South Africa can learn about targeting growth through joint ventures

CA Irene Chikobvu explains what South Africa can do to drive economic growth within the country.

With a young population, a growing middle class and blossoming entrepreneurs, South Africa continues to seek transformative growth with new and inspiring opportunities. The UN is expecting the population on the African continent to double over the next 30 years, it has thus become absolutely imperative for us to drive economic growth within our own country and seek gaps to create employment. In doing this, we can take heed in learning from the growth strategies of other developed and developing economies. A good example would be that of China, from whom South Africa can learn about targeting growth through joint ventures.
China’s automotive industry has risen to be one of the largest automobile markets in the world. A significant contributor to its growth is foreign investment, where foreign automakers have experienced striking success in China.

However, do not be fooled by the simplicity of seeking out foreign investors to boost our own emerging market. In light of the influx, the Chinese government has attentively managed all foreign investment into the industry through mindful regulatory policies. This was done with the unwavering objective of developing a domestically driven automotive industry. Their strategy has been to allow market access to foreign automakers in exchange for technology transfer through a ‘50:50 Sino-foreign equity joint venture structure’ - a limited liability company that has the status of a Chinese legal person.

This can be translated in to the idea that foreign automakers entered the Chinese market through joint ventures, where half the company is required to be owned by the Chinese and the other half by the foreign company/investor.

I personally read about this and thought of it as brilliant. However, this lays a prerequisite for us to understand the risks and rewards of a Joint Venture set up:

A joint venture can face its fair share of problems when it’s met by investors with different objectives, a difference in cultures and management style as well as poor leadership. However, if those hurdles are appropriately navigated, JV’s provide increased financial resources, greater technical expertise, access to established markets and a company with increased capacity that could enhance the bottom line.

Furthermore, in a 50/50 Joint Venture, management is obliged to work together as opposed to the majority owner simply putting their foot down during a decision making process. A truly democratic system. An important characteristic of the country being invested in however, is that the country needs to have the ability to legally enforce contracts.

Bringing this home, South Africa is considered one of the most desirable emerging markets in Africa for foreign investors. Out of 17 countries, Bloomberg ranked South Africa in a joint seventh position with Chile and Turkey, but beating India and any other African countries in a list of “Top emerging market picks for 2021”. We should leverage off this reputation because our economy stands to benefit from foreign direct investment as a necessity to drive growth. However, as a country coming from a history of stolen economic freedom and as citizens who don’t always understand the full nature of foreign investments, we tend to assume that there are unfavourable “strings attached” to foreign investment and that we may slowly but surely be giving up parts of the young economy to foreign investors. We can be sceptical, almost pessimistic of stronger economic powers entering the gates of our not so passed past. And this is what probed me to find interest in the Chinese ‘Sino-foreign’ Joint Venture.

This particular strategy should be of great interest to us because it allows foreign investment to enter our country whilst still protecting the market share of local businesses. The strategy sets the market for the exchange of knowledge and mentorship on local companies, and facilitates opportunities to expand in an unimaginable way.

A basic example of this would be that of clothing retailers such H&M and Zara entering a highly competitive local industry where our local Edcon group and other retailers were already finding it difficult to survive. Despite other failings, it was inevitable that retailers would continue to lose an even greater market share to the highly sought after and popular global brands. Hypothetically speaking, had it been a prerequisite for the foreign companies to Join a local company, (a venture for which interested local companies could tender), it is likely that would have resulted in a more favourable outcome for the clothing giant, Edcon, or even the birth of a new Clothing SMME. This can assist in directing the perception of foreign investment, so that it can be seen as an exciting opportunity for growth.

Although it is not my goal to present this as a single solution to a rather large problem. While there is a substantiated amount of benefits as outlined above, a risk based and holistic approach is to be considered by decision makers to ensure that all aspects are covered. But it is a strategy worthy of thought as it has worked well for the Chinese automotive industry.