South African Businesses And The New Trend

Economic watch: Retrenchment across SA

There’s been little news reporting on widespread retrenchments throughout South Africa, but those with a keen eye and interest in businesses across industries will have noticed, that this ‘trend’ is prevalent throughout the country.

Rand Rescue takes a closer look at South African businesses and why so many are making cutbacks.

Company Restructure — a clever euphemism

Retrenchments may not be advertised so blatantly in South African news for various reasons. Firstly, it is clearly bad for investor sentiment and company morale if such things are reported on. Instead, as is the trend in South Africa, retrenchment tends to follow the procedure dubbed ‘company restructure’. 

This is not to say that company restructures aren’t necessary. Restructures are crucial during times when a business needs to refocus, save money and change their marketing, production or distribution strategy.  What’s troubling, however, is the sheer frequency and ubiquity of such restructures.

When speaking to friends or affiliates, one often hears of company restructures completed almost year on year in certain businesses. The frustrating part for those who miss the retrenchment guillotine, is that businesses often spend a large chunk of their budget on the restructures themselves, with new collateral and employee engagement novelties offered as band-aids for those left reeling. For those under guillotine… well, they will need to find solace in their retrenchment packages.

Of course, one can’t blame a struggling business for downscaling, but it is cause for concern when this happens so frequently and extensively.

Businesses across sectors have gone through or are currently in the process of restructure, including the financial services sector, the food and beverage, construction and engineering, tourism, mining and agricultural industries are a few who are seeing major cutbacks in their respective businesses.

Why are our industries failing?

There is not a singular reason why sectors are failing, instead we are looking at an anthology of calamities which have befallen different businesses or sectors and been influenced by poor country governance as well as international trade and economic stability. Each new crisis sends shockwaves through sectors with a knock-on effect on related industries.

The demise or downscaling of one business affects the businesses which rely on it for patronage or services, and the vicious cycle continues, sending ripples throughout the country.

In fact, City Press stated recently that South Africa had already seen its unemployment rate rise to 29.5% in the first quarter of 2019, with retrenchments in the construction, mining and banking sectors standing at 5 200.

Although one cannot necessarily scream causality when we see ancillary businesses or sectors struggle following a ruinous event or phenomena in one particular business or sector, it is hard to deny the correlation. So let’s take a look on some of the problems hampering SA business.

Mining collapse

A problem which has been detrimental to the mining sector in particular is the effect of large scale job losses over time.

Miningmx reports that the mining sector has shrunk significantly in the last few decades. From 600 000 employees in 1994 to 45 543 in 2018. In the five year from 2013 to 2018 alone, more than 55 000 job losses in this sector alone. One of the biggest causes for this downscaling is the dwindling of investment as well as the disappearance of iconic mining giants like AngloGold Ashanti.

The knock-on effect, is the loss of members for trade unions, who need to counter these financial losses by demanding greater pay raises and benefits for their members each year. Lonmin is one example of how things can go terribly wrong when mining companies and their workers clash, and it’s understandable that the companies are wary of strikes. The ramifications are strikes, lengthy negotiations and companies eventually offering a higher pay raise than they’d bargained for, which subsequently requires more retrenchment of workers to cater for the additional loss of income.

For other industries, this means less material mined in South Africa and more imported material required from abroad. As one business forks out more to make ends meet, businesses who use their services or products need to raise their own prices, and so the cycle continues to the end-user, common South Africans, whose pockets are affected in the end.

Tyre industry suffering

The collapse of the mining industry has served a direct hit to the tyre industry. Continental is one tyre manufacturer who has made the decision to take production for their mining and agricultural tyres out of SA .

Continental had attributed the closure of these segments of their business and the subsequent retrenchment of 170 people to the continued and persistent decrease and uncertainty in SA’s mining sector.

It’s not an equal playing field

It’s no surprise that South Africa gains a lot of income from exports to other countries. What many people aren’t aware of, is that the playing field is not quite equal and that it’s becoming increasingly difficult for South Africa to compete against other countries.

Factories in the steel and aluminium industries have already started closing doors, and after the US lifted the 25% tariff on steel and 10% tariff on aluminium for Canada and Mexico, this trend is likely to accelerate. By lifting the tariffs for its neighbouring countries, the US has essentially made it impossible for international players to compete.

Not only is it far more expensive to transport the materials from South Africa to the US, but the tariff lift means South Africa has to pay between 10 and 25% more than Canada and Mexico to get our products into the country. Furthermore, after US Steel cut its production, the country was sent into a panic and many companies bought large quantities of steel as a stockpile in fear of shortages. The shortage never occurred, however, and instead, many companies now have an excess of steal which has drastically lowered demand.

Tariff and rate increases

When rates and tariffs remain steady, it makes it easier for companies to budget and make accurate forecasts. When rates increase unexpectedly and from various sources, it becomes highly troublesome, and those companies who are already struggling to keep their heads above water will find it increasingly difficult to stay afloat.

