As the strongest continental economy, South Africa accounts for a quarter of total Sub-Saharan gross domestic product (GDP). It is also the largest investor in Africa. By 2008, South African companies had put US$ 8.5 billion into the sub-continent, more than any other African country. Investment has occurred in a number of economic sectors and has gone beyond the traditional Southern African markets, spreading into West, East and even Central Africa, in most cases with much success. In this context, the story of South Africa’s continental ventures holds a number of interesting and important lessons for those seeking to do the same. Unpacking these lessons requires a closer look at the historical reasons behind South Africa’s unique expansion as well as the continued reasons for its dominance.

This CAI article explores South Africa’s role as an investor in Sub-Saharan Africa. It first examines the extent of South Africa's African investments, highlighting the country's commercial dominance on the sub-continent. This paper then looks at the foundations of such dominance, arguing that it can be traced historically to the end of apartheid and the unlocking of investment capital that came with the lifting of economic sanctions. It then seeks to explain South Africa’s continued success, pointing to a number of other structural factors, such as access to venture capital and the linked nature of export industries. It next carries out a short mapping exercise of which industries have been primarily targeted by South African firms, in which countries, and to what degree of success. Finally, it looks at the challenges that investors have faced in driving corporate expansion and the effect these challenges are likely to have in years to come.

The extent of South African trade with the rest of the African continent

Over the years, there has been a slow and steady rise in South Africa’s exports to the rest of the African continent, as illustrated in Figure 1 below. Barring a dip in 2008 and 2009, exports have continually risen, reaching US$ 12.3 billion in 2011 and US$ 12.1 billion in the first nine months of 2012. Meanwhile, imports from the entire African continent trail significantly behind at only US$ 6.2 billion in 2011 and US$ 7.7 billion in the first three quarters of 2012.

Figure 1 Total South African imports and exports with African countries from 2006-2012 (in US$ billion) ⁽²⁾
*Figures for 2012 until October 2012

Explaining the upward trend

A number of unique factors explain South Africa’s significant presence in economies beyond its borders.  Historically, the 1990s were essential to laying the foundations for a successful expansion of South African corporate entities. The end of the apartheid era coincided with a major global push for liberalisation and privatisation in Africa. Meanwhile, the end of the apartheid regime and the lift of international economic sanctions against South Africa meant that corporate entities found themselves with a surplus of capital that could be directed towards smaller and less competitive markets beyond the country's borders. The reintegration of South Africa into the political and economic world thus greatly facilitated the process of its corporate expansion.⁽³⁾ The advanced nature of the South African economy, relative to its African neighbours, meant that African markets offered to South Africa what other economies could not - a chance to develop a strong comparative advantage. The majority of African economies exported, and still export, primarily raw materials. Value-added goods remain only a small percentage of their exports, as does the exportation of services. In contrast, while raw materials do still form part of South Africa’s external trade profile, the country is also a major exporter of services and value-added products that serve to meet a growing consumer demand across the continent.

Three major factors explain the continued dominance and flexibility of the South African investors. Firstly, it is especially important to note that South African investors have significantly better access to credit and other financial instruments to support their ventures. More financing options are available than anywhere else on the continent. As of 2013, there are three major equity instruments that provide in total over US$ 101 million to South African citizens wanting to invest in Africa.⁽⁴⁾ The Standard Bank Africa Equity Index Exchange Trade Note (ETN) is a debt instrument that can be bought and sold. It has a value of US$ 66 million and matures in 2021. It also gives investors access to active listed companies across the sub-continent.⁽⁵⁾ Two major funds are also in place. The Momentum Africa Equity Fund has a total size of US$ 23.9 million and currently has 71% of its assets allocated in Sub-Saharan Africa and 29% in North Africa. The Momentum fund is the largest African mutual fund but requires the high initial investment of US$ 11,750. More accessible is the Prescient Africa Equity Fund, a fund with a total size of US$ 11.2 million. This requires the much lower initial investment of US$ 1,129 or US$ 56 a month, making it significantly more accessible.

Secondly, an extremely crucial factor touched upon by Daniel, Lutchman and Naidu,⁽⁶⁾ is the supportive nature of South Africa’s exported industries. The main pillars of the South African economy – mining, retail, financial services, telecommunications, tourism and manufacturing – work “collaboratively to secure [foreign] investment.”⁽⁷⁾ For example, South African financial service providers offer numerous retail banking operations for South African retail investors; increased business travel by South African investors helps to support a growing South African hotel industry in host countries, and new South African retail outlets encourages property development carried out by South African firms. This interconnected and supportive network is key to creating the conditions overseas that are not only conducive to investment emergence but central to its endurance.

