Investing In South Africa

Market Entry Strategy

Because the South African market is sophisticated, entry should be well planned and should take into consideration the following  actors:

• The skewed demographic income distribution pattern, where ten percent of the population earns 45 percent of national income;
• The price sensitive nature of the majority of consumer demand;
• Distribution issues given that the large retail centers are spread over only five metropolitan regions;
• A judicious selection of one of three low-risk entry strategies: representation, agency or distributorship (Note: if you are selling to the government or government funded organizations, any local partner should be BEE compliant);
• The entrenched bias of a conservative market that sticks to known suppliers and therefore requires sustained market development; and
• South Africa’s position as the pre-eminent stepping-stone for developing most sectors in sub-Saharan Africa: the marketing mix should anticipate this mediumterm option.

In addition to this Country Commercial Guide, the Commercial Service office in Johannesburg offers many services designed to assist you in developing your market entry strategy and to facilitate your export experience in South Africa. For a detailed description of these services please visit: http://www.buyusa.gov/southafrica/en/servicestouscompanies.html.

Using an Agent or Distributor

One of the first steps that an exporter may wish to take in locating an agent or distributor in South Africa is to contact the U.S. Department of Commerce and register for one of the many services specifically designed to meet the needs of U.S. client companies. South Africa offers foreign suppliers a wide variety of methods to distribute and sell their products, including using an agent (also known as a Commission Sales Representative or CSR) or distributor. A link to details of these services is available at the end of this section.

In South Africa, the terms "Agent" and "Distributor" have a very specific meaning: Agents work on a commission basis after obtaining orders from customers; distributors buy, carry stock and sell products directly to customers. Agents often distribute durable and non-durable consumer goods, as well as some industrial raw materials. They may be particularly appropriate when products are highly competitive and lack a large market. It is common to appoint a single agent capable of providing national coverage either through one office or a network of branch offices. In addition to their role as the local representatives of U.S. exporters, agents should be able to handle the necessary customs clearances, port and rail charges, documentation, warehousing, and financing arrangements.

Local agents representing foreign exporters, manufacturers, shippers, or other principals outside South Africa who export goods to South Africa, are fully liable, under South African import control law, for all regulations and controls which are imposed on the foreign exporters. Local agents are required to register with the Director of Import and Export Control of the Department of Trade and Industry. It is important for a U.S. exporter to maintain close contact with the local agent to track changes in importing procedures and to ensure that the agent is effectively representing the sales interest of the exporter.

Typical commission rates for CSR’s in South Africa depend upon the contract concluded and upon the representative's responsibility. This can range from 3 percent to 25 percent commission per concluded transaction. Companies sometimes pay a retainer fee plus costs plus an incentive scale on deals. Distributors who buy for their own account and carry a wide range of spares often best handle capital equipment and commodities such as chemicals, pharmaceuticals, and brand new products on an exclusive basis. Leading distributors often have branches throughout South Africa and sell to both wholesalers and retailers. In some cases, the distributor is also the principal with sub-agents or a major user of the products. When appointing a South African distributor, U.S. exporters should take care to find out if the distributor handles a competing product. It has happened that major South African corporations whose holding companies market products competing directly with American products have approached some U.S. exporters. In South Africa's competitive marketplace, it is essential that the U.S. exporter provide adequate servicing, spare parts, and components, as well as qualified personnel capable of handling service inquiries. In most cases, after-sales service should be available locally since potential delays often lead purchasers to seek alternative suppliers.

The U.S. Commercial Service has found that the most successful ventures entered into by U.S. companies are those where there has been thorough market research prior to engaging in a search for agents or distributors. Once contacts are established, it is often advisable to visit South Africa since firsthand knowledge of the market and society is an advantage. Such a visit provides an opportunity for a personal appraisal of the prospective agent or distributor. U.S. exporters should carefully investigate the reputation and financial references of a potential agent or distributor and establish a clear agreement delineating the responsibilities of both the exporter and the agent. The Commercial Service in South Africa offers a number of business facilitation services, including market research, appointment setting and background checks on potential business partners.

