Back to South Africa

Dec. 21, 2004
U.S. firms are returning at twice the rate of their European and Asian competitors, but doing business in the country presents challenges -- crime, an unskilled workforce, and political uncertainty.

South Africa hogs the superlatives. It boasts vast reserves of gold, platinum, and diamonds. It is Africas most advanced economy, with more cell phones, computers, and cars than any other country on the continent. At $227 billion, its gross domestic product is almost twice that of Egypt, Africas next largest economy. Financial capital Johannesburgs $280 billion stock exchange ranks among the worlds top 10. "Everything that happens in South Africa is larger than life," points out British author Anthony Sampson, who is writing the forthcoming authorized biography of Nelson Mandela. "Any problem is magnified in South Africa, but that always makes the resolutions more spectacular." Seeking to capitalize on South Africas wealth, foreign companies are hurrying to establish operations there. Foreign direct investment has increased annually since 1994 when Mandela became president in the nations first democratic election. The U.S. accounts for the largest share with more than $2 billion in commitments. Every month at least six U.S. companies set up offices or locate employees in the country -- at twice the rate of other foreign firms. Some U.S. companies, having pulled out in the 1980s to protest the government policy of apartheid, are returning. "Before disinvestment South Africa was always one of Goodyears most profitable subsidiaries," says Mike McNamara, managing director of South Africa-based Contred (PTY) Ltd. (In 1997 Akron, Ohio-based Goodyear Tire & Rubber Co. bought a $121 million controlling share of Contred.) "The automakers are pouring in," adds Paul Shippey, country manager for Ford Motor Co., which returned in November 1994 when it formed a joint venture with Anglo American Corp. Ltd. "Five years ago there were 12 types of cars on South Africas streets, now thats up to 38," Shippey estimates. Similar to Goodyear and Ford, most U.S. companies are reinvesting, expanding existing facilities, or acquiring equity in local corporations. Some 227 U.S. companies purchased equity in South African firms, and 47 have nonequity ties, reports the Washington-based Investor Responsibility Research Center. Microsoft Corp. is a newcomer. The company opened its first office in Johannesburg in 1992 with a handful of employees, and it now employs 70. Its Windows software is the standard operating system in 50% of the countrys computers, estimates Mark Hill, Microsofts general manager. The U.S. lifted its sanctions against South Africa in 1991, but Microsoft did not return until it was satisfied the country was on a path to democratic transformation. "The company spent a lot of time talking to different stakeholders, including the African National Congress [the party of Mandela]. Once we realized change was irreversible, we decided to open an office," explains Hill. Other firms waited longer than Microsoft, wanting to be sure South Africa was both stable and ready to welcome foreign business. Four years after his election, Mandela is credited with giving executives -- both foreign and local -- some measure of assurance. "Before the election one constantly wondered [if there would] be a revolt or rebellion. For the first time we have an indication of where South Africas heading," says Fords Shippey. Executives also credit the Mandela government with business-friendly policies and improving labor relations by introducing the new Labor Relations Act. The nations labor costs are more competitive now that the number of strikes are down. In 1997 there were half as many days lost to strikes as in 1995. South Africa has lifted import tariffs and introduced incentives to encourage foreign firms to manufacture in the country. With Merrill Lynch & Co. Inc. as advisers, the government is selling off a handful of state-owned monopolies including South African Airways. The countrys currency, the rand, is undervalued, which is a boon for manufacturers selling goods in dollars, but covering costs in rands. "Since Mandelas election weve seen the market open up. The government is aware of the dangers in inflation [now about 8%] and has been taking decisive measures -- implementing controls to limit consumer spending -- when [it sees] inflationary pressures," explains Thomas E. Evans, president of Tenneco Automotive, which in May 1997 announced a joint venture with South Africas Armstrong Holdings Ltd. to manufacture vehicle parts. U.S. companies returning to South Africa find a new market dawning. During the apartheid years, foreign manufacturers targeted the part of the population with disposable income: about 6 million white consumers. Today U.S. corporations seek to sell goods to a growing black middle class. Some 6% of the countrys black population (which makes up 75% of the countrys 42 million population) are considered middle class. Black professionals today control 10% of the stock market. U.S. companies also are looking at the continents southern tip as a springboard to the rest of sub-Saharan Africa, but recognize turning profits will take time. Executives expect to wait 10 to 15 years before making money in countries "south of the continents bulge," as Microsofts Hill sees the potential market. Firms are focusing on countries in the Southern African Development Community -- a trade group made up of 12 nations including Namibia, Botswana, and Zimbabwe with a total population of 130 million -- as the most promising because of their proximity to South Africa. "The Zambian economy is looking more positive. There are opportunities in Zimbabwe. Malawi and Nigeria have tremendous potential," points out Goodyears McNamara. Certain manufacturers even use South Africa as a base to export to Europe. Goodyear sends nearly 1,000 tires a day to the continent. Ford won an Export Achievement Award, given by local governments for selling abroad some 120,000 engines manufactured in its Port Elizabeth facility. Only 1% of sales of Dortmund, Germany-headquartered Deutsche Magnet Technik, which manufactures magnets in Isithebe, South Africa, are local. Most of its magnets are shipped to England, Germany, and other countries in Western Europe. It invoices its European customers in their local currency so even if the South African rand dives in value, the company makes money. The government rewards Deutsche Magnet for this arrangement in incentives, because it brings foreign reserves back to the region. However, some companies have not found what they hoped for. New Age Beverages, a U.S.