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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 bombardments. So ... 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:
And of the 10 'get in' methods ... 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:
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 market. 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 pharmaceutical industry. '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 Pharmaceuticals'. Foreign companies which don't already have a local presence will find the industry structure 'complicated'. The South African pharmaceutical market is divided into three sectors:
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 Pharmaceuticals. 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 leader. The American company, CPC International, which manufactures Skippy Peanut Butter, has:
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 consumers' tables.' 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. 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 include:
Food liaisons 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
market works. Slashing prices is another common 'get in' strategy. Characteristically, price-cutters maintain low prices until they corner a predetermined share of their target market. To keep prices low while they gun for market share, these invaders often eliminate the provision of customer service and forgo profits. 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 prices. '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 prices. 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 across-the-board. 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 markets. Which upsets Rogers. He wants 'fair and reasonable' tariff protection to cover constant investment in modern plant. But he's not going to get it. 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. 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 distribution costs. But more worrying for ABI is the re-entry of Pepsi-Cola into the South African market. 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 create demand. 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 Pride Cola. 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. 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 countries. 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 1996.' 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. 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 the market. 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:
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
market share. 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 ...
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