V. MARKETING U.S. PRODUCTS AND SERVICES Distribution and Sales Channels Approximately 90 percent of the population is found in areas surrounding the cities of Johannesburg, Cape Town, Durban, Pretoria and Port Elizabeth, which represent the country's major areas of economic activity and the major consumer markets. PWV: The "Pretoria-Witwatersrand-Vereeniging" area of the southern Transvaal stretches from Pretoria, the country's administrative capital, in the north, to Vereeniging in the south, with Johannesburg and the Witwatersrand (the industrial and mining belt) straddling the center. Although this area accounts for only 2 percent of the country's land mass, it is the powerhouse of the South African economy, generating 43 percent of the GDP. While the PWV remains a center for raw materials, it is also the site of 48 percent of South Africa's manufacturing. The PWV has the highest population growth rate in the country, which, along with numerous migrants, gives it the country's largest and most dense population of 8.7 million. Johannesburg: Johannesburg, the commercial and financial hub of South Africa, is located in the center of the PWV. Industry in the Johannesburg area emphasizes steel, petrochemicals, and manufacturing. As the country's transportation hub, it is the center for all rail and road connections and has the country's major International Airport. Johannesburg is 456 miles from Durban and 954 miles from Cape Town. Durban: The Durban metropolis is the second largest urban area in South Africa with a population of over 3 million, and the home of Africa's busiest and most modern port. The climate is pleasant year round, making it a popular tourist center as well. The triangle of Durban-Pietermaritzburg-Pinetown is the manufacturing core of Natal. Natal's major industries are footwear, textiles, paper, clothing, refined petroleum, chemicals, sugar, and processed food. Emerging sectors include professional and scientific equipment, nonferrous metals, and wood. Many export-oriented industries are located in the Durban area. Lying to the north along the Indian Ocean coast from Durban is Richards Bay, constructed to handle bulk cargos, particularly coal exports. Cape Town: Greater Cape Town area is the country's third largest urban area, with a population of 2.5 million people, and the site of parliament. Over the years, the importance of manufacturing and construction has declined as the region's comparative advantages have moved towards agriculture, transport, and commerce. The Western Cape has excellent road, rail and air links, and Cape Town itself has a well-equipped, modern harbor. Cape Town's location along the coast, as well as the region's rich farmland, has led to growth in the food processing industry. Cape Town is the country's insurance capital and the home base for most multinational oil companies. Other strong industries include textiles, clothing, footwear, wood and furniture products, chemicals, plastics, machinery, and technology-based industries. Also located in the Cape region, northwest of Cape Town, is Saldhanha Bay, specifically developed to handle iron ore exports, but which also has potential to handle commercial shipping. Port Elizabeth: The immediate Port Elizabeth area has a population of 984,000. It is South Africa's fifth largest city and third largest port. It has a large concentration of motor vehicle assembly operations and is the home of the footwear industry. The motor vehicle industry provides the main source of employment for area residents. The eastern Cape is a significant fruit and vegetable producer and is the location of the wool and mohair industries. Two other important cities in South Africa are Bloemfontein and East London. Bloemfontein is the capital of the Orange Free State and the Republic's judicial capital. East London is a port on the Indian Ocean that primarily handles fruit and grain exports. Use of Agents/Distributors: Finding a Partner South Africa offers foreign suppliers a wide variety of methods to distribute and sell their products. These include using an agent or distributor; selling through established wholesalers or dealers; selling directly to department stores or other retailers; or establishing a branch or subsidiary with its own sales force. When appointing a South African distributor, U.S. exporters should take care to find out if the distributor handles a competing product. Some U.S. exporters have been approached by major South African corporations whose holding companies market products which compete directly with the American products. Slightly less than 50 percent of total merchandise sales pass through both a wholesaler and a retailer before reaching the final consumer; 40 percent of sales are from the manufacturer to the retailer, bypassing the wholesaler; 5 percent by the wholesaler directly to the consumer, and 5 percent bypasses both the wholesaler and the retailer, reaching the consumer directly from the producer or the importer. Many South African manufacturers have established wholesale and