Business profits in South Africa and elsewhere

I spend a large amount of time interviewing and engaging with private sector enterprises. This fieldwork is sometimes like a roller coaster ride, because you can go from seeing a cutting edge business to seeing a business on the verge of collapse within one morning.

While even I have often lamented the state of competitiveness of our South African manufacturing sector, I am often amazed at how profitable many businesses are. If so many of our enterprises are so profitable, why are we complaining? Oh, perhaps it is also good to ask that if so many enterprises are so profitable, why are they not also competitive? Can less competitive enterprises still be profitable? Lastly, a business person recently asked me what I mean with profitable. His argument was that it is better to keep the cash for the “thin years” than to invest now.

So even uncompetitive enterprises can still be profitable. A enterprise that is not “price” or “performance” competitive can still be profitable because they are one of few firms that provide a particular product or service. While many quantitative measures of competitiveness concentrate on measurable indicators, softer indicators such as service, good relations, free (embedded) advise, etc. are not measured. Hence it is possible for an enterprise that could be measured to be uncompetitive to still be profitable. Back to the main argument.

Lets look at those enterprises that are competitive (using some or other objective measure) and they are profitable. Why are so few of them not investing, and treating their current profitability as a short term (if you can call 8 years short) phenomenon? Firstly, many business people comment that earning only 21% gross profit is not good compared to the margins of 15 years ago. No comment. Secondly, many business people in RSA are uncertain about the future and the overall investment climate. News reports about the unsustainable consumer spending also reinforces the message that current demand is unhealthy, unsustainable, or even undesireable. No wonder business people only expand their operations AFTER they get longer term orders.

In general, our developmental challenge is that it is hard to say just how many of our enterprises are profitable. Most of the press coverage and academics research either focus on the listed companies, or on micro enterprises. Take a look at the editorial in the South African Business Day for some of the explanations behind why it is easier for listed companies to be analysed. Of course, their data is publicly accesible.

But perhaps there is another reason. While many of our publicly listed firms are larger firms with many smaller subsidiaries, these listed firms cannot sit and wait for the economic climate to change. Their investors wants continuous financial returns, and hence these firms are constantly trying to find new markets, new niches and new ways to earn a return on their investment. Businesses with private investors behave in the same way. But the rest of the businesses that are “owner managed” do not have this same pressure, and hence they are under less pressure to find innovative ways of investing their profits and earning a return. This is where the underinvestment (despite higher profits) are the most pervasive. If a listed company generates profits, they pay a divident, but the rest of the profits are invested after a while. Financial experts don’t like huge piles of cash doing nothing…

So perhaps another way to get our businesses to treat the current trend as an expansion opportunity would be to get more firms to list on the alternative or development exchanges, or for more private investors to buy into owner-managed enterprises. I know this is easier said than don

My frustration is that smaller (profitable) businesses are not seeing the profitable trend of the last few years continuing into the future. Perhaps we need some stronger leadership in government so that we can unleash investment in the private sector by the private sector. But perhaps that would be shifting the responsibility of forming a vision of the future to government. Actually, the private sector also has a role to play in shaping the future that goes beyond lobbying and advocacy. Often advocacy and lobbying includes painting a bleak picture, so we might just be shooting ourself in the foot if we dont also focus on the bright side and the profitable opportunities that can pursued in South Africa.

By getting the private sector to invest their profits back into the country is the only way that we can use what we already have (clever and brave business people with some capital) to address what we don’t want (unemployed people becoming restless because they feel sidelined).