing its downward trend, flattening and by the new year growth should begin to return.

Key issues I believe will be the the following. The increasing price trend in commodities will need to continue. This will depend on the BRIC countries getting their growth above 7% again.

Government will need to keep the economy stimulated with infrastructural spend. Despite the deficit we are currently nursing, this is an ideal tool for stimulating economic activity in South Africa. The Government has a large budget to spend, so it will be crucial that the political appointment of senior officials is stopped with immediate effect, and business principles employed to ensure competency. Unskilled people cannot spend this amount of money effectively. A suggestion would be to get big business to perhaps second senior executives to assist in running these departments until the recession is reversed.

Similarly, banks are going to have to start lending. They cannot continue with their tight-fisted approach for too long as they need the profit. This is a global problem, but until they start lending on cars and houses, it is unlikely we will see the recession begin to reverse. So when you see car sales and house sales start to pick up, you will know we are on the right track for a reversal.

So hang in there, be innovative and use this time to grab market share from incompetent competitors.

SMEs in South Africa - a big market on our doorstep

2009-05-24T04:11:00.000-07:00

While the European and USA markets to the north are of obvious and necessary interest to our technology industries, our manufacturing industries would do well to view the trends within the retail sector.

Our retailers are entering the African markets to the north, and finding it lucrative. As South Africans, we have an edge on the bulk of our African bretheren from the point of view of skills and experience in retail and manufacturing.

In respect of overseas competitors, we also have the advantage of shorter distances and hopefully lower costs as a result.

So let us attempt to build a series of lucrative markets in Africa for our manufacturers. They need to study these markets and see what the opportunities are. Global players are seeng the market opportunities in Africa so why not us?

Hopefully the new minister at the DTI, who apparently supports this view in general, will raise the profile of these opportunities and provide the funding and support to help SMEs enter these markets, and perhaps even to develop new industries to service these markets.

Heres hoping.

SMEs in South Africa - a big opportunity

2009-05-17T11:31:00.000-07:00

Last week we looked at one of the biggest obstacles to SME development in South Africa. This week we look at some of the big opportunities available to SMEs in South Africa.

One of these opportunities are the government funded activities such as marketing assistance. The government funds many interventions which have been shown to be of enormous financial benefit to the SME. To get a handle on these, go to the DTI website at http://www.thedti.gov.za and spend some time reviewing all the opportunities available to you for accessing government funding to help your business. You have to work at this as government itself markets these amazing opportunities very poorly.

Another opportunity is the broad base of useful information and research available from South African universities, South African Department of Statistics, SARS and the DTI. Look at their websites and the university libraries to identify information useful to you and your business. Remember that knowledge is power, and therefore you need to gain as much useful and current information as is possible. Look particularly through dissertations prepared at the local university as it is normally research based upon local businesses.

SMEs in South Africa - a big challenge

2009-05-10T03:55:00.001-07:00

SMEs in South Africa - a big challenge. One of the biggest threats to SME development in South Africa is the BBBEE legislation. Why do I say this, especially as I believe the BBBEE legislation to be generally fair and reasonably well thought out?

As a consultant operating in this arena, I am aware that the bulk of businesses are actively attempting to comply with the BBBEE legislation. However, the efforts of the business community in this regard are being destroyed by the South African Government, the same people who created the legislation in the first place. How?

By not forcing government departments at national, provincial and local government level to comply with their own legislation. Government has not changed the legislation that applies to their own procurement activities (Public Preferential Procurement Framework Act PPPFA)to reflect the BBBEE requirements which they legislated into place, and we are now 3 years down the road.

This has allowed insignificant people with their own personal agendas to create their own policies in each department at every level. The nett result is a system that is unfair and directly in contravention of the spirit and the law related to BBBEE.

The South African Government created a tool to try and re-align the economy so as to remove previous racial biases, but their failure to complete the job properly is an indictment of their lack of true commitment to economic development through the use of SMEs.

I am aware of many businesses who have spent large sums of money in complying with the BBBEE legislation, and have made a significant difference in the community as intended, and yet they remain excluded from business opportunities purely on the basis of their race. This not only applies to White entrepreneurs but also to Indian and Coloured entrepreneurs.

The Government must either accept that their lack of action will soon lead to businesses refusing to comply as the system is not applied correctly and fairly, with a major loss to the communities they operate in as a result, or they must fully implement their legislation. Failure to do so will continue to create opportunities for corruption as is so often the case right now, with incompetent and over-priced suppliers often getting the business. This is resulting in massive overspending on purchases by government which is in turn contributing to ongoing inflation and lack of delivery by government, as budgets run short. Many White and Indian businessmen now only go to compulsory tender meetings to meet the Black business people who will get the business. When the tender is issued they then get the business at the same profit margins as they would normally make, except that the order is channeled through a Black business. These Black individual are merely adding a level of intermediary costs and not adding any value. So no development is occurring. Emails are often received from black individuals offering to sell their orders. They are in effect making themselves to be no more than a front, in direct contravention of government's intent.

If the South African Government is serious about economic development, all things must be created equal. Right now being Black is enough to get the business. Other race groups may have skills, better pricing, and be established businesses with large staff numbers (often Black), and they invest heavily in skills, socio-economic and enterprise development among other things, and yet they do not get the business. This cannot lead to economic development and growth, and can only lead to where we generally are, in a pool of corruption that destroys our economy as another layer of cost is added with no value add and no organisational development.

Our fragile economy needs to ensure Black entrepreneurial activity, and the BBBEE legislation was intended to do just that. However, the failure of Government to implement this thoroughly and as planned, has and will continue to result in tenders being given to friends, family and bribers, because it can safely be written off as BEE.

It will be interesting to see what the new Jacob Zuma government does, considering his statement that he wants to see BBBEE grow in the SME sector and no longer in the corporate sector.

ALL South Africans want to see the country prosper and are fully aware that it requires everyone to prosper. We need BBBEE to work properly so we can all benefit.

SMEs in South Africa - the purpose

2009-05-03T11:39:00.000-07:00

SMEs in South Africa as a blog is intended to alert SMEs to the macro issues in South Africa which are impacting, or going to impact on their businesses.

SMEs too often become mired in the micro detail of running their businesses, and lose sight of the "bigger picture".

This blog will help SMEs to find out what is happening that will impact on their businesses without having to spend a lot of time looking for information and then trying to understand the impact of what they have found.

Interestingly, they will also find anomalies that exist, which will help them to be a little wiser and more careful in their dealings with big business and government. At times these entities find themselves with conflicting imperatives, and often the SME cannot understand why certain decisions are made.

Then there are the global trends in SME creation, numbers and behaviour. These too will be visited on a regular basis, and their impact on SMEs in South Africa identified.

This will be a weekly blog.