BACK TO SOUTH AFRICA
BUSINESS RETURNS, WITH A WARY EYE, TO EX-PARIAH STATE
March 21, 1994
By BY VERONICA ANDERSON Chicago Business
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On a handshake, the chief executive of Leo Burnett Co. strikes a deal to hook up with a Johannesburg advertising agency. Sara Lee Corp. becomes the largest U.S. employer in South Africa when it buys Kiwi Brands SA, a Durban-based shoe polish company it had dumped during the height of the sanctions movement in 1986. Playboy Enterprises Inc. launches a South African edition of its namesake magazine-the product of a recent licensing agreement with a South African publishing giant. Hyatt International Corp. lends its name to a 248-room luxury hotel scheduled to open in a posh Johannesburg suburb next year. Call it the return of the prodigal companies. Make that tentative return. Big Chicago names are returning to South Africa, helping make seven years of U.S. economic sanctions a distant memory. But they're holding tight on the purse strings, awaiting the country's first post-apartheid elections, on April 27, and hoping that Africa's largest economy will survive its most revolut!
ionary political challenge. Instead of making major investments in manufacturing facilities, many Chicago and U.S. firms are opting for smaller commitments: setting up sales offices or joint ventures, for instance, or signing licensing agreements, distribution deals or other forms of non-equity agreements. Such arm's-length deals may disappoint some champions of investing in South Africa. But others say it's at least a starting point. Besides, the mere presence of U.S. companies may be enough to prop up other foreign investors' confidence. "It's crucial to the future of the whole region to see American investors go back to South Africa," says longtime Chicago anti-apartheid activist Prexy Nesbitt. "(South Africa is) catalyzing all of Africa in a new way. Africa lacks that kind of base now." In the long run, South Africa and its 40 million people require more economic support. The new government will inherit a $103-billion economy battered by a decade of pariah status and !
an unemployment rate widely estimated at around 40%. "We need !
investment in the country that's going to create jobs, turn raw materials into a product," says David Altman, president of Made in USA Inc., a New York trade show promoter that drew nearly 200 U.S. businesses to a Johannesburg event last fall. For now, however, many Chicago businesses are content with toehold status. Leo Burnett can exercise an option next year to take a 26% stake in Sonnenberg Murphy & Leo Burnett, its new South African affiliate. But the Chicago agency has no plans this year to invest additional money or dispatch employees. The impetus to return comes after several major clients, including Procter & Gamble Co. and Reebok International Ltd.-announced plans to do business in South Africa. "We are very much client-led," notes Kerry Rubie, a Burnett group vice-president who oversees offices in Latin America, Europe and the Middle East. Also in South Africa's favor: a mature advertising market and economic infrastructure similar to America's. "Despite sanctions!
," Mr. Rubie explains, "it's consistent with what you see in other industrial countries." Playboy isn't pumping much new money into South Africa, either. Its licensing deal last year with Johannesburg-based Times Media Ltd. will reap an undisclosed percentage of ad sales and circulation revenues for the Chicago company. In return, Times Media gets the Playboy name and editorial content, which may be edited for a South African audience, says Playboy's U.S. publisher, Michael Perlis. For example, the December/January issue contains an interview with Joe Slovo, chairman of the South African Communist Party and the "one white man many South Africans . . . profess to hate." Greater presence Not all Chicago corporations are maintaining their distance. Sara Lee is returning to South Africa bigger than when it left: Only 203 people worked for the Kiwi shoe polish division Sara Lee sold in 1986; now, Kiwi is a $130-million company that employs 4,600 people and owns South African Hos!
iery Co. and Avroy Shlain Cosmetics Ltd. U.S. sanctions didn't!
drive Sara Lee from South Africa. "Our reason for leaving was shareholder complaints," says Chairman John H. Bryan Jr. Still, the two companies maintained close contact. Kiwi technically was sold to a Swiss trust, but its acquisition strategy in the late 1980s and early '90s clearly mimicked Sara Lee's. Sara Lee influence Concedes Mr. Bryan, "I don't think anyone ever thought this little shoe polish company was going out and buying (major companies) without a nod from us." The January reacquisition won't pump significant new money into South Africa's economy yet. "The emphasis will be on consolidating the current business and maximizing its potential," says Denis Shelley, Kiwi's managing director, from his Durban office. Kiwi has no immediate expansion plans for its operations' seven factories. Five years out may be a different story, but it'll be up to Sara Lee headquarters. "They have to be pragmatic about the political outlook," says Mr. Shelley. "They'll wait and see." !
Beyond the world of multinationals are small and mid-sized companies clamoring for a piece of South Africa's emerging markets. "I am surprised at the level of enthusiasm, in light of the (pending) elections and the uncertainty about that," says foreign trade attorney Peter Powles, a partner at Chicago's Baker & McKenzie who grew up in East Africa. About 70% of clients calling Mr. Powles about South Africa want to re-enter or buy back divested companies. ("Now, American companies can go over with a clear conscience," he says.) The other 30% are smaller firms looking to do business there for the first time. Six small businesses here recently signed on with Chicago consultancy
QED International L.P., a joint venture of accounting firm Friedman Eisenstein Raemer & Schwartz and local South African-born attorney Hadley Donenberg. African-American-owned firms seem especially eager to stake a position with South Africa's black consumers. Beauty products makers Soft Sheen Products !
