SMALL businesses in outlying economic areas could soon benefit from added business and financial support through the Department of Trade and Industry’s plans to set up economic clusters to assist the country’s underperforming regions.
The department’s efforts are slowly gathering steam since the approval of a draft regional industrial development strategy three years ago, which signals the department’s return to cluster support after a more than 10-year hiatus.
This will put South Africa in line with many other countries around the world including Finland and Italy as well as India and Brazil, that have reaped the benefits of clusters, which among other things allow businesses to learn from one another and to sell and market to buyers in a more cost-effective way.
Alfred Tau, chief director of regional economic development said the department hoped a policy on clusters would promote partnerships between the government, the private sector and academic institutions in supporting economic development.
Clusters would benefit from support such as infrastructure development, training of staff, and interventions in quality and standards, productivity improvement, he said.
In the last financial year the department completed a pilot to identify unique opportunities for 10 underperforming regions.
Tau said these included, ceramics and small-scale clay brick manufacturing around Kuruman, a renewable energy manufacturing and assembly hub in East London, agro-processing in KwaZulu-Natal’s Umkhanyakude region and poultry farming around King Williamstown.
Tau, who added that not all the country’s regions had been covered by the pilot mapping phase, said the process revealed mixed results.
“In some areas, the long-term potential of those regions were established while in others the opportunities were really not long-term opportunities upon which to anchor regional industrial clusters,” he said.
The department is also piloting a policy adapted from Japan, called “One municipality, One product”, which aimed to promote key products and services in municipalities for support with the aim of getting small towns and rural areas to generate more from exports.
Presently, Tau said the department, together with the Department of Economic Development and with the support of the UN Industrial Development Organisation (Unido), was still studying various policy options on clusters.
Tau said Special Economic Zones (SEZs) and initiatives such as Productivity SA’s Workplace Challenge Programme would be some of the tools used to support industrial agglomerations through clustering, he said
The programme, initiated in 1995, aims to increase the productivity of businesses big and small, by getting them to work together in clusters and share learnings.
In 2009/2010 19 clusters were benefiting 187 enterprises according to Productivity SA’s 2010 annual report. Some enterprises acknowledged that they may have had to liquidate if it wasn’t for the programme, said the annual report.
About a third of these were businesses with fewer than 200 employees, according to programme director Justice Tshifularo.
Businesses that participate in the programme recorded an average of 49% fewer rejects, 25% fewer instances of late delivery, while 69% of companies record cost reduction and 14% an improvement in attendance, according to Tshifularo.
But Douglas Comrie, managing director of B&M Analysts, which facilitates five clusters – four of them private-public partnerships, was skeptical of the government’s idea to set up clusters in outlying areas.
Comrie said it would take “massive” rebates, tax exemptions or land incentives to lure companies to these regions.
He said most businesses had already clustered in a particular area either to take advantage of a cheap labour pool – such as clothing firms that were situated near the Lesotho border, to be near manufacturers – such as the automotive sector or to be near the market – such as companies in the chemicals sector clustered near the Durban port.
The five clusters B&M Analysts run are the Durban Automotive Cluster, the KwaZulu-Natal Clothing Clothing and Textile Cluster, the Cape Clothing Cluster, the Durban Chemicals Cluster and the Benchmarking club – a national association with about a 50 members in the automotive industry belong to.
Members ordinarily paid for half of the interventions, while the remaining half is funded by local or provincial government.
The two clothing clusters had a considerable number of small businesses, while small firms make up about a quarter of the 40 members of the Durban Automotive Cluster. A further 110 small suppliers benefit from enterprise development and supply-chain initiative benefits through 12 of the cluster’s members, he said.
Comrie said it was not common in South African culture for companies to co-operate with one another, as trust levels were not high in business culture here.
The problem with low levels of trust was that the cluster tended to look at external issues, resorting to lobbying for instance, rather than on improving workings inside their own individual companies.
He said this meant cluster facilitators had to play a big role in building trust. B&M Analysts’ approach was to focus on getting members to trust the facilitators, rather than to trust one another first.
However Trusha Pillay, who owns Maritzburg Engineering and is a member of a chapter of the Durban Automotive Cluster said she was never concerned about sharing information on her business with other cluster members, largely because her business offers services unique to those of other members.
Her business, which has 38 employees, suppliers various mechanical engineering services, including the manufacture of bracket holders and parts for trucks and trailers.
Pillay estimated that she had been able to increase her turnover by over 30% since joining the cluster five years ago – mainly through being exposed to big business concepts and being benchmarked against other companies in the cluster.
She also benefited from a training programme which twined her business with a large company. She pays R300 a month in membership fees.
Glen Robbins, of the University of KwaZulu-Natal’s School of Development Studies, said if clusters in underperforming regions were to prove successful it was essential that a “more capable” state and private-sector institutions to partner with one another.
However he cautioned that the department’s cluster policy could be shortsighted if it was limited to supporting only clusters in underperforming regions, rather than those where a higher number of businesses had set up.
Robbins cautioned against the department simply creating clusters where there was no pre-existing relationships between firms in a certain sector.
For example firms were best able to work together if they were already involved in a supply chain together or shared issues around the local environment for example.
If the department wanted to create successful clusters it had to demonstrate that it could provide useful assistance to firms, he said.
He pointed to one example in the automotive sector cluster in Durban where local authorities involved in the cluster had helped to source funding from the Department of Science and Technology for firms to meet a need identified by members of the cluster improve their employees knowledge on supply-chain standards.
Robbins said it was easier to share issues around absenteeism or HIV/Aids or those around benchmarking or common practice, which he referred to as low risk issues, than such things as export assistance.
Here firms felt the risks of sharing information were high, as there was a fear that a competitor might use such information to “squeeze itself back into the market”.
Robbins said in the 1990s the Department of Trade and Industry had invested heavily in studies on how to support clusters from various sectors, even commissioning cluster expert Micheal Porter’s consulting company to carry out several such reports.
It set up a grant scheme, the Sector Partnership Fund which funded several cluster initiatives. But when the fund ran out it was not replenished and clusters came to re-orientate funding to provincial and city.
This had seen the emergence of among others, the Automotive Supplier Park and the Innovation Hub, cluster initiatives funded by the Gauteng Provincial Government.
Shortly after entering the new millennium, the Department of Trade and Industry ceased its focus on clusters, said Robbins. But clusters are now once again on the agenda.
This article originally appeared in Business Day on 19 October 2010.
Stephen Timm is a