Can you be efficient in a “laggard economy”?
No. It is almost impossible for individuals and corporates to be efficient in an economy that is lacking in economic growth and this anecdotal support this argument based on a South African context.
There seems to be a delink between the performance of the South African economy and its best performing corporates. Whilst economic growth has been deteriorating in the last couple of decades, the private sector (Corporate SA) has performed relatively well at the same time. In fact, if you invested in the JSE Top 40 over the same period, you would have earned great returns, even when you outstrip the “rand hedges “.
Profitability does not necessarily mean efficiency.
This is evident in the fact that while most of the South African corporates have been performing well by reporting organic growth in the local market, they are not operating at an efficient level that is efficient enough for them to compete in other markets. There is a host of companies that have tried to expand to other markets beyond the local market but have not necessarily succeeded in this strategy.
Nigeria seems to be the best market to venture into when Corporate SA wants to expand beyond South Africa. This makes sense given that Nigeria has the largest population in Africa, but that market seems extremely hard to crack. The list of South African companies that tried to grow in this market but had to exit include Tiger Brands, Mr Price and Shoprite. MTN seems to have got a grip on this market, but the number of “irregularity fines” it gets is of concern. The failures of Corporate SA are not just limited to Africa. Woolworths and Redefine Properties attempted to grow in Australia. The latter had to exit the UK after Brexit. Truworths, another Corporate SA, is failing to conquer the UK market. The list of Corporate SA failing to grow beyond the local market goes on and on. Most analyses on these failures are usually looked at from an accounting perspective and how difficult it is to be in those markets these businesses ventured into, and not from an efficiency perspective of their own operation in their base (local) market.
What exactly are these inefficiencies in the local market.
The following personal experiences demonstrate the different inefficiencies one can encounter in South Africa.
A colleague of mine, while on a Summer camp in Beijing, ordered a pair of sneakers on Taobao one night, they were delivered the following day before noon. Another colleague, upon his arrival in New York and realising he forgot to pack his cell phone charger, ordered one on Amazon, it was delivered in the less than two hours.
Back in South Africa, I ordered a reading fleece blanket and a Rain sim card on TakeALot. The delivery? 12 days. The only quick delivery you can expect is for Fast Food deliveries. No wonder why South Africa is one of the countries ranked with the highest obesity rate.
Ant Financial, the financial subsidiary of Alibaba, can decide in less than 5 minutes whether to loan a small business or not upon receipt of such application. It has one of the lowest default rates compared to other banks.
Back in South Africa, a simple transaction such as a transfer from one bank to a different bank takes 2–3 business days to clear in the receiving bank. To be fair, the 2–3 business days is what most local banks promise us when you make such transfers. The money usually clears the following business day if you made the transaction in the morning the day before. My common dilemma while at varsity, every time I asked my parents money on a Friday morning and they made the transfer in the afternoon of the same day, I will get the money in my bank account very early the following business day, a Monday morning (with a Friday night, Saturday and Sunday all gone). Make no assumption, the money was not for “the weekend”.
Ofcuz, there is an option with all banks to make the transfer clear immediately, but you have to pay to get this option. The least you can pay with what is supposed to be the “cheapest bank” in South Africa for an immediate transfer to another bank is R8.00. Yep, Eight South African Rands. That is 1, 2, 3, 4, 5, 6, 7, 8. You will need two hands to count this with your fingers. 8 Rands might not sound like it’s a lot to someone who can read this article and understand its content, simply because you cannot even buy internet data with it (We have the most expensive internet data prices relative to other African countries), but, 8 Rands is equivalent to the same price millions of South African pay for their daily commute in minibus taxis. By the way, Minibus taxi is the most used transport mode in South Africa, and based on a PhD research (Which I do not have the permission to link to this article), they transport more than 1 million South Africans at any given hour on any given day, including Sundays and Public holidays. I will let you give a good guess of how efficient the minibus taxi industry is. To arrive at a convincing answer, just observe how taxis drive on the road.
Another inefficiency you can experience in South Africa is this. An individual saving for their Retirement is limited to the different asset classes which they can invest in. Regulation 28 its called. In particular, Regulation 28 governs that you can only have up to 30% of your total investment portfolio in Offshore investments, among other limitations it imposes. This means that you must have 70% of your total portfolio invested in the local South African market. Interesting fact, the South African Rand has been depreciating at a very steady rate for the past couple of decades and this is partly because of the deteriorating economic growth. Another interesting fact, the South African market, based on the market value, does not count for more than 1% of the total available investment securities that are available globally or in the “investment universe”. We have also established that most South African companies fail to successfully grow beyond the local market. Considering all of these, it seems to be counter-intuitive then to limit investment to offshore to only 30% of the total investment portfolio.
Are all South African companies limited to grow only locally?
Not at all, there has actually been a lot of other South African companies that do exceptionally well in growing beyond the local market. Mining companies are among some of these companies but there is a plausible explanation on why they thrive in other markets. Mining, as a sector is a unique industry in the sense that you are trading or dealing with rare natural resources and have to achieve economies of scale to be profitable. This leads to the creation of monopolies and oligopolies, and in such sectors with less competition, you don’t need to be efficient to thrive.
Another group of companies that thrive beyond the local market are clustered in the financial sector. Discovery, for instance, is one of those companies and its success can be attributed to the fact that its pioneering using data to tailor their insurance to each of its clients, from health insurance (Vitality) to Car Insurance (Getting rewarded for good driving). In fact, the South African financial sector is one of the most prudential in the world when measured on certain metrics and this is because of the different regulations that are in place. But one should also view the same regulation as the cause of some of the inefficiencies in South Africa, for instance, Regulation 28 or how long it will take for a business to get a banking license to operate as such. Most banks though are waking up to the idea that you don’t necessarily need a banking license to compete with them. There are numerous local fintech start-ups that are coming to this party and dancing well to the tango with the very same banks.
Conclusion: It’s highly unlikely to be efficient or reach an optimum level in a laggard economy.
My argument is that it is difficult for any individual or business to be efficient in a deteriorating economy. You can be efficient enough to be successful in the local market, but it becomes difficult to be efficient enough for you to grow in other markets. This is because in a laggard economy, the inefficiencies go beyond the slow supply chains and bureaucratic regulations that we are subject to. Does TakeALot stand any chance in competing against Amazon or Taobao if they were to compete in a new market like the rest of Africa or India? Or how will the local banks fare if they attempted to grow their retail business elsewhere.
These same questions should be asked by any other South African business before they attempt to grow in any other market. Corporate SA, however, seems to believe that when they are highly profitable in the local market, they can grow in other markets too, not realising that profitability does not necessarily equal efficiency. So, next time a local successful business’s new strategy includes growing in other markets, they must have thoroughly evaluated such a decision rigorously and at least, execute such a strategy at the lowest financial leverage possible.
The views and opinions expressed in this article are that of my own and do not represent the same views and opinions of any entities I am associated with.
