Exporting into Africa - A case study
At a Cape Town presentation to FNB clients in February 2012, Managing Director Anni Bodington discussed the opportunities and challenges of doing business in Africa as experienced by her company, TESA Palisade Fencing. This is her story in her own words:
I am not going to go into great academic detail as to why you should or shouldn't do business in Africa, even though in my opinion, this is a no brainer as 6 out of the 10 fastest growing economies globally are African.
I am an Entrepreneur not an Economist or Soothsayer. I am here to provide you with some light-hearted introspection and sharing of the journey my company has taken into sub Saharan Africa, from our perspective, with our opinions, about the problems and victories we have experienced whilst learning about exporting, bearing in mind that I think like an Entrepreneur – which means that risk is not something I spend a lot of time thinking about!
Clearly we were naïve when we ventured into exporting as the routes we took were often not clever business, but when opportunities presented themselves, risk and failure were not really uppermost in our minds as the SA construction industry, the arena in which we operated at that time, was heading for the deepest of doldrums.
We wanted a new arena to compete in during 2009 and it seemed the African situation was improving, as I believe it continues to do today and I often hear from my contacts in the USA and Europe that Africa is considered the last investment frontier. We really had no choice at the time; we chose to venture into the African market and being ill prepared, we made mistakes and lost more money. But I do however live with the motto of: ‘never give in, never, never, never,’ … so we became smarter and began to learn the ropes and where to look for pitfalls in exporting. We took the risks associated with currency, country and commercial factors in sub Saharan Africa, discovered who we were, changed, grew, learnt and even to this day… it is still an adventure and we are nowhere near victory but every year is proving more and more exciting for us.
What we do:
TESA, not Teazers, is essentially a manufacturer of Palisade Fencing, although we do buy products in which we offer to our market as added value. Our core product is Steel fencing which is packed in a quite nifty kit form. Our market predominantly is Telecommunications and we sell our fence to networks and turnkey OEM companies who use our fences on what they call base transmission sites which are cell phone sites that house the towers which you and I see all over the place.
In terms of opposition, in South Africa there are 4 main players in this fencing market supplying volume into Africa, in our opinion, us being 1 of them. We are the small kids on the block, with one of the others being listed and another having a Bank in their group of companies enabling them to offer finance of fencing with payment terms of 12 to 24 months, often the terms requested by the African market. This gives them a huge advantage. Two are in Jhb, one in Durban and we’re in CT, a disadvantage for us as all steel transported to CT has an added surcharge of R500 per ton and we pay R2 p/kg more for galvanising in CT than in Dbn and Jhb.
What gives us our winning edge, we believe, and what makes TESA a thorn in the side of this opposition, is the fact that as the small fish, we are flexible, nimble and are able to change direction rapidly depending on our customer requirements. A good example of this was a recent David and Goliath situation when, after a long and arduous battle, TESA was specified for the fencing contract for the entire CELL C 3 and 4 G rollout, much to the dismay of our competitors, who tried unsuccessfully to have this decision overturned.
Other opposition and a very real challenge is the product sourced from China and India, but more about that later.
Essential daily operations involve TESA's team being the middleman between our clients who are OEM's and their clients, the cellphone networks, although the networks sometimes order from us directly and we work with the networks in recommending specification. Although making a fence is not rocket science, you would not believe the politics and technicalities that take place at this level to get our stuff specified. Relationship management is key for successful delivery of service and product.
The kit form works quite well for our customers who collect 2 boxes which contain an entire fence for a cell site, from a central warehouse and take it often 100's of km's into the middle of nowhere where there is little or no infrastructure, poor road conditions and the distances between SA ports and northerly destinations are challenging from a transport perspective.
We adapted our design concept to suit the conditions associated with the remote areas where our product is being used and where a spade and spanner is all that is available as equipment to erect the fence. We take for granted our 5 ton forklift. On a site they dismantle with a Bakkie and rope. We had to put ourselves in their shoes, adapt the product to smaller lighter loads, hence the kit form.
