Negotiations in South Africa
With the third-largest economy in Africa, abundant natural resources, and a robust emerging market, doing business in South Africa is increasingly very attractive to foreign investors. This document contains vital elements that will enhance successful South African business negotiations.
Five most important things to know about negotiations in South Africa (if you only read one thing, this is what you should read)
Diplomatic Approach. It is very important to be diplomatic and remain calm during negotiations – avoid saying a direct and final "NO", but do not overly sugar-coat your responses. Demonstrate the willingness to make compromises.
Leverage Relationships. Good relationships can benefit you when negotiating in South Africa. Discover the essential players that can determine the outcomes of negotiations and begin to build relationships and trust with them. Decision-makers often favour persons with whom they have prior relationships and trust.
Be Patient with the Pace of Negotiations. Hurried negotiations are usually associated with fraud and fake / low-quality products. Sometimes your South African counterparts might use lengthy negotiations to vet your credibility. Expect a lengthy negotiation and be patient through it.
Be aware of the price-consciousness. Don't step in with very high pricing: it could drive the other party to seek alternatives. Adjust your pricing to the range in the local market.
Show strength - but seek a win-win situation. Structure negotiations to make the other party believe they are getting more than you are from the deal. Start the negotiations with enough room for concessions.
Despite being the third-largest African economy, South Africa (often referred to as "SA") is the most industrialised country and one of the most developed nations on the continent (Kamer, 2022; Thopil, 2021, p. 253; and GEIDCO, 2019, p. 96). Its key industries include agriculture, food processing, financial services, business process outsourcing, industrial manufacturing, mining, and tourism (Creamer Media, 2021; Pariona, 2018). Several factors like its demography, diversiﬁed, productive and advanced economy, abundant natural resources, transparent legal system, and political stability make SA a more popular destination for foreign visitors and investors, compared to other African countries. Although it runs a mixed economy, SA's dynamic business community is market-oriented and driving economic growth. SA, therefore, offers ample opportunities, attracting investors seeking a comparatively low-risk entry-point into Africa, the continent with the world's fastest-growing consumer markets.
Prospects aside, the country suffers from a high crime rate – the third highest in the world (Business Tech, 2021). It also experiences frequent social unrest (strikes and demonstrations), high levels of corruption, and some structural issues in electricity supply and logistics (Njini, 2022; Orderson, 2022; Reuters, 2022; Winkler, 2021; EXX Africa Insights, 2019; Runciman, 2018). The unclear policies and structural reforms may also worry investors (Friedman, 2021). The legacies of apartheid contributed to some of the social issues mentioned above (Nel, 2022). Apartheid was a discriminatory political system. It favoured privileges to the white South African minority and excluded black and 'coloured' people (most of the country's population) economically and politically.
However, since 1994, the SA government has been working to make South Africa a more attractive destination for foreign investment. It pursues various economic policies to boost the ease of doing business and make the country more investor-friendly (Nel, 2022; Mhlauli, et al., 2015, pp. 203-219). With the massive influx of investments coming into the country, it is essential to successfully negotiate investment terms, contracts, and pricing. This article provides insights on how to do so in South Africa.
Diplomacy is a widespread and vital quality in most African societies (Nam, 2015, pp. 377-381). The considerable significance of hierarchy and the need to belong to in-groups (collectivism) makes it even more essential. Although South Africa is not as collectivist as many other African countries, showing tact and diplomacy is still essential. Being direct in SA is acceptable in different business situations. Still, when negotiating in South Africa, it is advisable to employ some degree of tact and diplomacy. It is best to know your clients/audience to help you better apply emotional intelligence before the negotiation level. Also, avoid saying "No" even in difficult situations. Instead, you could say, "Although it is not usually what we do, we will be willing to renegotiate it". Demonstrating tact and the willingness to make compromises helps negotiations.
