Doing Well By Doing Good? Not In South Africa

Simon Steward's Chase Manhattan Bank led many U.S. banks in deciding not to renew loans to South African borrowers in 1985. The resulting debt crisis helped push the system of 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.

A virtual Who's Who of American companies, including banks such as Chase, 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. An attractive lifestyle is an added lure for executives.

But those companies that heeded the anti-apartheid movement's call to divest aren't getting a leg up. It's not just white Afrikaner resentment, either. Even Mandela's African National Congress, which dominates the government, isn't rewarding companies that helped it win power. Morgan Stanley & Co. representative Beth Nandel says companies find that 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 the reality of it is that from a practical business standpoint, you are behind." Morgan Stanley was the first U.S. investment bank to open in South Africa last year.

SEE NO EVIL. The new government says it doesn't want to show favoritism because it is bent on shedding 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 of the country, 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 the case of Toys `R' Us Inc., a local company replicated its concept down to the mazelike store layout--as allowed by the South African law of the time. In other cases, competitors from Europe and Asia took advantage of U.S. departures to write long-term contracts and 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 the Investor Responsibility Research Center (IRRC) in Washington. Much of the vacuum was filled by German, British, and Japanese companies. But since President Bush lifted the prohibitions on new investments in 1991, the number of U.S. companies with direct links has risen to 208, says the IRRC. Counting those with nonequity interests, the number is nearly 500.

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 closed up shop, thus abandoning 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. Ten years after Apple ceased all sales and service, Proudfoot finds that rivals and their IBM-compatible systems have a "virtual stranglehold." Apple has 10% of the PC market worldwide but only about 1% of South Africa's.

Because Apple is locked out of most corporate accounts, it is concentrating on education and publishing. It has enjoyed success with the Argus newspaper publishing group, which is converting to an Apple platform for its editorial systems. Apple has been able to sign up three distributors and build a network of about 80 dealers countrywide.

The way IBM remained in South Africa without alienating U.S. shareholders was to divest its subsidiary into an entity called the Information Services Group (ISG) in 1987. ISG made IBM's full product line available. Managing Director Willie Scholtz, who has been with IBM South Africa in its various forms for 22 years, says there was an arm's-length relationship because local executives were cut off from IBM's cutting-edge technology.

But the connection still 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 and officially renamed the company IBM South Africa Group. Eleven IBM executives have been brought in to work with 1,600 former ISG employees.

Like Apple, Pepsi is waging a dramatic market struggle against a bigger competitor that maintained a local presence. Coca-Cola Co. sold off local operations in 1986 but moved its concentrate plant to Swaziland, a tiny mountain 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 President 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. "They didn't fully understand we were a startup company, though we have a big name," he says. The incident distracted top managers and soured what could have been a triumphant reentry.

"CARTELIZED." Then, Pepsi found out just how tightly tied its competitor was to what Fandeso calls "cartelized" corporate South Africa. Coke's alliances made it tough for Pepsi to find bottles and cans. "Suppliers have indicated they have other commitments," said Fandeso. Pepsi is bringing in containers and coolers from Mexico and Kenya and says its reentry is on track.

Even American giants such as AT&T face uphill battles in trying to crack the telecom-equipment market. The company will be bidding 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. "We're at a significant disadvantage because we were not here," says President Coleman, whose operation is only six months old.

Beneath the spirit of reconciliation, he senses a subtext of "Where were you?" Some question why they should buy from AT&T now when it wouldn't sell to them before. Others ask why no factory has been built. "We don't expect any red-carpet welcome will be rolled out for AT&T here," says Coleman.

In contrast, some U.S. companies resisted shareholder pressure and maintained a full presence in South Africa. Ingersoll-Rand Co., a maker of mining equipment, defused some U.S. criticism by pumping money into social-responsibility programs and using nonracial labor practices. But it never altered its corporate structure despite 17 years of stockholder-divestment initiatives.

So 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 bring problems for his company. Far from it. Judging from the success he has had with state-backed companies, it's clear there's no blacklist. "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 in the region, with the target around 50%. From $5 million in investment since 1993, Ingersoll-Rand has expanded its South African divisions and already is working its way north with subsidiaries in Zimbabwe and Namibia, distributorships in other sub-Saharan countries, and a headstart on resource-rich Angola, with its incalculable pmtential if the civil-war peace settlement holds.

FREE SHOW. 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, as South Africa's own companies try to gear up to compete globally. "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 out Germany's $4.67 billion, according to the South African Foreign Trade Office. Britain was third, with $4.2 billion, and Japan was fourth, with $3.3 billion.

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


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

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

INGERSOLL-RAND Defied shareholder pressure and is now expanding sales into neighboring countries of southern Africa.

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


PEPSI Facing difficulties getting bottling and distribution going.

APPLE Frozen out of 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.


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