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Doing Worse By Doing Good?


International Business: SOUTH AFRICA

DOING WORSE BY DOING GOOD?

Simon Steward's Chase Manhattan Bank led many U.S. banks in deciding not to renew loans to South Africa in 1985. The resulting debt crisis helped push apartheid toward its demise, setting the stage for Nelson Mandela's election in April, 1994.

But that hasn't helped Chase reestablish itself in the new South Africa. One day recently, Steward met with a white senior member of the black-led government on the golf course. "Oh, you," said the politician. "You're the ones who pulled the trigger." The comment stung because, even though political power may have shifted to a black majority, "the government doesn't give us business," says Steward, the bank's regional director for southern Africa. The economy remains firmly controlled by white powers-that-still-are.

SEE NO EVIL. A virtual Who's Who of American companies and banks are setting up shop or expanding in South Africa these days. They're attracted by a $122 billion economy growing at a solid 3% rate, as well as by the country's relatively First World banking, telecommunications, and transport

infrastructure.

But companies that heeded the anti-apartheid movement's call to divest aren't getting a leg up. It's not just white Afrikaner resentment. Even Mandela's African National Congress, which dominates the government, isn't rewarding those that helped it win power. Morgan Stanley & Co. representative Beth Nandel says companies find their sanctions-era boycotts are "a throwaway line" at best. "You can mention not being here when you see an ANC person in government," she says. "But from a practical business standpoint, you are behind."

The new government says it doesn't want to show favoritism because it is bent on shedding the past inclinations toward socialism and nationalization that made the white corporate sector so jittery. "We cannot turn the clock back," says Alan Hirsch, the Trade, Industry & Tourism Ministry's foreign-investment strategist. "There is no way we can now penalize those companies that defied sanctions. It would be dangerous for us to interfere."

So as ironic as it may be, the more fully a U.S. company pulled out, the more difficult a time it is likely to have coming back in. Some, such as McDonald's, Toys `R' Us, and Victoria's Secret, lost the rights to their trademarks, which have been usurped by local competitors. In other cases, competitors from Europe and Asia took advantage of U.S. departures to entrench themselves in relationships in South Africa's insular corporate community.

Eastman Kodak Co., the market leader in most photographic products when it pulled out in 1987, is now just a "startup company," says Managing Director Jay C. Smith. AT&T South Africa President Franklin Coleman also describes his operation as a "startup," and so does Monwabisi Fandeso, president of PepsiCo Inc.'s new franchise.

In all, 209 U.S. companies sold or closed their South African operations, leaving 104 in the country at the nadir in 1991, according to Investor Responsibility Research Center in Washington. But since President Bush lifted the prohibitions on investment in 1991, the number of U.S. companies with direct links has risen to 208, says the IRRC.

As it reenters, Apple Computer Inc. is at a particular disadvantage with respect to IBM, which maintained a business presence. These days, the response to Apple is not always warm because the company is perceived as having abandoned its customers. "We think it was the right thing, but there is no question that it cost us market share," says Apple General Manager Charles Proudfoot. He says rivals and their IBM-compatible systems have a "virtual stranglehold" in the personal-computer market.

The way IBM remained in South Africa without alienating U.S. shareholders was to divest its subsidiary into an entity called Information Services Group (ISG) in 1987. ISG made IBM's full product line available. Managing Director Willie Scholtz says there was an arm's-length relationship because local executives were cut off from IBM's cutting-edge technology.

But the connection allowed IBM to make a rapid and complete reentry by paying $260 million to buy back a 51.1% share. With $414 million in business in South Africa in 1994, IBM already has jumped to the head of the IRRC's list of U.S. companies by sales. With sales growing at a heady 20%, IBM has opened a headquarters in suburban Johannesburg's poshest corporate neighborhood.

