Posts

Opinion: What’s Stopping South African Businesses from Expanding Overseas?

This article was written by Olivier Holmey.

A string of high-profile failures in Western markets has highlighted the brighter prospects that lie in continental expansion for many South African corporates.

Fifteen minutes is all the time it took to wipe out New Frontier Properties’ top brass. Anticipating a fight at the annual general meeting on 24 February, the firm’s executives had come to its offices in Mayfair, London, accompanied by a lawyer.

But the chairman, Franz Gmeiner, promptly asked the lawyer to leave, on the basis that only shareholders and representatives of the business could attend. Minutes later, the 97% of the shareholders present, including Gmeiner, voted to remove Michael Riley, the firm’s chief executive, and Patrick Smith, its finance director, as well as two other directors.

Within hours, all traces of the former directors had vanished from the firm’s website.

The shareholder revolt followed months of turmoil at New Frontier, a real-estate investor listed in Johannesburg but mainly invested in shopping malls in the UK. A tumultuous real-estate market, coupled, investors argued, with serious mismanagement, collapsed the value of the firm’s assets from £192m ($239.6m) in 2018 to £70m in 2019, and reduced its share price to virtually nought.

Big bets, big losses

New Frontier’s ill-fated investment in the UK is just one recent example of South African companies betting big on markets outside Africa, only to see the value of these foreign operations nosedive.

In the UK, Brait, an investment holding company owned by South African businessman Christo Wiese, wrote off its investment in fashion retailer New Look, while Famous Brands, the dining group headed by Darren Hele, wrote down half of its bet on Gourmet Burger Kitchen. Clothing retailer Truworths wrote down more than a third of the £256m it invested into the UK shoe chain Office Holdings, while Intu, the owner of shopping centres in the UK, saw its market valuation crash from £13bn in 2006 to about £50m early this year, before going into administration in late June.

South African corporates have struggled in other developed markets, too. In January, retailer Woolworths fired CEO Ian Moir, who had overseen the 2014 acquisition of troubled Australian department store chain David Jones. David Jones’s profits have halved under its new owner, and Woolworths wrote down half of its £1bn initial investment in the business.

Fuel giant Sasol has faced similar woes in the US, where it aimed to transform into a global chemicals player with the construction of a huge ethylene plant. But the $13bn project has been mired in controversy, with costs surging about 50% above estimates and an internal probe revealing gross mismanagement.

Vanity projects

Some of South Africa’s businesspeople, and observers of the country’s corporate fortunes, have come to see the global ambitions of many businesses as little more than vanity projects. Barring a few exceptions – like the restaurant chain Nando’s and the internet firm Naspers – they say that South African companies have tended to fare poorly in developed markets. They also argue that the country’s firms have a far greater competitive advantage in Africa.

“I agree wholeheartedly with that position,” says Junior John Ngulube, CEO of Emerging Markets at Sanlam. “We want to expand geographically, but we are an emerging-market player. That’s what we know, and therefore our expansion will be limited to other emerging markets. Those are the places where we believe we can add value.”

This vision, which many South African businesses now share, has served Sanlam well. Since the mid-2000s, the insurer has expanded into 33 African countries to become the largest non-banking financial group on the continent. A quarter of its net group revenues now originate outside South Africa, predominantly in Africa.

South Africa’s largest banks have similarly expanded their reach. Standard Bank now operates in 20 African countries, Absa in 10, FirstRand in eight and Nedbank in six. In 2019, Standard Bank’s African operations outside South Africa represented 31% of its headline earnings, up from just 10% a decade earlier.

Beyond banking and insurance, examples of successful expansion into Africa abound. MTN’s transformation into a multinational behemoth owes much to its early push into Nigeria, in 2001. Shoprite launched its first foreign operation, in Namibia, in 1990, and today is Africa’s largest food retailer, with a presence in 14 countries outside South Africa. Shoprite is typical of South African business expansion on the continent, which has tended to start with neighbouring countries like Botswana and Namibia.

