South Africa’s business crisis: Violence, costs, and policy failures collide
Key topics
Business confidence in South Africa hits decade-low amid violence and costs.
Multinationals and local firms exit, risking job losses and de-industrialisation.
Regulatory burdens, crime, and poor infrastructure worsen economic decline.
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The South African economy is going through a torrid time and business confidence is sliding away. An increasing number of multinational companies are either closing or selling their local operations.
Around 1994, the world’s major multinational corporations were eager to be here. They have been deeply disappointed in how things evolved. For over a decade there has been little if any economic growth, and the government has been hostile toward business.
Business confidence is low, and eroding. Six out of ten businesses surveyed in the second quarter by Rand Merchant Bank/Bureau for Economic Research were not satisfied with operating conditions in the country. The index slid from 45 to 40 at its second quarter reading.
Earlier this week, Hendrik du Toit, CEO of Ninety One, the country’s largest asset manager, warned the government to rein in crime or risk capital flight. This comes in response to the killing of insolvency lawyer Bouwer van Niekerk at his law office on Friday. Two years ago, insolvency lawyers Cloete Murray and his son were gunned down on the N1 in broad daylight. Earlier this year, the head of Ekurhuleni’s Forensic and Investigations, Mpho Mafole, was killed.
President Cyril Ramapahosa’s visit to an agricultural fair in Bulawayo and his praising Zimbabwe last week have also not helped SA’s business case. Zimbabwe’s seizure of farms and its economic implosion are examples of what to avoid.
While multinationals in SA are considering their options, local big corporations are sitting on their cash waiting for better times that they hope will come, if and when our infrastructure is turned around. Many might be waiting for the state-owned behemoth, Transnet, to properly operate its assets so that they can import and export to meet their orders on time.
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Where this will end is anyone’s guess. There is no sign that the multinationals are being replaced by new investors, and jobs could be gone forever. For the first time since 1994 there must be a real fear that the country will seriously de-industrialise and suffer critical damage and yet higher unemployment. If multinationals and their service centres close on a large scale, there could be shortages of critically needed spare parts.
Manufacturing as a share of GDP shrank from 25 percent in 1994 to about 12.3 percent last year. We can probably survive without it, but this just makes things more difficult, and means we could face a degree of economic isolation and reduced levels of domestic economic competition.
Jobs are destroyed
With manufacturing contracting, jobs are destroyed, skills are no longer required, there is less demand for associated repair and maintenance-type work, and demand for the services of lawyers, accountants, engineers and others disappears.
Vast swathes of our car manufacturing industry are under threat, with the end of the US Africa Growth and Opportunity Act and the Trump administration’s imposition of a 30 percent tariff on US imports.
Last week, the steelmaker ArcelorMittal SA said it plans to close parts of its operations and is laying off about 3,500 workers, after talks with the government failed to address its concerns. By one reckoning, there are as many as 100,000 associated jobs that could also go.
Shell and BP have closed the SAPREF refinery in Durban, and last year Shell said it was cutting back on distribution activities. Two years ago, BP said it would exit the jet fuel business.
The tyre maker, Goodyear, has said it will close its manufacturing plant in Kariega in the Eastern Cape by the end of the year. As it shifts to the distribution of imported tyres only, it will lay off 900 workers.
Last year, one of the world’s largest banks, HSBC, said it would pull out of SA and transfer its services to First Rand. French Bank BNP Paribas left SA last year. Six years ago, the French Bank, Société Générale, pulled out of the country.
Back in 2020, the tyre maker Bridgestone closed its manufacturing plant in Port Elizabeth. And AngloGold Ashanti pulled out that year.
The big turn of investors away from SA has been long in coming. But this year seems to be a turning point. Speak to business, and there is a palpable fear about the future. The ANC is probably not hearing this, as it speaks to organised business keen to tell good news stories.
Slump in sentiment
There is not just one factor behind this slump in sentiment. High up on the list are killings of insolvency lawyers and the rise in extortion rackets in almost all industries. A few years ago, the mafias were largely confined to the construction industry in KwaZulu-Natal. Then these rapidly spread to Mpumalanga and are now countrywide and active in most industries. Managers in charge of construction projects have been threatened and killed.
We have long known that Black Economic Empowerment employment and equity regulations are a massive burden for business. But now with the passage of the Employment Equity Amendment Act, which came into force at the start of this year, the Minister can decree the racial breakdown of your company’s workforce.
Makone Maja, the Institute of Race Relations’ Strategic Engagements Manager, who heads a project looking into reasons for companies divesting or downsizing, recently heard about what she says is the “great anxiety” in many companies over the new more draconian Act. Many companies are not doing well, but under the Act could be forced to take on more employees to meet the racial sectoral requirements.
Then there are the increasing cost pressures companies face, that make the business environment difficult. Most South African factories are minute by international standards. Our market is small and there is no free trade arrangement beyond the Southern African Customs Union.
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So factories do not have an immediate prospect of achieving the economies of scale of US, European or Chinese factory operations. That represents a serious cost disadvantage, and when combined with high electricity prices, relatively high labour costs, and productivity that does not match overseas levels, it means we are not competitive.
Read between the lines
When companies leave, they don’t issue a protest saying that this is the result of government policies or mafia activity. Instead, they issue a banal statement in corporate doublespeak saying that the company has decided on a strategic reorientation to other regions. But read between the lines and in each exit, there is a bigger story.
The reforms to stop the haemorrhage are not even under consideration. Operation Vulindlela, the ANC reform programme, is akin to palliative care rather than any attempt to address root causes. The ANC just can’t admit to the root causes of the problem, because these go to the heart of its beliefs and vested interests.
*Jonathan Katzenellenbogen is a Johannesburg-based freelance journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Katzenellenbogen has also worked on Business Day and as a TV and radio reporter and newsreader. He has a Master's degree in International Relations from the Fletcher School of Law and Diplomacy at Tufts University and an MBA from the MIT Sloan School of Management.
This article was first published by Daily Friend and is republished with permission