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Logistical Challenges for Doing Business in South Africa

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South African business

Following the Covid-19 pandemic, the world is witnessing a recession of epic proportions. In a November article on BUSINESSTECH, BNP Paribas chief economist for the Middle East and Africa, Jeff Schultz, stated that considering the recession in 2023 that the U.S and Europe will be facing soon and China’s attempts to tweak its zero-Covid policy, the outlook for South African growth and activity “does not look good.” South African business might soon face numerous organizational challenges, ranging from supply chain issues to disruptive technologies.

South African Business and Organizational Growth

When a company can comfortably look into an expansion and additional channels through which it can generate revenue, it has hit the organizational growth stage. Many components push a company in that direction, mainly industry growth trends, business lifecycle, etc.

Achieving Organizational Growth

There are multiple paths a company can take to achieve organizational growth. The following are some of them.

  • Joint venture alliance: Partnerships are most effective for small and medium-sized businesses with limited resources. This approach’s most significant selling points are acquiring needed resources and organizational flexibility.
  • Licensing products: This approach entails licensing a company’s most advanced product or technology. It may be ideal for companies with proprietary technologies.
  • Tapping into new markets: A market in which a company doesn’t yet have much competition brings significant growth.
  • Outside financing: Many companies resort to outside funding to search for capital for their expansion.
  • Product expansion: This method heavily relies on the product or service a company offers. Expanding said product or service supports growth and boosts revenue.
  • Forward acquisition: In some cases, mergers and acquisitions result in profitability and growth. Forward acquisition growth means purchasing component companies that are essentially a part of an organization’s distribution chain.

Benefits of Organizational Growth

Organizational growth is gratifying.

  • Attracts new customers
  • Economies of scale
  • Establishes revenue streams
  • Offers branding opportunities

Disadvantages of Organizational Growth

No plan is perfect. This one demonstrates certain disadvantages.

  • Shortage of resources
  • Compromised quality
  • Loss of control
  • Increase capital requirements
  • Increased employee turnover

Problems Facing South African Business

South African business faces many logistic challenges, mainly supply chain and procurement risks, disruptive technologies, and regulatory risks.

Supply Chain and Procurement Risks

South African business has faced some unique challenges at the level of the supply chain in South Africa. Not too long ago, workers at Transnet, the national freight and logistics company, went on strike. This sudden halt of import and export activity costs the country billions daily. The issues went beyond a strike as the resulting backlogs would require anywhere between six to nine weeks to clear.

Furthermore, a recent report from the South African Association of Freight Forwarders (SAAFF) demonstrated that domestic logistics delays for the supply chain in South Africa had cost the country millions of USD, if not more.

Moreover, South African business faces procurement risks as preferential procurement practices have been scrutinized. Procurement issues are present even in government. For example, the Renewable Energy Independent Power Producer Programme (REIPPP) displayed many obstacles: delays and red tape have led South Africa to fall short on renewable energy procurement.

Disruptive Technology

Disruptive technology, generated by the fourth industrial revolution (4IR), has become one of the greatest threats to organizational growth. Its impact covers all aspects of business, including consumers. Furthermore, the fourth industrial revolution inspired the adoption of new technology in South Africa. This integration might go over poorly with specific customers. The disinterest discourages established companies from investing in developing disruptive products, leading to the companies’ eventual downfalls.

Regulatory Risks

As time progresses and technology evolves, the laws become outdated and useless in certain areas. With that in mind, the Financial Intelligence Centre Act (FICA) might be amended, broadening the scope of ‘accountable institutions’ under its purview. The change to this law inadvertently forced companies of all sizes to comply with the new regulations, thus increasing costs and burdens.

According to The Financial Action Task Force (FATF) Mutual Evaluation Report of South Africa in 2021, there are weaknesses in the South African Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) Regime. These weaknesses showcase that the existing regulations and legislation do not satisfy the requirements set in place by FATF. The critical deficiencies found were:

  • A limited understanding of risk-based approach;
  • The inconsistent implementation of a risk-based approach at a group level;
  • No proper identification of the beneficial owner;
  • Too simplistic a view on client risk;
  • Not sufficiently focused risk mitigation on high-risk scenarios;
  • Lack of adequate AML/CTF training
  • Many more

South African Business and the Recession in 2023

“More than a third of the global economy is headed for contraction in 2022 or 2023,” said The International Monetary Fund (IMF)’s economic counselor Pierre-Olivier Gourinchas in a blog post accompanying the fund’s latest report.

However, many factors have accelerated the phenomenon for South African business, including the pandemic. During that time, production had to come to a halt. That situation led to many companies shutting down either temporarily or, in the worst cases, permanently. Consequently, millions of South Africans lost their jobs. Furthermore, the cost of living in South Africa is increasing (upsurge in the prices of commodities and fuel), contributing to the inflation from which the country suffers.

What we are witnessing today in South Africa is a technical recession (defined as two consecutive quarters of negative gross domestic product (GDP) growth). Since the global financial crisis in 2008, the South African economy has declined. The events of the last couple of years have contributed to the decline in economic growth. This trend of erosion has led to jobless growth (created by struggling job creation). South Africa is going through the wringer right now, from the energy crisis to the lack of labor-intensive employment. The country looks at a full-blown recession in 2023 (the National Bureau of Economic Research defines it as “a significant decline in economic activity” lasting longer than a couple of months).

Wrap-up

The recession in 2023 will hit every corner of the globe very hard. Some countries are already exhibiting symptoms, such as South Africa. Supply chain and procurement risks, disruptive technologies, and regulatory risks are hindering the organizational growth of South African business. However, it is still the third-largest economy on the continent and has remained relatively robust in these uncertain times.

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