South Africa's economy: key sectors
South Africa's economy has traditionally been rooted in the primary sectors - the result of a wealth of mineral resources and favourable agricultural conditions.
However, the economy has been characterised by a structural shift in output over the past four decades.
Since the early 1990s, economic growth has been driven mainly by the tertiary sector - which includes wholesale and retail trade, tourism and communications. Now South Africa is moving towards becoming a knowledge-based economy, with a greater focus on technology, e-commerce and financial and other services.
Among the key sectors that contribute to the gross domestic product and keep the economic engine running are manufacturing, retail, financial services, communications, mining, agriculture and tourism.
Sections in this article:
- Manufacturing
- Mining
- Agriculture
- Communications
- Tourism
- Wholesale and retail trade
- Finance and business services
- Investment incentives
- Useful links
Manufacturing
The bottling section of South African
Breweries’ plant in Alrode, Johannesburg.
(Image: Chris Kirchhoff,
MediaClubSouthAfrica.com. For more free
photos, visit the image library.)
South Africa has developed an established, diversified manufacturing base that has shown its resilience and potential to compete in the global economy.
The manufacturing sector provides a locus for stimulating the growth of other activities - such as services - and achieving specific outcomes, such as employment creation and economic empowerment. Manufacturing presents an opportunity to significantly accelerate the country's growth and development.
This sector contributed 16,2% of the annual GDP in 2008, making it the second largest contributor to the nation's economy.
Manufacturing is dominated by industries such as agroprocessing, automotive, chemicals, information and communication technology, electronics, metals, textiles, clothing and footwear.
Agroprocessing
South Africa exhibits a wide range of climates - from semi-arid and dry, to sub-tropical. As a result, a variety of crops, livestock and fish are to be found.
This industry spans the processing of freshwater aquaculture and mariculture, exotic and indigenous meats, nuts, herbs and fruit. It also involves the production and export of deciduous fruit; production of wines for the local and export market; confectionary manufacturing and export; and the processing of natural fibres from cotton, hemp, sisal, kenaf and pineapple.
World-class infrastructure, counter-seasonality to Europe, vast biodiversity and marine resources, and competitive input costs make the country a major player on the world's markets.
Preferential trade agreements, such as the Africa Growth and Opportunity Act (AGOA) for the US market, and a free trade agreement with the European Union confer generous benefits.
Automotive
The automotive industry is one of South Africa's most important sectors, with many of the major multinationals using South Africa to source components and assemble vehicles for both the local and international markets.
South Africa's automotive industry is a global, turbo-charged engine for the manufacture and export of vehicles and components. The sector accounts for about 10% of South Africa's manufacturing exports, making it a crucial cog in the economy.
The government has identified the automotive industry as a key growth sector, with the aim of increasing vehicle production to 1.2-million units by 2020, while significantly increasing local content at the same time.
The sector has exhibited significant growth under the Motor Industry Development Programme (MIDP). Introduced in 1995, the programme will be gradually phased out until 2012. Its successor, the Automotive Industry Programme, has been developed to stimulate production of automotive vehicles and components in South Africa and to encourage the expansion of motor-industry investment and employment.
The automotive and components industry is perfectly placed for investment opportunities. Vehicle manufacturers such as BMW, Ford, Volkswagen, Daimler-Chrysler and Toyota have production plants in the country, while component manufacturers (Arvin Exhaust, Bloxwitch, Corning, Senior Flexonics) have established production bases here.
The industry is largely located in two provinces, the Eastern Cape (coastal) and Gauteng (inland). Companies with production plants in South Africa are placed to take advantage of the low production costs, coupled with access to new markets as a result of trade agreements with the European Union and the Southern African Development Community free trade area. Opportunities also lie in the production of materials (automotive steel and components).
Chemicals
The chemicals industry has been shaped by the political and regulatory environment that created a philosophy of isolationism and protectionism during the apartheid years. This tended to foster an inward approach and a focus on import replacement in the local market. It also encouraged the building of small-scale plants with capacities geared to local demand, which tended to be uneconomic.
Through isolation of the industry from international competition and high raw material prices as a result of import tariffs, locally processed goods have generally been less than competitive in export markets. Now that South Africa is once more fully part of the global community, South African chemical companies are focusing on the need to be internationally competitive and the industry is reshaping itself accordingly.
