Synergy holds the key to growth

10 February 2016

The Word Bank’s most recent annual update on the South African economy highlights anti-competitive behaviour by industry-wide cartels as a major impediment to economic growth and poverty alleviation. It correctly notes the role our competition authorities play in breaking up these cartels, which serve the interests of large players dominating their markets and cosy supply chains favouring long-standing supplier relationships.

The Bank found that more competition both reduces input-costs and improves productivity, thereby creating space for lower prices to consumers and end-users.

While the Competition Commission, Competition Tribunal and Competition Appeals Court all serve a purpose, on their own they cannot address the causes of this anti-competitive behaviour, let alone offer solutions.

At the root of the problem is the over-concentration of our economy in the hands of a few large players in each sector. The World Bank cites the food, agri-processing, cement and telecommunications sectors as particular culprits, where four or five firms lock up to 90% of the market for good and services supplied to end-user customers.

This situation is often encouraged by trade associations, which were found to be behind many of the cartels identified and tackled by the competition authorities.

South Africa’s isolation from world markets and international competition created the incentive for firms to vertically integrate and consume smaller rivals. This was reinforced by exclusionary, state-led Apartheid policies. The legacy today is that many sectors are dominated by a few large players, who in turn rely on a few dominant suppliers.

As a result, SMEs play a proportionately small role in the economy in the face of significant economic and cultural barriers. This reduces competition and stifles innovation, leading to a competent rather than globally competitive economy.

Small businesses can be critical drivers of competitiveness because they are forced to innovate constantly in order to survive.

In an inclusive society, this innovation is transferred into the broader economy resulting in improved competitiveness and the ability to access global supply chains. This in turn drives economic growth and employment.

Under the ANC government, small businesses have been stifled by layers of red tape and ill-conceived interventions, including punitive labour regulations, which have undermined competitiveness. Thus transformation and job creation gains have stalled while relations between big and small business are strained.

The B-BBEE codes have been unsuccessful in driving enterprise and supplier development because they have created a culture of over-regulation and crony enrichment.

To succeed, small businesses require a conducive operating environment and access to financial and non-financial support interventions when required. Similarly, larger businesses must recognise that SMEs are important sources of innovation in their own products and seek to integrate them more effectively through inclusive supply chain practices.

If supported correctly, SMEs can act as important catalysts for generating growth and employment opportunities, contributing to poverty alleviation.

Without increasing competitiveness, SA’s economy cannot grow or transform. Improvement will require formidable private sector commitments, in addition to political will.

The depreciating Rand has improved competitiveness possibilities but factors such as the regulatory environment discourage companies from investing. While most of the nation’s workers are not globally competitive, education shortfalls can be mitigated through supply chain supported know-how sharing.

A shared, ambitious vision is therefore required that accelerates growth, inclusion and competitiveness, enabling more SA companies to become part of globally competitive supply chains.

Supply Chain Inclusion (SCI) is a fresh approach to addressing exclusion and anti-competitive behaviour. It combines the disciplines of strategic sourcing and economic development to remove impediments and provide a suite of tools to improve supplier performance.

SCI begins with a comprehensive assessment of existing supply chains and markets before developing an SCI strategy per sourcing category.

Where traditional B-BBEE supplier development approaches have focused on low value, low complexity and non-core categories, a key focus of SCI is to assist SMEs participating in higher value, higher complexity functions to access larger value chains.

The result will be a detailed, actionable strategy per category with a clear business case and inclusion plan.

SCI is a comprehensive, elegant set of tools ideally designed to meet SA’s core challenges. The solution delivers high returns on capital and effort without placing reliance on government. Because the focus is on pragmatic, commercially viable solutions that leverage existing assets, SCI provides companies with an attractive alternative to box-ticking B-BBEE compliance.

Some South African companies have succeeded in going beyond compliance towards a more determined effort to include formerly marginalized suppliers. Examples include Anglo Zimele, SAB Miller and Growthpoint, which recognise that they and the economy as a whole can benefit from supply chain inclusion.

Old ideas around transformation have come up well-short. They are now clearly out-of-date. SA’s economic growth is reliant upon large companies working with small companies with each specialising at what it does best.

Blending cooperation and competition has been central to the rise of Asia. South Africans are a naturally innovative people whose political divisions have been greatly exacerbated by factions seeking to control natural resource wealth. After hundreds of years, that era looks to be passing before our eyes.

Whereas so many of the most successful countries of the past generation have had to import modern business knowledge, SA has thousands of highly sophisticated companies including many in the technology, communications and financial services sectors. Effective transformation of SA’s society and its economy must be sharply accelerated through firstly transforming the country’s business and political environment.

The choice business leaders face is continuing with outdated practices or embracing new ones which in the short term bring immediate gains and in the long run create a more vibrant economy in which all can benefit.

SA’s future as an inclusive society rests upon a broad expansion of employment opportunities. Such a future is within our grasp. Those who enjoy the privileges of holding positions of responsibility must fully accept an obligation to work constructively at building the economy. This requires collaborating with highly diverse groups of people and adopting a builder’s mentality.

SA does not lack for talented, ambitious people. Nor is there a shortage of regulations. What is needed is less regulations and more effort by policy-makers to remove the obstacles which constrain talent and ambition.

South Africa can unlock the nation’s growth potential by effectively aligning the strengths and resources of large companies with the creativity and vigour which is housed amid under-resourced smaller companies. Supply chains have tremendous capacity to advance inclusion and the DA is committed to working with all the key actors to unleash this under-developed path.

Toby Chance is a Democratic Alliance MP and shadow minister for small business development.

This article first appeared in Business Day.