Establishing an Office

The Companies Act of 1973, which is administered by the Registrar of Companies, regulates the formation, conduct of affairs and liquidation of all companies. The act makes no distinction between locally owned or foreign-owned companies. Companies may be either private or public. Foreign companies establishing subsidiaries in South Africa must register the subsidiary in accordance with the act.

Foreign companies may establish a local branch office in South Africa by registering the branch as an "external company" with the Registrar of Companies. Any nonresident or foreign company must register within 21 days of establishing an office in South Africa. Government approval is not required for registration and there is no requirement that a percentage of share capital be held locally. The branch company, within six months after the end of its financial year, must file annual financial statements with the Registrar. Branch profits remitted to a foreign firm's headquarters are not subject to withholding tax. The legal liabilities of a branch are not limited to only its South African assets. There are three forms of business enterprises in South Africa: Private Companies (Pty), Public Companies (Ltd) and Close Corporations (CC). Each has its own set-up and reporting requirements as detailed below.

A locally registered private company, identified by the words "Proprietary Limited" (Pty) in its title, is a form commonly used to carry on operations as a subsidiary of another, foreign company. Private companies may have up to 50 shareholders, but cannot offer shares to the public or transfer them and are not required to have a minimum subscription. Private directors need not lodge a written consent with the Registrar and they need not be South African nationals or residents of South Africa. The registration of a company is established by filing the following information with the Registrar of Companies: a certified copy of the Memorandum and Articles of Association; the registered address; the name and address of the company's local auditor; and a share capital duty receipt. Private companies are not subject to the statutory meeting and reports requirements of public companies and do not have to lodge their annual financial statements with the Registrar.

Public companies, designated by the word “Limited” or letters "Ltd" in the title, are formed to raise funds by offering shares to the public; therefore, there is no limit on the number of shareholders in a public company. Public companies are required to file annual financial statements and reports with the Registrar of Companies. For public companies that issue a prospectus, proof must be submitted to the Registrar that each director has paid full price for the shares and the number of shares issued equals the stated minimum subscription. For public companies with share capital, the following must be forwarded to the Registrar: a director's statement that capital is adequate for business operation; particulars of the directors and officers; and proof that the annual duty has been paid. A public company may not commence operations prior to receipt of the Registrar's certification.

Close corporations, designated by the letters "CC" after their names, are a form of business organization unique to South Africa. They can only be organized by natural citizens of South Africa and are limited to a maximum of ten persons. Close corporations are subject to fewer registration and operating regulations than companies and have been instrumental in encouraging a low-entry threshold entrepreneurial culture in South Africa. This form of legal person is currently under review and may be changed during the course of 2007.

Franchising

Recent years have seen the popularity of franchising increase significantly, emerging in South Africa as an effective way to conduct and grow successful businesses. Franchising also plays an important role in furthering the development of small and medium businesses. Job creation, poverty alleviation, economic growth and black empowerment rank high on the South African government’s agenda. Franchising, with its advantages of skill transfer, start-up support and ongoing operational assistance, is becoming a preferred type of business to address these areas. Business format franchising, in particular, is a proven concept offering potential opportunities for interested firms.

Direct Marketing

Assuring alignment to industry regulations, particularly those regarding BEE, when choosing an advertising or marketing partner to open the South African market, will be crucial in the future. Direct marketing is expected to grow over the next ten years, as long as marketing plans include strong emphasis on clear cut information campaigns, almost intended to pre-empt consumer questions and introduce appropriate solutions all in one effective customized direct marketing package. Direct marketing channels in South Africa include:

• Direct e-mail selling - such as Internet viral campaigns (where one email user nominates “friends” to participate in a  promotional campaign and to his/her own benefit hands over the email addresses of friends and colleagues);
• Direct selling channels - such as the independent agent or distributor system; and
• Internet marketing – which has also grown rapidly as more South African consumers are now feeling comfortable about handing over banking details and ordering from non-brick and-mortar companies.

Joint Ventures & Licensing

When a company is interested in entering into a foreign licensing agreement to manufacture a product in South Africa, the South African licensee must submit an application to the Industrial Development Branch of the Department of Trade and Industry. The Department of Trade and Industry, in turn, will make a recommendation to the South African Reserve Bank (SARB). Exchange control regulations stipulate that SARB’s Exchange Control Section must approve the payment of royalties. When a licensing agreement involves no manufacturing, the request for exchange control approval is sent directly to SARB.

