- EY survey shows a resurgence of confidence among South African middle market companies with almost one in three predicting growth above 10%
- A further 30% are targeting growth in excess of 10%, a marginal increase from 2017, when 24% of companies were in this high growth band
- 75% of South Africa middle market CEOs say they are already adopting or planning to adopt artificial intelligence (AI) within two years (last year only 8% had this view)
- South Africa continues to be placed as a diversity leader among the global cohort, with 15% of respondent CEOs being female.
Middle-market companies across the globe are significantly more optimistic about business conditions and opportunities than last year, according to the findings of the annual EY Growth Barometer 2018. This is no different for South African middle market companies, with one in one in three predicting growth above 10% for the coming year. This is the finding in EY’s Growth Barometer report for South Africa released today, which is well above the International Monetary Fund’s GDP forecast that South Africa’s economy will expand by 1.5% this year.
The global annual survey of 2,766 middle-market executives across 21 countries and nine key middle-market sectors reveals that global confidence in business growth has strengthened in the last 12 months, particularly in South Africa as indicated in the local report.
“Business confidence has soared since Cyril Ramaphosa was elected in February as the country’s president,” says Azim Omar, Africa Growth Markets Leader at EY. “Economic growth forecasts are stronger this year, where last year there was a risk that we were heading for a recession.”
In South Africa, the data shows that 58% of middle market companies are targeting growth between 6-10%, which compares favourably with only 32% of companies having the same growth ambitions a year ago. A further 30% are targeting growth in excess of 10%, a marginal increase from 2017, when 24% of companies were in this high growth band. What’s more, only 12% of respondents in 2018 expect a decline in growth, compared with 44% in 2017.
Twenty seven percent (compared to 23% for the rest of the world) of South African middle market leaders have overseas expansion as the top strategic growth priority. South Africa’s survey respondents are also among the most bullish of the Brazil, Russia, India, China and South Africa (BRICS) group, on export growth, trailing only China. South Africa’s C-suite is also keen to move into adjacent activities or sectors, a priority cited by 21%; this reflects the rise in industry convergence, which is considered the second-most disruptive megatrend by the country’s cohort. A further 18% prioritise internal growth, in line with their BRICS peers.
The race to AI adoption
Intelligent automation and machine learning have moved centre stage as vital enablers to ambitious middle-market growth. Attitudes toward new technology have evolved rapidly since last year. In 2017, 64% of South Africa middle market CEOs said they would never adopt robotic process automation (RPA), yet just 12 months later 75% of respondents say they are already adopting or planning to adopt artificial intelligence (AI) within two years.
The survey shows that South African middle market companies are evolving fast. In fact, South Africa is joint third with Singapore in the early adoption of AI, above leading economies such as the US, Russia and Germany.
Omar says: “Successful and profitable responses to convergence favour the fast. Agile companies who can adjust their offering or business model to align with a shifting consumer environment are the ones who will thrive.”
Technology is seen as a great enabler in South Africa, with 27% of respondents naming it as a key factor in improving productivity. A sign of South Africa’s IT maturity is that business leaders regard improving the customer experience as the number one purpose of technology investment, ahead of more routine uses such as improving process efficiencies and financial data. However, IT is not a universal panacea: 17% consider technological disruption as the greatest operational challenge to growth, after insufficient cash flow.
Regulation driving, not stifling, innovation
This year regulation has emerged as a new force in stimulating innovation, not obstructing it. In contrast to most of their global peers, South African middle market leaders put more regulation (26%, 17% elsewhere) above lower taxes (24%) as the best thing the Government could to boost growth.
“One of the largest media companies in South Africa says it’s lost hundreds of thousands of subscribers because of competition from unregulated streaming services,” says Omar.
Contrary to the broadly held assumption that red tape stifles growth, regulation is also cited as the third-greatest innovation driver (19%), behind profitability (23%) and competition (22%). Customer demand trails in fourth place but elsewhere the customer is paramount; when it comes to ways of increasing innovation, the preferred approach for three out of 10 (30%) is using customer data.
Concerns over cash flow and funding remain
Slow or flat global growth is a major a concern for South African middle market companies, with 27% of leaders naming it as the biggest external risk to growth, up 15 percentage points on last year. This is directly linked to their burgeoning expansionist agenda.
While access to credit continues to be an issue, this year company leaders cite insufficient cash flow as a more significant challenge, cited by around one-third (32%) of the South African C-suite, in line with elsewhere (34%). This may reflect the changing nature of sales patterns worldwide, as industry convergence, unpredictable online buying patterns, and the need to invest quickly to satisfy changing consumer demands increase the need for ready money.
The right skill set key to growth ambitions
South African executives in middle market companies are convinced that their growth ambitions are inextricably tied to the right skill set. A lack of skilled talent is named as the third-greatest challenge to growth, cited by 15% — above the rest of BRICS (8%) and elsewhere (14%). And 35% say an ideal organisational culture is one that attracts younger, digitally native talent.
More than four out of 10 (43%) South African respondents plan to increase their full-time staff numbers — in line with the rest of the BRICS (43%) but above elsewhere (38%). However, three out of 10 (30%) are more cautious and are looking to maintain current levels, versus 22% in the rest of BRICS. As globally, gig hiring is down, with only 8% planning to hire contractors or freelancers.
“The reality in South Africa of our youthful population — with 47% of the country’s 56.5 million people under 25 — may exacerbate the country’s skills challenge and explain why demographic shifts are cited as the most disruptive force facing businesses,” explains Omar.
“However, we continue, in South Africa to be placed as a diversity leader among the global cohort. With 15% of respondents’ CEOs being female, versus 3% for the rest of the world, this proportion looks set to rise even further, with almost half (46%) putting diversity at the top of their hiring priorities, compared with 41% for the rest of the world,” says Omar. “As we mark Women’s Day in South Africa this year, this is a notable achievement for the South African middle market, with many more opportunities for women business owners in the future.”
Meanwhile around the world, EY’s global data in this survey confirms that women-led companies are significantly affected by a lack of funding, with 18% citing access to capital as a major barrier to growth, compared to 11% of their male-led peers. However, 30% of female-led companies are targeting growth rates of more than 15% in the next 12 months, compared with just 5% of male-led firms, even though more than half the women-led companies (52%) say they have no access to external funding.
Omar says: “The funding gap matters because companies with high-growth potential that do not secure early investment can have a harder time scaling-up, and much of the time, these companies are led by women. Financial support for women-led businesses represents a major challenge and only a handful of organisations around the world are focused on supporting the growth of women-led businesses. In South Africa, this narrative is different, and we look forward to seeing the acceleration of more women owned businesses in this country.”
View the report online at ey.com/growthbarometer/southafrica