-backed Pepsi Cola bottler, pulled out of the country only two and a half years after it entered in 1994. Local business analysts blame labor problems, mismanagement, and tough domestic competition for its demise. Social and political uncertainty threaten South Africas fragile stability. In July the reverberations of the Asian crisis hit South Africa, causing the rand to fall 25% against the dollar. In late September it had appreciated from rock bottom by 10%. The nation has an explosive racial mix. Whites make up 12% of its population and control most of its wealth. Blacks, which represent three-quarters of the population, bear the countrys problems disproportionately. There is a lack of adequate housing. As many as 2 million blacks are homeless. Foreign companies entering the country will likely have to provide housing or allowances for some employees. Blacks make up most of the countrys unemployed. Until recently they lacked the same education opportunities as whites, reflected in the fact that only 62% of the population holds the equivalent of a seventh-grade education. Companies that enter South Africa need to train workers in such basic skills as reading and math. Ford hired 12 teachers when it learned almost 80% of its workforce could not read or had trouble with simple arithmetic. Goodyear focuses on technical and computer skills. Microsoft has spent more than $200,000 to set up two digital villages -- computer equipped buildings in traditional black townships -- to teach people how to use computers and the Internet. Twenty computers in each site are equipped with entertainment, small-business, and educational software. "Unemployment is over 75% in these areas. We train local people to use computers and then staff the facilities. We pay their salaries and expenses," explains Microsofts Hill. Taking a different tack, some manufacturers are turning to electronic equipment to control machines, rather than train unskilled workers to perform the same task. As a result, sales at Rockwell Automation, which opened its first office in South Africa in 1995, are booming. During the apartheid years whites held the whitecollar jobs, and blacks held the bluecollar jobs. Today companies practice affirmative action known locally as "equity in South Africa," says Gerhard Stander, economic counselor at the Embassy of South Africa in Washington. American companies should know that they must play a key role in integrating blacks into the economy, he explains. Local companies have grappled with affirmative action for the last five years and many have blundered. Since blacks lacked the same education as whites, they often didnt possess the same work experience. Some firms made the mistake of installing black employees who lacked the skills to perform the jobs they were hired for. The results proved disastrous. "It was tokenism, and it failed," believes Boston-based Advanced Manufacturing Research Inc.s senior analyst Roddy Martin, who was born and raised in Johannesburg. "South African businesses forgot that the purpose of business is to be profitable." What seems to work is the system conglomerate South African Breweries Ltd., Martins former employer, has put in place. South African Breweries concentrates on developing black managers and bringing them up through the ranks so they understand principles of business. "As a former chief engineer there, when I interviewed black and white engineers with the same qualifications and potential, but if the black engineer had less experience, I would take the black engineer and then give him six months to get that experience," explains Martin. The most difficult problem managers face is not corporate integration, but crime. Private security firms thrive as citizens try to protect themselves. Johannesburg has been crowned the worlds murder capital. Companies in the city post armed guards at the front doors of their factories and at other strategic points. "Theres a sentiment that the government isnt in control when it comes to crime," admits Fords Shippey. "The policing system is old, riddled with corruption. Policemen in South Africa face the highest danger in perhaps the world of being killed on the job, and theyre not well paid." Corporate crime also flourishes. Microsoft suffers from intellectual-property theft. Half the software on the South African market is pirated -- down from 80%, estimates Microsofts Hill. The threat to its intellectual property is so bad that Microsoft has hired private investigators to help local police crackdown on pirates. "We train police on what software is. We train them how to use computers," Hill explains. Microsoft even organized a donation of 20 computers to the police force and has plans to give more. Despite these difficulties, executives express optimism about South Africas future. Last May the government announced it had engaged international risk-management and security firm Kroll Associates Inc. to assist local police forces and the military to battle an estimated 200 organized crime syndicates operating in South Africa. Mandela has announced his plans to retire, and local businesspeople praise his chosen successor, Deputy President Thabo Mbeki. Although not as charismatic as Mandela, Mbeki is regarded as an excellent administrator. "Mbeki is much better qualified to run the country than Mandela was. He has an international outlook, and where hes been most effective is reassuring local industrialists. He talks to them in their language," points out Mandela biographer Sampson. Mbeki already is known to run the governments day-to-day operations, and executives credit many economic reforms to him. The nations success hinges on those who choose to help rebuild it. In some professions the brain drain has been devastatingly high. One local accountant estimates that 90% of his university classmates are now living overseas. Microsofts Hill, a native South African, left his motherland to make a life for himself in the U.S. "I relocated my family to Seattle with plans for a new lifestyle, but Microsoft asked me to go back to South Africa, and I couldnt resist," he says. "Theres a certain thrill to live and breathe the changes happening here. You cant get it anywhere else."

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