Royalty fees are based on a percentage of total ex-factory sales, with a maximum of four percent for consumer goods and six percent for intermediate and final capital goods. Down payments will not be approved unless actual costs of transferring tangible technology items are incurred. Minimum or annual payments are not acceptable to SARB. Exchange approval will normally be granted for an initial period of five years. Contract conditions involving obligatory purchasing and pricing agreements or requiring the licensee to sole source articles from the licensor are prohibited. Additional information on licensing regulations can be obtained from:

Department of Trade and Industry
Directorate: Licensing
Private Bag X84, Pretoria, 0001
Tel: +27 (12) 394 9500; Fax +27 (12) 394 9501
Website: http://www.dti.gov.za/

Selling to the Government

Government purchasing is a significant factor in the South African economy. Nearly all such purchasing (at all three levels of government) is done through competitive bidding on invitations for tenders, which are published in an official state publication, the State
Tender Bulletin (http://www.dti.gov.za/tender/bulletins.htm), and sometimes in leading newspapers. Although the purchasing procedures of the central government and parastatal institutions favor products of local manufacturers, an overseas firm is not precluded from bidding if the firm has an agent in South Africa to act on its behalf. As a general practice, payment is made to the local agent.

South Africa has changed its government procurement to a “Supply Chain Management” process in order to streamline the buying procedures of national, provincial, local, and state-owned companies. As part of the Public Finance Management Act Regulations of 1999, procurement accountability has now devolved to “accounting officers”. Depending on their level of responsibility, the accounting officers are allowed to approve government purchases up to a certain amount.

The basic principles for government procurement in South Africa, in terms of socioeconomic objectives, are set out in the Constitution: procurement by an organ of State or any other institution identified in national legislation must, on the one hand, be "in accordance with a system which is fair, equitable, transparent, competitive and costeffective," and, on the other hand, allow for categories of preference and the protection, or advancement, of persons disadvantaged by unfair discrimination, within a framework national legislation. Other principles on which procurement must be based in South Africa are accountability and the just-in-time (JIT) delivery principle. Purchases are generally by competitive tender for project, supply and other contracts. Bidders generally need not pre-qualify, but the ability of bidders to supply goods or render a service generally is examined. Foreign firms can bid through a local agent. The due date for a bid is usually at least twenty-one days from the publication of the notice. As a general practice, however, a lead-time of thirty to forty-five days is allowed. Bids for government tenders must be on a basis of all costs included to the specified delivery point. Bids on tenders are to be addressed as indicated in the tender document and must be lodged in a sealed envelope with the tender number, due date and name and address of the tender on the outside.

A pivotal consideration with the government and parastatal procurement process is that manufacturers or suppliers to government qualify as BEE (Black Economic Empowered) partners. These criteria aim to quantify the contribution by these partnerships to empower previously disadvantaged individuals (i.e., those whose racial/ethnic original is described by the South African terms “Black”, ”Coloured,” and “Indian”) according to a varying mix of the following parameters:

• Black Ownership
• Black Management
• Percentage of Black Skilled Personnel
• Procurement from Black/BEE suppliers
• Skills Development Initiatives
• Other BEE Initiatives (e.g., social responsibility)
• Enterprise Development initiatives for Black businesses

Note that in BEE legislation, the term “Black” is used generically to refer to South African citizens of the following racial/ethnic groups: Blacks (those whose ancestry is exclusively/almost exclusively African), “Coloureds” (those of mixed European/African or European/Asian origin), or Indians (those whose ancestry originates in the Indian subcontinent). In January 2004, President Mbeki signed into law the Broad-Based Black Economic Empowerment Act of 2003, the legislation enacting the BEE strategy. The Act directed the Minister of Trade and Industry to develop a national strategy for BEE, issue BEE implementing guidelines in the form of Codes of Good Practice, encourage the development of industry specific charters, and establish a National BEE Advisory Council to review progress in achieving BEE objectives. While firms are not legally required to meet BEE criteria, in practice they are less competitive if they do not. BEE Codes of Good Practice and other pertinent legislation may be found on DTI’s website: http://www.dti.gov.za/bee/codes2005.htm.