South Africa’s direct investment into the continent totalled $10.2bn last year, according to EY’s Africa Attractiveness Report, giving the country’s firms a leading role in continental integration. In 2018, Boston Consulting Group identified 75 African firms driving the continent’s interconnectedness. 32 were South African, though their reliance on foreign markets varied greatly – industrial equipment dealer Barloworld (#26), for instance, derived 26% of its revenue from outside South Africa in 2018, whereas MTN derived 67%.

Analysts say these successes demonstrate that South Africa’s sophisticated businesses can more easily fend off competition from local rivals in Africa than they can in developed markets. Why, then, have the UK, US and Australia drawn so many South African corporates over the years? Speaking anonymously in order to share his candid views on this topic, the CEO of a black-­empowered company listed on the Johannesburg Stock Exchange blames the lingering ideology of apartheid. He tells The Africa Report: “Apartheid had a very strong anti-African tint, looking with a lens that viewed the rest of Africa as a black threat to the apartheid government. […] That propaganda pervaded the minds of businesspeople.”

The lure of London

This disregard for Africa’s economic potential, he argues, has led South African companies into markets for which they were ill-prepared. “You’ve seen big South African companies, like Pick n Pay, like Woolworths, like Old Mutual, like Investec – all of them have had a preference for either the UK and Europe or Australia,” he says. “With the exception maybe of the mining companies, just about every single South African company that has tried to go to Australia or North America or the UK has had an absolute disaster.”

Rob Cannavo, a former South African trade commissioner to Angola, Italy and the UK, sees things differently. He defends the validity – and profitability – of South Africa’s commercial ties to the Western world, in particular to the UK. “Love it or hate it, the historical connection is there,” he says. “London has always been the first port of call [outside Africa].” He cites Anglo American, Investec, Mondi and Mediclinic as examples of companies that started off in South Africa and have now become London-listed giants.

One reason the country’s companies have sought to build operations outside Africa is South Africa’s volatile currency, says Cannavo: “A lot of companies are trying to hedge their earnings.” Western investors are also a strong draw. “There’s a huge pool of capital in London,” he adds.

Challenges in Africa too

He agrees that the African continent is South Africa’s most promising foreign market, with the incentive even stronger now, due to weak growth at home.

That is not to say expansion into Africa is challenge-free.

Ikemesit Effiong, head of research at Nigerian consultancy SBM Intelligence and a former communications adviser to MTN in Nigeria, says tensions between South Africa and Nigeria, which flared up last year, made operations very challenging for a number of South African companies in the country.

Effiong says friends and family called him a traitor to Nigeria because he worked for MTN. “It was actually a very stressful time,” he recalls. “A lot of the criticism is based on prejudice and the natural competition that happens between economic rivals,” he says, but “South African operators support a vast ecosystem of Nigerian businesses, Nigerian talent, Nigerian suppliers.”

South African firms have faced difficulties elsewhere in Africa. In July last year, Pieter Engelbrecht, Shoprite’s chief executive, described trading conditions as “relentless”, as currency depreciation in countries such as Angola, Zambia and Nigeria caused the company’s operations in the rest of Africa to suffer losses. “But given our optimism for the long-term food retail opportunity on the continent, we remain resolute in our purpose to be Africa’s most affordable and accessible retailer,” added Engelbrecht.

Cannavo commends that approach.

“This is the view that you need to have in Africa,” he says. “You can’t go in with a quick and short-term strategy; that’s not going to work. […] If you can ride out the slump in one market, you might have a boom in another,” he argues.

Ken Gichinga, chief economist at Kenyan consultancy Mentoria Economics, points out that many South African firms have simply replicated in Kenya the business model that worked for them in their home market. He cites the example of News Cafe, a South African restaurant chain that he says has not, at times, sufficiently taken into account the habits and tastes of Kenyan consumers.

