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Family business in South Africa

Tony Balshaw is National Partner-in-Charge, PRIMA Family Controlled Companies consulting division, Grant Thornton South Africa.

The South African economy is growing despite difficult global conditions. Business owners are confident to own their own business, and optimism and expectations are high

For the first time in 108 years, the shares of De Beers Consolidated Mines, the dominating force in the world diamond trade were, as from 1 June 2001, no longer available for public trading on the Johannesburg Securities Exchange South Africa (JSE). The US$18.7 billion deal price resulted in the company, which is the world's leading diamond producer, operating as a private company with the Oppenheimer family as controlling owners. Anglo American PLC and the Botswana government are the other significant shareholders of De Beers.

An unsettled past
The history of De Beers is interwoven with that of Africa, particularly South Africa. Long before the birth of Christ, Africa was home to communities and civilisations whose influences spread through the continent over thousands of years. Hunters and gatherers were gradually displaced by agriculturists and iron-workers.

The San people appear to have been the original inhabitants of the southern African region, but by the late 19th century a combination of disease, wars and genocide had effectively destroyed their communities.

Merchant interests in Europe provided the impetus to attempt navigation of the Western bulge and Southern tip of Africa, in order to reach the Indian subcontinent. The most prominent navigators in the 15th century were Portuguese, especially in the era of Prince Henry the Navigator. Bartholomeu Diaz led the first expedition, which sailed around the Cape in 1488. Trade was conducted with African communities by the Portuguese, Dutch, Danes, French, and English, both on the coast and in the interior, through the agency of middlemen.

But between 1790-1875 the nature of the European presence in Africa was rapidly and profoundly transformed. The gap between their respective technologies and political structures widened tremendously, as the economies of Europe began to industrialise, and competing nation-states projected their rivalries with renewed vigour into the distant trading zones of the globe.

In the 17th century, the Dutch East India Company established a supply station at the Cape of Good Hope. This developed into a colonial outpost, occupied successively by the Dutch, the British during the Napoleonic Wars, the Dutch again and once more the British. At the end of the wars in 1815, it became the node of colonial settlement in southern Africa.

The focus of European interest in Africa had shifted again by the 1870s. The potential resources that Africa offered were increasingly highlighted, especially after unexpected diamond discoveries in Kimberley in 1875.

Where agriculture failed to support families, older African fathers were beholden to their sons who were sent off to the mines or farms to earn wages and deliver cash to the homestead. African patriarchs saw their authority ebb further after 1910, as white settlers appropriated even more land. When the round of competition between white and African patriarchies concluded at the end of the 'war of the heads', colonial authorities prevailed. Their power was magnified by greater military, commercial and agricultural resources.

No shortage of family firms
Kimberley is the home of De Beers Diamonds, on which the Oppenheimer fortune was built. Nicky Oppenheimer represents the third generation of the powerful Oppenheimer dynasty. His grandfather Ernest founded Anglo American with UK£1 million in 1917. Anglo American was the first mining company to be registered in South Africa. It was Nicky who announced his family's bid to take control of De Beers, which mines half the world's diamonds and sells three quarters of them.

The fourth generation is represented by Jonathan, the only child of Nicky and Strilli. British educated, he is already raising his profile in De Beers' office in Johannesburg. His American lawyer wife gave birth to their third child, and second son, in 2001.

South Africa has no shortage of family controlled conglomerates. A quick look at leading blue chips, besides the Oppenheimers, reveals household names such as Rupert, Gordon, Ackerman, Venter, Hersov and Menell.

The Rupert family are second to the Oppenheimers in the wealth stakes. The Ruperts control Swiss based luxury goods Richemont and the diversified industrial group Remgro. Anton Rupert is one of South Africa's most extraordinary entrepreneurs, who made his money by introducing the world's first king-size cigarette. His son Johann didn't go into the family business until 1985, and is currently CEO of Richemont Securities AG and non-executive chairman of Remgro.