Closely linked to BEE, is the increasing attention that the South African Government and its parastatals are giving to Public Private Partnerships (PPP). This mode of outsourcing operational responsibility seems set to become a preferred alternative to government procurement. It allows primarily for a variety of leasing options, but also for buying a service from a private entity. This mode of business implies less risk for government due to a significantly reduced capital investment requirement, and a predictable expenditure model (linked to the fee structure payable to the service provider) while at the same time allowing BEE entities to benefit from traditional government operations. The SA Department of Finance (Treasury) administers the government procurement process.

South African National Treasury
PPP Unit
Private Bag X115, Pretoria, 0001
Tel: +27 (0)12 315 5741
Website: http://www.treasury.gov.za

South Africa has an Industrial Participation Program (IPP), which mandates a countertrade/ offset package for all state and parastatal purchases of goods, services, and lease contracts in excess of US$10 million. Under the program all bidders on government and parastatal contracts who exceed the imported content threshold must also submit an Industrial Participation package worth 30 percent of the imported content value. The bidder then has seven years to discharge the Industrial Participation obligation. Nonperformance of the contract is subject to a penalty of five percent of the outstanding Industrial Participation obligation. These IPP requirements are issued with the tender documentation of all government and parastatal tenders and are overseen by the Industrial Participation Secretariat of the Department of Trade and Industry.

Parastatals, local authorities, and major private buyers such as the mining houses must follow similar practices to the central government. Parastatal procurement is guided by and bound to the schedule of local content preference. Local government purchases are increasingly significant and also involve overseas bidding. With the establishment of nine new provincial governments in South Africa, the prospects for additional government procurement below the central government-level are significant, even though strict budgetary restraints are in place.

Distribution & Sales Channels

Approximately 90 percent of South Africa's economically active population is found in areas surrounding the cities of Johannesburg, Cape Town, Durban, Pretoria and Port Elizabeth, which represent the country's major areas of economic activity and consumer markets. The distribution chain within a given industry varies, depending on the nature and type of equipment and/or products being imported. Consumer-oriented products, for example, are distributed by local subsidiaries or joint-venture partners to a fixed number of distributors who sell to wholesalers and/or retailers who in turn sell to end-users. There may be more middlemen within the chain, depending on the arrangement worked out by the original equipment manufacturer (OEM).

In South Africa, each industry sector has but a handful of major distributors, but often hundreds of small players. Major players prefer an exclusive agent/distributor agreement with the foreign firm. Most South Africa imports are handled through the country’s largest airport in Johannesburg or through one of three of the country’s ports: Durban, Cape Town and Port Elizabeth. Major distribution points:

• Johannesburg - The city of Johannesburg is the commercial and financial hub of South Africa. As the country's transportation hub, it is the center for all rail and road connections and has the country's major international airport, which handles 22 million passengers and 300,000 metric tons of cargo annually. The headquarters of the National Ports Authority of South Africa (NPA) is also located in Johannesburg. Johannesburg is one of the world’s few major cities located on neither the ocean nor a major river. Yet, ironically, it hosts the largest and busiest “port” in Africa – an exportimport freight container terminal called City Deep, which handles 30 percent of South Africa’s exports.
• Durban - Durban is the busiest ocean port in Africa and its Durban Container Terminal is the largest and best-equipped container terminal in the southern hemisphere. Durban’s location on the eastern coast of South Africa makes the terminal a pivotal hub for the entire Southern African region of the Indian and South Atlantic Oceans – serving trade routes linking North and South America with the Middle East, India, Asia and Australia. The terminal also serves as a crucial interface for the distribution of cargoes between ocean carriers and the markets of South Africa, Botswana, Zimbabwe, Zambia and Zaire. On the landside, there is direct connection with surface transport via rail sidings and also speedy connection to South Africa’s trunk road network. The facility handles in excess of 4,000 ships annually, with an estimated gross tonnage of 81,700,000. Containers handled at Durban port represent 64 percent of the total number of containers handled at South African ports.
• Cape Town - Cape Town (located at the southern-most point of Africa) is ideally positioned as a hub terminal for cargo to South America and the Far East. West/East Africa cargo has grown substantially making the Cape Town Container Terminal the terminal of choice for trans-shipment cargo. The terminal currently handles 3,161 vessels per year for a gross tonnage of 44,501,297.
• Port Elizabeth - The Port Elizabeth Container Terminal is one of the three specialized container-handling facilities along the South African coastline. It serves the immediate area of the Eastern Cape where its main business focuses on the needs and requirements of the motor vehicle and components industry as well as various agricultural products. The terminal offers value-added services in the form of storage, packing and unpacking of containers and logistics management. The Terminal currently handles 1,271 ships with a total gross tonnage of 25,756,823.

