CHAIN REACTION - JSE MAGAZINE

CHAIN REACTION

Small businesses can benefit immensely by forming partnerships with large corporates

CHAIN REACTION

Footwear may not excite you but there’s a brand of colourful ladies’ pumps in SA shoe shops that might raise your heart rate, despite them being made for comfort rather than sex appeal. Woolworths’ ballerina-style pumps are not synthetic imports off a low-cost production line in China but are instead manufactured from leather by local company Chic Shoes in a factory in Parow, Cape Town.

Chic Shoes is one of the success stories of the Woolworths Enterprise Development programme. The small family-owned business hiked up its pump production volumes to meet the monthly order that has increased sixfold over a five-year period, while the number of staff has tripled from 96 to currently 289. Last year, the factory moved to larger (4 000 m2) premises, made possible through funding from the Industrial Development Corporation.

Founder and co-director of Chic Shoes Rachmat Thomas says: ‘The growth has been enormous for us as a company. We’ve gone from manufacturing 6 000 pairs of pumps a week to 13 000 a week in the last year-and-a-half alone. The whole experience has been overwhelming. Woolworths has been fantastic. We started our journey with them in 2010 when we joined their enterprise development programme.

‘This meant that we received money to buy leather, we get help from their design and technical team, and are promptly paid within seven days of delivery. We already have orders from Woolworths lined up until June next year. On top of that, we have big dreams of expanding our own branded product range.’

The shoe manufacturer is an example of how SMEs can benefit from partnerships with large corporates and financiers. Last year the government established a national ministry for Small Business Development to pursue an ‘aggressive entrepreneurship drive’ with the aim of unlocking economic opportunities, particularly for women, youth and people with disabilities.

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Minister of Small Business Lindiwe Zulu said in her budget vote speech in May: ‘It is in the interest of big business to help grow and sustain small businesses. The diversification of supply chains assists big business to have a wider choice of suppliers from SMMEs and promotes innovation within the value chain. The growth and sustainability of big business therefore depends on a strong small-business sector, both as consumers and suppliers.’

The NDP envisages that the small business sector will create 90% of an expected 11 million new jobs by 2030. This means, according to Zulu, that small businesses will have to contribute roughly 800 000 jobs per year until 2030.

However, small enterprises in SA – like in most emerging economies – face a number of challenges. For one, the majority of entrepreneurs have difficulties obtaining finance when starting a small to medium business. The 2015 SME Insights Survey, published by the South African Institute of Chartered Accountants (SAICA) in September, found obtaining finance to be the second most difficult barrier for SMEs when starting a new business.

The report includes responses from more than 1 300 participants. ‘In South Africa, red tape from government is considered to be the biggest obstacle, with red tape from the private sector coming in third place. Compliance with legislation and registering for VAT are also significant obstacles. Finding customers and marketing the business are the biggest commercial/operational obstacles,’ the report states.

‘That’s why a small business winning a long-term contract with a big company or government can be likened to hitting the jackpot,’ says Bridgitte Kriel, SAICA project director. ‘It’s the ideal situation because it’s much easier to manage your business essentials when you know you have a sustained income, because you can control your cash flow and plan ahead.’

She explains that SAICA’s small and medium practitioners are well positioned to assist SMEs in cracking the corporate market. ‘In addition to the traditional audit, tax and accounting services, our practitioners increasingly offer business advisory functions such as guiding SMEs in obtaining financing and investigating growth opportunities.

‘Accountants tend to be more conservative, while entrepreneurs are naturally risk-inclined, so it’s beneficial for a small entrepreneur to have potential risks pointed out and conservatively assess the pros and cons before making decisions.’ says Kriel.

Chain reaction
‘It’s much easier to manage your business essentials when you know you have a sustained income’

BRIDGITTE KRIEL, PROJECT DIRECTOR, SAICA

While only 27% of SMEs in the survey indicated they are doing business with government, three-quarters (76%) of respondents already engage in business with large private sector companies. She adds that the revised BEE codes should go

a long way in encouraging the government and corporates to engage more in the SME environment. The BEE elements of ‘enterprise development’ and ‘preferential procurement’ have now been merged into ‘enterprise and supplier development’.

