The chemical industry in South Africa: strategic change resulting from economic liberalisation in 1994

Abstract

The research study was carried out in order to detennine the influence of competitive shocks on developing countries and specifically on an industry of such a country. This study focussed on the South African chemical industry in order to detennine whether it changed as a result of the competitive shock which was brought about by the first democratically elected representative government in South Africa, in April 1994, and specifically how and why it changed in response to economic liberalisation which was brought about by the competitive shock. The responses of three of the main players in the South African chemical industry were researched over a period of fifteen years, firstly from 1984 to 1993 before the onset of economic liberalisation end then for the period 1994 to 1999, five years after the onset of economic liberalisation. A third objective of the study was to detennine the South African chemical industry role in a global chemical village and to develop a sense of future competitiveness. The research study comprises six chapters. Chapter 1 is an introduction to the study end provides a bac.kground to the study. It defines the problem statement and research objectives es well es the scope of the study, outlines the methodology used and sets out a framewont within which the study was done. In the second chapter, an overview of the theory on economic liberalisation end competitive shock is presented. Chapter 3 describes the methodology used for the research report and contains the design of the research study, the method of data collection and the method of data analysis that was used in the study. Chapter 4 contains an analysis of the South African chemical industry pre- and post economic liberalisation and uses strategic tools such as Porter's diamond, Porter's five forces and Ghemawat's predictive framewont for change in key elements of an industry structure. Chapter 5 is written in the fonn of a case study. The condusion drawn in the last chapter finds that three of the four detenninants of Porter's diamond, organisational strategy, struc:ture and rivalry; demand conditions and related and supporting industries indicate a negative influence on the South African competitive advantage. The exception was found to be fador conditions as a result of South Africa being well endowed with minerals, unskilled labour and agricultural resources and has a well developed basic infrastrudure. It was found that government's influence is significant, although mostly negative. In terms of competitiveness in the South African chemical industry it was found that changes in three of the five forces occurred during the period of the study. They were threat of new entrants, rivalry amongst competitors and baigaining pawer of suppliers. Wdh regard to threat of new entrants it was found that entry baniers were lower. Rivalry changed in terms of industry growth which has increased since economic liberalisation and is forecasted to grow into the new millennium, and in tenns of proclud differences which are evident from the strategies of players in the industry to move towards value edded dlemicals and nidle markets. Baigaining power changed since economic liberalisation as the number of suppliers increased as a result of the lifting of sanctions and the government is decreasing import tariffs in line with GATT. It has also been found that as a result of a change in strategy amongst the main South African chemical players to move towards value added products, the baigaining power of Sasol Ud, in particular, has inaeased as it is both a major player and supplier of raw materials to the market. It was found, with regard to Ghemawat's predictive framework for changes in six of the key elements of an industry, that changes had indeed occurred as a result of economic liberalisation. The six elements were entry rates, concentration levels, foreign presence and diversification in tenns of vertical, horizontal and geographical scope. It was found that entry rates have increased since economic liberalisation, in line with the predictive framework. Concentration levels also increased during the period since the onset of economic liberalisation and in this regard the C3 ratio increased fonn 56 % in 1991 to 80 % in 1996. Foreign presence also increased as predicted by Ghemawat's framework. Wdh regard to diversification it was expected in line with Ghemawat's framework that geographical scope and horizontal scope would reduce and that vertical scope would first increase and then decrease as the economy develops. It was found however, that geographical scope increased globally and reduced locally and that horizontal scope decreased in line with Ghemawet's predictive framework. However, it was also found that much of the reduction in horizontal scope resulted from a change in company strategy which happened in the earty nineties and therefore before the industry experienced the competitive shock. This was as result of a trend to focus on core competencies and which had already started during the late eighties. It also innuenced the South African chemical industry and as a result many of the main chemical players divested from non-core businesses which resulted in a reduction in horizontal scope. Lastly it was found that little change in vertical scope occurred, and that where it happened, in most cases it resulted in a decrease in vertical scope, once again often related to company strategy and not necessarily as a result of economic liberalisation. The study found that all three main players changed during the period of the study, as a result of economic liberalisation, but not solely as a result of economic liberalisation. The study also found that the South African chemical industry can successfully compete in the global chemical village, especially where players have an advantage regarding technology and local raw materials and can use this to compete globally. Lastly the study found that South African chemical players need to be pro-active in forming strong strategic alliances and joint ventures with international companies, as the wor1d chemical market is in a consolidation phase and it is viable for a multi-national company to enter the market through an acquisition of a South African chemical company, as was the case with Sentrachem being taken over by Dow Chemical Corporation. In conclusion, the South African chemical industry did indeed change as a result of a competitive shock which brought about economic liberalisation. However, it did not change solely as a result of economic liberalisation.