Selling Factors & Techniques

New products entering the South African market require extensive market research and mass advertising to identify potential customers’ buying patterns and preferences. This applies particularly to unknown brand names, as South Africans are very brand conscious. One way of launching a new product in South Africa is by exhibiting at a trade show. Promotional “give-aways” are also very popular. An editorial and/or advertisement in a specialized trade publication will also enhance awareness of the product. Although South Africa has eleven official languages, promotional material is typically printed in English. Direct selling has certainly found a niche market in South Africa. Directly selling products to individuals on a personal one-on-one basis by freelance agents is fast becoming a multi-million dollar industry in South Africa. Examples of products sold in this way include costume jewelry, plastic containers, lingerie and personal products and personal health and herbal type products.

Electronic Commerce

Consumer response to electronic commerce has increased. While acceptance of B2C interaction has grown, South Africans still primarily use websites for information gathering rather than purchasing. South Africa still faces prohibitive cost structures in terms of ADSL and wireless Internet connection and this has slowed the general migration to e-commerce. Cell phones are rapidly replacing wallets, as banks, card operators, retailers and communications companies provide alternatives to cash as a means of payment. Mcommerce, where cell phones are used to pay for goods and services, has advanced beyond mobile banking to debit and credit transactions. M-commerce is particularly attractive in Africa due to the rapid increase in the number of cell phones and the limited access to the Internet, and poor fixed-line infrastructure. Proponents of M-Commerce claim it is more secure than Internet commerce, but the public concerns regarding Mcommerce center primarily around complexity and security.

Trade Promotion & Advertising

South Africa has a sophisticated advertising industry. Advertising agencies provide a full range of services and the majority of the larger agencies are subsidiaries of prominent international agency groups. Major media outlets include television, radio, newspapers and magazines, outdoor advertisements, cinema and the Internet. The deregulation of the airwaves has introduced more competition through a further independent television channel and independent radio stations.

The key figures in South Africa’s advertising industry are the Association for Communication and Advertising (ACA) (www.acasa.co.za); the two major media bodies, the National Association of Broadcasters (NAB) (www.nab.org.za) and the Print Media Association (PMA) (www.printmedia.org.za); and finally the Advertising Standards Authority of South Africa (ASA), which regulates South African advertising standards.

Advertising agencies in South Africa are no longer solely remunerated by clients on a commission system. Fee arrangements are becoming increasingly common and specialist media buying companies are taking a growing market share of media purchases in South Africa. Customarily, the various media offer 16.5 percent commission to recognized advertising agencies provided payment is made within the stipulated 45-day period. Additional information can be obtained from the following association.

Advertising Standards Authority
Willowview, Burnside Island Office Park
410 Jan Smuts Avenue, Craighall Park, Johannesburg
Tel: +27 (0)11 781 2006; Fax: +27 (0)11 781 1616
Email: Leon@asasa.org.za
Website: http://www.asasa.org.za

Names and addresses of major advertising agents, newspapers, magazines, market research companies, and public relations consultants along with their current rates, can be found in the Advertising and Press Annual of South Africa available from:

The National Publishing Company (Pty) Ltd.
IHS South Africa
Managing Director Tim Gray
PO Box 8147, Johannesburg, 2000
Tel: +27 (0)11 835 2221; Fax: +27 (0)11 835 2631
Email: natpub@lia.co.za
Website: http://www.natpub.co.za

Several trade exhibition firms operate in South Africa. The Exhibition Association of Southern Africa (EXSA) provides an overview of the Exhibitions and Trade Shows being held in South Africa and can be found at: http://www.exsa.co.za. You can also visit the Commercial Service South Africa’s website at http://www.buyusa.gov/southafrica/ for links to upcoming trade events and business service providers.