Inc. and Luster Products Inc. both are setting up distribution!
and sales outlets there (see related story on Page 24). "This is very much the right time to go back," says activist Mr. Nesbitt. "Companies that show sympathy to the aspirations of the majority population will have a head start." Trade has been increasing since 1991, when President Bush lifted federal sanctions. (U.S. exports to South Africa in 1992 totaled $2.4 billion, with $137 million originating in Illinois, according to the latest data.) More boosts followed the ending of all remaining trade barriers by President Clinton, and Commerce Secretary Ron Brown's extension of federally backed trade insurance to help protect U.S. companies. Removal of sanctions Most significant, however, was Nelson Mandela's United Nations speech last year calling for the removal of sanctions. By mid-January, 72% of 183 state and local sanctions had been repealed, including those by Chicago and the state of Illinois. Not that sanctions and social stigma had deterred all U.S. companies. Arth!
ur Andersen & Co. opened its first office in South Africa in 1966 and never left. Its 650 employees there today are spread across four offices, in Johannesburg, Cape Town, Durban and Port Elizabeth. (Andersen officials in South Africa and Chicago decline to comment.) Amsted Industries Inc., a Chicago rail products firm, acquired a company in 1986 that operated a manufacturing facility for heating and cooling equipment. Sales for the Cape Town unit of its Baltimore Air Coil Co. have slowed, but a spokesman says the firm was smart to stay. "Companies that pulled out have a hard time re-establishing themselves," he says. "And we felt that we could do more to bring about change by being here." Similar sentiments are echoed by Caterpillar Inc. and Deere & Co. Although influential shareholders asked Caterpillar to divest, the Peoria-based heavy equipment manufacturer-which has been operating in South Africa since 1962-kept its 80-employee replacement parts warehouse in operation.!
"We felt we could . . . promote a racially harmonious society!
," says a spokesman. Moline-based Deere makes tractors and tilling equipment at a 150-employee plant in Nigel, a farming town southeast of Johannesburg, and sells construction and industrial equipment through its 52-worker Terraquip distributorship in Johannesburg. Instead of pulling out, Deere officials signed onto the Sullivan Principles, a voluntary set of rules for companies to lead by example in pushing for social change in South Africa. Business slowed considerably during the economic crunch, says Terraquip General Manager Johan Louw, but he predicts business will mushroom after the election, when work is expected to begin on massive "upliftment" projects, such as construction of houses for black South Africans. "We're ready to move right ahead, heaven help us," Mr. Louw says. "A lot of things are improving here. For one, the business climate is improving. It has to improve." Even as South African society rejects apartheid, uncertainty about civil unrest is forcing Chi!
cago firms into a cautious stance. "We've been taking more of a laid-back position on South Africa, waiting for elections to take place," says trade consultant Milam Fitts, president of Chicago International Development Corp., adding that he steers clients toward neighboring states, such as Namibia and Botswana. Besides possible violence in South Africa, firms fear too much government intervention, says Baker & McKenzie's Mr. Powles, noting that Mr. Mandela-the country's likely new leader-has not ruled out government roles in some industries. Nevertheless, going back is not a major risk for multinationals like Sara Lee. "I'd be scared to death if (Kiwi SA) was our whole business," Mr. Bryan jokes. John Koppisch in Johannesburg contributed to this report.
South Africa's 75%-black population offers an estimated $115-million market for at least two of Chicago's black-owned hair care products companies. "We have a majority market for a change," says Reginald Maynor, i!
nternational sales manager of Chicago's Luster Products Inc. W!
hile privately held Luster has had a longtime interest in South Africa, the company waited until economic sanctions were lifted late last year before striking a deal with a black-owned South African distributor. Now, Luster is mulling a plan to manufacture its hair grooming products there. Meanwhile, Soft Sheen Products Inc. has taken a different tactic. Since the Chicago firm opened its office in suburban Johannesburg in July 1992, it has tutored 2,000 black hairdressers during one-day courses at sites ranging from the five-star Carlton Hotel in downtown Johannesburg to some 600 more-modest salons in dusty townships where most black South Africans live. "Before you can use our products, you have to be trained," notes Raymond Smith, managing director of Soft Sheen's South Africa operation. Company officials decline to say how much they've invested in the country. Products now are imported from the States, but Soft Sheen is negotiating to manufacture in-country at a South Afr!
ican division of New Brunswick, N.J.-based Johnson & Johnson. And the home office is putting up half the money for a Soft Sheen-sponsored foundation that will operate a non-profit cosmetology school. Black-owned American companies walked a fine line in South Africa until sanctions were officially lifted. "In the States, we're very high-profile (among blacks)," explains Mr. Smith. "As a company, we believed in the sanctions cause and we did not feel we could violate (Nelson) Mandela's call to maintain sanctions." On the other hand, sitting on the front lines of political change in South Africa has an upside for black businesses from the U.S. Says Luster's Mr. Maynor: "It gives (us) a chance to help with black empowerment. (Black South Africans) have the same wants, needs and aspirations that we have here."