South Africa, a country once identified with strict racial segregation during the years of apartheid rule (1948–1994), has gained a new identity as the “Rainbow Nation.” Since the country’s first democratic election in 1994, the term has symbolized the diversity of South Africa’s cultures and races, as well as hope for a bright future. Furthermore, Broad-Based Black Economic Empowerment (BBBEE) policies instituted by the nation’s government in 2007 have seen a rise in economic wealth among black South Africans and an emerging black middle class.
In December 2010, South Africa was invited by BRIC countries—the emerging economies of Brazil, Russia, India and China—to join the group, which was then renamed BRICS. South Africa’s inclusion in BRICS is recognition of its economic strength and potential and is expected to facilitate trade, investment, industrialization and job creation.
Over the past few years, while growth has slowed in the United States and Europe, emerging markets have played increasingly important roles in the global economy and attracted businesses and investors the world over.
South Africa, which has the largest economy in Africa, is characterized by growth, opportunities and challenges similar to other emerging economies. “Businesses that are looking to grow have turned their eyes to Africa, which is beginning to demonstrate its potential and take off,” says Michael Hsu (徐佩勇), Taipei’s representative to South Africa. Hsu heads the Taipei Liaison Office in the Republic of South Africa, which is based in Pretoria, the executive capital of the country. “South Africa’s good transportation infrastructure across the whole spectrum of aviation, shipping, railroads and highways makes it the ideal gateway to Africa,” he says.
Seeing South Africa as a country full of opportunities, Hsu encourages Taiwanese businesspeople to pay greater attention to the African country by looking at the points in its favor rather than being deterred by its social challenges such as crime or the long distance from Taiwan. The South African government has been stepping up efforts to develop a number of high-tech industries, for example, Hsu says. These include information and communication technology (ICT), solar energy and optoelectronics. Taiwan should try to seize these opportunities as it possesses strong know-how and competitive advantages in these fields, he says.
Likewise, Feng Tze-ling (馮子陵), director of the Economic Division of the Taipei Liaison Office in the Republic of South Africa, suggests that Taiwanese enterprises use South Africa as a base to secure a foothold on the continent and then expand their operations to other countries. “South Africa is a place where people can make money as profit margins are generally high and products can be sold in the Southern African Development Community [SADC] Free Trade Area and enjoy preferential tariffs,” Feng says. “Plus, compared with other African countries, South Africa has better infrastructure and a more advanced banking system.” SADC presently consists of 15 member states and aims to further social, economic, political and security cooperation in the region.
Still, Feng notes that businesses operating in South Africa have to be prepared for “hidden costs” and investment risks from factors like taxes, labor strikes and poor public security.
Employees at Mustek Ltd. Group assemble personal computers. Mustek is the largest PC assembler and supplier in South Africa. (Photo by Kelly Her)
Jobs for 40,000
Currently, there are about 620 Taiwanese-owned companies operating in South Africa. About half of them are engaged in the manufacturing industry, mainly in textiles and garments, electronics and gemstone processing, and the other half in the service sector including import and export trade, real estate and wholesaling. It is estimated that they employ more than 40,000 local workers in total.
One such firm is the Mustek Ltd. Group, which is located just outside the northern city of Johannesburg and was established by Taiwanese expatriate David Kan (甘致行) in 1987. Mustek was listed on the Johannesburg Securities Exchange in 1997 and stands as the largest assembler and supplier of personal computers (PCs) in South Africa. The group employs 1,100 workers and has expanded its business to Kenya, Lesotho, Nigeria and Zimbabwe.
Kan attributes his company’s growth over the years to a product portfolio that covers desktops, notebooks, networking, printing, imaging and cloud computing. Apart from acting as a distributor and setting up authorized repair centers for top-tier brands such as Acer, Brother, Epson, Fujitsu, Lenovo, Microsoft, NEC and Toshiba, Mustek sells computer equipment under its own brand name Mecer. The group sources computer parts and components mainly from Taiwan, Kan says.
Another important growth driver, the group’s chief executive says, has been his company’s ability to secure a significant number of orders from the South African government thanks to its strict compliance with BBBEE policies, which measure companies’ “empowerment progress” for black South Africans. The annual review considers equity of employment, ownership, management, preferential procurement and skills development. The majority of the Mustek Group’s board of directors, for instance, are black Africans, Kan says.
