Well connected

Many SMEs rely on inclusion in the supply chains of larger companies

Well connected

When disaster (a pandemic, say) strikes, vulnerable businesses are the hardest hit. In 2020, an estimated 15% to 19% of SMEs closed their doors and have not re-opened, with many of the remaining SMEs experiencing a decline in revenue and profitability, according to CSI consultancy Trialogue’s 2021 Business in Society Handbook.

While there is little clarity about the size of the SME sector, owing to a lack of baseline studies over the past 10 years, the latest report by the Centre for Development and Enterprise, an independent policy research and advocacy organisation, places the SME contribution towards the country’s GDP at 22% in 2019, and states in its 2021 report that the ‘relative size of the formal SMME sector has stayed broadly consistent during the past five or six years, hovering either just below or just above 20%’.

In 2020, McKinsey & Co reported that SMEs across SA ‘represent more than 98% of businesses, employ between 50% and 60% of the country’s workforce across all sectors, and are responsible for a quarter of job growth in the private sector’.

This isn’t quite congruent with the findings of the Small Business Institute (SBI). ‘In a study we did in 2018, we found that the bulk of formal employment is created by large corporates, state-owned enterprises, state organs and government departments, which also means that they are the largest contributors to tax revenues,’ says SBI CEO John Dludlu. ‘Obviously, over and above this role, they also create opportunities for small businesses through enterprise and supplier development programmes and broader supply chain initiatives.’

This is not enough, he adds. More can and should be done. ‘First, we need to ensure that our small businesses – both formal and informal – contribute more to growth and employment. The National Development Plan expresses a jobs aspiration of 90%. We accept this, though the reality is that we are set to miss this 2030 target considering the current trajectory. Still, we should at least redouble efforts to ensure we reach the 60% to 70% global norm by then.’

Dludlu also reinforces the need for accurate data on which to base future policy and legislative reviews and interventions. ‘Right now, we don’t agree, as an ecosystem, about the size, shape and complexity of the small business segment in South Africa. This is very unhelpful – our small businesses need less fragmentation and squabbling.’

With this dearth of accurate data, can any projections be made about SA SMEs’ prospects for growth?

One indication may come from the South African Startup Ecosystem report – a collaboration between start-up-focused news and research company Disrupt Africa, government’s SME Fund and Nedbank CIB – which found that the peak year for launches of currently active start-ups was in 2016, with start-ups being founded at a generally slower rate each year since 2018. Tech start-ups are in sharp decline.

However, the Global Entrepreneurship Monitor found that in 2021, overall entrepreneurial activity in the general population remained positive, ‘despite the macro challenges of COVID-19, the electricity shortages that prevailed throughout the year, and the civil unrest and riots in July [2021]. In 2021, South Africa’s TEA [total early-stage entrepreneurial activity] rate increased to 17.5%, from 10.8% in 2019, while its EBO [established business owners] rate increased to 5.2% in 2021 from 3.5% to 2019’.

The mining sector has likely been an important contributor to this upward trajectory, since it has been credited with cushioning the economic blows of the pandemic due to its strong economic performance.

Northam Platinum Holdings’ ESD procurement opportunities portal is housed on its website and has tripled its pool of local community-based SMEs registered on its vendor database over the past five years.

‘The corresponding procurement spend with our local communities has grown to more than R1.4 billion during the current year,’ says Dali Duma, Northam Platinum Holdings’ sustainability executive. ‘To assist these SMEs with cash flow, we offer favourable payment terms.

‘Northam Platinum Holdings appreciates the crucial role played by SMEs in stimulating local economic development. Notwithstanding the socio-economic challenges that are prevalent in the communities where our operations are situated, our approach to procurement is underpinned by the principles of inclusivity, transformation and transparency. Our ESD initiatives are targeted at incorporating community-based SMEs in our host and neighbouring communities, into value chain.’

Northam has appointed two ESD specialist companies to provide enterprise development support to aspirant entrepreneurs in an effort to ensure their sustainability. This support includes business-management skills and developing familiarity with digital environments – which can be a challenge in rural and underdeveloped areas.

‘Our SME partners play an invaluable role in the communities by acting as a bridge between large corporates and the communities,’ says Duma. ‘SMEs are the cornerstone of emerging economies; thus we believe there is no better way to contribute to our country’s sustainable economic growth and alleviation of socio-economic challenges than to contribute towards the operational and financial sustainability of SMEs.’

Of the R15.8 billion that precious metals giant Sibanye-Stillwater spent on procurement in 2020, 10% was spent on local doorstep suppliers in communities around its operations, and it provided financial support to existing and qualifying suppliers in host communities through its CEO Enterprise Development and Supplier Development funds.

Zimele, meanwhile, is Anglo American’s SME development branch, which includes enterprise development, supplier development and youth development programmes, and has hubs at the group’s Mogalakwena, Rustenburg, Kolomela, Amandelbult and Sishen sites.

Major retailers, with their nationwide networks, are also well-positioned to integrate SMEs into their operations. Pick n Pay’s ESD programme currently supports 200 suppliers, with a further 100 prospective suppliers, according to Mishinga Seyuba Kombo, head of enterprise and supplier development at Pick n Pay.

‘In our business, transforming the supply chain by creating opportunities for small-scale suppliers, farmers or entrepreneurs is a fundamental role we are playing to grow the country,’ she says. ‘During our last financial year we spent R4.3 billion procuring from SMMEs and 28% of our total suppliers are SMMEs.’

Growing past the start-up phase is extremely challenging, and supplying to a big retailer to gain access to a wider market even more so for some without the resources and know-how, she says. Pick n Pay’s ESD programme was launched in the 1990s and plays a leading role in mentoring, encouraging and enabling small-scale entrepreneurs to become sustainable suppliers to the retail industry.

‘Through the programme, we work closely with entrepreneurs with innovative product concepts or start-up enterprises to actively grow our diverse supplier pool – be it under their brand or as a supplier for our growing PnP own-brand range. Our support for businesses in the programme also extends beyond our buying team and we provide preferential payment terms to assist with cash flow.’

SMEs do not only require cash flow and skills – many also need access to professional services such as legal, auditing, IT, marketing and HR.

‘All Pick n Pay employees play a central role in guiding and nurturing these entrepreneurs through our app-based ESD mentorship programme, which provides support from accounts to marketing and legal. These functions aren’t often established within small business and we help to guide in these areas as and when needed,’ she says.

Woolworths’ ESD programme has a range of beneficiaries, all in varying stages of growth and development. In the period ending June 2022, SMEs on the ESD programme created 393 new jobs (81.42% permanent), according to Zinzi Mgolodela, Woolworths’ director of corporate affairs.

Mgolodela says Woolworths has a tailored approach to SME support, one that recognises that every SME is a unique business. Support may take the form of facility sharing, cash-flow support or linking with established suppliers, SME financiers or other like-minded partners. ‘Our procurement and buying teams also offer their skills in support of SME growth and sustainability,’ she says. ‘The tailored support provided is underpinned by a needs-based assessment and gap analysis combined with ongoing mentoring and monitoring over time.’

Even with these ESD measures in place, both the public and private sector need to dramatically increase their SME support if we’re to get these potential economic engines out of the gate.

‘Part of the measure of big business’ success should be the number of small firms they enable to become exporters and big businesses each year, not only the quantum of their ESD and procurement spend,’ says Dludlu. ‘The two-pronged trick is embarrassingly simple – first, commitment; and second, conscious application of this commitment.’

By Robyn Maclarty
Image: Gallo/Getty Images