Toby Chance: Lessons from Germany? Inclusive SMEs economic saviour.

When one thinks of the German economy, it’s usually big business that comes to mind. Toby Chance debunks this myth, showing that 80.4 percent of the country’s economic output is from companies employing less than ten people, while those employing over 500 only contribute 0.4%. Chance also makes note of the 1,300 German SMEs that have become global market leaders, what he calls ‘hidden champions’, compared to the 360 from the United States. Chance looks at how lessons from Germany can be implemented in the SME space in South Africa, with the key ingredient involving inclusion. He says big business should not be so complacent and short-sighted because without opening up to small business, the local economy could face an existential threat. – Stuart Lowman

By Toby Chance*

The Department of Small Business Development, in partnership with the Small Business Development Institute (SBDI), recently hosted the second National Small Business Policy Colloquium at the IDC offices in Sandton. Members of the Portfolio Committee were invited, and I was eager to attend to listen to current thinking in one segment of the small business development ecosystem.

The word that comes to mind in summing up the colloquium presentations and deliberations is exclusion.

Toby_Chance_DA_minister
Toby Chance is the Democratic Alliance’s shadow minister of Small Business Development.

Small businesses, especially those in the informal sector, have long been excluded from the mainstream economy. Introducing the Colloquium, Xolani Qubeka, CEO of the SBDI, spoke of the first and second economies, language first used by former President Thabo Mbeki describing South Africa’s dual economy – “one developed and globally connected and another localised and informal, display(ing) many features of a global system of apartheid”.

Mbeki, speaking at the 62nd Session of the UN Security Council in 2007, suggested this was not just a South African phenomenon but a feature of the global economic system.

Small businesses, he implied, suffer from exclusion from access to finance, access to markets, access to training and support, infrastructure and networks – the things that underpin a connected and inclusive economy.

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This is certainly true of South Africa where a few big companies dominate in their sectors and the informal sector makes up a larger proportion of total economic output than in developed economies.

A radically different picture was presented by Professor Michael Woywode from Mannheim University in his analysis of Germany’s “mittelstand”, or small and medium business sector. Small businesses employing less than ten people make up 80.4% of Germany’s economic output, while those employing over 500 contribute 0.4%.

So while behemoths such as DaimlerChrysler, Siemens, SAP and Deutsche Bank dominate our thinking about Germany’s dymanic economy, it’s actually the small businesses that make it the international powerhouse that it is.

Not only are they integrated into local supply chains, they also succeed internationally, penetrating niche markets using their prowess in engineering and technology. Around 1,300 small and medium German “hidden champions” have become world market leaders, compared to around 360 from the USA, 76 from Italy and 67 from the UK.

How many South African small or medium companies can make that claim?

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This is made possible by Germany’s emphasis on funding quality education and apprenticeships. Germany regularly comes near the top of world league tables in science, technology, mathematics and science (STEM) education. The mittelstand funds the majority of apprenticeships, which feed a continuous stream of skills into the economy and keep it at the cutting edge.

Clearly, Germany does not have the same problem of exclusion that we have in South Africa, at least when it comes to its economy.

What did the Colloquium have to say about finding solutions to economic exclusion back home?

As usual at gatherings of this kind, much of the blame is laid at the door of big business for locking small businesses out of their supply chains.

Our economy is skewed, with an undeveloped mittelstand, a few over-dominant companies at the top and a huge, unregulated and excluded informal economy at the bottom of the pyramid.

That this situation should change with the economy becoming more inclusive is not in doubt. The question is: how?

The black business lobby, with the Black Business Council at the forefront, attacks “white minority capital” and wants a bigger slice of the pie for black-owned businesses. It was vocal in pressing for the formation of a department for small business, from which it aimed to extract concessions and set-asides.

But this approach will result in a few connected individuals – the much-vaunted 100 black industrialists – becoming very rich while excluding struggling small and micro black-owned businesses not connected to the ANC’s patronage network.

It will do nothing to stimulate growth in the wider economy, drive investment or improve our international competitiveness – vital sources of job creation.

The real problem at the centre of this issue is opening up markets previously closed to small businesses, of whatever colour. Government’s solution is twofold – BBBEE regulations and preferential procurement for black-owned companies.

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The Enterprise Development Council of South Africa’s recent survey of enterprise and supplier development (ESD)  – which accounts for 15 out of 105 BBBEE points available – revealed that 86% of ESD spend was ineffective. This means that the vast majority of around R20 billion annual ESD spend (3 % of the net profits of compliant companies) fails to have a positive impact on developing small businesses and job creation.

There are exceptions, notably Anglo Zimele which has invested R1.4 billion in close to 1, 900 businesses turning over R6 billion since it was formed over a decade ago.

Less well known is Property Point, the enterprise development initiative of South Africa’s largest property developer, Growthpoint. Instead of ticking the BBBEE compliance boxes, Property Point has concentrated on developing and absorbing some 100 suppliers that collectively have contributed over R400 million in goods and services to its supply chain. It is now partnering with competitor Attaq to broaden its successes in the wider property sector.

On the procurement side, Government aims to procure 30% of goods and services from SMMEs, mostly black-owned. To this end, Treasury tabled new regulations which give equal recognition to price and BEE rating – 50/50, as opposed to the 80/20 ratio currently pertaining to suppliers turning over less than R1 million.

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This would lead to winning tenders potentially pricing their bids 50% higher than their non-empowered competitors – at the expense of the poor who will have to pay higher prices for diminished services. As Western Cape Premier Helen Zille said, this is legalised corruption, and does nothing to improve competitiveness in our small business sector.

Is punitive, redistributive and racially motivated legislation the only way to overcome the entrenched exclusion of small, mainly black-owned businesses, from the mainly white-owned formal economy?

Many companies now see BEE as simply a checkbox exercise and make do with a level 4 rating, which is the highest achievable without bringing in black shareholders and senior management.

But business should not be so complacent and short-sighted. Without opening up to small business, our economy could face an existential threat.

The EFF’s recent march on the Chamber of Mines and the JSE presents our captains of industry with a stark choice: open your arms to inclusive development or have it forced upon you by an angry and resentful mob.

To bring business on board, government should move away from its punitive approach to non-compliance and instead incentivise beneficial outcomes like job creation and new enterprise formation.

It will take time and effort. But this is surely preferable to bending to unreasonable demands from the EFF for JSE-listed companies to hand over 51% of their equity. This can only lead to economic ruin.

One way is for medium and large companies to invest in financing small businesses to gain entry into their supply chains. This can have a far greater impact than is possible through adherence to the 3% of net profit after tax mandated in the BBBEE scorecard for ESD.

The private sector should see ESD as a business and social imperative, not a grudge purchase to satisfy BEE regulations. Like Germany, we should invest in education and apprenticeships, so feeding the pipeline of small businesses.

There is a palpable sense of inequity in our economic landscape. It is real and must be addressed. But resorting to methods that perpetuate exclusion based on race and political connections, rather than inclusion based on broadening opportunities for all SMMEs, will not solve this problem.

  • Toby Chance is the DA’s Shadow Minister of Small Business Development.