Think Investment.

Think South Africa

      Sector information

DAVOS 2010
JANUARY 27 - 31
1. BACKGROUND
South Africa is an integrated and responsible member of the global community. South
Africa enjoys preferential market access into traditional markets like the EU and US,
but also into emerging new poles of demand like India and soon with China. We
transformed the economy through fundamental macro-economic reforms and created
the enabling environment for the majority of South Africans to participate in the
mainstream economy. Today over 70% of GDP is now derived from manufacturing
and services. Direct mining now contributes around 6% to GDP. We have created more
than three million new jobs since 2004. Of course, we have a long way to go still in the
area of unemployment. The position we have today has been achieved through sound
fiscal management, consistent and coherent policy formulation and implementation.
It is with this same rigour and well thought out policies that South Africa is coming out
of this global economic crisis.

Between 2006 and 2010 Government will invest more than $59billion in catalytic
interventions in infrastructure, from rail freight services, energy production, to
communications, airports and upgrading of ports of entry. South Africa remains a global
leader in the resources sector and our industrial policy will seek to enhance beneficiation.
Special emphasis is being placed on labour intensive sectors and in diversifying
competition. We are prioritising those sectors that will maximise the multiplier effect
on downstream industries. Now is a very good time to position and prepare for the
upswing, with continued investments and expansions taking place in South Africa and
the continent despite the backdrop of global economic downturn, which now seem
to display tentative signs of recovery. In this regard South Africa offers amongst others,
additional opportunities in the Agro-processing, Automotives, Chemical and allied
industries, Business Process Outsourcing and IT enabled services, Electro-technical,
Tourism as well as Aerospace, rail and marine sectors of the economy.

The African continent has been the least effected from the global financial crisis and
investments here have been secure. The new global economic order must see Africa
at the centre and not on the periphery. As the richest continent on the planet in terms
of resources, it is an economic and social imperative that Africa be an integral player in
turning the global fortunes around. The operating environment in the continent has
been improving visibly and rapidly with:

• 54 countries, 35 democracies (compared to only eight in 1991)

• Many countries have improved their business environment:
• restored macro-economic stability
• greater predictability & increased reliability of policy & regulatory framework
• increased transparency and improved decision-making
• privatisation initiatives
• reduced corruption
• investment protection & promotion
• intra and inter-regional initiatives
• High returns on investment
• The only global region for which a higher rate of growth was forecast by the IMF
for 2007 & 2008 (relative to 2006)
2. LEAD SECTORS
• Capital/ Transport Equipment & Metals

The South African capital equipment, metal fabrication and transport equipment
sectors have developed important capabilities based on South Africa’s fairly diversified
industrial base and long history of industrialisation. Technological leadership has been
achieved in a range of niche areas related to capital equipment for the mining sector,
such as valves and pumps.

There is a major opportunity to grow these industries through the public expenditure
programme in energy and transport as well as the current mining and mineral processing
boom. However, this requires a coordinated effort to match public investment and
operational expenditure to the upgrading of domestic suppliers. As much as possible of
this opportunity will be leveraged without compromising the cost or quality of public
investments. Mining and mineral processing investments and replacement expenditure
also represent a major opportunity to grow these industries.

• Automotive Assembly & Components

The automotive industry is South Africa’s leading manufacturing. Our vision for 2020 is
to double production levels to 1.2 million units, with a much stronger development of
the local component manufacturing. Driven by the MIDP, the sector has restructured,
rationalised and almost doubled in recent years.

Due to its synergies with several sectors such as metals, leather, textiles and plastics, the
automotive sector has a strong linkage effect with the broader manufacturing sector.
There has been significant growth in important component sectors such as leather seat
covers, silencers, exhausts and catalytic converters.

South Africa currently exports vehicles to over 70 countries, mainly Japan, Australia,
the UK and the US. African export destinations include Algeria, Zimbabwe and Nigeria.
All of the major vehicle makers are represented in South Africa, as well as eight of
the world’s top 10 auto component manufacturers and three of the four largest tyre
manufacturers. Many of the major multinational companies use South Africa to source
components and assemble vehicles for both the local and overseas markets.

• Chemicals, Plastic Fabrication & Pharmaceuticals

The South African chemical sector is diverse and complex. On the one hand it comprises
a well-developed upstream industry – Basic Chemicals and Other Chemicals – with
the former being highly capital-intensive. On the other is the more labour-intensive
downstream Plastics industry.

Producers of the chemicals sector invest around R2 billion annually in upgrades,

with less than 1% of sales being spent on research and development. Around 60% of
upstream chemicals are consumed within the chemical pipeline as feedstock.

The chemicals and metals sectors are the basis for almost every manufacturing activity.
It is thus a crucial industry from the perspective of South Africa’s growth path for
advancing socio-economic development objectives.

