You must identify the gaps before you can plug them
BEFORE you can plan and implement a defensive strategy to
effectively counter the offshore threat, you must determine
the source of the attack and the type of strategy your
adversaries will adopt to carve themselves a slice of your
market. The developed states of Europe, North America and
Japan won't fire every salvo. On the contrary, many
economists and business people expect developing countries in
the Pacific Rim to deliver the heaviest and most sustained
WHAT STRATEGIES WILL THEY USE TO 'GET IN'?
Most of the South African companies approached for comment
agreed that offshore companies would probably choose one or
more of ten strategies to infiltrate the local market:
Direct investment in plant, personnel and marketing
The acquisition or take-over of established South
Entering into joint ventures, partnerships or alliances with well-entrenched South African
Price-cutting. Slashing prices to the bone to
gain market share quickly.
Dumping. The process of flooding the South African
market with products surplus to foreign requirements
at extremely low prices.
Political pressure. Expecting paybacks for politically correct actions
during the apartheid years.
Licensing agreements with South African companies.
Niche marketing. Some offshore companies may be prepared to supply special
parts or accessories. In the interim they'll attempt to secure a market
segment and may eventually 'move into the big league'.
Rentals. Other companies will ease their way into the
South African market by offering customers renting or
leasing deals. This option will attract customers
because it relieves them of repair and maintenance
Better product and service quality. While the quality of South African
products usually compares favourably with that of imports, the quality of
customer service in general is pathetic as I pointed out in my book, I Was
Your Customer (William Waterman Publications, 1994).
And of the 10 'get in' methods ...
WHICH STRATEGY POSES THE GREATEST THREATS?
The answer depends on the type of business you run and the
source of the threat.
Some local businesses believe that foreign competitors
will favour the direct investment route to 'get in'. Lovemore
Mbigi, of Nampak, explains why:
Tariff regulations make exporting products to South
Africa generally cost-prohibitive.
Foreign direct investment is the most advanced form of
entry into a foreign market because it involves
establishing and controlling an offshore subsidiary.
Direct investment is also risky.
However, while high import tariffs decrease the incentive
for foreign firms to export their products to South Africa,
they increase the incentive for direct investment. In
addition, the favourable rand exchange rate makes foreign
direct investment a viable option for overseas competitors.
A lot of companies that want to bludgeon their way into
the South African market will take the acquisition trail.
Buy-outs, say some business people, are quicker, easier and
often cheaper than setting up an entire operation from scratch
on foreign soil.
Service-based businesses, like consultancies, are
particularly ripe for this type of 'get in' strategy.
Dr Trevor Woodburn, managing director of Woodburn Mann, an
executive search and management consultancy, fears attack from
the United States.
While low levels of growth in South Africa have made the
market sluggish, several leading global players have been
'sniffing around' with the idea of buying out an existing firm
in order to gain easy access in southern Africa.
Woodburn identifies the main 'sniffers' in his area of
specialisation as Korn Ferry, Heindrich & Struggles, Spencer
Stuart, Egon Zehnder and Russel Reynolds.
To avoid heavy investment in compiling research bases,
offshore consultancies will attempt to gain a foothold in
South Africa through buy-outs or joint ventures with small to
medium companies that have established client portfolios.
Acquisitions aren't confined to consultancies.
They also offer cash-flush offshore manufacturing
companies the easiest and fastest route into the South African
When they take over a local operation, the purchase price usually includes:
The alternative - entering the market with a zero base - involves heavy capital investment in plant and equipment,
setting up sales, administration and financial components. It
also means sacrificing profits to subsidise the advertising
needed to create awareness and grab market share.
In fact, whether they set up a plant from scratch or
acquire one, advertising will be a major cost factor.
B Schrieber, managing director of ballpoint manufacturer
BIC, says that whatever the chosen route: 'Encouraging
suppliers to stock your products is the only entry strategy,
and this requires a substantial investment in advertising.'