Leading retailer company Pick 'n Pay has a joint 40% market share. The retail giant was turned into a multi-billion turnover entity by Raymond Ackerman, who passed the leadership baton in 1999 to professional non-family executive Sean Summers. His is still the image asset of the company, and his family are still involved in the business.

Other examples of founder/family controlled companies include Donald Gordon, the founder of Liberty Life; Louis Shill, founder of Sage Life; the Kunene brothers in the Coca-Cola, Information Technology and Financial Services businesses; the Venter family in the electronics and electrical sector, with second generation Robbie Venter as CEO; Anglovaal, with the third generation Menells involved in Anglovaal Mining (Avmin).

Few countries have experienced such profound socio-political and economic changes as South Africa, and even fewer have managed the consequences so well. The country has taken enormous steps in the right direction insofar as freeing up the economy and making it more accessible to the majority of people – particularly those marginalised by the scourge of apartheid.

A new era
In February 1990, South Africa entered a new era of constitutional development. Black and radical left-wing political parties, which had previously been banned, were allowed to re-enter the formal political arena. The National Party government of De Klerk abolished the remaining pieces of discriminatory legislation and negotiations between the various political groupings within the country began under the auspices of the Council for a Democratic South Africa (CODESA).

In March 1992, a referendum was held among white voters to ratify support for the negotiation process. This produced a two-thirds majority in favour of the process, which culminated in the first-ever democratic election on 27­–29 April 1994, and the inauguration of Nelson Mandela as President. The leadership succession process was masterfully executed by the African National Congress (ANC) – the leadership baton was handed to Thabo Mbeki after South Africa's second democratic election, which was held in June 1999. Nelson Mandela left gracefully, serving as mentor and wise elder statesman. His 'ambassadorial' role has included reassuring, stabilising, influencing and guiding the country on the road to a truly successful democracy.

Although classified as emerging, South Africa has little in common with most emerging economies. For example, the country's capital markets are well-developed, financial infrastructure is particularly strong and is underpinned by a world class prudential and regulatory framework. Thanks to its industrialisation strategy, the country has a diversifying export base: minerals and unbeneficiated commodities constitute less than 35% of exports, as opposed to more than 50% a decade ago. Consequently, the South African economy has increasingly delinked itself from global commodity cycles. Unlike many emerging economies, South Africa has built sound infrastructure in areas such as transport, telecommunications, electricity and water.

The economy has shown great resilience and recovery has been robust. Despite unfavourable conditions among key trading partners (Europe, Japan and the USA), South Africa's economy is expected to expand by more than 2.5% a year over the next few years. Strong corporate, financial and political governance have all contributed to this.

The South African economy is exceedingly large by developing countries' standards, with nominal GDP of more than R975 billion (US$113 billion) in 2001. South Africa accounts for more than half of total African exports.

The domestic economy is equivalent to 0.4% of global GDP, easily the biggest in Africa. South Africa also has one of the lowest inflation rates on the continent and ranks among the highest in GDP.

South Africa is a middle-income, developing nation with a generous supply of natural resources and a well-developed, modern infrastructure in the banking, legal, communications, construction and energy sectors.

In addition, South Africa has a stock exchange (the JSE Securities Exchange SA) that is ranked 17th largest in the world in terms of market capitalisation. It also has an efficient transport system.

Much economic activity is concentrated around minerals and energy, which are the base of the country's manufacturing sector. The government has demonstrated its commitment to greater integration into the global economy by opening South African markets, establishing privatisation objectives, implementing inflation targeting and floating foreign exchange rate.

Because of South Africa's drive for globalisation, the domestic economy is in a state of transition and is no longer dominated by mining and agriculture. Their overall contribution to GDP is being eroded by the services and the manufacturing sectors.

Services have become the primary contributor to GDP, due largely to the success of the highly developed financial services industry, as well as to tourism and retail.

The financial services sector, originally linked to the expansion of mining activity, had long developed to a greater level of sophistication than the rest of the economy. In the modern world, in which the role of global finance is strong, a well-developed financial sector is a considerable asset.