One of the biggest culprits is undoubtedly the National Energy Regulator (Nersa). The embattled utility is knee-deep in debt, accused of widespread irregularity and does not have the necessary skills or resources to supply South Africa with electricity. South Africans are affected in a multitude of ways.

Firstly, the persistent rate hikes to keep the regulator from imploding means businesses have to fork out more to keep their own businesses running, which means making cuts elsewhere — through secondary expenditure and acquisitions from other companies, hiking up their own prices and job cuts.

Secondly businesses are affected by unexpected power outages and scheduled load shedding. These outages have a significant impact on production and productivity which requires companies to spend additional funds on alternative energy sources, hike up their prices and, once more, retrench members of their workforce to balance their budgets.

Another persistent tariff hike affecting business is the fuel levies which have already increased four times this year. The Department of Energy blames international factors for the continuous rise in fuel prices, stating that the rising prices of Brent crude oil requires the persistent price hikes.

As fuel prices rise, businesses have to increase the cost of their products and services to account for the higher expenditure. Furthermore, public transportation services such as the South African Taxi Council warned that the fuel price hikes are affecting their livelihoods and requires that they increase their tariffs as well. This, of course, places increasing pressure on employers to offer higher wage increases than expected and face possible protest action and strongarming by trade unions if they fail to do so.

Then, of course, there was the unexpected increase in Value Added Tax (VAT) last year for the first time in a quarter of a century. Though finance minister Malusi Gigaba stated the 1% hike would add R22,9 billion to the fiscus which would theoretically assist public finance, some argue that it was a bad call given the widespread corruption and irregularities in government spending. Considering that businesses will now need to fork out an additional 1% on all expenses for which VAT is levied, this has seen significant prices hikes throughout all industries.

Poor planning and compound issues

One industry which has come under fire recently is the sugar industry — most specifically Tongaat Hulett. The company had recently announced retrenchment of approximately 5 000 employees following admission of financial irregularities. The company is under forensic investigation after it was discovered that it had inflated its financial  results. The findings had seen the company’s value drop to its lowest point in twenty years which, according to its executives, requires a workforce culling of 16%.

To make matters worse, the South African Cane Growers Association has claimed that the sugar tax in addition to widespread drought, illegal imports and low exporting tariffs are making it impossible for them to operate.

Sugar tax had been introduced in April 2018 in a bid to curb obesity in South Africa. The 2.1% tax had cut the demand for sugar by 170 000 tonnes and R1 billion in revenue in a single year.

Lack of innovation

Accenture’s Innovation Maturity Index recently indicated that 76% of South African companies struggle to release ‘trapped value’ in their businesses due to a lack of innovation and progression focused on modern problems and modern technologies.

The findings further indicated that up to 50% of executives employed in SA companies are unsure or dissatisfied with their companies’ lack of innovation efforts. Of course, one cannot really fault companies for skimming on innovation when they’re merely trying to stay afloat, but it’s noteworthy that South African businesses will need to provide novel services and products which keep up with international trends if they’re to remain relevant.

Consider DStv, for instance. Although the largest private competitor for entertainment viewing in South Africa for decades, their premium option is losing subscribers by the day. The company has blamed competition and a difficult economy, but many believe the biggest problem is that the business is not keeping up with modern times. Given the exorbitant costs of DStv premium, viewers are opting for alternate providers like Netflix, Hulu or Showmax instead. These providers not only allow for streaming on different devices and binge-watching of exclusive series, but users have found them far cheaper than DStv.

International relevance

Speaking of international relevance, the South African wine industry is taking a knock when it comes to their premium wines. Wine-Searcher editor, Don Kavanagh, noted that the problem for SA winemakers remains that our wines are not seen as relevant in the international market.

The industry is therefore predominantly reliant on local buyers, and yet South Africans aren’t willing to pay for expensive vintages or high-end wines.

The industry is further challenged by widespread land disputes. In recent months the story of Stefan Smit, a vintner from Stellenbosch, had been reported on almost weekly. The farmer had been in a dispute with illegal dwellers who had encroached on his land. Following months of unrest, Smit was murdered on his farm. The violent outcome sent shockwaves through the industry and has led many farmers to fear for their own lives — this is especially significant given the volume of farm attacks and murders perpetrated in the country.

Scurrying for the hills

Given the state of South Africa’s economy, it’s understandable that many saffas are scurrying for the hills, or — to be more exact — closing up shop and moving their business abroad. Some are choosing positions at corporate giants abroad while others are tapping into their entrepreneurial nature and moving to countries where startups have a better chance of rising to fortune.

The sad reality is that even with a capable president at the steer, some believe that there are too many problems facing South Africa to be able to enact a quick fix. Latest efforts to save failing State Owned Enterprises are seen as a band-aid to help them save face instead of the drastic action required to save our economy.

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