Can SMEs deliver on government expectations?

SMEs in South Africa, like those all over the world, are perceived to be the saviours of government economic policy failure. SMEs will save jobs, create jobs, boost GDP growth, and stimulate innovation among a host of other thing expectations. Are these expectations realistic? The following comments are based upon my interaction with SMEs across all race groups in South Africa, and are not an opinion but rather anecdotal evidence of what I see and hear among SMEs. It all depends on how it is contextualised! The first question has to be whether or not SMEs can deliver on these expectations? In my opinion absolutely. The next question is whether there is room for government interventions in order to assist SMEs to achieve these expectations? Once again the answer is a big yes.However, there are two types of intervention, the functional and the selective. Selective interventions do have their place. They are used to boost particular sectors for strategic reasons. But more important are the functional interventions. These are those interventions which help to level the playing field and make it easy for all citizens to be able to enter the market. Here I am afraid the South African government has not delivered what they could have. I am not going to attempt to understand or critique their logic, but will review where the biggest problems lie for SMEs. The first problem is the inability of SMEs to hire and fire. Many entrepreneurs of all race groups deliberately focus on businesses that require no staff in order to avoid the complex labour system and the CCMA. The CCMA guarantees you that whether you win or lose you have to pay the ex-employee money. It is merely a legalised extortion system for workers. The incompetency of many chairpersons often leads to cases going on Appeal to the labour court to get bad/illegal decisions overturned. All this costs money that SMEs seldom have, so why go there. This is forcing more and more entrepreneurs into the import/export or services-based business so they can avoid staff. The impact of this is vast. This whole situation is exacerbated by the fact that you then have to comply with bargaining councils and the like who set wages at levels that are unrealistic for SMEs. This stops SMEs entering the manufacturing sector, where they have traditionally introduced the greatest innovation. There is unlikely to be innovation in importing and exporting or services! The second problem is access to finance. While the National Credit Regulator denies this, I have been informed directly by funders that their reluctance to lend to SMEs is directly related to the National Credit Act. I am not a legal expert, but these organisations have them aplenty, and believe it is a problem. So how was it addressed? They no longer lend on the basis of equity, but purely on the basis of cash flows. By default this excludes SMEs wanting to grow, from accessing growth finance on the basis of future cash flows. So how will they grow if they cannot access growth finance? Red tape in the form of the many forms and returns required. A previous report calculated the cost to business of red tape in South Africa was R70bn. I await their new report with interest. The latest addition was CIPC who now also wants information that they could be getting from SARS, but because SARS will not share information we all have to pay CIPC to capture our own information again. The whole BEE ting has been a disaster from the beginning. A few have got rich, the rules change faster than underwear and is generally a nightmare. The industry that has developed to issue certificates is so rabid that an accounting audit of Anglo American must be easier than getting a BEE certificate for a small business. Unexpected and unplanned outcomes of legislation abound in this country. Even the DTI are not always consulted on legislation in advance. Take the example of the Department of Health. They want to ban alcohol advertising. The industry spends in excess of R400m per annum on advertising. Where will the people get new jobs when this revenue disappears out of the advertising industry. So a few thousand people must lose their jobs and what goes with that, in order to save a few people who quite likely are not worth saving? We all drink and smoke by choice. SO leave us to our choices and their consequences. My father has sugar diabetes, but insists on eating sweets and chocolates. It is shortening his life but it is his choice. Must we now ban sweets and chocolates advertising to save diabetics? No they must make a choice. When this thinking is taken to the nth degree it becomes ludicrous. Where does it end? Banning smoking from public areas such as restaurants and aircraft is fair comment because people who do not smoke have no choice. But people who do smoke continue despite all the inconvenience. I have yet to meet someone who gave up smoking because they cannot smoke in a restaurant anymore. Legislation does not change human nature. Essentially, the environment is not conducive to SMEs existing, developing or growing. Throw in globalisation and the concomitant pressures for SMEs that this brings, and then add in a state that sees everything in terms of race and a big stick. It is time our government shoved the stick into a cupboard, got rid of all the unnecessary legislation, and created a carrot environment. History has proved that governments that use a carrot approach generally fare better than the big stick government, and normally last longer. Our government ignores the fact that while there are 2m workers who might vote for them, there are also 3m businesses who might have voted for them if they made life easier for business in general. A mixed economy that leans too close to the command side invariably results in collapse, one way or the other. Buy some carrots - please.

How many SMEs?

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.
I do have exact data on some countries which is available commercially.
Rob

SMEs – SMEs struggling in South Africa. Why?

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

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

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

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?

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 :)