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Made In South Africa

Home-grown digital services can support the country and expand SA’s reach to international markets. How is this sector faring?

What is the state of South Africa’s home-grown platforms? Local digital services companies represent the emergence of South Africa’s place in the global digital hierarchy. It speaks to how local companies can compete globally, an advantage that South Africa is not exploiting to full effect.

A case in point is the comfortable dominance enjoyed by services like Netflix and Spotify, not to mention a flood of overseas cloud services available in the country. These are often good services, and they help South Africa remain competitive. But local is lekker, and a vibrant local digital services sector is a clear indication of the country’s potential and progress as a digital hub. It implies the state of local digital penetration, costs, skills availability and other factors that determine our 4IR success.

The big picture is sometimes not encouraging, such as online advertising. According to a new report from PwC and the Interactive Advertising Bureau, even though online advertising had grown by double digits in 2019, local publishers only saw three percent growth. The vast majority of ad growth went to Google and Facebook. There’s still a big gap between domestic and imported digital service growth.

The good news

What is the potential for domestic services? The Margin approached South African digital platform services, and several graciously returned answers to our questions. Although an informal survey, it gives a sense of where local services are, what they do well, and what we can do to help them succeed.

We define a digital platform as any modern software service that can be provided locally and, possibly, globally. These include public cloud as well as on-premise services, the distinction being that they use more modern techniques such as micro-services or SaaS consumption models. Specifically, they’re part of the new generation of digital services.

To start, let’s get the elephant out of the room:

Can SA compete globally?

South Africa’s potential in digital markets has long been held up as a bright light for its development. From the rise of the Asian Tigers to the more recent success of India and other emerging economies, many examples seem to align with our country. But is that the case?

ANDREW CRUISE, Routed ANDREW CRUISE, Routed
The answers generally confirm this. Justin Drennan, CEO of courier- and warehousing logistics-as-a-service company ParcelNinja, points to the convenient time zone alignment with the EU and US, enabling numerous successful tech businesses offshore. But, he adds: “SA needs to look at streamlining international investment processes, and re-look at how IP is managed locally.”

Clayton Hayward, co-founder and CEO of contactless cash-transfer service uKheshe, agrees that SA can compete globally. He says that digital platforms level the playing field: “If more of these are created, it will assist the continent in breaking through many inhibitors preventing market growth. This will, in turn, boost job creation and the informal and domestic economy.” Several answers point to the lower operating costs in the country; another advantage is South Africa’s proximity to African markets. It can serve as a local hub for offering such services.

These advantages are translating into some global traction. At least one respondent operates very strongly internationally, and several say they receive a lot of interest from global markets, including the EU and the US. All, though, serve a growing base of South African customers. Most are focusing on those opportunities, proving that local digital businesses can take on and outcompete global vendors entering the market.

Yet their growth and potential to expand overseas are being hampered by clear challenges.

What are SA’s challenges?

The picture is not as rosy when you look at some of the pain points. Skills are frequently mentioned as a problem — there simply aren’t enough skilled people available to the market, prompting an impetus on better education. Several also cite the cost and quality of internet access — both as businesses and for their potential staff and consumers. Some of the specific issues include special small business payment terms, diverting corporate spending from BBBEE to SME, and less cumbersome tax and regulatory processes.

The fundamentals need addressing, says Will Harris, CEO of Gmaven, which provides management software to the real estate market. He adds that the market needs an “aggressive change in regulations, and skilled and competent administrators to foster an environment where entrepreneurs can thrive. The other solutions, such as education, are, sadly, not quick fixes.”

So, the two main challenges are access to skills, and the costs and bureaucracy of running a small business. Another major issue cited several times is the difficulty accessing funding to grow such businesses. The lack of a vibrant and powerful venture capital sector is a significant pain point, and Daniel Chilcott, MD of Flowgear — an Integration-as-a-Service platform — highlights this specific point.

“South Africa’s domestic VC options are not on par with those in countries like the US or UK. Simultaneously, it’s difficult to work with foreign VCs due to exchange control regulations. Treasury has proposed no longer requiring approval for export of IP for fair value, but this has yet to be implemented. Access to world-class capital, without fear of being unable to optimally structure IP, would go a long way.”

How can we grow local digital services?

Local digital services hold great potential. They can carry the South African flag globally while also leading us into a future of being technology providers and not only consumers. They are the push against digital colonisation, they provide a local tax base, and they can help bring foreign currency into the local market.

So how can we improve their chances for success? Addressing the issues mentioned above is important. There is also a need to improve the local consumer base. South African consumers – people and businesses alike – are still prone to favour international digital brands over local ones. Pushing local alternatives will help, but some local consumer businesses are still too `traditional’ in their thinking, says Andrew Cruise, MD of home-grown cloud solutions provider Routed: “It would be nice if South Africans, in general, can be persuaded to buy local. The presence of the hyperscalers is a blessing and a curse. Their marketing machines promote cloud as an option, but immature thinking also persuades some that there are no other genuine alternatives. Generally, a more educated public is a benefit to us, as we’re not trying to be the silver bullet that fixes every cloud problem, but do want our use cases to be promoted more widely.”
JUSTIN DRENNAN, ParcelNinja JUSTIN DRENNAN, ParcelNinja

In other words, the home-grown digital services sector needs TLC, more profile, better access to funding, and streamlined bureaucracy. Beneath that, their destiny is tied to developing South Africa’s overall digital capability.

“Probably just get the fundamentals right,” answers Sean Rule, founder of EquityMaven, a business valuation platform. “The push must continue for greater internet penetration, higher smartphone adoption, and increased comfort with digital services to grow the addressable market for platforms. And, stimulating underlying macroeconomic growth and ensuring regulatory stability would help the whole economy flourish, and create more businesses wanting valuation services.”

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