Many invaders who need sophisticated operating
environments, get into the market by setting up alliances or
entering into partnerships with established South African
companies. This strategy is particularly applicable to the
'Any company that attempts to enter the field on its own
is courting disaster,' says Stravos Nicolaou, marketing
director of Garec, which styles itself as 'The House of
Foreign companies which don't already have a local
presence will find the industry structure 'complicated'.
The South African pharmaceutical market is divided into
The private sector, which caters for only 18% of the
population and is worth about R3,1-billion a year.
The still developing managed care sector which
serves about 4% of the population.
The public or tender sector. Although it caters
for 78% of the population, it is valued at only
R100-million a year.
While the pharmaceutical market in South Africa turns over
more than R3-billion a year, it's small compared to some
overseas countries. One product alone, Zantac, earns close to
R7-billion a year in the United States, says Nicolauo.
Statutory controls make operating in the South African
pharmaceutical market even more complex. The production,
supply and advertising of medicines must have the blessing of
the local Medicines Control Council. In addition, all
pharmaceutical companies and their managing directors must
register with the South African Pharmacy Council. A
prerequisite for registration is that managing directors must
be a registered at the council as pharmacists.
Foreign pharmaceutical companies that don't acquire local
operations or buy themselves in with either money or product
may elect to enter into licensing agreements with established
local suppliers. In these cases, says Nicolaou, the local
company acquires use of the trademark although the overseas
company continues to own the product.
Probably the best-known joint pharmaceutical venture in
South Africa is that between Astra Pharmaceuticals - currently
the fastest growing pharmaceutical company internationally - and Adcock Ingram
Astra has a 60% shareholding in the joint venture.
Adcock, with 40%, manages the encapsulating, packaging,
labelling and distribution of Astra products.
In the processed food sector, an American manufacturer has
ganged up with two South African companies to attack S.A. Oil
Mills, which produces Black Cat Peanut Butter, the market
The American company, CPC International, which
manufactures Skippy Peanut Butter, has:
entered into an agreement with Vaalharts Co-operative,
South Africa's major supplier of peanuts, to ensure an
inexpensive source of raw material, and
entered into an agreement with Tongaat Foods, which
gives the American company access to well-established
production and marketing facilities.
The dissolution of the Oils Seed Board, a government-
subsidised body which controlled the quality of peanuts, will
ease CPC's entry into the market.
It will also raise another major problem. S.A. Oil Mills' process engineer Mark Preston-Whyte points
out that anybody with access to cheap, low-grade peanuts and a
cheap mill can now manufacture peanut butter.
'The end result will be a mass of cheap and low quality products on
To overcome the problem of inferior quality peanut butter
contaminating its image in a market that buys entirely on
price and without brand consciousness, CPC has positioned its
product as a high quality, competitively priced peanut butter
that competes head-on with S.A. Oil Mills' Black Cat Peanut Butter.
Partners in property
Even local property developers will find themselves in the
firing line. They expect competition to come from the most
unlikely areas such as the Middle, Near and Far East.
'A Malaysian firm,' reports Grahame Lindop, of Anglo American Property
Services, 'recently contacted us to discuss possible investment
opportunities in South Africa.'
Lindop reckons many offshore companies based in non- English speaking
countries with markedly different business cultures will favour liaisons
with local companies to work on joint developments.
And neither is the retail sector immune from let's-get-
together propositions. Roger Bennet, of the JD Group, which
claims a 25% share of South Africa's retail furniture trade
through 600 stores nationwide, gives the reasons.
Since existing chains already occupy the best urban
trading sites, a newcomer setting up an operation from scratch
faces the problem of finding a suitable location.
Furthermore, the cost of controlling a wholly owned subsidiary
on foreign terrain is high. It requires considerable
commitment of resources to management and heavy capital
investment plus cash to cover start-up and operating costs.
The benefits to foreign entrepreneurs of joint ventures
There are also moves afoot to usurp the positions of well-
entrenched local food groups through partnerships and
alliances. The Fedics Group, which turns over about R521-
million a year by providing industrial and commercial catering
services, has already experienced joint-venture competition.