retail outlets. Capital equipment often is best handled by distributors who buy on their own account and carry a wide range of spares. Distributors frequently handle commodities such as chemicals, pharmaceuticals, and brand new products on an exclusive basis. Leading distributors often have branches throughout South Africa and sell to both wholesalers and retailers. In some cases, the distributor is also the principal or a major buyer of the products. For example, there are South African distributors of general aviation aircraft who also run charter aircraft companies using the aircraft they distribute or distributors of helicopters who also operate helicopter services for crop spraying and the transport of persons and materials. In South Africa's very competitive marketplace, it is essential that the U.S. exporter provide adequate servicing, spare parts, and components, and qualified personnel capable of handling service inquiries. In most cases, servicing should be available locally since potential delays often lead purchasers to seek alternative suppliers. Once contacts are established, it is often advisable to visit South Africa, since firsthand knowledge of the market and society is useful. Moreover, such a visit provides an opportunity for a personal appraisal of the prospective agent or distributor. U.S. exporters should carefully research the reputation and financial references of a potential agent and establish a clear agreement delineating the responsibilities of both the exporter and the agent. One of the first steps which an exporter may wish to take in locating an agent or distributor in South Africa is to make use of the U.S. Department of Commerce Agent/Distributor Service (A/DS) which can be initiated at any Commerce district office. (See below). Selling Through an Agent or Distributor: Agents are often used for the distribution of durable and nondurable consumer goods, as well as some industrial raw materials. They may be particularly appropriate when products are highly competitive and lack a large market. It is common to appoint a single agent capable of providing national coverage either through one office or a network of branch offices. In addition to their role as the local representatives of U.S. exporters, agents should be able to handle the necessary customs clearances, port and rail charges, documentation, warehousing, and financing arrangements. Local agents representing foreign exporters, manufacturers, shippers, or other principals outside South Africa who exports goods to South Africa, are fully liable, under South African import control law, for all regulations and controls which are imposed on the foreign exporters. Local agents are required to register with the Director of Import and Export Control of the Department of Trade and Industry. It is important for a U.S. exporter to maintain close contact with the local agent to track changes in importing procedures and to ensure that the agent is effectively representing the sales interest of the exporter. Selling Through Established Wholesalers: Consumer goods requiring maintenance of stocks and industrial raw materials often are exported to South Africa through established wholesalers. Selling Through Retailers: Many U.S. exporters of consumer goods sell directly to South African retail organizations, such as consumer corporations, department stores, chain stores, and cooperative groups of independent retailers, which assume the functions of wholesale buying, selling, and warehousing. Consumer Retail: Retail trade outlets in South Africa offer the full spectrum available in the United States: the neighborhood drugstore (cafe), small general dealer, specialty stores handling a single product line (for example, clothing, electronics, furniture), exclusive boutiques, chain stores (groceries, clothing, toiletries, household goods), department stores, cash and carry wholesale-retail outlets, and cooperative stores serving rural areas. About 90 percent of the consumer trade inventories of these stores are domestically sourced. A recent phenomenon in South Africa is the evolution of hypermarkets which sell large quantities of almost all consumer goods on a self-serve basis. The hypermarkets, located in suburban shopping centers, have disrupted the traditional distribution chain by purchasing directly from manufacturers and bypassing the wholesaler. Assistance Offered by the U.S. and Foreign Commercial Service The Department of Commerce maintains a U.S. & Foreign Commercial Service (US&FCS) offices in Johannesburg and a branch office in Cape Town. Companies can contact the Commerce District Office listed at the back of this publication to obtain more information about tapping Commerce programs and services to assist exporters and business persons. Commercial Information Management System: All of the International Trade Administration's (ITA) publications, market research, industry sector analyses, and alert reports submitted by US&FCS overseas posts are available to U.S. exporters through the Commercial Information