He adds that South African commercials often depict scenes that have clearly been shot in South Africa. “Nobody in Kenya has a white-picket fence, so it lacks authenticity,” he says of one such ad. “That is really the challenge of South African businesses: they seem very distant.” But Gichinga argues that they have learned from these mistakes by increasingly partnering with local firms and hiring local staff.

Sanlam’s Ngulube shares the view that firms cannot succeed in new markets with an approach designed in Johannesburg and implemented by South African teams flown in. The insurer partners with local companies in every market where it operates, and executive staff are drawn from the local talent pool.

That, he says, has proven key to the firm’s success across Africa: “You are not viewed in that country as a foreigner who is coming to grab profits, you are seen as a local entity that benefits the country in a win-win arrangement.”

 

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email info@relocationafrica.com, or call us on +27 21 763 4240.

Sources: [1], [2]. Image sources: [1], [2].

Abdul Samad Rabiu: “Entire Industry Business Models are Going to Have to Change” in Nigeria

There are no defensive postures here. Undaunted by the potential for pandemic induced collapse in demand for commodities like sugar and cement, Nigerian billionaire Abdul Samad Rabiu sees only possibility – especially in agriculture, especially in Nigeria.

Not only is agribusiness relatively simple in terms of its business model, but it is urgent to save needed foreign exchange and to boost employment, he explains. Rabiu’s major focus is on promoting more production and processing to meet national demand and make more profits for his conglomerate BUA Group. BUA listed its subsidiary BUA Cement in January to raise capital for industrial projects in the glass, steel and oil sectors, citing the rigour and “scrutiny” of the process as a way of “de-risking” Nigerian opportunity for investors domestic and foreign.

“The opportunities are here,” enthuses the group chairman and chief executive during our videoconference, a portrait of South Africa’s former president Nelson Mandela beaming over his shoulder. That has not really been the case for the man on the Lagos Danfo, to twist a phrase – the city buses were restricted due to measures against transmission of COVID-19.

Most Nigerians are still reeling from the economic impact of the pandemic. Traders have ceased operation, farmers have thrown away produce due to the lack of transport, and businesses have mothballed investment projects. Most of BUA Group’s expansion programme remains undisturbed. Chief executive Rabiu unveiled plans for 3 million tonnes per annum (mtpa) in cement capacity and 50MW of power in Adamawa State in July.

However, he put off the announcement of a glass project that was slated for the postponed June France-Africa summit. While COVID-19 disrupted most firms, greater automation in BUA Group’s agribusiness and cement plants allows them to operate at about 40-50% of their normal capacity. “We are lucky for the fact we are even at 50%. Many others have not been able to work at all,” says Rabiu.

The ban on travel between Nigeria’s states was the greater challenge, “and that is lifting now”. He argues that “the impact [of the coronavirus] is going to be with us for quite some time” and that “entire industry business models are going to have to change.”

Better than 2019

Learning from operating his family business as a young man, Rabiu has built up his empire slowly but surely. BUA Group has moved from a trading company importing commodities to a manufacturing powerhouse in agribusiness and construction materials. From edible oils, through sugar and cement projects, the group also operates a shipping terminal in the oil town of Port Harcourt and owns a real-estate portfolio.

Cement is the industrial star. BUA Cement had a solid first quarter in 2020, banking nearly $60m in profit. This means, according to Rabiu, that it can absorb the slowdown from April to June, and have year-end results that may be “better than 2019”. That is not something many other Nigerian companies are predicting. It is bullish given the record year the company had in 2019; a 47.5% increase in turnover, with profit jumping nearly 70%.

He attributes the leap to the launch of a second line at the Obu plant in March 2019, adding 3mtpa to BUA’s output, and the first full year of the Kalambaina plant’s second line operations. The cement expansion does not stop; while BUA Cement currently has capacity for 8mtpa, Rabiu is targeting 14mtpa over the next few years.