The development of the chemicals sector has two major elements: first, to promote
beneficiation of minerals into primary products for exports and also to provide
feedstock into higher value-adding manufacturing activities; and second, to promote
downstream fabrication of polymers, thereby creating more jobs and adding significant
value.
Major markets for South African exports in priority sub-sectors are as follows:
• Inorganic chemicals: US, India, France and Germany;
• Bulk formulated chemicals: Zimbabwe, Zambia, Malawi and Tanzania;
• Consumer formulated chemicals: Angola, Mozambique, UK and Zambia; and
• Plastic conversion: Zambia, Zimbabwe, China and Mozambique.

• Forestry, Pulp, Paper & Furniture

Because forestry and the primary processing activities take place largely in rural
areas, it has the potential to increase jobs and income in poor rural communities.

The forestry sector strategy provides for the afforestation of 100,000 hectares net increase
in planted area over the next ten years in the Eastern Cape (EC) and 40,000 hectare in
KwaZulu-Natal (KZN). This represents an investment in forestry in excess of R1.5 billion,
with further substantial investments in downstream processing enterprises.

It is estimated that the new afforestation has the potential to contribute R215 million to
GDP and create 26,000 jobs at plantation level and 1,700 at primary processing level in
EC. In KZN it will contribute R500 million to GDP and create 15,000 jobs at plantation
level and 429 at primary processing level2.

In order to realise growth in this sector, Government has committed itself to expediting
the afforestation licensing process, the confirmation of land rights for land holding
communities, technical and financial support for emerging small growers and
improvements to transport infrastructure.

• ICT and Electronics

The ICT & Electronics sector, with its key sub-sectors of electronics, electrical engineering,
information technology and telecommunications, is an important global sector. The
sector has an important role to play in the South African economy because of its direct
contribution to high value production and highly skilled employment, as well as its
contribution to increasing the competitiveness and value-add of related sectors such as
automotive, defense, power generation and distribution, and aerospace.

The leader of information and communication technology (ICT) development in Africa,

South Africa is the 20th largest consumer of IT products and services in the world.

As an increasingly important contributor to South Africa’s gross domestic product

(GDP), the country’s ICT and electronics sector is both sophisticated and developing.
South Africa’s 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.

With a network that is 99.9% digital and includes the latest in wireless and satellite
communication, the country has the most developed telecoms network in Africa.

The South African telecommunications market is the largest in Africa, both in terms
of customers and revenues. The market is growing consistently and substantially.
South Africa’s ICT products and services industry is also penetrating the fast-growing
African market. South African companies and locally based subsidiaries of international
companies have supplied most of the new fixed and wireless telecoms networks that
have been established across the continent in recent years.
3. ASGI-SA SECTOR PRIORITIES
• Business Process Outsourcing & Offshoring

The global Business Process Outsourcing and Offshoring (BPO&O) industry is forecast to
grow at 50% per annum (equivalent to growth of between $90 billion and $100 billion)
over the coming years. A window of opportunity exists for South Africa to become
a significant global player in the industry through an appropriate value-proposition
based on a high-quality yet cost-effective offering.

It is estimated that the sector has the potential to create up to 100,000 new jobs in
South Africa (25,000 direct and 75,000 indirect) by 2014.

• Tourism

South Africa is one of the world’s fastest growing holiday destinations. The country is well
known for its scenic beauty, magnificent outdoors, sunny climate and cultural diversity.
This and its reputation for delivering value for money has resulted in a phenomenal
tourism growth.

Tourism is one of the five priority economic sectors that government has chosen to
focus its efforts to support investment and facilitate growth. Tourism plays a meaningful
role in contributing to the economic development of South Africa. Since 1994, tourism
growth has been exceptional

Tourism is performing well relative to other priority sectors. South African tourist arrivals
have grown eight-fold since 1990 and continue to outperform global tourism growth.

This exceptional growth has been primarily driven by Africa land arrivals and other
regions indicating positive growth. Hence, tourism is often referred to as the ‘new gold’
of the South African economy, partly due to the above and also because the total
foreign direct spend of tourists have overtaken gold foreign exchange earnings.

• Biofuels

The biofuels industry in South Africa has substantial potential to assist in addressing
important economic and social challenges. Internationally the biofuels industry is
growing rapidly, due chiefly to a combination of higher oil prices, mounting concerns
regarding the environment, and government policies, regulations and incentives that
support this renewable fuel source over fossil fuels.

The Biofuels Strategy aims to achieve an average biofuels market penetration of 4.5%
in liquid fuels (petrol and diesel) by 2013. The development of a biofuels industry
will have enormous economic benefits. It will stimulate small-scale and cooperative
farming practices in rural areas, creating up to 55,000 job opportunities. It will generate
macro-economic benefits as increased use of biofuels will reduce our dependence
on oil imports. It is estimated that about R2 billion per annum will be added to GDP.
As a renewable energy source, biofuels will also contribute 75% towards our 2013
Renewable Energy targets of 10,000GWh.
• Clothing & Textiles

Since 1994, over US$1bn has been spent on upgrading and modernising South Africa’s
textile, clothing and footwear industry, making it efficient and ready to compete
internationally. South African market demand increasingly reflects the sophistication of
developed markets, and the local textile and clothing 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. With technological
developments, local textile production has evolved into a capital-intensive industry,
producing synthetic fibres in increasing proportions.