“Currently, demand for ICT products in South Africa largely comes from the public and corporate sectors given that Internet access is not prevalent in the country and, moreover, is expensive,” Kan says. “In particular, [South Africa’s] Ministry of Education is endeavoring to promote computer education in public schools by funding the establishment of PC classrooms. As well, several government units ranging from customs to police departments are working to computerize their operations.”
The increasing government emphases, together with the gradual reduction of Internet connection fees, will continue to spur demand for PCs, Kan says. Moreover, the demand will not only be among government and commercial organizations, but also individual consumers, which will present lucrative business opportunities for the next five to 10 years, he says. Mustek targets revenue of R4.5 billion (US$528 million) this year, compared with R3.8 billion (US$445 million) last year.
“The advantage of doing business in South Africa is that one can enjoy a good rate of profit—16 percent on average in our case,” Kan says. “The overall operational costs, including employee wages and income taxes, are high, however,” he says. Taxation is up to 42 percent for individuals and 35 percent for businesses. “Plus, the rapid depreciation of the rand against major currencies over the years has been a big challenge to importers like us who make payments in US dollars,” the Mustek chief says.
David Kan, chief executive of Mustek (Photo by Alexander Chou)
Eye for Opportunity
Mark Lu (盧宏志), CEO of Corex IT Distribution Dynamics Ltd., is another Taiwanese entrepreneur doing well in the ICT sector. Before moving to South Africa in 1995, Lu worked as a sales manager for an export-oriented ICT company in Taiwan and had to make frequent business trips overseas, including those to the African nation. He spotted vast untapped opportunities in the country and decided to capitalize on them.
“When I arrived here in the mid-1990s, South Africa’s economy had just started undergoing structural transformations under the new government leadership with the implementation of economic reforms aimed at market opening and creating a fair and efficient marketplace for businesses and consumers alike,” Lu says. “In addition to the favorable investment climate, there was great potential demand for PCs and consumer electronic products due to a growing black middle class.”
Lu says Taiwan’s well-developed, innovation-minded ICT industry helps his company offer diverse product lines, which encompass computers, consumer electronics, digital signage, PC components, peripherals, servers and networks. Corex cooperates with about 20 Taiwanese ICT firms including Acer, Advantech Co., Micro-Star International, Partner Tech Corp. and ZyXEL Communications Corp., and is also a distributor for international brands LG, Samsung and Sony.
Currently, Corex, which is based near Johannesburg, works actively with some 2,000 resellers across South Africa and has 100 employees. “As a sales and marketing company, we’re committed to the localization of our workforce, including at the management level. That approach has enabled us to understand the dynamics of the South African market very well and formulate effective business strategies,” the CEO says. “Many foreign investors here complain about the low efficiency of local workers. I think that’s related to how you treat them, though. By offering lucrative remuneration packages, our firm has recruited and retained competent and loyal staff and maintained its growth momentum.”
Lu admits that competition in the local ICT market is getting fierce due to the entry of more players from around the world and consequently the onset of price wars. In response, his company has striven to find niche products and reinvent its distribution models. The firm believes there is large growth potential for products with commercial applications such as cloud computing devices, digital surveillance equipment, point-of-sale (POS) systems and industrial PCs, together with business-to-business-to-consumer (B2B2C) distribution, and will place bigger emphases on the development of those markets, he says.
At the same time, the Corex CEO notes that personal safety remains a concern for people doing business in South Africa, although the problem has improved since the country increased its police force in 2010 when it hosted the World Cup. Another issue, he says, is taxation. In addition to income taxes, most of the goods sold and services delivered in the country are subject to a 14 percent value-added tax.
Corex CEO Mark Lu, center front, stands with sales and marketing specialists at the company’s headquarters near Johannesburg. (Photo Courtesy of Corex IT Distribution Dynamics Ltd.)
Still, in view of South Africa’s status as the economic powerhouse of Africa and its position as a stepping stone to the rest of the continent, Lu says many multinationals including Lenovo and Samsung have made aggressive moves to cultivate the country’s market through strong advertising campaigns and the establishment of sales outlets. Lu is also upbeat about the economic prospects of South Africa and Africa as a whole, citing the large population, the formation of the SADC free trade area and expanding middle class.
