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Enabling the future: The Importance of Clustering in South Africa

Enabling the future: The Importance of Clustering in South Africa

Enabling the future: The Importance of Clustering in South Africa

08 March 2014 | Posted in SACEEC News.

The SACEEC's involvement in Industry Development has given rise to a variety of Clusters aimed at assisting companies in the implementation of government policies. The most recent of which is the Localisation Programme and the Designation of locally manufactured products.

Session 5: Legislation and practice: Policy and implementation
Enabling the future: The Importance of Clustering in South Africa
By Sybil Rhomberg
The author is Managing Director of the South African Capital Equipment Export Council (SACEEC)

audio session 3 19:50

This is all about developing business, and we sometimes forget that it doesn’t often happen naturally. There are lots of entrepreneurs, but not enough, and so we have to make entrepreneurs and that’s where I come in. I’m very involved with making those people who dabble in business into first line entrepreneurs.

Before I start, this morning when I came in I read the document from the ECA, and I’d like to read a bit that encapsulates what I’m going to speak about.

One: “Firstwork with the private firm”. And I’m going to add: down to the fifth tier, those companies less than R1 million. We keep talking about big companies and yet we all know that it’s the small companies that create the jobs, and create the sustainability and the stability in the economy. What makes America what it is? It’s the plethora of mama-papa businesses. I see it in my sector. Sometimes with really antique technology, but they have captive markets because they are in areas that otherwise wouldn’t be serviced. Now we don’t have that, and that’s the first premise.

The second is: “to engage with major commodity firms to voluntarily facilitate local sourcing”, and that’s exactly what the mining houses are. There has to be a platform for us to meet, and at the moment there isn’t one. We had dabbled in this a few years ago. We tried to get something going in trackless mining and it never came about. If you’re going to cluster, you need a champion. They’re not easy to find and if it isn’t championed it will die straight away.

The third issue is: “when necessary, use regulation to compel the companies to increase the breadth and the depth of the linkages” and that’s what I’m hoping to show you, a way of increasing the depth of the linkages.

What is a business cluster?

I seem to be the only sector that’s really actively involved with clustering. At the moment, within the SACEEC, I’m running 18 clusters with 4 desperately waiting to get involved. And there are significant ones. Later on I’ll show you the integration, how to put it together, so that you’ll understand where you’ll fit, if you happen to be one of the private companies.

So what is a cluster?

It’s a geographically bound concentration of similar or complementary businesses related via a value chain. It’s very important to think of the value chain. I sat next to a gentleman at lunchtime from the stainless steel industry. If he’s not involved with deliberations within the value chain, what happens? There may be some grades he needs to change. Or maybe there is a company making something in milled steel[23:40] which is being chromed but should actually be made using stainless steel. If he doesn’t meet them, they’re like ships that pass in the night and no real business is made.

A cluster has active channels for business transactions, communication and dialogue. The businesses in the cluster share specialised infrastructure, labour, markets and services – and these are all the things that we talk about – but they are faced with common opportunities and threats. That’s the crux. If it doesn’t come bubbling out, you don’t know where the problem is. In many cases in South Africa, our economy ages prematurely because we don’t have that.

The companies are identified by talking with each other, and it’s a real contact sport. You have competitors sitting next to each other. Initially they don’t want to, but once they see the benefits of the process, they get to the stage where I can’t get them out of the car park because they chat so much, because they enjoy so much to meet fellow competitors or persons in that industry.

There are various types of clustering. Passive clustering occurs naturally. You’ll find there are certain areas or certain industries that are very focused. Maybe there are various factories and manufacturers related to a science park nearby – that is a naturally occurring, passive cluster. Firms congregate over time to take advantage of potential opportunities but enhance these by undertaking further deliberate actions, such as creating economies-of-scale

I am involved in active clustering, in which firms realise the potential benefits of active co-operation, enter into closer relationships and set up mechanisms for collaboration in order to reduce costs, develop new or upgrade products or product ranges, develop flexibility and build a “common purpose”.

The important thing is that it should fit in with economic policy. Development cluster initiatives are an important new direction in economic policy, building on earlier efforts in macro-economic stabilisation, privatisation, market opening and reducing the costs of doing business. In South Africa, we write many policies, but we’ve been very, very slow at unpacking those into procedures and processes. Therefore we keep having new policies instead of actually using the policy that’s there and tweaking it to fit the purpose.