Although the industry is still relatively small, it boasts some impressive results in world
markets:
• Local yarn manufacturer Sans Fibres supplies 80% of the sewing thread used in
the world’s apparel sewing operations.
• Local fabric mill Gelvenor Textiles supplies more than 50% of the world’s demand
for parachute fabrics.
• Local suit manufacturer House of Monatic has delivered its one millionth suit to
the UK market.

Several factors make the prospect of investing in South Africa’s textiles, clothing and
footwear market attractive. Most significant, perhaps, is the fact that South Africa has
trade agreements with the EU and the US, whereby the country enjoys a 17.5% duty
advantage. In the case of the US, textile exports have increased by 62% since the advent
of the Africa Growth and Opportunity Act (Agoa). South Africa will soon also have
preferential access to the SADC region, thanks to the SADC Free Trade Agreement,
which will be in full operation in 2008.

Other competitive advantages for the sector lie in competitive labour costs and the
ready availability of natural fibre raw materials. South Africa produces in the region of
40,000 tonnes of cotton a year with above world average lint, providing the potential
for the local cotton pipeline to become increasingly export-oriented. Cotton fibre and
yarn can also be imported from the SADC region to supplement production for Agoa
purposes.

South Africa has the raw materials needed to produce any type of footwear, from
low end to high end. Bovine, ostrich, Nile crocodile, game leather, textile and PVC
and PU synthetic raw materials can all be sourced locally without difficulty. South
Africa is successfully growing and processing natural fibres such as flax and hemp, in
response to increasing demand from the automotive and aeronautics industries for
environmentally friendly body parts. South Africa is the world’s largest mohair producer
and the fifth largest producer of wool.
4. OTHER KEY SECTORAL PROJECTS
• Diamond beneficiation & jewellery

The world market for uncut stones is valued at US$13.4 billion per year. Diamond-
producing countries in southern Africa are therefore looking to bridge that gap by
promoting local beneficiation to ensure a bigger share of the downstream profit
(cutting and polishing adds approximately 50% to the value of rough stones), as well as
much needed employment creation.

In February 2006, Cabinet passed the Diamonds Amendment Act, aimed at promoting
local value addition and eliminating loopholes in the law that had enabled companies
to export rough diamonds duty free.

The Act makes provision for the local supply of rough diamonds through the
establishment of the State Diamond Trader (SDT), with the power to purchase 10% of
mine production in order to improve access to rough diamonds for local beneficiators.
Further legislative amendments include the introduction of beneficiation licenses for
control purposes and a reduction of the export duty to 5%. The key thrust of this policy
is to increase locally beneficiated diamond production from 3% to at least 10 per cent
of rough diamond production.

A major objective is to grow and advance South Africa’s cutting and polishing capacity
in order to position South Africa as a globally competitive diamond-producing
country. Development strategies in the sector aim to create a more enabling business
environment through the creation of diamond and jewellery hubs, addressing access
to capital, and the provision of incentives to attract manufacturing investment, as well
as training and skills development initiatives.

• Agro-processing

South Africa’s dual agricultural economy comprises a well developed commercial

sector and a predominantly subsistence-oriented sector in the rural areas. About 12%
of South Africa’s surface area can be used for crop production. High potential arable
land comprises only 22% of total arable land. Some 1.3m hectares (ha) are under
irrigation. This amounts to about 1.5% of South Africa’s agricultural land.

The country can be sub-divided into a number of farming regions according to climate,
natural vegetation, types of soil and the type of farming practiced. 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 more
arid regions.

There are strong backward and forward linkages into the economy, with the agro-
industrial sector is estimated to comprise about 15% of GDP. Today, South Africa is not
only self-sufficient in virtually all major agricultural products, but in a normal year it is
also a net food exporter. Major import products include wheat, rice and vegetable oils.
Despite the farming industry’s declining share of GDP, it remains vital to the economy
and the development and stability of the southern African region. Over the past five
years, agricultural exports have contributed on average about 8% of total South African
exports.

Normally, South Africa is a net exporter of agricultural products in rand value. The largest
export groups are wine; citrus; sugar; grapes; maize; fruit juice; wool; and deciduous
fruits, such as apples, pears, peaches and apricots. Other important export products are
non-alcoholic beverages, food preparations, meat, avocados, pineapples, ground-nuts,
preserved fruit and nuts, hides and skins, and dairy products.
• Film & Television

The ASGI-SA prioritises cultural industries because of their potential contribution to

nation-building and South Africa’s international image and because they can support
employment creation in tourism as well as in production of cultural goods and services.
It is estimated that the sector employs around 20,000 people directly in broadcasting,
film, commercials and other media related companies.

Although the South African film industry has a long history, until 1994 it was largely
characterised by an inward-looking and culturally exclusive production structures.

The opening up of the political, economic and cultural systems saw the development
of new challenges and opportunities for the industry. An increasing number of feature
film, television and documentary productions and commercials have been produced
in South Africa since 1994, which has had a positive impact in the local industry.