Management System. Exporters are encouraged to review the list of materials available for the Republic of South Africa on CIMS by contacting their local Commerce district office. National Trade Data Bank: The National Trade Data Bank (NTDB) is a trade information data bank on CD-ROM that contains documents and publications from 15 federal agencies including the Departments of Commerce, State, Agriculture, and Energy; the Export-Import Bank of the United States, and the Overseas Private Investment Corporation, among others. NTDB discs are updated monthly. Each monthly disc sells for $35, and a 12-month subscription is $360. Agent/Distributor Service: US&FCS offices in South Africa will assist U.S. exporters in identifying qualified agents and distributors. The U.S. company provides its product literature and information to the US&FCS offices in South Africa which contact agents and distributors by telephone and through trade journals. The US&FCS office prepares a short-list of qualified agents/distributors which the U.S. exporter may use to select an agent/distributor. The search normally takes 30-45 days after the US&FCS receives the company's product literature. The Agent/Distributor Service can be ordered by contacting the nearest Commerce District Office. There is a nominal fee. Comparison Shopping Service: The Comparison Shopping Service (CSS) offers a custom market survey that answers nine basic marketing questions related to the U.S. company's product or service including major competitors, comparative prices, customary distribution channels, promotion practices, trade barriers, and other factors. The survey usually is completed within 45-60 days from receipt of the company's product information at the US&FCS office. Contact the nearest Commerce district office to order the service. There is a fee. World Trade Data Report: The World Trade Data Report (WTDR) provides commercial and credit information on potential customers, agents/distributors, or other South African companies. Information includes length of time in business, number of employees, bank credit references, trade references, reputation in the business community, etc. Normal processing time is 30-45 days after receipt of the request by the US&FCS office. This service may be ordered through the nearest Commerce district office for a nominal fee. Gold Key Service: US&FCS Johannesburg offers a Gold Key Service for U.S. companies which would like personalized assistance establishing or expanding their business in South Africa. With a minimum of two-weeks notice, US&FCS can plan and schedule appointments with interested South African companies or government agencies, conduct pre- or post-market research, and provide other related business services. The fee for the first day is $200, then $150 for each additional day; the first day is payable in advance. The Gold Key Service is available by directly contacting US&FCS in Johannesburg, South Africa: Telephone: (27 11) 331-3937, Fax: (27 11) 331-6178. Franchising Franchising is one of the most promising sectors for business growth in South Africa today. There are currently some 90 franchisors in South Africa, 60 of whom are members of the South African Franchise Association (SAFA). According to SAFA, its members account for over 2,700 franchise outlets with sales estimated at more than $1.5 billion during 1990-91. By far the largest franchise sector in South Africa is the fast food industry. The emphasis on nutritious food has led to a 13 percent annual sales growth rate in the chicken fast food industry between 1987 and 1990. In addition, there are many other industries which exhibit promise for future growth, particularly in the service sector such as automobile servicing, educational training, hair care salons, and industrial cleaning services. Contact: Franchise Association of Southern Africa (FASA) P.O. Box 31708 Braamfontein, 2017 South Africa Tel: (27 11) 403-3468 Fax: (27 11) 403-1279 Direct Marketing Given South Africa's stringent foreign exchange controls and import documentation requirements, it is recommended that overseas firms contract with a South African agent or partner who would be responsible for marketing the product, holding stock, fulfilling purchasing transactions, and remitting revenue to the U.S. company. Companies interested in learning more about South Africa's mail order sector can contact: South African Direct Marketing Association 4 Tennant Road, Kenilworth Cape Town 7700 Telephone: (27 21) 797-4470 Fax: (27 21) 797-5537 Licensing Exchange control regulations in South Africa stipulate that the payment of royalties must be approved by SARB. When a licensing agreement involves no manufacturing, the request for exchange control approval is sent directly to SARB. When a company is interested in entering into a foreign licensing agreement to manufacture a product in South Africa, the South African licensee must submit an application to the Industrial Development Branch of the Department of Trade and Industry. The application should include a