Pricing

Prices are generally market-determined, with the exception of petroleum products, certain agricultural goods and prices administered by parastatals (government owned firms) such as the South African Post Office and Telkom. Provisions of the Sales and Service Matters Act set marking requirements and stipulate that prices cannot be evaded through auction sales. The act also requires that persons offering goods or services for resale keep and retain records for possible recall, indicating purchase costs, manufacturing costs, and selling prices. Changes in the fixed prices are published in the South African Government Gazette.

South Africa applies a 14 percent Value Added Tax (VAT) (as opposed to General Sales Tax (GST)) on all goods and services, except for some basic staple diet items. Exports are zero-rated and no VAT is payable on imported capital goods. In Industrial Development Zones (IDZ) there is a VAT suspension on imports and exports, provided the finished product is exported. The South African Revenue Service (SARS), a division of the South African Department of Finance/Treasury, administers the VAT:

SARS
Private Bag X923 or P.O. Box 402, Pretoria, 0001
Tel: +27 (0)12 422 4000; Fax: +27 (0)12 422 5181
Website: www.sars.gov.za

Sales Service & Customer Support

In the South African consumer market after-sales service is extremely important, especially in terms of providing technical and spare part services to prospective clients. Many South African consumers will base purchasing decisions on the prospective after sales service for their products, especially in high-end luxury goods such as electronic Country Commercial Guide for South Africa 2007 equipment. Appointing a central distributor that stocks spare parts and provides maintenance and repair service is advisable for existing brands and new brands breaking into the market. As the South African market has opened up and become more competitive, South African consumers have become more and more concerned about quality and after-sale service. Foreign companies that bring strong customer support systems to this market will find themselves with a competitive edge. Consumers may direct queries and complaints to the South African National Consumers Union (SANCU), http://www.sancu.co.za.

Protecting Your Intellectual Property

South Africa is a signatory of various international agreements and conventions relating to the protection of intellectual property, which includes Patents, Trade Marks, Designs and Copyright. South Africa has an independent judiciary under which any threat to property rights may be enforced without political interference. While South African intellectual property rights (IPR) laws and regulations are largely in keeping with Trade-Related Aspects of Intellectual Property (TRIPS), there are still concerns about widespread copyright piracy and trademark counterfeiting. The United States is working with the South African authorities to address these issues. The South
African authorities seem keen to enforce a higher compliance with IPR laws and the South African Revenue Service (SARS) has been playing a prominent role in deterring imports of counterfeit goods.

The U.S. and South African governments have held extensive consultations to clarify a section of the South African Medicines Act, which appeared to grant the Minister of Health broad powers in regard to patents on pharmaceuticals. The U.S. and South African governments reached an understanding that any action taken by the South African government will be compliant with TRIPS. A similar understanding was then reached between the pharmaceutical companies and the South African government. However, there are still concerns with intellectual property in pharmaceutical circles and the discourse is currently centered on data exclusivity as a means to protect intellectual property.

Additional information on South African rules and registration procedures for patents, trademarks, and copyrights can be obtained from:

Department of Trade and Industry
Companies and Intellectual Property Registration Office
Trademarks, Patents, Design and Copyright
Private Bag X84, Pretoria, 0001
Tel: +27 (0)861 843 384; Fax: +27 (0)861 843 888
Mr. Joseph Makena
Email: JMakena@cipro.gov.za
Country Commercial Guide for South Africa 2007
Website: www.cipro.gov.za

Due Diligence

Proper due diligence information should form the starting base for any business negotiation with South African concerns. U.S. companies should act prudently in completing due diligence reports prior to any proposed business deals. The U.S. Commercial Service can provide valuable background information on South African firms through our International Company Profile (ICP) service. Further information can be obtained by visiting our website at www.ussatrade.co.za or by contacting your local U.S. Export Assistance Center or the U.S. Commercial Service directly in Johannesburg.