THE correct understanding of the role of firms and their actors necessarily has to form the basis on which one can properly appreciate the instrumentality of firms in delivering the promise of a better life for all.
I had a meeting last week with a group of professional and business actors that I am mentoring who are members of the National Independent Business Correspondent Association (“NIBCA”) and a I posed the question: “What do you think is the business of firms like BP, Shell, Mobil, Sasol and Engen among others?
The responses were predictable. They all said that the above mentioned firms were in the fuel retail business. My reaction surprised everyone when I said that the firms were not in the business of fuel distribution rather they were in the storage and convenience business.
I was then compelled to explain the reasoning for my strange reaction. My reasoning is as set out below:
The firms are both in the upstream and downstream fuel-related businesses. However, with respect to the retailing aspect of the supply value chain, it is the case that in order to receive fuel, one has to be in possession of a container. The firms involved in the business have to invest in big containers i.e. tanks that can hold bulk volumes.
However, what is contained in the tanks is value in liquid form that is then converted into a cash equivalent when the liquid is discharged to motorists and other users. It doesn’t take a rocket scientist to know that he who has storage has the last laugh in the fuel supply value chain. The liquid product is not created in any form that it can be traded without putting any effort and resources.
The creator was smart not to give any living human being the pin number to his resources and also not to make it easy to convert his gifts into commercially tradeable value without any extra and tangible value add.
It cannot be disputed that inside the big tanks is not a differentiated product but a homogeneous product. It is the case that no such liquid exists capable of being exclusively attached to any of the companies involved in the exchange of cash in liquid form for real cash. In the Engen tank, for example, there is no fuel called Engen. The fuel that is exploited and refined into fuel for sale is ultimately, nothing but a gift from the creator.Advertisement
Firms in the upstream supply value chain extract the oil in crude form and then have to add value by converting the crude or similar products into tradeable products. When one draws fuel from the branded tanks, one is compelled to pay for the volume drawn from the big tank. This process takes place until the fuel in the big tanks is exhausted.
The process of exchange is no different to the Cash & Carry or Pick N Pay principle that is applicable to all commercial transactions. In the case of Cash & Carry, it means that without tendering cash, one is not permitted to carry anything from the store.
With respect to Pick N Pay, the concept is equally the same, if one picks, then one has to pay, if one doesn’t pick, then no obligation can be legally imposed on the person to pay. If one picks and doesn’t pay, then what is true is that tomorrow there may be nothing to pick as the goods on the shelves originate from the efforts of others who would have spent funds to create the goods in a form that can be exchanged for cash.
On the morning of 19 July 2015, I bumped into two friends; one of them is an employee of the Builders Warehouse, a wholesaler of building materials that is under the Walmart’s subsidiary, Massmart stable, and the other is involved in a housing construction business.
I was informed that the gentleman involved in the construction business recently got a subcontracting job to construct 2,000 houses. The challenge is that the construction company does not have the required working capital to construct the houses. The construction guy was so excited to meet as he thought I could add value in his business especially with respect to assisting in the mobilization of funds.
I told the two gentlemen that it is not easy to raise contract financing as the tricky issue concerns the inherent performance risk related to construction projects i.e. if the contractor fails to deliver the promise as set out in the contract. If the contractor fails to perform, then the credit providers will be left financially exposed as the funds would be in the form of unfinished construction works.
In addition, I made the point that big construction firms like Murray & Roberts are not really in the construction business as their core business is more related to the financing of construction jobs. They can use their financial clout to raise funds in the market and can also optimise their supply chain value system.
It is always the case that bulk purchases attract discounts yet it is often the case that small and medium scale businesses pay more for the goods and services than bigger firms. The market disadvantages inherent in SMME businesses cannot easily be cured. The alternative lies in SMMEs to organise their affairs in a manner that permits them to buy at the same or better prices than the bigger firms.