This indicates a shift from the old enterprise development donor/beneficiary paradigm, according to Robin Woolley, executive director of BEE consultancy Transcend Corporate Advisors. He writes in the Trialogue 2014 CSI Handbook: ‘In future, the relationship between donor and beneficiary will be strengthened to one of mutual benefit: that of client and supplier.

‘The difference between enterprise development, as we have come to understand it, and supplier development is that beneficiaries are suppliers first. Secondly, they are part of a structured development programme that starts with a needs analysis, resulting in a project plan with agreed champions support-ing the holistic development of a supplier.’

There are already a number of such champions, with Anglo American’s Zimele being one of the most replicated enterprise-development models worldwide. The R1.7 billion fund predates BEE legislation as it was founded in 1989 but its sole purpose is black economic empowerment.

‘It is a socio-economic imperative, a way of enabling Anglo American to run effectively in a complex socio-political and economic context,’ says Hlonela Lupuwana, Zimele MD.

Zimele (meaning ‘to stand on one’s own feet’) relies on strong public-private partnerships and an extensive hub network that reaches into mining labour-sending areas. The Supply Chain Fund, which is the inaugural Zimele vehicle, still helps the Anglo American procurement departments to identify appropriate black-empowered SMEs and supports them by sending business opportunities their way.

The fund also provides equity and loan finance of up to R5 million per project while combining this with hands-on support, business guidance and skills transfer. ‘Over time we’ve grown to support the broader SME sector without focusing only on Anglo American’s supply chain. This is why we’re increasingly funding non-mining-related SMEs too,’ says Lupuwana.

‘Each fund has a specific mandate and as new needs have emerged, we’ve launched new funds – the latest being the Godisa Supplier Development Fund.’ The remaining of the six Zimele funds are the Community Fund, the Green Fund, the Anglo American Small Enterprise Finance Agency (Sefa) Mining Fund and the Sebenza Fund. The latter is a partnership with government to bring sustainable jobs to areas with high unemployment and poverty.

By the end of June 2015, the Sebenza Fund, which only started operating in mid-2013, had already disbursed R235 million in funding through 126 transactions. It is reportedly on track to create 8 000 jobs by 2018.

The Godisa Fund is a R165 million agreement between Transnet, Sefa and Anglo American, to which each partner will contribute one-third of funding (R55 million). The main goal is the development of black-owned SMEs for the procurement value chain in Transnet’s rail and port businesses.

A steadily increasing number of corporates are thinking along the same lines. For instance, Eskom runs an annual business investment competition worth R1.3 million to promote SMEs.

Sappi’s Project Grow has established in excess of 100 SMMEs to support tree growers from whom the company buys back the timber at market-related prices.

Sanlam’s successful enterprise and supplier development programme assists SMEs by providing tailored business development and funding support.

Massmart Holdings recently started a supplier development programme aimed at aligning SMEs to do business with big corporates.

Pick n Pay (PnP) is building and sourcing from an increasing number of small businesses. The retailer states in its 2015 sustainability report: ‘Through co-operation with the Ackerman PnP Enterprise Development Fund, 25 businesses and community enterprises benefited from the enterprise development programme, of which 12 are now suppliers.’

Each SME that has made it into the supply chain of a big company – be it the workers at Tshivhase Tea Estate in Limpopo, the owner of the Dreamland Piggery farm or the founders of Chic Shoes – adds to diversity and contributes to a more resilient economy.

The relationship between small and big business is symbiotic; one depends on the other. Zulu sums up why large corporates need strong small businesses: ‘An inclusive economy that benefits all is also a guarantee for the social stability that is required for business to flourish.’

By Silke Colquhoun
Image: Gallo/GettyImages