The South African chemicals sector has two noticeable characteristics. Firstly, while its upstream sector is concentrated and well developed, the downstream sector - although diverse - remains underdeveloped. Secondly, the synthetic coal and natural gas-based liquid fuels and petrochemicals industry is prominent, with South Africa being the world leader in coal-based synthesis and gas-to-liquids technologies.
The industry is the largest of its kind in Africa. It is highly complex and widely diversified, with end products often being composed of a number of chemicals that have been combined in some way.
The primary and secondary sectors are dominated by Sasol (through Sasol Chemical Industries and Sasol Polymers), AECI and Dow Sentrachem. These companies have recently diversified and expanded their interests in tertiary products, especially those with export potential.
Information and communications technology
The country's established and sophisticated indigenous information and communications technology (ICT) and electronics sector comprises more than 3 000 companies and in 2001 was ranked 22nd in total worldwide IT spend.
South African software developers are recognised as world leaders in innovation, production and cost efficiency - and are backed by an excellent local infrastructure.
The local IT industry is characterised by technology leadership, particularly in the field of electronic banking services. South African companies are world leaders in pre-payment, revenue management and fraud prevention systems, and in the manufacture of set-top boxes, all exported successfully to the rest of the world.
Several international corporates, recognised as leaders in the IT sector, operate subsidiaries from South Africa, including IBM, Unisys, Microsoft, Intel, Systems Application Protocol (SAP), Dell, Novell and Compaq.
Testing and piloting systems and applications are growing businesses in South Africa, with the diversity of the local market, first world know-how in business and a developing country environment making it an ideal test lab for new innovations.
Gartner, the international research group, rates South Africa as one of its top 30 software development outsourcing destinations, with 2007 research putting it on par with Israel in the Europe, Middle East and Africa region, and next to Australia and India globally.
The electronics industry has repeatedly demonstrated world-class innovation and production. The industry is characterised by a handful of generalist companies with strong capabilities in professional electronics, while small to medium companies specialise in security systems and electricity pre-payment meters.
Investment opportunities lie in the development of access control systems and security equipment, automotive electronic subsystems, systems and software development in the banking and financial services sector, silicon processing for fibre optics, integrated circuits and solar cells. There are also significant opportunities for the export of hardware and associated services, as well as software and peripherals.
Metals
South Africa's large, well-developed metals industry, with vast natural resources and a supportive infrastructure, represents roughly a third of all South Africa's manufacturing.
It comprises basic iron ore and steel, basic non-ferrous metals and metal products. The basic industries involve the manufacture of primary iron and steel products from smelting to semi-finished stages.
Primary steel products and semi-finished products include billets, blooms, slabs, forgings, reinforcing bars, railway track material, wire rod, seamless tubes and plates.
The primary steel industry is a significant contributor to the economy and earns considerable amounts of valuable foreign exchange.
South Africa ranks about 20th among the crude-steel producing countries in the world - producing in the region of 1% of the world's crude steel. South Africa is also the largest steel producer in Africa: it is responsible for more than half of the total crude steel production of the continent. Total South African crude steel production is in the order of 10 million tonnes per year.
South African primary steel producers manufacture in excess of 8 million tonnes of finished steel products per year, of which about 5,5 million tonnes are consumed domestically. Imports account for about 9% of locally consumed primary steel.
ArcelorMittal SA, formerly Iscor and now part of global steel company ArcelorMittal, is South Africa's largest steel producer. Other industry players are Scaw Metals, Cape Gate, Columbus Stainless Steel, Highveld Steel and Vanadium and Cisco.
South Africa's non-ferrous metal industries comprise aluminium and other metals (including copper, brass, lead, zinc and tin). Aluminium is the largest sector but, as South Africa has no commercially exploitable deposits, feedstock is imported. South Africa is ranked eighth in world production of aluminium. Key players include Billiton (with smelters in Richards Bay) and Hulett Aluminium.
Other non-ferrous metals have a lesser role, but are still important for exports and foreign exchange earnings. Although the country's copper, brass and bronze industries have declined, it is hoped that new mining and reclamation technologies will allow the exploitation of previously unviable deposits.
The international and local steel industry has changed dramatically over the past two years. Several steel companies have fallen away and protectionism has increased.