However, although the concept behind firms like Old Mutual was to allow individuals to use their spending on insurance and related products to advantage, it is the case that ignorance of supply value chain economics is the real elephant in the room rather than the perceived role of the purported “white monopoly capital.”
It is always difficult if not impossible to help unorganised business actors. On the surface, it appears that the white business actors acquired their advantage from the pre-democracy era but in reality one cannot doubt the applicability of the universal principle that scale matters in trade.
The substitute to economies of scale is higher costs and in any competitive world, it is a natural and predictable outcome that SMMEs will always pay more for less. It is not unusual for political actors to misconstrue their true purpose in the human value chain by calling for economic freedom and seeking to intervene in market transactions.
In any market, transactions that are originated and executed between independent and sovereign consumers do not call for, let alone, justify the involvement of third parties on behalf of a presumed weak and willing market participant.
It is the case that market power does not require any slogans to prove its existence and utility. Market power is a direct consequence of economies of scale. The retail approach to African commerce has its financial consequences. The fact that the colonial experience has failed to generate the required literacy and actions to reposition black business actors correctly in the value chain to match their political power, is not a result of any conspiracy.
If one were to correctly and critically examine the question of economic freedom and its true conveyers, one would conclude on the basis of empirical evidence that persons like Mr. Raymond Ackerman ought to be regarded as “economic liberators par excellence” for demystifying the misunderstood purported trading secret by creating scale that translated into lower prices for the consumers.
In fact, the emergence of big outlets who stock cash in bulk in the form of goods has allowed smaller players to access goods cheaply and, in turn, pass on the benefits to the end consumer. The majority of the people who pick in Pick N Pay are black and they flock to the so-called “white companies” not because they are delusional but because they understand the value inherent in the model. Surely, the failure of the post-independence era to produce a “New Mutual” cannot be faulted on whites.
The idea of exchange of value was twisted by Karl Marx to help explain his theoretical propositions yet when properly understood the idea simply represents the ability to trade an asset, such as money, for goods and services. Money has no “value in use” and for the financially literate, it would be self-evident that in itself money is only useful in its ability to represent value in exchange.
With respect to the state of affairs in the post-colonial era in so far as labour relations is concerned, it then becomes clearer that the notion that white monopoly capital has anything to do with the triple challenges of poverty, unemployment and inequality is misplaced and mischievous.
It cannot be rationally asserted that, in any society in which the idea of exchange of value is entrenched, that at the point of sale there can be no better substitute for the principle that one who tenders cash has to receive the equivalent in goods. Any alternative would generate chaos and the person who would then suffer in the main would be the very workers who weekly or monthly exchange their time at work with an equivalent value depending on market forces for cash.
It is the cash received in the form of wages and salaries that would allow workers to pick and then be able to discharge their obligations to the persons involved in the supply value chain. Even the most ardent proponents of communism would agree that the system failed not because of the purported conspiracy of Western nations but due to its bankruptcy in terms of founding principles and values.
In Communist/Socialist nations, it was the case that shelves were empty because there existed no incentive for suppliers to supply without being paid a market-determined price. One often forgotten fact is that no society composed of forward-leaning persons would subscribe to an ideology that assumes the foolishness of suppliers in order to be operable i.e. suppliers whose pricing policies were administratively determined yet their costs were incapable of being administratively determined in a sustainable manner.
In South Africa, the ideological battle lines based on ignorance in the main has had its toll on business confidence and productivity. Who is going to train the unions? We all have a duty to add our little knowledge on what matters.
If you find the above of interest, please join us at NIBCA www.nibcaportal.org, not-for-profit and non-partisan association of members established to promote awareness of the role of business in building societies that work for all.
NIBCA stands for the National Independent Business Correspondents Associations (NIBCA) an organisation established in terms of the laws of South Africa as a platform for members to share experiences, knowledge, ideas and insights into the supply value chain system and how plugging into the system can add value to the enterprise of life.