Year 2014 is expected to be an important year in the energy industry in South Africa. The first generation activity at Medupi is expected, clearer guidance on nuclear and shale gas is expected, the renewable energy (RE) industry will continue its significant expansion, and the Department of Energy will unveil its long term energy roadmap – this on the back of a challenging 2013. Combined, these activities will have an interesting impact on the energy supply chain, not only from a generation and transmission perspective, but also from a service provider standpoint, with many market participants predicted to find themselves obsolete.
The South African economy has been slowing down over the last 18 months, predominantly as a result of the spill over effect of the global economy. Various growth adaptations have been seen over the past 12 months, based on South Africa’s current tepid growth figures. With Libya (11,6%), Sierra Leone (9,6%) and Chad (9,5%) reaching excellent growth in 2013 GDP figures, South Africa has fallen into the lowest 10 countries in terms of GDP growth, at a rate of 2,8%. The average growth (per African country), as per a recent report by a leading bank, is pegged at 4,8% for 2013. This low figure of growth for South Africa is seen by Frost & Sullivan as a motivator to the South African government to put in place plans and policies to drive growth during 2014. The anticipated spurt in growth initiatives is something companies active in the energy space should be aware of.
However, from a negative point of view, shortages of electricity, together with a lack of competitiveness and a rapid devaluation of the South African Rand, have been significant reasons for why the country has experienced a decline in foreign direct investment. And despite the on-going efforts of the national utility to get its mega power plants on-line, it has become clear that these projects have been delayed and that electricity generation increases will be postponed. The net result of which has been a decrease in business confidence in the country. This, coupled with disappointing productivity improvements, has further pressurised the manufacturing and industrial segments in the country.
The declining Rand has brought some relief to manufacturers in South Africa; however, importers have seen a significant increase in Rand costs of their imports. Since the majority of energy equipment in South Africa is imported, the relative Rand value of most equipment has increased. This comes at a time when South Africa is investing heavily in the energy industry across generation transmission and distribution segments.
The changing energy landscape breeds the need for companies to be adaptive in order to ensure financial sustainability. A select number of companies will be more protected from this changing landscape. For example, companies that are active in industries where the competition is low, due to a niche market, overall lack of skills or being protected by long term contracts. Even with a blue ocean market, it is vital for companies to construct a growth strategy, where long, medium and short term goals and objectives are identified, defined and allocated to staff members who will be held responsible and accountable for implementation.
An aspect that needs to be discussed and addressed within a changing landscape, is the handling of company risks. Risks are often classed into either external or internal risk relative to the company. External risks are typically triggered by market factors such as changing policy and trends, introduction of new competitors, and labour unrests; whereas internal risks are often triggered by organisational restructuring, loss of key staff, cultural misalignment and a misunderstanding of the company’s core service offering. From an energy perspective, the external risks should be managed by tracking the market, trends and regulatory aspects. The internal risks can be managed by ensuring that senior management is always abreast of new developments within the market, as well as aligned and informed of activities in the company. This includes cost-cutting initiatives such as reducing input costs. One positive impact of increasing energy costs and decreasing availability has been the significant roll-out of energy saving initiatives driven by the national power utility (Eskom) across the residential, commercial and industrial sectors. Large numbers of new efficient technologies have been implemented and South Africans will continue to reap the benefits of more efficient energy use for many years. Significant opportunity remains for more efficiency in energy intensive devices such as pumps, motors, compressors, municipal and commercial lighting, HVAC systems, and most heating and cooling processes. With profit margins of companies often in the single digit range, the willingness of the company to adapt and adopt such cost-cutting initiatives may prove to be the differentiating factor in a highly competitive market. Senior management should have the foresight to understand when and how to adapt, without deviating too far from the original growth strategy.
Methods of adapting to the market can include several activities, such as: increased (or reduced) involvement in product supply chain activities in line with margin optimisation, increased or decreased value proposition offerings, introducing new systems that enable the company to respond more quickly to end-user feedback / service requirements, adoption of new technologies, and entering new markets. OEM’s manufacturing in South Africa (or importing into South Africa) will have to explore additional regional markets in order to expand their activities. Finding the right distribution model into the continent remains one of the largest success criteria. Africa’s overall economic expansion, continuing at a rate in excess of 5 percent, is clearly driving opportunity for local manufacturers. The vital question is: “which micro markets are best suited to a company’s value proposition?”. Finding ways of marrying a company’s product and service line with a local market is often the tipping point when it comes to whether success is achieved during geographic expansion or not. The time of saying “we are expanding in Nigeria” is over, and has been replaced with “we are expanding by setting up our head office in Port Harcourt, rather than Lagos, since our largest transformer market is found in the Port Harcourt area, and the strong levels of competition in Lagos have saturated the market.”
While companies ride the positive-negative seesaw of the South African and wider African economy, the overall outlook for companies within the energy space in South Africa is “realistically optimistic”, and although it is not expected that the overall industry will expand at double digit rates, a solid outlook for industry remains encouraging. With the large amount of activities on the cards for 2014, it holds true that companies who are robust in adapting their services and value proposition to address shifting market demand, will be better suited to address ad hoc market needs. Tracking markets has always been vital, but over the next 5 years it is predicted to be one of the key drivers of a company’s success in Africa. Companies that are able to find innovative ways of balancing the positive and negative aspects of the South African economy, in line with their Growth Strategy, are expected to find innovative ways of driving internal organic growth. Adaptation is not driven by a faceless company. Strong leadership goes hand-in-hand with the implementation of robust adaptation initiatives and as such, visionary strategic leaders in Africa who can implement ideas will become even more of a commodity.
Cornelis van der Waal is the Business Unit Leader for the Energy & Environment unit and Johan Muller is the Senior Industrial Consultant at the Frost & Sullivan Africa.