Finally, domestic political and economic conditions have also played a large part in encouraging outward corporate expansion. For many sectors, the South African market is considered to be highly saturated, resulting in true growth potential existing mainly in foreign markets. More recently, union strikes and a slumping economic growth rate of 2.9% ⁽⁸⁾ in 2012 that trails significantly behind an African average of 5%,⁽⁹⁾ has also served to encourage investors and entrepreneurs to seek foreign ventures in other African markets.

These factors have combined to create a relatively strong corporate industry in South Africa that has found it beneficial to expand its operations outside the South African economy, towards new fields of opportunity.

Pushing beyond the traditional

The South African corporate presence has traditionally been strongest in countries of the Southern African Development Community (SADC).⁽¹⁰⁾ Pick ‘n Pay, Africa’s second largest retailer has 100 outlets in SADC countries, spread out over Botswana, Namibia, Mauritius, Zimbabwe, Mozambique and Zambia, and has recently announced plans to enter into Malawi and even the Democratic Republic of the Congo (DRC).⁽¹¹⁾ However, across the sub-continent, South African corporations and investments are continuously emerging and gradually expanding beyond SADC’s borders. Over recent years, South African companies have been seen entering into West, East and Central African markets with great success. Flourishing industries include agri-food, telecommunications, financial services and retail. In agri-food, SABMiller, first born out of South African Breweries’ pioneering move into the African beer market,⁽¹²⁾ is now an industry giant operating directly in 14 African countries. Tiger Brands, a South African food company, just recently took over Nigeria’s leading food manufacturers, UAC and Dangote Flour Mills, sparking fears of eventual monopolisation of the Nigerian food industry. A look at the financial service sector reveals a similar story. Standard Bank has operations in 19 West, East and Southern African countries, including a new branch in South Sudan. With 2.6 million customers outside South Africa, it is the sub-continent’s largest bank in terms of both income and assets.⁽¹³⁾ In telecommunications, MTN’s expansion into the Nigerian market, initially met with great scepticism, has proved to be incredibly successful and profitable, seeing a return on investment two years earlier than expected.⁽¹⁴⁾ With 43 million customers and a profit margin of 60.5%, Nigeria is by far MTN’s most profiting subsidiary,⁽¹⁵⁾ proving even more successful than its home South African market. It dominates the Nigerian telecom market and its early entrance has made it incredibly difficult for other companies, like Vodacom, to meaningfully compete with it. Retail is another example. Africa’s biggest retailer ShopRite has a total of 156 non-South African stores spread out over 17 countries, including Ghana, Uganda and Nigeria – Africa’s next most important consumer markets.

Interestingly, investments have also started to go beyond traditional Anglophone markets expanding into Lusophone and Francophone markets too. For example, the DRC has also become a new South African investment target for telecommunications and mining. In telecommunications, Vodacom, MTN’s major rival, has recently entered into the DRC and has fast become its main service provider.⁽¹⁶⁾ In mining, the signing of an agreement between PetroSA and Cohydro plans for cooperation in the hydrocarbons industry from pre-exploration to production between the two firms.⁽¹⁷⁾ This push into new and risky markets is what many have pointed to as South African corporations’ strength and added value. Investors do not shy away from volatility, corruption and uncertainty and instead seek to place their brands among the pioneers of that market, creating strong foundations for future, if not immediate growth and profit, within the host economy.

Challenges faced

This expansion has not been without its challenges. Domestic regulation, particularly strict exchange control, has made foreign investment somewhat difficult in the past. In South Africa, all foreign exchange transactions are subject to exchange control overseen by the South African Reserve Bank (SARB). The SARB thus effectively controls and restricts the outflow of money from the country. While still in place, controls have been significantly relaxed over the years and are not as strict as they once were. The most recent relaxation in October 2011 raised investment and travel allowances by US$ 400,000 and US$ 100,000 respectively. The result is over US$ 500,000 being made available, per year, to each South African resident to invest abroad.⁽¹⁸⁾  While a positive and welcome step, further relaxation should be encouraged.

Once operating outside South Africa investors face a number of other challenges. Poor infrastructure in many of the countries mentioned above can make business difficult for operating firms. Bad quality roads raise transportation costs, which transfer costs unnecessarily to consumers making products less competitive in local markets. Unreliable access to energy is another significant challenge in many countries. The telecommunications industry faces major problems operating in Nigeria and the DRC where the electricity grid is especially inefficient, forcing maintenance costs to be high. Returns on investments are also not straightforward or immediate. In Nigeria, Standard Bank has not yet reported a profit, despite being involved in retail banking for over three years. However, despite the difficulties associated with market entry in risky economies, for many this is not only an opportunity but a curious advantage. Isolation, poor infrastructure and a traditionally unattractive investment portfolio, even in the most difficult terrains, offers significant advantages by creating natural barriers to competition from other firms.