To survive in these harsh conditions, the South African primary steel industry has taken major steps to become more efficient and competitive. Many local steelworks have engaged in restructuring and productivity improvements.
Textiles, clothing and footwear
The South African textile and clothing industry aims to use all the natural, human and technological resources at its disposal to make South Africa the preferred domestic and international supplier of South African manufactured textiles and clothing.
Though the textile and apparel industry is small, it is well placed to make this vision a reality.
Owing to technological developments, local textile production has evolved into a capital-intensive industry, producing synthetic fibres in ever-increasing proportions. The apparel industry has also undergone significant technological change and has benefited from the country's sophisticated transport and communications infrastructure.
The South African market demand increasingly reflects the sophistication of First World markets and the local clothing and textile industry has grown accordingly to offer the full range of services - from natural and synthetic fibre production to non-wovens, spinning, weaving, tufting, knitting, dyeing and finishing.
Since 1994, about $900-million has been spent on modernising and upgrading the industry, making it efficient, internationally competitive and ready to become a major force in the world market.
About 44 000 people were employed in 2008 by this sector, which has been earmarked by the government as a key job-creating sector.
In an attempt to support the industry and offset the effect of the deepening global recession, the government was, in early 2009, considering an ambitious rescue package for the clothing and textile sector, which could include incentives under the manufacturing investment programme.
Mining
The massive Sishen open-cast iron-ore
mine in the Northern Cape.
(Image: Graeme Williams,
MediaClubSouthAfrica.com. For more free
photos, visit the image library.)
The country is renowned for an abundance of mineral resources, accounting for a significant proportion of both world production and reserves, and South African mining companies dominate many sectors in the global industry. This sector contributed 5.6% to total GDP in 2008.
South Africa is the world's biggest producer of gold and platinum and one of the leading producers of base metals and coal.
The country's diamond industry is the fourth-largest in the world, with only Botswana, Canada and Russia producing more diamonds each year.
Although well over a century old, South Africa's mining industry is far from fully tapped. The country is a treasure trove, with mineral deposits only matched by some countries of the former Soviet Union.
South Africa - while holding the world's largest reserves of gold, platinum-group metals and manganese ore - has considerable potential for the discovery of other world-class deposits in areas yet to be exhaustively explored.
The country produces 10% of the world's gold, and has 40% of the world's known resources. It is estimated that 36 000 tons of undeveloped resources – about one third of the world's unmined gold – still remains.
The sector spans the full spectrum of the five major mineral categories - namely precious metals and minerals, energy minerals, non-ferrous metals and minerals, ferrous minerals and industrial minerals.
Apart from its prolific mineral reserves, South Africa's strengths include a high level of technical and production expertise, and comprehensive research and development activities.
The country has world-scale primary processing facilities covering carbon steel, stainless steel and aluminium - in addition to gold and platinum.
With the growth of South Africa's secondary and tertiary industries, as well as a decline in gold production, mining's contribution to South Africa's gross domestic product (GDP) has declined over the past 10 years. However, this may be offset by an increase in the downstream or beneficiated minerals industry, which the government has targeted as a growth sector.
Lucrative opportunities exist for downstream processing and adding value locally to iron, carbon steel, stainless steel, aluminium, platinum group metals and gold.
A wide range of materials is available for jewellery - including gold, platinum, diamonds, tiger's eye and a variety of other semi-precious stones.
The Mineral and Petroleum Resources Development Act of 2002 has opened the doors to meaningful participation of black people in the exploration and exploitation of mineral resources. The Act enshrines equal access to mineral resources, irrespective of race, gender or creed. When the Act was passed, there was only one junior mining company. By mid-2008, there were 21.
South Africa's mining industry is continually expanding and adapting to changing local and international world conditions, and remains a cornerstone of the economy, making a significant contribution to economic activity, job creation and foreign exchange earnings.
Agriculture
A maize field under centre-pivot irrigation
near Hoedspruit, Mpumalanga.
(Image: Chris Kirchhoff,
MediaClubSouthAfrica.com. For more free
photos, visit the image library.)
Agriculture as a percentage of GDP has decreased over past four decades. This implies that the economy has gradually become more advanced. In 1960, agriculture constituted 9,1% of the total economy; this decreased to only 2,3% in 2008. Though this decrease would seem to be a negative trend from a farmer's perspective, it signals that the South African economy is reaching maturity as the secondary and tertiary sectors become more important.