draft licensing agreement and a questionnaire, known as Form MP337. The Department of Trade and Industry, in turn, will make a recommendation to the SARB. For more information on licensing regulations contact: Directorate of Industrial Development Department of Trade and Industry Private Bag X84 Pretoria 0001 Telephone: (27 12) 310-9791 Fax: (27 12) 322-0298 Royalty fees are based on a percentage of total ex-factory sales, with a maximum of 4 percent for consumer goods and 6 percent for intermediate and final capital goods. Down payments will not be approved unless actual costs of transferring tangible technology items are incurred. Minimum or annual payments are not acceptable to SARB. Exchange approval will normally be granted for an initial period of 5 years. Contract conditions involving obligatory purchasing and pricing agreements or requiring the licensee to sole source articles from the licensor are prohibited. Steps to Establishing an Office The Companies Act of 1973, which is administered by the Registrar of Companies, regulates the formation, conduct of affairs, and liquidation of all companies. The act makes no distinction between locally owned or foreign-owned companies. Companies may be either private or public. Foreign companies establishing subsidiaries in South Africa must register the subsidiary in accordance with the act. The South African Government contact is: Registrar of Companies P.O. Box 429 Pretoria 0001, South Africa Telephone: (27 12) 325-2350 Private Companies: A locally registered private company, identified by the words "Proprietary Limited" in its title, is a common form to carry on operations as a subsidiary of another company. Private companies may have up to 50 shareholders, cannot offer shares to the public, and are not required to have a minimum subscription. Private directors need not lodge with the Registrar a written consent, and they need not be South African nationals or residents of South Africa. The registration of a company is established by filing the following information with the Registrar of Companies: a certified copy of the Memorandum and Articles of Association; the registered address; the name and address of the company's local auditor; and a share capital duty receipt. Private companies are not subject to the statutory meeting and reports requirements of public companies and do not have to lodge their annual financial statements with the Registrar. Public Companies: Public companies are formed to raise funds by offering shares to the public; therefore, there is no limit on the number of shareholders in a public company. Public companies are required to file annual financial statements and reports with the Registrar of Companies. For public companies which issue a prospectus, proof must be submitted to the Registrar that each director has paid full price for the shares, and the number of shares issued equals the stated minimum subscription. For public companies with share capital, the following must be forwarded to the Registrar: a director's statement that capital is adequate for business operation; particulars of the directors and officers; and proof that the annual duty has been paid. A public company may not commence operations until receipt of the Registrar's certification. Close Corporations: Close corporations are a form of business organization unique to South Africa. They can only be organized by natural citizens of South Africa and are limited to a maximum of ten persons. Close corporations are subject to fewer registration and operating regulations than companies. Local Branch Offices: Foreign companies may establish a local branch office in South Africa by registering the branch as an "external company" with the Registrar of Companies. Any nonresident or foreign company must register within 21 days of establishing an office in South Africa. Government approval is not required for registration, and there is no requirement that a certain percentage of share capital be held locally. The branch company, within six months after the end of its financial year, must file annual financial statements with the Registrar. Branch profits remitted to a foreign firm's headquarters are not subject to withholding tax. Advertising and Trade Promotion Advertising is sophisticated in South Africa. Major media include television, newspapers, magazines, radio, and motion pictures, the most popular being television. South African advertising agencies provide a full range of services, including market research and full media coverage. The trend for the 1990s forecasts an escalation in social advertising in which public service organizations are the clients and social services campaigns are the products. Another trend is a movement away from conventional to more direct advertising. Prior to the 1980s, fast moving consumer goods comprised most advertising expenditures, whereas during the 1980s durables and financial services comprised the major advertising campaigns. The four key players in South Africa's advertising industry are the Association