Some of the challenges:
Although payment from OEMs is mostly done from Europe and China, most of them have operations in SA so our Sales team spend a lot of time in JHB. These OEM'S have operations in country, often with South Africans running the operations. Telecomm people stay within the industry and migrate between players in the industry.
It works for us when an alliance is formed with an individual and they like our product so even when they change employment they continue to support us. The negative is what we call the brandy and coke brigade.
As TESA does not have operations in the countries like some of our opposition do, we are not on the ground all the time. What happens is a community is formed amongst expats and sometimes decisions about contracts are made over a braai and a bottle of ‘klippies’. There have been times where price and quality have not been considerations for contracts but again, it shows never to underestimate the powers of relationships, even in deep dark Africa.
We did learn pretty early though that contracting in country is an area we are not ready for as we found out when installing fencing for shopping centres in Angola. Local laws and labour, the expected greasing palms with suitcases full of money made us realise that we should stick with our core competency which is manufacturing. We have also learnt that South Africa and South African expats in other African countries are not necessarily that well thought of and SA having the second largest African economy and the largest GDP does not necessarily mean that other African citizens hold us in the same esteem we hold ourselves. It can be perceived that we are deemed to be creating wealth in arena’s that belong to other countries.
A bit about the industry:
Traditionally companies supplying their RF equipment were strong in this arena and they ventured into turnkey and building sites. Then Chinese companies entered the fray offering to fund the networks with favourable payment terms essentially funding rollouts with terms of payment years later once the networks started raking in the bucks.
The result was price slashing on every level including fence and the traditional losing market share to Chinese companies.
We are selling a fence for less now than we did 4 years ago. The companies who traditionally dominated the industry took a pounding with Chinese companies scooping up the contracts. Historically their reputation for quality and delayed payment terrified companies such as ours. Another worry was the pricing from China for product similar to ours was almost half of our manufacturing cost.
So we tried a different approach completely and employed a Mandarin speaking South African Chinaman, who understood our culture and the Chinese culture. He even says 'hey broer'. The rewards were immediate. The largest portion of our business is now ordered by Chinese companies, payment issues have been largely resolved and we all understand exactly what the quality criteria is. But it was a long road.
Initially, our product was constantly rejected due to a misunderstanding on their part of technical specification, payment ran many months overdue and generally mutual respect was non-existent. But that has all changed and this success can be attributed only to communication which has resulted in mutual respect.
The moral of this little story is that the understanding of different cultures can win the ultimate success when working across cultures and that would be mutual respect. For us it led to an award in November in Schenzen for Best Overseas Regional Partner from our largest Chinese customer.
From a pricing perspective, naturally the weaker the Rand, the better for us. We also find that we are unsuccessful in East Africa as products shipped from China and India are more competitive in price delivered to these areas. This is not the case for West and Central Africa and we are favourably situated to make this our target market.
When we began dabbling in exporting, we didn't speak the language of the country we were negotiating in, never mind that at first, we didn’t speak the international exporting language either, this being the incoterms language! Speaking about naïveté, we didn't think DDP or DDU to Juba, South Sudan was that difficult, until our Forwarding partner strongly advised against this!
Talking about Freight Forwarders - having an experienced supply chain partner is critical. Your Freight Forwarder needs good representation in country. Not every Forwarder has an agent when you need one, although even this does not help when you won't pay bribes at border posts which can result in a minimum of 3 day delay.
Lack of Planning and incorrect documentation can have disastrous results. We have experienced delays at border posts as our customer had not timeously paid his duties and VAT. Trucks delayed at a border for 3 weeks over the Christmas period, extra charges (demurrage) from our Forwarder and a strained relationship.
Although Zimbabwe is low on the listing of attractive countries to do business in, for the past 2 years, more than 60% of our business has been there. There are many challenges in doing business in Zimbabwe, Reserve Bank accessibility to Forex, the fact that an air ticket to Harare costs the same as a ticket to London and corruption. Of interest is the high volume of Egyptian business in Zimbabwe and again, of course the Chinese companies.