Relationships, whether personal or business, could be helpful in negotiations. However, foreigners need to carefully consider how to leverage those relationships depending on the kind of business, context, and clients they are dealing with. For instance, relationships might present a tremendous advantage for negotiations in townships and rural areas in South Africa. However, people tend to place a relatively lower emphasis on relationships in business contexts in urban centres. Nevertheless, decision-makers generally rule in favour of persons with whom they have prior relationships and trust. These relationships take time to build – years in many cases. However, they could last lifetimes when established, providing astounding benefits for both parties. Leveraging relationships could get favourable considerations and help with win-win negotiations as "backdoor", or "offline" negotiations often work better.
Pace the Negotiations (Patience)
Mahatma Gandhi, who incidentally lived in SA for about 11 years (History.com Editors, 2021), once said, "To lose patience is to lose the battle" (Thieme, 2021, p. 115). As with many other issues in life and business, this saying is especially true when conducting negotiations in SA. You might often find the need to be very patient during negotiations. It is best to be patient, expect changes in contract terms and accept delays. These factors could influence negotiations positively or negatively. Negotiations could go quickly depending on the type of business or products being sold or the terms and conditions of the sale. In other instances, it could be a long process with several meetings and discussions. Sometimes, the delays could test your credibility and authenticity – hurried negotiations are usually associated with fraudulent business deals, low-quality brands, or fake products. Negotiations in SA could take up to several months, depending on the type and scale of the business.
Be aware of Price-consciousness
The more significant part of the South African market is price sensitive to a large extent. For over a decade, the country's economy grew sluggishly, deepening price consciousness amongst corporate and retail buyers (Deloitte, 2019, p. 3). Foreign businesses should be aware of this before starting negotiations. You should analyse the market well to know how to price products and services. However, when communicating prices, start with a price that gives enough room for concessions. You should carefully balance this, though: if you present very high prices, you could be indirectly directing your client to look for alternatives. Be careful not to be outpriced. It is best to adjust your pricing to local market realities, except if you offer a unique product. The best ways to do this include visiting the country to get a feel for the market, partnering with a local company, or engaging a consultant to obtain relevant advice.
Show strength – but seek win-win
"Negotiation is a strategic conflict" (Kilgour, 2009, cited in Low, 2020, p. 284). This view is particularly valid in SA. When negotiating, show strength but still seek a win-win situation, especially if you want to establish a mutually beneficial long-term business relationship. Willingness to make concessions is one way to achieve this. Holding on to a strong stance and refusing to budge might be helpful sometimes. Still, it is often better to eventually make some concessions. Hence, as previously advised, start your negotiations with enough room for flexibility and concessions (a 10-20% margin, or as the situation may require). Finally, structure negotiations to make the other party believe they are getting more than you are from the deal. Note that on the Hofstede 6D Model on culture, SA scores high on Masculinity and low on Long-Term Orientation. Therefore, giving your counterpart the impression that they are getting more out of the deal than you could give them a sense of pride and help you clinch the deal.
Short case study
A foreign construction company won a contract to design and build a residential estate for a South African company. The parties agreed that the construction would be completed in four months and delivered to the South African client. On one of their inspections, the client's team discovered some unrequested changes with four buildings. The inspectors were also unhappy about the steel doors, noting that they were not the quality agreed to at the beginning of the project.
The CEO of the South African company demanded that there should be a 30% reduction in the cost of the entire project. After 7 weeks of negotiations, both parties finally agreed to a 15% reduction because of the client's dissatisfaction. The foreign contractor also agreed to address the unrequested changes with the four buildings (since they were still at an early building stage). The CEO of the South African company was impressed by the contractor's willingness to make the cost reduction and the offer to address the changes.
Within the new project timeline, all the construction was completed, the four houses were rebuilt, and the steel doors were changed to the client's preference. The CEO felt the construction company would not have made a reasonable profit on the project and was impressed by their show of integrity and good faith. He decided to give them other contracts and recommend them to his network. Unknown to him, the construction company had included a 20% buffer in the initial agreed-upon project cost. This made it easy for them to make concessions during the renegotiations and cover the cost of rebuilding the four houses.
Resources and interesting links