of Advertising Agencies (AAA), the Association of Marketers (Asom), and the two major media bodies, the South African Broadcasting Corporation (SABC) and the Newspapers Press Union (NPU). AAA has 36 corporate members extending to 48 branches and associates. Background information on SABC can be found in the "Infrastructure" section of this publication. Customarily, South African advertising agencies are not paid directly by their clients. Newspaper, magazine, and radio corporations reduce charges for space and time when the purchaser is a recognized advertising agency. The agency then bills the client at the full rate and retains the difference as a commission. A typical commission is 16.5 percent. The agency's profit is, in turn, limited by law to one-sixth of the normal cost of the advertisement. ASOM and AAA can be contacted at the following addresses: Association of Marketers Marketing House P.O. Box 1035 Johannesburg Telephone: (27 11) 642-6064 Fax: (27 11) 482-3190 Association of Advertising Agencies P.O. Box 2302 Parklands, Johannesburg 2121 Telephone: (27 11) 880-3908 Fax: (27 11) 447-1124 Names and addresses of major advertising agents, newspapers, magazines, market research companies, and public relations consultants along with their current rates, can be found in the Advertising and Press Annual of South Africa available from: The National Publishing Company (Pty) Ltd. Communications Group Building P.O. Box 2735 Johannesburg 2000 Telephone: (27 11) 835-2221 Fax: (27 11) 835-1943 Languages: The white population speaks Afrikaans and English, the black and Asian populations speak a variety of languages and many also use English and Afrikaans. Printed advertising directed at the nonwhite population is mostly in English, radio advertising is broadcast in nine African languages, and television advertising is conducted in five languages. African language advertising and broadcasting is expected to escalate to reach more black consumers. The predominant African languages are Zulu (36 percent), Xhosa (16 percent), Northern Sotho (14 percent), Southern Sotho (11 percent), Tswana (8 percent), Shangaan/Tsonga (5 percent), Swazi (4 percent), Southern Ndebele (2 percent), Northern Ndebele (1 percent), and Venda (1 percent). Languages used by the Asian population include Tamil (2 percent), Hindi (2 percent), Gujerati (2 percent), and Urdu (1 percent). Newspapers: Seven daily national newspapers and twelve weekly national papers are published in South Africa. The major press groups are Argus Group, Nasionale Pers, Perskor, and Times Media. The national dailies (and their language) are: Beeld (Afrikaans), Business Day (English), The Citizen (English), The Sowetan (English), The Star (English), Die Transvaler (Afrikaans), Die Volksblad (Afrikaans). The national weeklies are: City Press (English), Rapport (Afrikaans), Sunday Star (English), Sunday Times (English), Sunday Tribune (English). The larger independent national weeklies are: Weekly Mail (English), and New Nation (English). There are also several major regional newspapers published for the Johannesburg, Durban, and Cape Town areas. Information about newspapers in circulation can be obtained from: Newspapers Press Union of South Africa P.O. Box 32003 Braamfontein, Johannesburg 2017 Telephone: (27 11) 339-6344 Fax: (27 11) 339-3393 Major Newspapers Business Day P.O. Box 1138 Johannesburg 2000 Tel: (27 11) 497-2711 Fax: (27 11) 836-0805 The Star P.O. Box 1014 Johannesburg 2000 Tel: (27 11) 633-9111 Fax: (27 11) 836-8398 The Citizen P.O. Box 7712 Johannesburg 2000 Tel: (27 11) 402-2900 Fax: (27 11) 402-7437 Sowetan P.O. Box 6663 Johannesburg 2000 Tel: (27 11) 474-0128 Fax: (27 11) 474-8834 New Nation P.O. Box 10674 Johannesburg 2000 Tel: (27 11) 333-2711 Fax: (27 11) 333-2734 The Weekly Mail P.O. Box 260425 Excom Tel: (27 11) 334-0730 Fax: (27 11) 334-0747 Sunday Times P.O. Box 1090 Johannesburg 2000 Tel: (27 11) 497-2711 Fax: (27 11) 834-1686 Beeld P.O. Box 5425 Johannesburg 2000 Tel: (27 11) 402-1460 Fax: (27 11) 402-1871 Die Rapport P.O. Box 4313 Pretoria 0001 Tel: (27 12) 328-3064 Fax: (27 11) 325-7481 Trade Journals See Appendix C for a listing of trade journals. Pricing In general, controlled prices apply to goods of primary interest to the agricultural sector, goods produced under near monopolistic conditions, and goods in short supply. The current list includes items such as agricultural machinery, liquor, coal, fertilizers, steel products, meat products, milk, petrol, sugar, and tires. Other provisions of the Price Control Act set marking requirements and stipulate that prices cannot be evaded through auction sales. The act also requires that persons offering goods or services for resale keep and retain records for possible recall, indicating purchase costs, manufacturing costs, and selling prices. Selling to the Government Government purchasing is a significant factor in the South African economy. Nearly all such purchasing is done through competitive bidding on invitations for tenders, which are published in an official