Like Apple, Pepsi is waging a market struggle against a bigger competitor that maintained a presence. Coca-Cola Co. sold off local operations in 1986 but moved its concentrate plant to Swaziland, a tiny kingdom encircled by South Africa. A master licensing agreement went to a South African company, National Beverage Services. When Coca-Cola took back control last year, it had exclusive display coolers in almost every corner cafe and a 75% market share.

Pepsi's strategy was to return to the country with a black-run South African franchise, New Age Beverages, backed by glamorous African-American investors including Whitney Houston, who sang to Mandela at the White House. But unfortunately, hundreds of job-seekers lined up outside its $15 million plant on Johannesburg's outskirts demanding work. The unattractive spectacle, Fandeso says, came from lack of understanding that Pepsi's investment, put at $100 million, would be spread over time. Pepsi also found out just how tightly tied its competitor was to what Fandeso calls "cartelized" corporate South Africa. Coke's alliances made it hard for Pepsi to find bottles and cans, forcing Pepsi to bring in containers and coolers from Mexico and Kenya.

Even American giants such as AT&T face uphill battles in trying to crack the telecom-equipment market. The company will bid to provide 1 million phone lines to previously unserved or underserved regions. But competitors, including Germany's Siemens and France's Alcatel Alsthom, have longstanding relationships with South African buyers, some cemented by 15-year contracts.

DUG IN. In contrast, some American companies maintained a full presence in South Africa. Ingersoll-Rand Co., a maker of mining equipment, never altered its corporate structure despite 17 years of divestment initiatives. When the ANC government took over, Bill Mallory, Ingersoll's local CEO and president of the American Chamber of Commerce, wondered if the new government might create problems for his company. Far from it, judging from the success he has had with state-backed companies. "Our customer base has been extremely positive that we made the effort and sacrifice to stay and continue to support them," said Mallory. Now, Ingersoll-Rand is well situated to make the most of South Africa's new rapport with its African neighbors. Exports make up 35% of the unit's $48 million sales.

There are exceptions to the pattern of rewards for those who stayed vs. difficulties for those who left. One is Compaq Computer Corp., which was absent for several years but now says it is achieving "aggressive growth." And there is optimism that South African markets will open to U.S. products, particularly high-tech ones. "South Africans relate to American technology," says IBM's Scholtz. "Often, people travel to America and say: `Why don't we have this?"'

American TV shows, filled with free advertising for U.S. brands, have been a window to the world for a country in isolation. And with South Africa "in a state where it needs all the foreign investment and job creation it can muster up," says AT&T's Coleman, "they cannot afford to offend any company."

So it is likely that American companies will make continued inroads. The U.S. already has reestablished itself as the country with the largest number of companies operating in South Africa, edging out the British and Germans. In trade, the U.S. regained its pre-sanctions position as South Africa's top trading partner in 1994, with two-way trade valued at $4.7 billion, just edging Germany's $4.67 billion, according to the South African Foreign Trade Office. Britain was third, and Japan was fourth.

But the way the Americans will compete won't be by talking about their anti-apartheid efforts. Reg Lascaris, whose advertising agency managed the ANC's 1994 election campaign, says "people are saying: `Forget the past. Show us the future."' That's precisely what more and more U.S. companies are trying to do.

THOSE THAT STAYED CONNECTED, WIN...THOSE THAT DIDN'T PLAY CATCH-UP

COCA-COLA Maintained a presence through independent bottlers. Now has 75% of market.

IBM Repurchased a former unit, and sales now exceed $400 million a year.

INGERSOLL-RAND Defied shareholder pressure and is now expanding into neighboring African countries.

FORD Repurchased a 45% stake in former subsidiary, and plans new models.

PEPSI Facing difficulties getting bottling and distribution going.

APPLE Frozen out of most corporate sales because customers are now IBM-compatible.

AT&T Siemens and Alcatel locked up key customers.

McDONALD'S Fighting in court to reclaim its brand name.

DATA: BUSINESS WEEKBy Drusilla Menaker in Johannesburg


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