Why do business in…Johannesburg?

Source: Exec Digital Canada

Date :6/16/2008 2:34:48 AM

Despite a history of violence and unrest, Johannesburg is now aspiring to become the economic epicenter of South Africa. Exec takes a look at this unlikely global city

By Rebecca Waters

The Inner City of Johannesburg lies at the heart of the Gauteng Province. Despite its relatively small size, the Province has the second highest population in South Africa with a total of 9.5 million inhabitants. This figure is growing by around 100,000 people every year, with the population likely to exceed 15 million within ten to 15 years - a rate that is seeing quickly make up ground on the world’s larger cities.

For example, at the end of 2002 the JSE Securities Exchange ranked 20th in the world, measured by market capitalization of shares of domestic companies - roughly equivalent in size to those of Mumbai, Sao Paolo, Singapore and Helsinki. Today, the JSE is the 16th largest stock exchange worldwide.

Fittingly, there is an enormous concentration on business in Johannesburg, with approximately 290,000 formal sector business enterprises, employing around 950,000 workers.

With this density, along with the fact that 74 percent of national corporate headquarters are in the city, it makes sense to ask whether or not your business should consider adding itself to the pile.

POSITIVES

“Anybody can really come and start up a business here,” says Christine Marincowitz, Marketing Manager at International SOS. And she’s right, Johannesburg is still a very affordable place to do business, there are some inflated areas but if you compare it in terms of an office base in London it is a fraction of the cost.

But with this doesn’t necessarily come a drop in decent services. “You can really get the most sophisticated banking and IT systems and any type of quality products you are looking for from around the world,” Marincowitz explains.

On top of this, the labour market is cheaper - as is the exchange rate - which certainly favours developed countries, but taxation itself is a good option in South Africa.

“What they [the Government] have done is reduce company taxation to stimulate investment and obviously drop inflation as well,” says Bob Rushton, Director EMEA / CIS of Travel Security Services at International SOS.

It’s a plan that’s worked. “Foreign investment is quite substantial,” explains Marincowitz. “Some days transactions by foreigners could be up to 50 percent of the volume of value traded on the JSE.”

Indeed, over the past few years, Johannesburg has been a site of international organisations, particularly corporations and the media. While the mining and heavy industries still continue to be profitable markets, these sectors are fast being eclipsed by financial services such as the JSE,, Barclays and Western Union, telecommunications (Telekom, Vodacom, MTN), and technology (IBM, PQ Holdings, Dimension Data).

It is the former of these that is set to see significant growth. With the bulk of the population not having been exposed to banking and financial services before, growth in the market is likely to be huge.

There’s also opportunities in terms of tourism, which makes up almost a third of gross geographic product (GGP). Although perhaps not the most exciting tourist destination, the city is the key point of global economic contact for South Africa and the wider region - a role greatly expanding since 1990. Having said that, there are a lot of challenges to be faced.

NEGATIVES

The biggest of these, unsurprisingly, is violent crime.

“When you go to Johannesburg it can actually look like any of the other major city around the world, but when you actually drive through you’ll often find that everyone lives behind high walls with barbed wire and electric fences,” says Rushton.

Aside from this, Johannesburg also suffers from an inherent lack of power and failing infrastructure. For potential businesses the power supply is a big problem, and blackouts are frequent. “You never know when you are going to have power,” says Patrick Anderson director of Castweld (Pty) Ltd, in spite of drives to regulate the black-outs.

Despite the booming times, beyond the city there is high unemployment. In September 2007, unemployment in South Africa reached 23.0 percent (Statistics Africa), from 25.5 percent in September 2006. This has led to an exodus of skilled labour and artisans,” Anderson says.

This, along with, intermittent power supply and a soaring crime contribute to a rapidly failing infrastructure. Often the traffic is bumper to bumper, particularly in the mornings or late afternoon, and the roads themselves are poorly maintained, and are full of potholes.

On top of this, as with any emerging city, Johannesburg’s wealth is not evenly distributed, “One minute you will be in a first world country and the next moment you will be in a third world country,” says Marincowitz.

The major cities (Johannesburg, Pretoria, Cape Town, Port Elizabeth and Durban), are quite affluent, but outside there is huge amounts of poverty and not a lot of investment. As a result, the Inner City has become synonymous with unregulated street trading, inadequate facilities for taxis, vacant and badly maintained buildings, squatting, crime, overcrowding and poorly maintained public areas.

CONCLUSION

The biggest challenge that Johannesburg and, more importantly, the South African Government faces is undoubtedly reducing crime. While this will be no short-term issue, Johannesburg is an emerging city with much potential, particularly for financial services and IT companies.

“If you can look past the issues, this is going to be an exciting place to be in the next ten years,” Marincowitz explains.

It’s a fair point. If you can handle the negatives, then the positives are sure to be a strong reward in the future. And for some, it will be the perfect place to position themselves as they look to get ahead of the curve.

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