In South Africa, a Push for Industrial Growth

By MATTHEW SALTMARSH New York Times

To many outsiders, South Africa has long been an unstable business environment with an economy overly dependent on natural resources.

Now, the government and a new breed of entrepreneurs are optimistic that they can change perceptions and climb the industrial ladder.

A group of companies is working in sectors like clean energy, aviation, engineering, military contracting and mining, hoping to benefit from positive growth forecasts for the region.

The state hopes this will lead to job creation and other benefits, and has played its part in some cases by offering direct financing and other sweeteners. It has also backed new university research positions and is trying to promote centers of excellence.

“We are a producer and exporter,” said Naledi Pandor, the minister of science and technology. “Now we’re saying: let’s become an innovator.”

South Africa’s many hurdles — notably unemployment, crime, illegal immigration, corruption, income inequality and health problems — have not disappeared. But executives and officials believe that the environment is improving and that the country’s success as host of the recent soccer World Cup can act as a catalyst.

“There has never been a greater opportunity for South Africa than today,” said Ivor Ichikowitz, a South African of Lithuanian descent who controls and runs an aerospace, security and military contracting company, Paramount Group.

The security obsession and regional conflicts of the apartheid era left an industrial and research legacy — and comparatively strong infrastructure. That, he said, makes South Africa an ideal place from which to make inroads in a continent often neglected by Western companies.

“Africa is the current economic battleground and the last frontier,” Mr. Ichikowitz said recently in Paris, where he was attending a conference. “The Chinese and the Indians are coming in with huge amounts of cheap capital and a very open approach.”

Based near Johannesburg, Paramount makes mine-protected vehicles, sold primarily to African clients for peacekeeping missions. It also refurbishes and upgrades Mirage jet fighters, and finances and supplies security forces.

Created in 1994, it had African countries involved in peacekeeping, like Uganda and Ghana, for its initial clients. More recently, it has signed deals to manufacture vehicles in Jordan, India and Azerbaijan, and it has alliances as far off as Singapore, raising its profile in global procurement bids.

Last year, it added a 19 percent stake in Aerosud, South Africa’s largest independent aerospace company, which manufactures parts for Airbus and Boeing including galleys, fuel supply systems and wing and fuselage components.

Paramount employs 3,500 people and is privately held. Mr. Ichikowitz would not divulge financial data except to say that the group is “very profitable.”

A recent report on the country by Jane’s World Defense Industry said that the military budget has fallen in recent years as the government focuses on social programs. But in 2008, South Africa authorized military export deals worth $2.6 billion, up from $406 million a year earlier, and sold equipment, munitions and components to 96 countries.

The country’s biggest military contractor, Denel, is state-owned. It posted a loss of 543 million rand, or $74.6 million, on sales of 4.05 billion rand last year.

Mr. Ichikowitz, a longtime member of the governing party, the African National Congress, owns a venture capital firm, an oil business, a teddy bear retailer and an exclusive luxury retreat in the bush.

“You cannot be in business in Africa if you are not respectful of the political environment,” he said. “A lot has to do with faith in people, trust and personal relationships.”

The democratic government that came to power in 1994 inherited an economy racked by internal conflict and external sanctions. Yet from 2004 to 2007, gross domestic product grew on average over 5 percent annually. It contracted by 1.8 percent in 2009, affected by energy shortages, slower consumption and the global recession, but it is expected to grow at 3.3 percent in 2010 and 5 percent next year, according to the Organization for Economic Cooperation and Development.

Mining accounts for almost a tenth of output, but in contrast to much of the rest of the continent, South Africa also has well-developed manufacturing, whose output accounts for over 50 percent of exports.

“South Africa’s ambition to climb the value-added chain is valid, justified and doable,” said Andreas Wörgötter, an economist at the O.E.C.D. who wrote a recent study of the country. The main challenges, he said, will be to “broaden economic activity” by creating jobs, moderating wages and improving the regulatory environment.

