The FT of London Says That South Africa Is A Great Place To Invest

Out of the bottle

By Richard Lapper

Published: February 1 2010 02:00 | Last updated: February 1 2010 02:00

In 1979, when Standard Bank published Pioneer Bank in a Pioneer Land , the title of the corporate history had a distinctly nostalgic feel. South Africa's largest bank - then an offshoot of Standard Chartered of the UK - might have spent much of its early days breaking new ground as it followed Cecil Rhodes and other gold diggers around Africa. But by the end of the 1970s it was on the defensive, labouring under economic sanctions and heavily reliant on its domestic market.

It took another decade before F.W. de Klerk told the white parliament, 20 years ago tomorrow, that its days of domination were over. But with democratic South Africa now more open to the rest of the world, the pioneer label is once again appropriate for Standard, which is increasingly orienting itself to the resource-rich African continent and big emerging markets, in particular the "Brics" - Brazil, Russia, India and China.

The bank's shift in strategy is just part of a growing trend in South African business. This period of expansion abroad embraces not only mining companies, which have traditionally had a more international focus, but sectors ranging from finance to retailing, telecommunications and consumer goods and services.

"It is an orthodoxy," says Jacko Maree, Standard's chief executive, who in the past three years has orchestrated multibillion-dollar deals with Industrial and Commercial Bank of China and Troika, Russia's second-largest investment bank. "When [South African companies] expand they look at emerging markets." Standard sold a 20 per cent stake to ICBC in 2007 and acquired one-third of Troika last year.

Bric investment into South Africa is less pronounced than in some other parts of the continent - indeed, $5.5bn (£3.4bn, €4bn) of China's $7bn investment is accounted for by the Standard deal. But trade connections are strengthening. Last year, China established itself as the country's biggest trading partner, displacing Germany.

Barred from doing business in most of Africa during the apartheid era, South African companies are meanwhile making up for lost time in their own continent. Links with other emerging markets - themselves interested in Africa's resources and high-growth consumer markets - are growing quickly. The economic momentum is also giving substance to a foreign policy that since the end of apartheid has favoured links with Asia, Latin America and Africa in an effort to reduce a historical dependence on Europe and the US.

"South Africa is becoming the corporate captain of Africa because it has more pan-African companies than any other country in Africa and this gives it a seat at the table of the Brics," says Michael Power at Investec Asset Management in Cape Town.

Growing connections with emerging markets in part reflect the long-term shift of an economy that remains heavily dependent on whoever is demanding its raw materials exports - and the way in which the global crisis has hobbled Europe and the US, while the east and south have been less affected. Mineral and raw material exporters have seen rising Chinese demand for their products help compensate for the slide elsewhere.

Coal and iron ore exporters - often part of big international groups such as Anglo American - have been particular beneficiaries. So have platinum miners. In 2008, about two-thirds of the platinum dug out of the ground was used to make catalytic converters, a component that makes vehicle exhaust emissions cleaner. Last year, the motor industry downturn led to a sharp fall in sales - but platinum producers were able to sell huge quantities of the metal to jewellery producers in China, where demand for the so-called white gold is strong.

In addition, though, companies in other sectors have been stepping up their expansion. Standard itself has been busy expanding in Africa, recently obtaining a licence in Angola. These arrangements have enhanced its capacity to negotiate project finance, mining deals and trade facilities, often - as in the case of a power station being built by the Chinese in Botswana - with a partner from one of the Brics.

For financial services groups, exchange controls and tight regulation meant the sector has emerged little scathed from the crisis and well placed to move forward. Last June, for example, FirstRand announced it would refocus activities on Africa and the region's growing trade and investment links with India and China, agreeing a month later a strategic alliance with China Construction Bank. Like ICBC, CCB ranks among the big four Chinese banks.

The trend is also visible among consumer companies. SAB Miller, the brewer, invested in China as long ago as 1994 and is now stepping up its drive into Africa. MTN, the telecommunications group that has sought and failed in the past few years to merge with India's Bharti Airtel (on two occasions) and Reliance (on one), has nonetheless made headway expanding in Africa and in the Middle East. It commands an average 38 per cent share of 10 markets ranging from Nigeria and Ivory Coast to Afghanistan and Syria, has more than 100m subscribers and generates 60 per cent of its revenues outside South Africa.

Even companies that were formerly bastions of apartheid have been joining the throng. Naspers, a publishing group of Afrikaner origins, has been picking up media, communications and especially internet businesses in Brazil, China, Russia and other high-growth markets - last September buying Brazil's BuscaPé, a profitable electronic commerce company, for $342m. Naspers also owns a stake in Tencent, a big Chinese internet portal.

Sasol, which under white rule developed technology to convert coal into oil to mitigate the impact of the international block on sales of crude to South Africa, has struck agreements within the past two years to develop plants in countries including China, India, Uzbekistan and Indonesia.

South African companies have been able to take advantage of these trends for several reasons. Perhaps most important is the country's business culture. South African managers are seen as less risk-averse than their counterparts in Europe and the US. The country's ethnic diversity and tumultuous recent history means they also tend to be open to different cultures and less dogmatic about business methods. Companies have become adept at working with local partners, influencing the course of a venture even though they might not have total control.