Since the 1980s, other Taiwanese businesspeople have invested in textile and garment manufacturing and trading in South Africa. At present, about 60 such businesses employ more than 5,000 workers in all.
Huang Ren-ming (黃仁明), for example, was sent to South Africa in 1988 by his employer, a Taiwan-based textile manufacturing company. Huang was responsible for overseeing the building of a factory in an industrial park located in Ladysmith, KwaZulu Natal province in the southwest of the country. Foreign investors at the park enjoyed government subsidies for the installation of machinery, labor wages, and electricity and water use.
“During the late 1980s, a lot of textile and garment manufacturers in Taiwan began to move their production lines to countries that provided cheaper labor and larger consumer markets,” he says. “South Africa, which offered investment incentives at the time, was one of the popular destinations for Taiwanese manufacturers.”
In 1996, Huang started his own business by setting up a sweater factory and returned to Taiwan to solicit interest from spinning and weaving producers to build production lines in South Africa. In the end, 47 suppliers decided to follow in Huang’s steps and many of them have since become contract manufacturers for his business.
Huang says that in recent years he has had to adjust his business model to address rising labor and utility costs, adding that the country is no longer suitable for labor-intensive manufacturing activities. Accordingly, 60 percent of his merchandise is now imported from Bangladesh and mainland China, with the remaining 40 percent being locally produced. With good cost control and years of local marketing, Huang has been able to supply clothing items to several major chain stores in the African country including Edgars, JET, Mr. Price and Truworth.
Anthony Hsueh’s clothing chains Fashion Station and Clothes Line are based in KwaZulu Natal province. (Photo Courtesy of Anthony Hsueh)
Similarly, Anthony Hsueh (薛燕福), who moved to South Africa in 1991, set up a garment factory there in 1994 by making use of government incentives to encourage foreign investment and immigration. Business went well and he became one of the major suppliers for a clothing chain that operated 200 outlets. The number of workers in his factory once reached 1,000.
Like Huang, Hsueh says he shifted focus from manufacturing to trading three years ago. The main reason for the business transformation, he explains, was labor issues such as wage hikes, high turnover rates and strikes aggravated by a rise in trade union power.
Hsueh operates two clothing chains in KwaZulu Natal province: Fashion Station, a budget to mid-range chain with nine outlets in local communities; and a high-end range called Clothes Line, which has 12 outlets at upscale shopping malls.
New Ways to Add Value
The entrepreneur sources apparel mainly from mainland China, but his company’s in-house designers add value to the garments through embroidery and printing at his factory. “Though local operating costs have risen over the years, the consumer market is growing steadily, so there are still good chances to make money,” he adds. “The key is to be flexible and adapt to change.”
Frank Chien (簡湧杰), managing director of JHB 101 Investments Ltd., expresses similar opinions. He says that while South Africa no longer has a strong competitive edge in manufacturing, its service sector is thriving and shows the promise of further growth as the spending power of the population increases.
Chien identified real estate, in particular, as commanding promising prospects and ventured into the field in 2007 by establishing JHB 101 in Johannesburg. His company has since built a shopping center and three residential projects. It retains ownership of the shopping center and rents out the property, which gives a rental yield of 10 percent to 15 percent, he says.
Contract laborers with JHB 101 Investments work on a government-funded housing project in Soweto, Johannesburg, South Africa. (Photo Courtesy of JHB 101 Investments Ltd.)
It seems that the managing director has found a successful path for his business as last year JHB 101 won a government bid to construct a 5,000-unit housing complex. “About 60 percent of the population in South Africa does not own a home. Around five years ago, its government moved to improve matters by launching affordable housing projects for mid- to low-income households,” he says. “This government initiative, together with support from the banking system, will be conducive to the long-term development of the construction industry.”
Despite many challenges encountered while operating in South Africa, Chien, like other Taiwanese entrepreneurs, has set his sights on the Rainbow Nation’s growth potential as an emerging market and is well positioned to take advantage of it.
“You can find plenty of business opportunities in South Africa and be successful if you work hard enough and understand the local environment,” the managing director concludes. “I usually arrive at the office at 6:30 a.m. to set an example for the others. Moreover, we have a talented workforce comprising local architects, designers and marketing specialists. We’re ready to capture any opportunities presented to us and believe that we can continue to grow our business.”
Write to Kelly Her at kher@mofa.gov.tw