Unemployment remains a huge hurdle; the O.E.C.D. forecasts it at 24.5 percent this year. Industrial strikes remain a feature, the health and education systems are also troubled and social inequity runs deep. A recent study from the University of Cape Town described the country as “the most consistently unequal economy in the world.”

Corruption is also cited as a drag by executives. South Africa has experienced a number of high-profile scandals within public-sector agencies, provinces and even senior levels of government. The O.E.C.D. criticized South Africa in a report last month for failing to enact any prosecutions for foreign bribery and called for “a more proactive approach.”

Despite such problems, examples of South African regional and global corporate success stories include Standard Bank and Investec in financial services; Sasol in chemicals and fuels; South African Breweries; Steinhoff International in furniture; and De Beers, Anglo-American and Impala Platinum in resources.

But there is a sense that the global breakthroughs have been few, and sometimes — in cases like Anglo-America, now based in London — the benefits can migrate.

“There are lots of good ideas here and a strong history of engineering and design, but we don’t commercialize and build sustainable business — we sell them to others,” said Diana Blake, sales and marketing director at Optimal Energy, which is preparing to produce the Joule, Africa’s first battery-powered car.

Examples of this include the Zebra, an advanced battery developed by a research body in Pretoria but now produced in Switzerland, and thin-film solar panel technology developed at the University of Johannesburg and now produced in Germany.

“Now there’s an enormous drive to keep the value in South Africa,” Ms. Blake said.

Optimal was co-founded in 2005 by an entrepreneur, Kobus Meiring, who was helped by an investment from the national innovation fund; the South African government holds more than 50 percent.

The standard five-seater Joule has a top speed of 135 kilometers, or 84 miles, an hour and a nominal driving range of up to 300 kilometers. It will start retailing at $30,000 to $38,000 — around the same price as the comparable Nissan Leaf.

About 80 percent to 90 percent of sales are expected to come from abroad once the car hits showrooms in 2013; the company hopes to export to Australia, Israel and Europe. Optimal hopes to be making 50,000 vehicles — and a profit — by 2015.

Production will be located in the Eastern Cape, near a Mercedes-Benz plant, and Optimal will work with EDAG, a German specialist in low-volume production, to ensure quality. Once production starts, the company expects to employ 2,300 people directly, with a further 8,000 in support industries.

A smaller company also being helped by the state is Adept Airmotive. It focuses on the design, development and manufacture of fuel-efficient engines for light aircraft and is working on products to run on leaded fuel, unleaded fuel mixes, including ethanol, and even L.P.G.

The company was formed in 2003 and financed by a handful of businessmen and a private equity firm. In 2007, the government took a 25 percent stake, which it eventually hopes to sell.

“I think South Africa probably has one of the best environments for a start-ups anywhere,” Richard Schulz, managing director, said from his base in Durban, South Africa, where he employs seven people in design and subcontracts manufacturing to a number of companies.

“We had planned a slow phase of market entry, but the demand is amazing,” he added, raising the possibility of an initial public offering of shares, stake sale or licensing agreement with a larger player. “There’s a broad spectrum of interest.”

South Africa also hopes to win a bid to host a giant radio telescope project known as the Square Kilometer Array. A collaboration among 19 countries, it would be the most powerful radio telescope ever built, attracting significant related investment in astrophysics and cosmology.

Construction is expected to cost €1.5 billion, or almost $2 billion, and is scheduled to begin in 2013 for initial observations by 2017 and full operation by 2022.

The government hopes that other projects, already established, like the Karoo Array Telescope and the Southern African Large Telescope, will help it to beat Australia in the final decision, due 2012.

“We in South Africa can’t afford to be pessimistic,” said Mrs. Pandor, the science minister. “We came out of such terrible times that we have to believe we can do it.”

http://www.nytimes.com/2010/08/03/business/global/03rand.html?_r=1&ref=africa

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