Since the end of apartheid and its first democratic elections in 1994, South Africa has liberalized the economy, enacted economic reforms to attract foreign direct investment (FDI), and performed consistently well on various surveys of competitiveness and the business environment. South Africa's value proposition that I discussed in a previous article may motivate the international marketer to rush in to take advantage of the market opportunities. However, international businesses should recognize that doing business in South Africa is not without challenges.

 

In 2010, the World Economic Forum's annual Global Competitiveness Report polled executives on the issues facing international businesses doing business in South Africa. The top five responses were inefficient bureaucracy, poorly educated work force, crime and theft, restrictive labor regulations, and corruption.

 

In Part 4 of my series on South Africa, I will discuss the key challenges businesses face in that country including the prevalence of non-tariff barriers, competition for holding companies, ineffective enforcement of intellectual property rights regulations (IPRP), piracy and counterfeiting, logistical nightmares, and the fragmented infrastructure.

 

 

While the Southern African Development Community (SADC) has moved towards liberalizing trade to make the flow of goods between countries easier and economically more rewarding, non-tariff barriers continue to be a concern.

 

Case in point: South Africa has a complex import process. The South African Revenue Service (SARS) defines approximately 90,000 product tariff codes that are strictly enforced on all imports. New-to-market U.S. exporters are actively encouraged to engage the services of a reputable freight forwarding/customs clearance agent well versed in the South African convention.

 

Other non-tariff barriers to trade often cited include port congestion, technical standards, customs valuation above invoice prices, theft of goods, import permits, antidumping measures, IPRP crimes, an inefficient bureaucracy, and excessive regulation. I would recommend reading my article, Beware of Non-Tariff Barriers in Global Markets, to understand the business implications.

 

 

Due to South Africa's history of apartheid and allied international sanctions, retailing is dominated by several large South African holding companies, which account for by far the majority of the leading retailing brands in South Africa. The holding companies operate in various categories ranging from grocery to clothing and footwear and from furniture to furnishings. Not only do these companies offer a number of brands within a certain area of retail, but they also ensure that they capture a core target market, whether lower-, middle- or upper-income consumers.

 

 

In South Africa, informal "Spaza" shops originating primarily in black homes are an especially prevalent type of retail operation. These businesses typically operate in a section of an occupied home or in another structure on premises used for residential purposes. Many Spaza shops are operated as family endeavors, selling food, beverages, and various consumer goods.

 

In addition there are micro retailers operating from residences called Tuck shops. These Tuck shops are found around taxi stands and public transit stations. Both Spaza and Tuck shops play key roles in poor communities. They facilitate trade by breaking bulk, stocking inventory, and providing convenience of location.

 

Other words commonly used to describe the informal retail structure include "sheeban." These are all located in black townships outside of Johannesburg. Hawkers–individuals without permanent structure—are also common features of retail trade. To succeed in this market, international marketers must develop strategies to embrace the fragmented retailing structure by finding ways of selling products to these retail operations.

 

 

South Africa has great roads and expressways, but public transport is either non-existent, unsafe or unreliable. South Africa has everything that the rich need, but the poor lack basic amenities from public transportation to schools. Since the majority of poor live in the rural area, about 50% of them live more than 30 minutes from the nearest clinic and post office.

 

In addition, there is insufficient space for trucks in the port and a shortage of equipment to load trucks. Truck queues can cause delays of between three and six hours, translating into a cost of $46 per hour per truck. Trucks often wait in queues of up to five kilometers long.

 

 

South Africa's value proposition coupled with the high penetration of western media, technology and lifestyles also present a lucrative market for counterfeit goods. Gray marketing and parallel importation also pose challenges, since there is no direct legal protection for local distribution against parallel imports. The major gateway for inbound counterfeit goods is Johannesburg International Airport.

 

In recent years, the South African government has introduced measures to enhance enforcement of the 1997 Counterfeit Goods Act, but the enforcement has been very lax. Despite efforts to improve IPRP enforcement, monetary losses from counterfeiting and piracy remain high. I would recommend reading my article, Counterfeit Products: Why Should You Care?, to understand the implications for marketers of branded products and services.

 

 

Though South Africa is often classified as an emerging economy, it might be more correctly seen as having two economies—the normal economy of sophisticated consumers and firms that are investing all over the world, and the rural economy that still contains many subsistence farmers or peoples who are living off of meager agricultural incomes and assistance from the state or their more fortunate relatives. One of the key challenges for post-apartheid South Africa is bringing the benefits of the country's formal, first-class economy to the low-income people who make a sizable majority of the population. Unemployment at the BOP could be as high as 70%.

 

A large percentage of the poorest households continue to live in informal and traditional dwellings. Approximately 66% of South Africa's poorest have electricity, while less than 50% of all poor households have running water. Since the majority of poor live in the rural area, about 50% of them live more than 30 minutes from the nearest clinic, post office or formal retail store. Reaching them can be a real marketing challenge.

 

 

The crime rate in South Africa is high, one of the highest in the world since it affects the everyday lives of people. Rising social tensions among the South African poor have resulted in incidents of violence. For the greater part of 2009, many townships in South Africa were literally burning up with mass protests against poor service delivery and the slow pace of development in their communities. The people were angry with their government for not fulfilling most of the promises made to them during election campaigns. Although the political situation is stable in South Africa, nationwide strikes and demonstrations can occur.

 

 

Although the education system has been reformed and all South Africans now have access to education, approximately 7.5 million people are functionally illiterate. Businesses in many different sectors in the South Africa economy experience severe difficulty in recruiting because of this skills shortage.

 

The prevalence of HIV infections in South Africa is, like other countries in southern Africa, among the highest in the world. These health-related issues impact workforce productivity and the life expectancy of workers.

 

As one can see from this article, entering the South African market is no sure thing. Despite the many opportunities that exist in this country, there are challenges that must be overcome. In my final article of this series, I make some recommendations for businesses looking to enter and succeed in South Africa.