ECIC is worth investigating with our government partnering with certain Banks to ensure payment for deals over $10mil for countries such as Zimbabwe. The paperwork process is onerous but it allows funding options to the customer in country and guarantees your money locally.
Another difficult area is Angola. This is a tough arena with corruption and payment considerations to be carefully considered. Botswana and Ghana are relatively easy. DRC is also difficult with corruption and is most challenging. We haven’t cracked Nigeria due to high import duties making our product uncompetitive due to the added value component of galvanising which means we can’t transport as an incomplete product and galvanising in country is highly contentious due to quality. These observations are my opinion and based on our experiences.
The risk associated with currency roulette is, I am sure, a subject which does not need much unpacking. The market we operate within dictates US$ without the reassurance of advanced payments and in fact most of our business is done on open account, which means we carry all the risk which we mitigate with long relationships and blue chips.
The currency fluctuation is so vastly unpredictable and unstable, as we all know, between R6.50 and R8.40 in a 6 month period. Naturally the best way is to fix your currency and the guys at FNB have international banking experience and are FICC and cross boarder specialists. So take advantage of their knowledge. We recently had an experience which I will tell you about but do not recommend as the chances of making money out of currency, is smaller than small. This has been the only time it has been in our favour and we made some money, quoting at R6.50 and being paid at R8.20.
How it happened was that one of the networks in Africa delayed payment to its turnkey operators who in turn delayed payment to their suppliers, including us. We quoted and supplied in June & July and got paid in December at R8.20. I say it is the first time we have made a gain as historically we have lost a substantial amount of money with similar scenarios, where the Rand has strengthened, so I do not recommend taking this kind of risk as it has never paid off for us before.
We have an internal private joke at TESA - the almost only sure bet in currency roulette is if I am going overseas and needing to purchase forex - you can almost be assured that the ZAR will weaken substantially to the US$ the day before my trip to the bank.
Documents, wording of LC's as we all know are critically important as Ashley of FNB will attest to in his experiences with TESA, with documents moving between the US, UK, Ghana and Africa due to a typo. We have also learnt that there are other pitfalls and that packaging and packing methods are very important. One of our products is a welded generator enclosure which is installed on the inside of the perimeter fence. We normally transport these 25 high on flatbeds. Recently, our client contacted us to say that 3 trucks had arrived with badly damaged goods. This particular order was ex-works but as an additional service, we load on behalf of the client but get the driver to tie and check the strapping. Fortunately, part of our procedure is to take detailed photos of the load, the flatbed or container and the vehicle registration plates. After a fair amount of mud being slung our way that we had not packed with sufficient protection, through the photos, it was discovered that for 3 consecutive days, the same truck had been to our premises to load. The goods were then taken to their depot, offloaded and later reloaded onto other trucks and in different packing sequence which resulted in load shifting and massive damage. Our client was quite impressed with our investigation skills.
The journey has proved that if TESA is associated with a measure of success, it can be attributed to the areas we had control over such as partnering with the right people, with long term relationships built on trust. The cliqued 'customer service' which my team lives and breathes and which encompasses all that we do has resulted in TESA gaining a reputation as long term partners and our footprint is spreading further afield with international companies wanting to partner with us when economic conditions improve.
We have, with tenacity, pursued a positive outcome, always believing and always fighting for more market share. It has been TOUGH. We had hectic financial challenges in 2009 and 2010. Everyone sitting in this room can attest to the difficulties experienced in business and in Africa, it's particularly tough.
To sum it up
Through the good and the bad, we have learnt much and we look forward to improved economic conditions globally and improved margins of yesteryear. It is not easy to be profitable in manufacturing. We have had a lot of luck and a lot of bad luck. However, we manufactured 1400 cell phone sites last year and that is no small feat.
FNB is not paying me to be here but I will say that if you want solid advice on importing and exporting, look no further than in this room.
The thoughts and opinions expressed here are those of the author alone and do not necessarily reflect the views of the industry or any of the mentioned organisations.
FNB Economics provides economic and financial data and comment on the performance of the South African economy as well as the global economy with particular reference to elements that impact on or have the potential to impact on our economy.