French caterer Sodexho came to an understanding with
Premier Group's Hospitality, which is active in the local food
and catering industry and understands how the South African
Slashing prices is another common 'get in' strategy.
Characteristically, price-cutters maintain low prices
until they corner a predetermined share of their target
To keep prices low while they gun for market share, these
invaders often eliminate the provision of customer service and
Joy Manufacturing learnt about price-cutting 'get in'
strategies the hard way. A competitor from 'Down Under'
filched 15% of Joys' mining industry market by slashing its
'I suspect that more companies will seek to enter through
this door,' says Joys' Andrew Croxton. 'This strategy has and
will put pressure on us since we are in business to make a
profit, not a loss.'
Countries in the Far East, particularly India and
Pakistan, are notorious for producing goods at astoundingly
low prices. One Indian company was prepared to accept a mark-
up of only 6%.
According to Unisurge, which claims a 30% share of the
domestic market for surgical instruments and hospital
furniture, companies in India receive massive tax benefits to
make up for the losses they sustain by exporting at cut-throat
The company alleges that some Pakistani and Indian
manufacturers have set up 'front' operations in Germany. They
then re-route their inferior quality products to these
operations where just enough local content is added to justify
a 'Made in Germany' stamp. These quasi-German instruments are
then sold in South Africa at rock-bottom prices.
Many business people see dumping by offshore companies as
the scourge of local industry. Let's examine it as a 'get in'
strategy through the eyes of Fatti's & Moni's. Although
they're in the pasta business, the general principles apply
Italian and, to a lesser extent, Greek pasta manufacturers
resort to dumping to break into the South African market,
alleges group managing director Trevor Rogers.
'Once their domestic market requirements are met, foreign
companies are left with excess capacity for which they have to
find markets. This involves no real additional costs other
than freight from Italy or Greece to South Africa.'
Dumping doesn't have anything to do with investment. It's
about getting rid of over-production any way the manufacturer
can for whatever he can wheedle out of the targeted country.
Although consumers get the benefit of low prices - and often
matching quality - manufacturers, who have heavily invested in
the host country, find the bottom falling out of their
Which upsets Rogers.
He wants 'fair and reasonable' tariff protection to cover
constant investment in modern plant. But he's not going to get
The government has announced that the current duty of 30%
on pasta will drop to 24% over the next four years, which will
increase the severity of competition.
MULTINATIONALS PLAY ROUGH
When you're under attack from a multinational corporation,
prepare to ward off hammer blows that may include price,
better service and even political pressure.
Defending its commanding position in the fizzy beverage
market is Amalgamated Beverage Industries (ABI), which bottles
a range of popular carbonated drinks, including Coca-Cola.
Coke has already felt the sting of offshore competition - albeit indirectly - from Canada.
A Canadian company, Cott Beverages, supplies a cola
concentrate to local retail chains. This allows them to
produce their own colas. Examples include Makro's American
Cola, Pick 'n Pay Cola, World Class Cola and Woolworths Cola.
These products automatically enjoy better shelf space and
in-store exposure than Coca-Cola. And they're sold at cheaper
prices since the chains that produce them incur little or no
But more worrying for ABI is the re-entry of Pepsi-Cola into the South
ABI believes that Pepsi, Coke's greatest international
rival, will use a get-in strategy that emphasises its
political correctness in pulling out of South African when it
did as a protest against the repressive policy of apartheid.
Pepsi, Coke alleges, will attempt to create the impression
that its return is motivated not so much by profits as by its
desire to improve living conditions of South Africa's
underprivileged black community.
Rumours suggest that Pepsi plans to make large investments
in community projects such as massive clean-ups in townships
like Alexandra and Soweto. These will probably be widely
advertised to generate awareness among potential consumers and
Pepsi intended to enter the market through a licensing
agreement with National Sorghum Breweries, a black-owned
company with established distribution channels. But this
scheme fell through when National Sorghum launched its own
So Pepsi entered the South African market in November 1994
through New Age Beverages, a R100-million joint venture
between Egoli Beverages and Pepsi.