Maize is most widely grown - followed by wheat, oats, sugar cane and sunflowers. The government has been developing programmes to promote small-scale farming and to boost job creation. Citrus and deciduous fruits are exported, as are locally produced wines and flowers.
South Africa has both well-developed commercial farming and more subsistence-based production in the deep rural areas.
Covering 1.2-million square kilometres of land, South Africa is one-eighth the size of the United States and has seven climatic regions, from Mediterranean to subtropical to semi-desert.
This biodiversity, together with a coastline 3 000 kilometres long and served by seven commercial ports, favours the cultivation of a wide range of marine and agricultural products - from deciduous, citrus and subtropical fruit, to grain, wool, cut flowers, livestock and game.
Agricultural activities range from intensive crop production and mixed farming in winter rainfall and high summer rainfall areas, to cattle ranching in the bushveld and sheep farming in the arid regions.
While 13% of South Africa's land can be used for crop production, only 22% of this is high-potential arable land. The greatest limitation is the availability of water. Rainfall is distributed unevenly across the country, with some areas prone to drought. Almost 50% of water is used for agriculture, with about 1.3-million hectares under irrigation.
South Africa is not only self-sufficient in virtually all major agricultural products, but is also a net food exporter. Farming remains vitally important to the economy and the development of the southern African region.
Communications
Telkom’s microwave communications
tower on Naval Hill in Bloemfontein, Free
State.
(Image: Graeme Williams,
MediaClubSouthAfrica.com. For more free
photos, visit the image library.)
The communications sector - which, together with transport and storage, accounted for almost 10% of GDP in 2006 - has been one of the fastest growing of the South African economy, reflecting the rapid expansion of mobile telephony across the country.
Fixed line penetration is estimated at 10%, while mobile penetration is significantly higher at around 93%, according to figures from the Department of Trade and Industry.
The estimated revenue generated in the telecommunications sector during 2007 was R126-billion, and telecommunications (hardware and software) contributed an estimated additional R27-billion.
Telkom, a listed company in which the government is the biggest shareholder, was until recently the only licensed provider of public fixed-line telecommunications services. Telkom is also a key player in an optical fibre undersea cable project that will cater for Africa's growing telecommunications needs for the next 25 years.
In late 2006, the government awarded Neotel a licence to become the second fixed-line operator. The new company, which is expected to challenge Telkom with competitive prices, has been gradually rolling out its services during 2007.
A court ruling in 2009 had added impetus, allowing value added network service providers - of which there are about 300 in South Africa - to build their own networks. A second transatlantic cable, Seacom, is expected to land in mid-2009.
South Africa's cellular phone market has grown phenomenally since its inception in 1994. It is also the fourth fastest growing Groupe Speciale Mobile (GSM) market in the world.
Cellular services are provided by three licensed operators: Vodacom, MTN and Cell C. In June 2006 a virtual cellular service provider, Virgin Mobile, was brought to life in partnership with Cell C.
The country has more than 33 million mobile phones. The introduction of number portability in November 2006 has increased the flexibility of the mobile service industry and is expected to bolster competition between various providers.
South Africa is also the largest Internet market in South Africa, with an estimated 4.6- to 5.4-million users. There are still around 700 000 dial-up users, while there were 1.35-million broadband connections at the end of 2008. Research firm World Wide Worx predicts that South Africa will show steady Internet user growth over the next few years, reaching 8.5-million Internet users in 2013 and 9-million users in 2014.
According to the Economist Intelligence Unit's Information Industry Competitiveness Index 2008, South Africa ranks 37th out of 66 countries reviewed, owing to well-established business and legal sectors.
Tourism
Camps Bay in Cape Town, the South
African city most favoured by international
travellers.
(Image: Graeme Williams,
MediaClubSouthAfrica.com. For more free
photos, visit the image library.)
Tourism is regarded as a modern-day engine of growth and is one of the largest industries globally. One of the advantages of tourism as an export earner is that it is less volatile than the commodity sector.
Tourism has been earmarked as a growth industry in South Africa, as the industry is ideally suited to adding value to the country's many natural, cultural and other resources.