Analysts do not share Rabiu’s optimism about the sector in the short term. “We expect the deterioration in the macroeconomic conditions – caused by the outbreak of COVID-19, which triggered a sharp decline in oil prices – to constrain activities in the construction industry as fiscal spending on capital projects weakens,” wrote Nigeria’s CSL Stockbrokers.

The scars will remain for some time for the Nigerian economy at large, Rabiu says, with the damage hitting the poorest first. “The price of goods has gone up, especially food items,” he says, partly as a result of the devaluation of the naira but also because the virus has hurt port logistics, making the clearance of imports difficult. That could be seen as an opportunity to intensify Nigeria’s great push to support food production, something that the government of President Muhammadu Buhari has supported for rice in particular.

As part of Nigeria’s CACOVID (Coalition Against Covid-19), an organisation of private-sector operators pooling funds to help relief efforts, BUA has put money into feeding programmes in Lagos and other cities, to cushion the blow of the pandemic. Fundamentally, Rabiu is unhappy about the high level of food imports. “It should not be happening at all, not only here in Nigeria, but generally in Africa. We have 60% of the world’s arable land. We have the people [to farm]. We have the climate. We have everything it takes.”

He is keen for that opportunity to go beyond food crops to cash crops, and again focus on keeping value in Africa. “The US, Germany, Switzerland and Belgium produce 75% of the entire chocolate production worldwide. And if we look at the cocoa industry worldwide, what are we talking about, $150bn-$160bn? And Africa gets maybe $10bn-$15bn of that?”

Sugar for resilience

He expects agriculture to provide the resilience that Nigeria needs in the post-COVID-19 era. Next year, for example, will see the ramping up or opening of operations at three major sugar plantations, including BUA’s own in Kwara State, as well as projects for Dangote Sugar and Golden Sugar.

BUA is Nigeria’s second-largest sugar producer after Dangote Sugar. “With that plantation, we will be able to produce 150,000tn of white sugar with millions of litres of ethanol, employing over 10,000 people in direct jobs,” says Rabiu.

He was inspired by a visit to Uganda’s Kakira sugar estate, run by the Madhvani family: “It was the most impressive sugar plantation I had ever seen.” And Mayur Madhvani told Rabiu that while he could get yields of 9tn per hectare in Uganda, the soils and potential in Nigeria were far greater.

 

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email info@relocationafrica.com, or call us on +27 21 763 4240.

Sources: [1], [2]. Image sources: [1], [2].

BUSA Statement on SA Moody’s Downgrade

The below statement was published by Business Unity SA.

Business Unity SA (BUSA) notes with dismay the decision by Moody’s Investors Service to downgrade SA to “junk status”.
It is an indictment on our country that BUSA needs to say this is not unexpected. Moody’s was the last of the major rating agencies to rate SA above junk status and had been indicating for some time their concerns about our lack of economic growth, bloated public expenditure, state of our SOE’s, our inability to make necessary structural changes in the economy and our labour market structure.


This rating downgrade comes at a time that the country is in the midst of pulling all its resources and capacity together to mitigate the impact of Covid-19 across economic, social and health sectors. The country’s resources and capacity are being stretched in addressing this extraordinary situation and the downgrade opens another major challenge for SA.


This is not the time for pointing fingers or starting blame games. We need to concentrate all the resources and capacity of our country towards the compact that is coming together to beat this virus. We recognise the urgency with which SA must respond to the Moody’s downgrade, but we do, as a country, need to mitigate the immediate economic impact of Covid-19.

If we fail in our endeavours to mitigate the negative impact of Covid-19 on our economy, we will be in a far worse position to resuscitate our economy post the Covid-19 crisis, thus making it virtually impossible to rebuild our economy to be rated again as investment grade.