state publication, the State Tender Bulletin, and sometimes in leading newspapers. Although the purchasing procedures of the central government and parastatal institutions favor products of local manufacture, an overseas firm is not precluded from bidding if the firm has an agent in South Africa to act on its behalf As a general practice, payment is made to the local agent. Central Government Procurement: The South African Government's buying procedures are highly centralized. The Chief Directorate of the Procurement Administration in Pretoria and three regional offices perform the administrative work of the State Tender Board, which has responsibility for procuring for over forty government departments. Purchases are by competitive tender for project, supply and other contracts. Bidders generally need not prequalify, but the ability of bidders to supply goods or render a service generally is examined. Foreign firms can bid through a local agent, who will then be so examined. The due date for a bid is usually at least twenty-one days from the publication of the notice. As a general practice, however, a lead time of thirty to forty-five days is allowed. Bids for government tenders must be on a basis of all costs included to the point where the goods are required. Bids on tenders are to be addressed as indicated in the tender document and must be lodged in a sealed envelope with the tender number, due date and name and address of the tenderer on the outside. As part of the Government's policy to encourage local industry, a price preference schedule, based on the percent of local content in relation to the tendered price is employed to compare tenders. To claim preference for local content, tenders must enclose with their bid a certificate showing classification of supplies offered in terms of local content, calculated as follows: Percent of Local Content Price Preference Not more than 5 percent 1 Over 5 percent to 10 percent 2 Over 10 to 20 percent 3 Over 20 to 30 percent 4 Over 30 to 40 percent 5 Over 40 to 50 percent 6 Over 50 to 60 percent 7 Over 60 to 70 percent 8 Over 70 to 80 percent 9 Over 80 percent 10 Parastatals, Local Authorities and Private Buyers: Parastatals, local authorities, and major private buyers such as the mining houses follow similar practices to the central government. Most parastatal procurement is guided by and bound to the schedule of local content preference. Local government purchases are increasingly significant and also involves overseas bidding. With the establishment of nine new provincial governments in South Africa, the prospects with additional government procurement below the central government-level are significant. Protecting Your Product from IPR Infringement South Africa is a member of the two major multilateral conventions pertaining to intellectual property: the Paris Convention for the Protection of Industrial Property (covering patents, trademarks, industrial designs, and unfair competition) and the Berne Convention for the Protection of Literary and Artistic Works (covering copyrights). The World Intellectual Property Organization (WIPO), an agency under the United Nations system, is also a member of the International Convention for the Protection of New Varieties of Plants. South Africa does not, however, as yet belong to the Patent Cooperation Treaty, the Budapest Treaty on the International recognition of the Deposit of Microorganisms for the Purpose of Patent Procedures, and the Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication of their Phonograms (Geneva Phonograms). South Africa has, however, taken steps to join the Budapest Treaty, and is preparing legislation to implement the Treaty. Documents for South Africa's accession to the Patent Cooperation Treaty are presently being drafted. South Africa intends to apply for membership in the convention relating to the distribution of Program-C signals transmitted by satellite, the Hague Agreement Concerning International Deposit of Designs, and the Agreement for the Prevention of False or Misindications of Source of Goods. Recent South African efforts to protect intellectual property include the Patent Act (57) of 1978 (last amended in 1988). The Parliament passed in December 1993 a replacement for the Trade Marks Act (62) of 1963 (last amended in 1971), the Trade Marks Act (194) of 1993. It will take effect on July 1, 1994. The new legislation allows for recognition of internationally recognized trade marks. Parliament also passed a Designs Act (195) in 1993. It will also take effect in July 1994. The bill allows for the protection of designers of functional circuits. A registration system will be introduced that provides protection for the proprietor of a design for 10 years from the date of registration or issue, whichever is earlier. Additional South African laws that protect intellectual property include the Plant Breeders' Rights Act (15) of 1976 and the Copyright Act of 1978, as amended in 1992. The Copyright Act does not, however, protect software as a "literary work."