Owing to past isolationist practices, the manufacturing industry is not sufficiently competitive globally. However, the new commitment to internationalisation has seen the scrapping of many protective policies. The industry's competitiveness has also been improved by its liberalisation, which has resulted in the removal of many subsidies under the General Export Incentive Scheme, tariff reductions in compliance with World Trade Organisation provisions and privatisation.   

Substantial and sound
Overall, South Africa's economic and political fundamentals are sound. Not for half a century, if ever, has any South African government had as much credibility globally as it has now. The overriding challenge is to boost aggregate investment levels so as to set in motion sustainable growth and development.

In essence, the South African economy consists of three very substantial urban areas surrounding Johannesburg, Cape Town and Durban. Moreover, if a line is drawn from Johannesburg to Cape Town (approximately 1,400km), the north and west of that line is an enormous economic void which fades into the even larger expanses of Botswana and Namibia. The area south and east of the line contains almost all the economic activity of the country.

The most important contributor to the economy, at around 40%, is Gauteng province. This is the industrial, mining and commercial centre of the country, with 7.9 million people concentrated primarily around Johannesburg.

The two other major areas are the Western Cape and KwaZulu-Natal. The latter is the most populous region, with 8.9 million people and an economy focused on tourism and agriculture. Some heavy industry is based around Durban, KwaZulu-Natal's major city, a rapidly growing industrial port with an important tourist trade.

The Western Cape, the third most important economic region, has 4 million residents and the port of Cape Town, the oldest city in the country, as its core. Although the province has little in terms of heavy industry and mineral resources, it performs well due to its efficient agriculture, wine industry and strong tourism sector.

Outside these three major economic areas are certain smaller centres, including Port Elizabeth, East London, Bloemfontein and Kimberley. The vast tracts of country which surround the urban areas contain many small towns which are relics of an earlier economic structure focused on livestock farming.

Achieving the miracle
South Africa is a truly cosmopolitan country with tremendous cultural diversity – many of the owners of successful family businesses are of European descent. South Africa has had the political miracle: the economy is in reasonable shape, new ventures are being started by entrepreneurs and the country continues to generate trade surpluses. Notwithstanding this, many skilled and high net worth individuals, particularly generation X's, have, and continue to emigrate. Significant corporates have also moved their primary bases offshore. From a family business perspective, this has accelerated the need to address the potentially treacherous ownership and management transition from the baby boomers to generation X; possibly sooner in South Africa than the rest of the world.

It is estimated that there is a total of 1.42 million active businesses in South Africa, of which 84% are family businesses. There are an estimated 330,000 active companies and 870,000 active individuals (operating as sole proprietors or partnerships) who meet the broad definition of a family business.

South Africa has an estimated population of 44.6 million people, and a per capital GDP of US$2,651. The Achilles heel of the socio-economic environment has been, and remains, unemployment. The South African economy is growing – but not strongly enough to cut into the high rate of unemployment and the government's efforts to accelerate economic growth and employment generation are being hampered by difficult global conditions. There are high levels of unemployment (greater than 35%), and the informal/subsistence/survivalist sector is large, with many who simply eke out an existence. It does highlight the need for Government and other agencies to create the right climate and conditions that encourage people to become entrepreneurial and establish new businesses, particularly family businesses.

The first ever International Business Owners' Survey (IBOS) published by Grant Thornton shows significant concern among business owners across the world and particular pessimism in G8 economies, with South Africa a notable exception. Pessimism is at its extreme in both the German and Japanese economies, but South African business owners are ranked high in optimism in this survey, with 84% of business owners, stating that their expectations regarding turnover had increased; 57% saying they were positive about the South African economy; and 34% saying they were confident about owning a business in South Africa. Out of the 19 countries researched, the balance of expectations for exports is highest in South Africa at 36%.

Clearly, business optimism in South Africa is largely based on the expectations business owners have for substantial increases in turnover and exports.

Family businesses have a great track record in South Africa. There is every reason to be bullish that South Africa can, having had a political miracle, achieve the economic miracle.

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