Egoli, which has a 75% stake in the New Age soft drink
bottling facility, was established by former Coca-Cola
employee Ian Wilson, a South African. Other major investors
include such prominent African-Americans as Earl Graves,
publisher of Black Enterprises magazine and chairman of the
Pepsi-Cola Bottling Company in Washington, singer Whitney
Houston and American basketball star Shaquille O'Neal.
Heading the New Age board are Khehla Mthembu, former
managing director of Afgen, and Monwabisi Fandeso, a former
South African Breweries and National Sorghum executive.
The return of Proctor & Gamble
Another major battle is likely to be fought for control of
the health-care, beauty and detergent markets. The main
contenders: Proctor & Gamble (P&G) and Unilever. P&G operates
in 51 countries and markets its brands in more than 140
An analysis of the international soap and detergent market
reveals that the world's biggest players, P&G and Unilever,
hold a 15% and 14% share of the market respectively.
'We know that P&G is back in the country,' says Unilever's
Patrick van Hoegaerden. 'When they left as a result of the
apartheid policy, they sold out to Permark, a local company,
under an agreement to buy back should the circumstances in
South Africa change.
'We believe they will be in the Unilever market as of
Also waiting for the P&G onslaught: the Consumer Products
Division of Adcock Ingram. Managing director Andrew McGibbon
reports: 'Procter and Gamble has more resources with which to
promote, advertise and exert greater influence on the trade
than almost any other worldwide corporation.'
Adcock Ingram's major concern:
P&G products that are
directly positioned against their own such as P&G's Vidal Sasoon and Adcock Ingram's Salon Selectives - both positioned
as professional hair-care products.
How will P&G get in?
Not by price-cutting.
P&G traditionally uses tested international campaigns to
market well-respected trademarks, the international
credibility of its corporate and brand names, world-class
service and high quality products.
Going for Telkom
In the telecommunications sector, Alcatel Altech Telecoms
(AAT), a joint venture between France's Alcatel Cit SA and
South African-owned Allied Technologies, which supplies public
switching, transmission and telematics systems to Telkom,
Vodacom, Transtel and Eskom, perceives a serious offshore
threat from many parts of the world.
The government had used the Bulk Supply Agreement to
protect Telkom since 1979. This barred vendors of transmission equipment from
Telkom adopted a technology-based policy of using a single
supplier. However, its approach is changing as a result of
rapid advances in technology, shortening product life cycles
and, increasingly, service-based decision-making.
As Dr Rodney Harper, of AAT, puts it: 'Telkom is looking
for a supplier who can offer the best total service solution'.
The end of the Bulk Supply Agreement in 1994 makes the
threat of international competition more acute. According to
Harper, the major threats stem from:
Ericssons, of Sweden.
Siemens, of Germany.
NEC, of Japan.
Ericcsons supported the ANC when it was banned. Now it expects something in
return. The company favours establishing partnerships with its customers.
AAT expects it to 'get in' and build market share through:
Siemens, the world's second largest supplier to the
international telecommunications industry, already has a
strong presence in South Africa with a 60% share of the
switching market. What worries AAT is the likelihood that
Siemens will attempt to increase its market share.
NEC, a major player in the world telecommunications
market, is already strongly positioned in the bordering states
of Lesotho, Swaziland, Malawi and Namibia.
'During the 1994 elections,' Harper recalls, 'rural radio
stations were needed to connect remote communities. We were
unable to manufacture the required number quickly enough. This
allowed NEC to enter the market.'
He believes that NEC will cut prices to gain further
THE PRICING CONUNDRUM
A lot of the companies emphasise price-cutting as an
important 'get in' strategy for foreign firms anxious to tap
the South African market. In fact, Richard McGhee, Budget Rent
A Car's sales and marketing director, says it's the only get-
in strategy for competitors in the car hire industry.
Is pricing really that important? To find out, I probed
further. But before we get into the nitty-gritty, a short
pause to reflect ...