How clustering works

It involves people-to-people contact. It’s more informal than formal. It involves local stakeholders rather than outsiders. It involves collaboration at multiple levels and requires a huge amount of social capital. Initially, the participants are slow to get involved. A little bit like all of you are sitting here, listening to me. It is like that when we start a cluster. Every time we start a new one, they sit around and listen. After they’ve attended four or five times, it becomes a very noisy place, because everybody’s talking and everybody’s chirping, and that’s exactly what you want.

It must be led by sub-sector participants for the sub-sector. You can’t, for instance, put people who are making a screening machine, which is used in the mining industry, together with someone who is making roof bolts. The guys who make roof bolts or underground drilling, digging and cutting want to sit together and the other guys want to sit together. You can’t mix them. Most importantly, you cannot include importers with local manufacturers. If you do that, it’s dead in the water and you will never move forward. You cannot use the multinationals that send representatives because they’re not high enough up to make input into the decision-making.

It’s a continuous process. With the new state-owned enterprise purchasing that they’re doing with Transnet, PRASA and ESKOM, we must cluster throughout the process of those particular contracts. So it will maybe be 20 years – but out of that you will end up with a very strong industry.

There is a six-step process:

  • form a leadership group
  • undertake a rough competitor analysis
  • form sub-cluster working groups as required
  • develop action initiatives – initially short term actions – to achieve runs-on-the-board
  • over time, tackle longer term initiatives
  • continually encourage communication and outreach by all participants.
  • What clustering is and what it isn’t

It is not an industrial policy. It is not a lobbying tool or a close circle of friends. It is not about cornering the market or a five-year plan. It is not top down. It is not solely the private sector: in order to become successful, it must include all stakeholders. If we’re going to set up one in mining, we have to work with the mining houses and their representatives in those various disciplines. Most importantly, as I said, it is not a one-off activity.

Why do we have clusters?

Because globalisation is a fact of life. It’s as much about defending our economy as building it. Why do the firms cluster? Because they need to improve and sustain their global competitiveness and defend current market share. The platform that clusters provide enables industry to address opportunities and barriers in a way that cannot be done on an individual basis. Yet the companies still compete with each other. Clustering is a procedure for unpacking remedial actions and improving global competitiveness. It’s all about competitiveness.

Formation and success of a cluster depends upon the industrial and technological development of the region; the continuous catalytic involvement and intensity of vertical and horizontal linkages, including between firms, buyers and the state; the efficacy of support institutions and the technological complexity of activities. The dynamism of the leaders and participants of the cluster also has a huge bearing.

Behind all the effort is finding new markets. The whole strength of the Competitive Supplier Development Programme (CSDP) is not to build capacity to supply into South Africa; it is to build capacity for the global markets so that we can compete around the world, not even only in Africa. In my sector, we spend much more time in Latin America than we do in any other region, because we know we’re competitive in those markets. The basis of it is innovation. You’ve got to unearth that. Those of you who’ve ever been in a think tank realise the enthusiasm that bubbles out when a whole lot of like-minded people get together. This is what the cluster does – it gives the opportunity for everybody to bubble together and think of new things.

A cluster map for the mining industry
[slide 10]

A cluster for the mining sector will need a governing body at the top, which I believe should be the DTI. One of the biggest problems that we have in South Africa is this silo mentality among the ministries and the DTI is the only one with a strong enough position to try and force them together. We have to have that at the top because all of the production issues that we have, and all the growth opportunities, are always cross-sectional.

In this example, the main clusters are the vertical ones: materials handling; environmental control; refining/manufacturing/process; drilling, digging and cutting; design and project management; construction; finance; electrical and instrumentation. I see those as the clusters we would need to look at.

You may find that you have to break it down into smaller sections if they’re going to be designated. I have two very strong clusters that are a long way down the track, one for valves and one for bag filters. They’ve got their designation status, they work very closely with Eskom and the state-owned enterprises, and they’re doing that hard work of convincing the municipalities. But knowing that they’ve got the designation, they get a good hearing. At the same time, those very companies are building capacities, because they’re exporting as fast as they can. That is important. You have to do both together. You cannot hope to fill the local market, and then afterwards – once you’ve built x amount of capacity – go into the international market.

At the moment, the SACEEC is pioneering clusters in the infrastructure projects, but eventually I hope to slot them off into the various sectors.

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