According to the World Travel and Tourism Council, tourism directly and indirectly constitutes approximately 7% of GDP and employment in South Africa.
Some 74% of all visitors in 2006 were from mainland Africa and about 26% from overseas. About 7.9 million of the 8.5 million foreign travellers (92%) visited the country for a holiday and approximately 196 951 (2.3%) for business in 2006.
According to the World Tourism Organisation , sub-Saharan Africa attracted 2.9% of the world's tourists in 2005. Of this percentage, South Africa has about 20.5% of market share. South Africa's international tourism receipts amounted to $7.3-billion in 2005. Its share of total African tourist arrivals and tourism receipts was over 34% in 2005.
The outlook for the future of the industry is positive, especially considering the 2010 Fifa World Cup. The build-up to the event, as well as the exposure that South Africa will receive before and after the event, will no doubt result in aggressive growth in foreign tourism. This has been a proven fact in every country where the event has been held.
It is projected that in 2010 the South African tourism industry will employ more than 1.2 million people either directly or indirectly.
Wholesale and retail trade
Maponya Mall in Soweto is just one of the
many shopping malls springing up in
townships across South Africa.
(Image: Chris Kirchhoff,
MediaClubSouthAfrica.com. For more free
photos, visit the image library.)
Statistics SA produces a monthly survey of the retail trade industry, covering various retail trade enterprises.
The survey generally covers retailers in specialised food, beverages, tobacco, pharmaceutical and medical goods, cosmetics and toiletries, general dealers, textiles, clothing, footwear, leather goods, household furniture, appliances and equipment, hardware, paint and glass, as well as various other dealers in miscellaneous goods.
Retail trade sales at constant (2000) prices, for the year 2006, showed an increase of 9.7% from 2005. According to Statistics SA, this is the largest increase, together with the 2004 increase, which was also 9.7%, for any year since 2000.
According to the survey, general dealers, other retailers and retailers in textiles, clothing, footwear and leather goods were the major contributors to the increase in retail trade sales.
Real retail sales' growth decreased in the fourth quarter from the third quarter of 2006 from 10.7% to 9.1% year-on-year. The deceleration follows from the 200 basis point hike in interest rates during the second part of 2006, making overall economic conditions somewhat tougher.
Among the major retailing groups are Edcon, Massmart, Pick 'n Pay, Shoprite Checkers, Mr Price Group, Foschini Group, JD Group and Ellerines Holdings.
Finance and business services
The Absa Bank contact centre in Auckland
Park, Johannesburg.
(Image: Chris Kirchhoff,
MediaClubSouthAfrica.com. For more free
photos, visit the image library.)
South Africa, despite its "emerging market" status, has a sophisticated financial sector. With the country's re-integration into the global sphere in 1994, corporate governance rules, disclosure, transparency and accountability have become an integral part of doing business in South Africa.
Consequently, regulations governing the financial sector, and particularly risk management, have undergone considerable refinement to align them to internationally recognised standards and best practice.
The financial, real estate and business service sector accounted for 22% of the country's real value added (value of total production) in 2006 and, together with other services sectors, has proved to be a pillar of the country's economic growth over the years.
The sector boasts dozens of domestic and foreign institutions providing a full range of services - commercial, retail and merchant banking, mortgage lending, insurance and investment.
South Africa's banking sector compares favourably with those of industrialised countries. Foreign banks are well represented and electronic banking facilities are extensive, with a nationwide network of automatic teller machines (ATMs). Internet banking is also available.
The Financial Services Board oversees the regulation of financial markets and institutions - including insurers, fund managers and broking operations, but excluding banks, which fall under the South African Reserve Bank.
The South African banking system is well developed and effectively regulated, comprising a central bank, a few large, financially strong banks and investment institutions, and a number of smaller banks.
Many foreign banks and investment institutions have set up operations in South Africa over the past decade. The Banks Act is based on similar legislation in the United Kingdom, Australia and Canada.
Although no formal agreements have established a consistent international position in the area of banking regulation, there have been amendments to exchange controls as well as financial market legislation, making South Africa an attractive investment prospect.
The National Payment System Act of 1998 was introduced to bring the South African financial settlement system in line with international practice. The Act confers greater powers and duties on the SA Reserve Bank in respect of providing clearing and settlement facilities.