So, we must commit to working together to deal with Covid-19, but also commit to work together to rebuild our economy post Covid-19. In making such commitment, the following remains pertinent and critical:
• Necessary structural changes in the economy
• The bloated public sector expenditure
• The wastage of scarce resources into SOE’s and other state structures that have no potential to deliver either social or economic returns
• Accelerating the processes at ESKOM to restructure the organisation so that it is fit for purpose and plays a critical role in a diversified energy generation and distribution environment. This includes urgently addressing the energy mix, accelerating the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) and implementing the Integrated Resource Plan (IRP)
• Ensuring legislation that erodes investor confidence is not considered or implemented
• Ensuring a single cohesive message from government, which must be that the most critical issue for SA is to do everything necessary to be rated again as an investment grade country, with this being the only focus.

We have come together as a country in the last few weeks to fight the Covid-19 outbreak. This “compact” must form the platform from which we now address the crisis of the downgrade. We have now got to channel all our resources and capacity to addressing these two crises. The critical component for this is decisive and urgent leadership from the President, his Cabinet and government. BUSA stands ready to work with stakeholders under such leadership.

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email info@relocationafrica.com, or call us on +27 21 763 4240.
Sources: [1], [2]. Image sources: [1], [2].

Ghana: Economy Among Africa’s Best

Ghana is the eighteenth-most attractive economy for investments flowing into the African continent, according to the latest Africa Investment Index (AII) compiled by Quantum Global’s independent research arm, Quantum Global Research Lab. In 2016, Ghana attracted a net foreign direct investment of US$3.5bn.

According to research by Quantum Global Research Lab (QGRL), Ghana’s economy has experienced strong and robust growth over the past decade, making its success a case worth emulating by its regional peers. Industry was the main driver of overall growth with an annual average growth of about 13%, followed by services with 8.4% and agriculture with about 8%. The strong growth record has fostered the country’s graduation to lower-middle-income status in 2010.

Commenting on the Ghanaian economy, Prof. Mthuli Ncube, head of Quantum Global Research Lab, stated: “Ghana’s democratic attributes are as robust as its economic growth, and by improving policies and institutions, successive governments have been able to build an attractive business climate conducive to growth. These measures include reducing the number of days it takes to register a limited liability company and days spent on resolving commercial disputes in the courts. Furthermore, the election of a new government in 2016 has revitalised the drive for higher growth and infrastructure investment, all which augurs well for investment opportunities in the country.”

Source

Higher Oil Prices by End Of 2017 Could Lift Nigeria’s Economy

Nigeria, the second biggest oil producer in Africa, is likely to enjoy increased earnings from its exports by the end of 2017, when global prices are expected rise to $60 per barrel, an increase that will boost the nation’s struggling economy.

Global oil prices fell from a peak of $115 per barrel in June 2014 to below $35 in February last year before recovering to $ 50 per barrel in December.

“I am hoping that we are heading towards $60 per barrel and I don’t see higher than that,” Gulf News quoted Emmanuel Kachikwu, the country’s Oil minister, as saying.

Kachikwu added that the West African nation production rose from a daily production of 1.4 million barrels per day (bpd) in early 2016 to the current 1.6 million and expects the output to hit 2.1 million by end of January.

The current production is the lowest since June 2007.

The nation’s output fell close to a 22-year low in May, following attacks by militants in the oil-rich region of Niger Delta, who damaged gas and oil pipelines and forced Chevron to shut its facility in Okan.

The government is negotiating with the militants.

Kachikwu said increased security by government forces in the region and the engagements with the militants who are demanding greater share of the oil-revenue will stabilize production this year, Gulf News reported.

In November, Organization of Petroleum Exporting Countries (OPEC) exempted the nation from a production cut of about 2.1 bpd due to the damage on its oil and gas infrastructure, Vanguard News reported.

Nigeria’s economy, which earns about 80 percent of its foreign revenue from crude oil exports, is facing its worst crisis in 25 years.

Source