The very isolation of the apartheid era forced business to be creative, but post-apartheid trends have helped, too. Black economic empowerment, a policy introduced in the 1990s under which an elite of black managers was created and billions of dollars of corporate equity transferred to black business, has made South African companies more acceptable in Africa and other emerging markets. Companies have meanwhile acquired experience in selling their products to South Africa's own emerging black middle class and low-income groups, arming them to operate in similar markets further afield. "South African business isn't as afraid of Africa as its competitors. They know what does and does not work and I think proximity helps as well," says Mr Power.

Size is another factor. With a population of less than 50m, South Africa's domestic market is far smaller than the giant emerging economies, forcing companies to be flexible rather than focus on volume. Yet local capital markets are relatively large compared with economic output, allowing companies to get hold of funds more easily than some of their developing country competitors. Capitalisation of the Johannesburg stock market is roughly twice gross domestic product, whereas in many countries the value of listed companies is smaller than the yearly output of the overall economy.

The country also has sophisticated debt markets on which companies can raise long-term funds. "South Africa has by far the most sophisticated capital market compared to [other developing economies]. You had an ability to fund yourself that was disproportionate to the size of the home base," says Standard's Mr Maree.

On top of all that, companies have been urged by their government to do business in emerging markets. Since the mid-1990s the governing African National Congress has wanted to promote a southern axis, linking the big emerging nations and Africa. In part, that is to keep US political domination in check by strengthening multilateral institutions.

Seven years ago, South Africa joined Brazil and India to form the G3, also known as Ibsa. Although its economy is by far the smallest of the three, the country's influence within Africa gives South Africa disproportionate weight, making it an attractive partner for the Brics when they seek to exercise diplomatic muscle. That influence was visible late last year in Copenhagen when South Africa - alongside Brazil, India and China - took an active role in climate change negotiations, giving birth to the so-called Basic group.

It will take time for these connections to develop. The government is wary of a high degree of dependence on any country and insists national interests have to be taken into account, with leaders warning about the dangers of a new colonial relationship. Indeed, the government imposed temporary quotas on Chinese textile imports in 2007 and 2008. In the eventually unsuccessful negotiations about merging MTN and Bharti Airtel, South Africa jealously defended the idea that the new entity should be listed in Johannesburg as well as Mumbai, in spite of the greater scale of the Indian undertaking.

No longer is it likely that globalising South African companies will be allowed to list their shares and move their headquarters abroad, as groups including Anglo American and SAB did in the late 1990s by relocating to London. But even so, say analysts, the country's corporate sector offers investors keen on the potential of the Brics a different way to access those markets. Because South African companies tend to be more transparent and better governed than many of their emerging market counterparts, it could also be a safer way to benefit.

Ayanda Ntsaluba, director general at the foreign ministry in Pretoria, says the government regularly holds discussions with companies such as Standard and MTN, and lends particular backing to co-operation between these businesses and Chinese, Indian or Brazilian counterparts. "We are encouraging more South African companies to establish themselves in the emerging world," he adds.

Brewer with a recipe that can vary to suit its markets

SAB Miller, the brewer listed in London since 1999, started South Africa's corporate move into emerging markets and has become something of a role model. Heavily dependent on its domestic market until 1990, the company now derives 80 per cent of its profits from Asia, Latin America, eastern Europe and the rest of Africa, an achievement that has made it the subject of close attention among South African businesspeople.

In part, SAB has been simply been faster than its competitors, buying into China - where it owns Snow, the best-selling local beer brand - as long ago as the mid-1990s. More recently, it expanded into eastern Europe, acquiring Pilsner Urquell of the Czech Republic under the noses of European competitors such as Heineken and Carlsberg. "This really was a coup," says Rob Forsyth at Investec Asset Management in Cape Town. The Colombia-based Bavaria has meanwhile given it significant exposure in Latin America.

All this means SAB Miller is well embedded in markets that have more growth potential than the US and Europe. Beer consumption in Africa is a fraction of that in other developing markets, with many still preferring the home brews offered in shacks and backroom bars.

There are other elements to the company's success. It has worked effectively with local partners, sometimes in situations where it does not own a majority stake. Mr Forsyth says that the group is in many ways a "beer consultancy", prepared to adapt its methods to local conditions. "One of their abilities is to work with people. They are open to different cultures and not too proscriptive."

SAB Miller has been innovative in its approach to operations. In African markets, for example, the group has built smaller breweries nearer to population centres. That helps cope with potholed roads and weak or non-existent rail links, reducing distribution costs. "Africa requires a different business model," says Mark Bowman, managing director of the group's business in the region. Breweries "have to be closer to the market".

The group has developed a broader range of beers and other drinks for the African market. These include cheaper so-called opaque beers that are sold in paper containers, have a limited shelf life and are aimed at the home brew customer. It has begun schemes to source ingredients from local farmers in order to make pricing more competitive, especially among low-income groups.

A beer made from local sorghum has been a big success in Uganda. This year, SAB Miller plans to start producing beer in Angola made partly from cassava.