The Payment Association of South Africa, under the supervision of the Reserve Bank, has facilitated the introduction of payment clearing house agreements. It has also introduced agreements pertaining to settlement, clearing and netting agreements, and rules to create certainty and reduce systemic and other risks in inter-bank settlement. These developments have brought South Africa in line with international inter-bank settlement practice.
Investment and merchant banking remains the most competitive front in the industry, while the country's "big four" banks - Absa, Standard Bank, Nedbank and FNB - continue to consolidate their grip on the retail market.
Reserve Bank
An office headed by the Registrar of Banks, operating as part of the Reserve Bank, is responsible for registering institutions as banks or mutual banks, and for enforcing the legislation.
The registrar acts with relative autonomy in executing his duties, but has to report annually on his activities to the Minister of Finance, who in turn has to table this report in Parliament. The extent of supervision entails the establishment of certain capital and liquidity requirements and the continuous monitoring of institutions' adherence to legal requirements and other guidelines.
The performance of an individual institution is also monitored against developments in the relevant sector as a whole. If deemed necessary, inspectors can be appointed to inspect the affairs of any bank, or any institution or person not registered as a bank if there is reason to suspect that such an institution or person is carrying on the business of banking.
Financial Services Board
The Financial Services Board is an independent institution established by statute to oversee South Africa's non-banking financial services industry.
The board's mission is to promote sound and efficient financial institutions and services, together with mechanisms for investor protection.
Major financial institutions regulated by the board include the country's exchanges and insurers, both short term-and long-term.
Investment incentives
South Africa offers various attractive investment incentives, targeted at specific sectors or types of business activities. These are:
The Enterprise Investment Programme manufacturing programme
The EIP (manufacturing) is a cash grant for locally based manufacturers who wish to establish a new production facility, expand an existing facility, or upgrade an existing facility in manufacturing industries.
The Enterprise Investment Programme tourism support programme
The EIP (tourism) is an investment incentive grant, payable over a period of two to three years, to support the development of tourism enterprises, and in so doing, stimulate job creation and encourage the geographical spread of tourism investment throughout South Africa.
Tourism-related activities supported by the grant include the following:
- Accommodation services
- Passenger transport services
- Tour operators
- Cultural services
- Recreational and entertainment services
Foreign investment grant
This grant seeks to compensate qualifying foreign investors for the cost of moving qualifying new machinery and equipment from abroad to South Africa.
Critical infrastructure
The critical infrastructure fund is a cash grant for projects designed to improve critical infrastructure in South Africa, including the following:
- Transport systems - road and rail systems
- Electricity transmission and distribution systems - power flow and regulation systems
- Telecommunications networks - cabling and signal transmission systems
- Sewage systems - network and purification
- Waste storage, disposal and treatment systems
- Fuel supply systems - piping for liquid, gas, and solid fuel conveyer transportation
Industrial development zones
IDZs are purpose-built industrial estates linked to international ports that leverage fixed direct investments in value-added and export-oriented manufacturing industries.
These zones provide the following benefits:
- Quality infrastructure
- Expedited customs procedures
- Duty-free operating environments
The location film and television production incentive
This incentive programme consists of a Large Budget Film and Television Production Rebate Scheme, whereby foreign-owned qualifying producers are rebated a maximum of R10-million for the production of large budget films and television productions.
The South African Film and Television Production and Co-Production Incentive Financial assistance to South African feature films, tele-movies, television drama series, documentaries andanimation. The objective is to contribute to the local film industry. Production budgets are required to be more than R10-million, with the rebate being 35%, capped at R10-million.
Export marketing and investment assistance
The EMIA scheme partially compensates exporters in respect of activities aimed at developing export markets for South African products and services, and to recruit new FDI into South Africa.
The scheme provides assistance in the form of:
- Air travel expenses
- Subsistence allowances
- Freight-forwarding of display materials
- Exhibition space and booth rental costs.
The business process outsourcing and offshoring investment incentive
The BPO&O investment incentive comprises an investment grant, and a training support grant, towards costs of company-specific training.
The incentive is offered to local and foreign investors establishing projects that aim primarily to serve offshore clients.
Automotive production and development programme
This programme has four key elements:
- Tariff reduction freeze from 2013 until 2020
- Local assembly allowance
- Production incentives
- Automotive investment allowance
