DONALD MACKAY: Smell that coffee: a master plan for localising failure

I just bought a shiny new Nespresso machine. We don’t make Nespresso machines in SA, so my machine was imported.

Here are some of my considerations when I bought the machine: does it make really good coffee? I am a coffee snob, so I like to pretend to myself that I can truly tell a good cup of coffee from a bad one. One of my colleagues even gave me a coffee mug that has “Coffee Snob” printed on the side, so the affliction is real.

Does it look cool? As much as I love good coffee, I have no intention of learning how to operate a real espresso machine. But I like the idea of a machine with that whole steampunk vibe, but that you just shove a pod into.

Finally, how much does it cost? As much as I love my Nespresso, there is a limit to how much I will pay. I am fully aware it is overpriced, but it gives me lots of the good feelies above, so I am prepared to pay the premium. Nespresso tie me into their whole coffee pod racket, which I am 100% aware is a racket, but they sell me a good experience and I am OK with that.

There are a lot of other people like me, hence their profitable business importing and selling these machines. I am not unhappy. Nespresso is not unhappy. This would appear to be a win-win transaction despite my complete awareness that the price is too high.

Now let’s imagine that coffee-making machines are added to the list of 42 priority sectors for localisation. A large duty is slapped on coffee machines (which now attract no duty) and perhaps you need an import permit before you can import a machine.

Enter the First up Coffee Kompany (“Mornings Engaged!” is their tagline), a local coffee machine manufacturer funded by the Industrial Development Corporation (IDC) and the Black Industrialists Fund. Trade, industry & competition minister Ebrahim Patel is overjoyed. When the president gives his next address to the country you can see a Coffee Kompany machine in the background and he is sipping from a branded cup.

Patel brings the CEO to parliament, showing off the entrepreneur and telling everyone how we will be exporting our First Up coffee machines and pods all over Africa; R1.5bn of IDC money has been sunk into the factory and everyone is beaming.

I have no idea how a coffee machine is made, but presumably it requires  some equipment, some qualified people and some less qualified people.  Forklifts, trucks and trade unions arrive. But so does the latest broad-based BEE legislation (including quotas for each level within the company), the Coffee Machine Master Plan, higher minimum wages, electricity price hikes, load-shedding, duties on coffee (because there is also a Coffee Master Plan and anyone selling pods must fill their capsules with at least 50% locally produced coffee or half of their capsules with 100% local coffee).

To ensure only quality employment is created, a Coffee & Coffee Machine Masterplan Oversight Council is created. A quota is placed on the number of foreigners who can be employed by any company that signs  the Coffee Masterplan or the Coffee Machine Masterplan. Audits are done each year by the department of employment & labour. Any company found to keep inadequate records or employ anyone with a suspicious accent (unless they are from outside Africa, in which case it’s OK) faces a large fine and their details published in the Government Gazette.

Retailers are pulled into the discussion, and they “commit” to stocking machines with at least 50% of the stainless steel procured locally and 30% of the plastics, and to sell only coffee pods that meet the local content requirement. They will buy only from producers who are part of the Coffee Industry Bargaining Council.

The First Up Coffee Kompany (Mornings Engaged!) gets its factory running, but it can buy stainless steel only from Columbus as it is the only local manufacturer and there is a 15% duty on stainless steel. They are told they can get this duty rebated if they buy at least 75% of their coffee from local producers. But there aren’t enough local producers of coffee, and to be honest SA-produced coffee is just not as good as coffee from Ethiopia or Guatemala. On the other hand, the duties now in place for coffee make it expensive to import.

Confronted with these circumstances, rather than set up a factory in SA Nespresso instead invests more in its own stores. It sets up more pop-up stores and, rather than get into a price war with the Coffee Kompany, pays the duties, increases its prices and remains in the market.

First Up approaches the Masterplan Oversight Committee and asks for  coffee machines and coffee to be designated so that all government departments now must only buy local coffee. A few months later the Treasury publishes a notice to this effect.

The IDC sets up a training fund to train 500 youngsters on how to insert coffee pods into the machine and press the start button. In the next state of the nation address the president tells everyone about the enormous job creation in the coffee machine sector. The Masterplan Oversight Committee is praised. The president is shocked that the growth in imports of Nespresso machines continues unabated.

Nespresso keeps opening new stores. Three years later the First Up Coffee Kompany (Mornings Engaged!) folds and the IDC writes off R1.5bn.

[The First Up Coffee Kompany (Mornings Engaged!) does not exist. There is no Coffee or Coffee Machine Masterplan (yet). I made up everything about Nespresso apart from the bit about their machines being amazing.]

• MacKay is founder and director at XA International Trade Advisors.