A significant and growing challenge is quelling fears from other African states about South African dominance to avoid stimulating protectionism. Certainly the Rainbow Nation’s multi-sector expansion and success has attracted critics who fear its monopolisation of their productive economic sector. In Nigeria, Tiger Brand’s buying of UAC and Dangote Flour Mills has promoted major fears of monopoly in the agri-food sector.⁽¹⁹⁾ Similar fears have been expressed in Kenya,⁽²⁰⁾ a market that has proved harder to enter due to high levels of competition. Concerns regarding South Africa’s recent entry in Juba following South Sudan’s independence have led the Ministry for Trade to express fears that this could push Kenya out of the market. A representative from the ministry was quoted stating that “Kenya should be aware of the threat being posed by South Africa.”⁽²¹⁾ South Africa’s expansion has clearly not gone unnoticed across the continent. How South African corporations manage these tensions and fears will be a key challenge investors will face in coming years.

Conclusion

A number of important lessons can be taken from South Africa’s successful entry into markets beyond its borders. The corporate expansion into smaller and relatively uncompetitive markets has allowed a number of firms to develop significant know-how and skills that further help to build up their competitive advantage, which can then be used to expand globally. While factors that have encouraged investors to look beyond domestic markets can be traced to a unique period in history, when conditions were particularly ripe for liberal expansion, a number of more recent factors continue to facilitate the process. Access to finance, particularly credit, is an especially important contributor. If there is to be a similar spread of investment from other African markets, funds must be made available to investors in order to support and encourage their ventures. South Africa’s expansion illustrates success in risky environments, showing that challenges can also represent significant opportunities.

Written by Leah Gatt ⁽¹⁾

NOTES:

(1) Contact Leah Gatt through Consultancy Africa Intelligence's Industry and Business Unit ( industry.business@consultancyafrica.com). This CAI discussion paper was developed with the assistance of Gaylor Montmasson-Clair and was edited by Nicky Berg.
(2) ‘Trade Data’, South African Revenue Service (SARS), 2012, http://www.sars.gov.za.
(3) Daniel, J., Lutchman, J. and Naidu, S., 2004. Post-apartheid South Africa’s corporate expansion into Africa. Review of African Political Economy, 31(100), pp. 343-348.
(4) Hoover, R., ‘3 frontier African funds for South African investors’, Investing in Africa, 9 January 2013, http://investinginafrica.net.
(5) ‘Standard Bank Group launches its Africa Commodity Index ETN’, Global banking and finance review, May 2011, http://www.globalbankingandfinance.com.
(6) Daniel, J., Lutchman, J. and Naidu, S., 2004. Post-apartheid South Africa’s corporate expansion into Africa. Review of African Political Economy, 31(100), pp. 343-348.
(7) Ibid., p. 345.
(8) ‘South Africa’s economic growth rate slows’, BBC News, 29 May 2012, http://www.bbc.co.uk.
(9) Trevino, J., ‘Sub-Saharan Africa maintains growth in an uncertain world’, International Monetary Fund (IMF), 12 October 2012, http://www.imf.org.
(10) SADC countries include Angola, Botswana, DRC, Lesotho, Madagascar (suspended), Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.
(11) Motsoeneng, T., ‘South Africa’s Pick ‘n Pay to enter DRC, Malawi’, Reuters, 18 April 2012, http://www.reuters.com.
(12) Ewing, J., ‘South African countries un-lock sub-Saharan Africa’, Business Week, 3 December 2008, http://www.businessweek.com.
(13) Kamhunga, S., ‘Standard Bank back on track to Africa’, Business Day, 12 November 2012, http://www.bdlive.co.za.
(14) Daniel, J., Lutchman, J. and Naidu, S., 2004. Post-apartheid South Africa’s corporate expansion into Africa. Review of African Political Economy, 31(100), pp. 343-348.
(15) McLeod, D., ‘Steady march to risky destination’, The Financial Times, 5 November 2012, http://www.ft.com.
(16) Ewing, J., ‘South African countries un-lock sub-Saharan Africa’, Business Week, 3 December 2008, http://www.businessweek.com.
(17) ‘South Africa: Nation, DRC boost bilateral relations’, SAnews, 24 October 2012, http://www.sanews.gov.za.
(18) Markham, A., ‘The slow demise of the South African exchange control’, Money Web,11 October 2012, http://www.moneyweb.co.za.
(19) Nnorom, N., ‘Nigeria: Tiger Brand’s incursion into local food industry could create monopoly’, Vanguard News, 17 December 2012, http://www.vanguardngr.com.
(20) Daniel, J., Lutchman, J. and Naidu, S., 2004. Post-apartheid South Africa’s corporate expansion into Africa. Review of African Political Economy, 31(100), pp. 343-348.
(21) Omwenga, G., ‘Kenya jittery as South Africa enters Juba for trade’, Sunday Nation, 28 July 2012, http://www.nation.co.ke.