Charles Mitchell. Worldbusiness. Volume 3, Issue 1. Jan/Feb 1997.
The elevator doors open on the sixth floor of the glass-walled office building where a xeroxed paper sign directs visitors to Legae Securities Limited. The five-room suite of offices on Diagonal Street-less than a block from the Johannesburg Stock Exchange, Africa’s oldest and largest bourse-is sparsely furnished. Emmanuel Lediga gulps coffee and steals frequent glimpses at his watch. In one hand is a blue rubber stress-ball, a constant companion, which he squeezes so hard and so steadily that it threatens to turn to Silly Putty.
In a few minutes, shortly after half past nine, Lediga will make history. When the newly computerized exchange opens for business this September morning, he will, with the click of a computer mouse, complete the first trade ever by a black-owned stock-brokerage firm on the Johannesburg Exchange.
As pioneering feats go in a country whose history is rich with risk takers, powerful achievers, and thundering accomplishment-Paul Kruger and the migration of the Afrikaner Voortrekkers, King Shaka and the rise of the Zulu nation, Nelson Mandela and the victory of his African National Congress over apartheid, to name a few Lediga’s mouse click may seem like pretty small beer. But it will be a truly significant moment. In the context of the new South Africa, it will be a watershed. ith the shift of political control from the white minority to the black majority now complete, a new phase in South Africa’s transition is under way. It is one that will have a profound impact not only on the continent’s most sophisticated economic engine, but also potentially on all of Africa itself. South Africa’s black majority, so long denied meaningful participation in the economy (as in so much else), is now focused on redressing that wrong. The national obsession has turned from black political power to black economic power. The new mantra of the African National Congress, South Africa’s governing party, can be expressed in five words: Real power is economic power. The ultimate goal is black control of the white-dominated economy.
The idea is not new in Africa, but how the African National Congress plans to implement it is. The party believes that encouraging black private investment and using the market to build black wealth will ultimately work far better than expropriation and nationalization. Those strategies were employed by other nations of Africa; economically and politically, the results were often disastrous.
“To have a stable democracy, you can’t just have a transfer of political power,” says Michael Spicer, an alternate director of Anglo American Corporation of South Africa Limited, the mining, manufacturing, and financial conglomerate (with $17.5 billion in investment holdings) that dominates South African commerce. “You need broad-based ownership of the economy. It’s been clear for a long time that unless black South Africans participate centrally in the South African economy as wealth creators, the market will not endure.”
Handing over political control cost the country’s 5.7 million whites scarcely a dime. Handing over economic control will be expensive and personally discomforting. They know it-and in many cases are resisting it.
There is a certain melancholy to all this, because while the costs of economic failure are high, the fruits of success are almost limitless. South Africa represents only 4 percent of the surface area and 6 percent of the population of Africa, yet it accounts for 25 percent of the continent’s gross domestic product, 40 percent of its industrial output, 45 percent of its mineral production, and 50 percent of its generated electricity.
South Africa is both the richest country in Africa and the most inequitable in terms of distribution of wealth. The richest 10 percent of the population-almost exclusively white-accounts for more than half of the nation’s income. The average monthly income of whites is more than two and a half times that of blacks. A report by Towers Perrin, a management consulting firm based in New York, says that executive pay (which means white executive pay) is twenty-three times that of a manufacturing employee, putting South Africa on a par with the United States (twenty-four times) but decidedly higher than Britain (nineteen times), Germany (eleven times), and Japan (nine times).
Within minutes of the market opening, Lediga joins Legae Securities chief trader David Cox, in the trading room, an office devoid of furniture except for a potted plant, a few chairs, and a table with three computer terminals. It hardly seems the venue of history. Cox, who is white, says he left a more established corporate life to get in on the ground floor of what he terms the future of South African business. Indeed, if all goes right for South Africa, the scene at Legae Securities is how black economic empowerment is supposed to work. There will be black-white cooperation supported by outside investment (Legae Securities has the London-based HSBC Investment Bank as a minority partner), great potential for growth, and most important, everybody making money. The process is not without obstacles, however, including an outrageously high unemployment rate of over 30 percent, powerful unions that have created one of the most rigid labor markets in the world, growing signs of white resistance to changes in the workplace, a devastating crime wave, and not least of all, the need to convince overseas investors, from entrepreneurs to the great multinationals, that there will be economic life in South Africa after Nelson Mandela.
Call it the Mandela paradox. Six years after his release from prison and two years after his inauguration as South Africa’s first black president, the seventy-eight-year-old Mandela remains a powerful symbol of racial unity and is indispensable as a domestic peace broker. His force of personality and indeed his very stature have been instrumental in assuring investors that South Africa is stable. At the same time, he has become so closely identified with the country’s future that outsiders have been reluctant to commit direct-investment funds-the kind of money that builds factories and creates jobs- because they have been unsure of what awaits them when that inevitable day arrives: the day after Mandela.
Examples abound that illustrate just how closely Mandela and the economic health of South Africa are linked. A particularly pointed one occurred last February when the Old Man, as he is popularly known here, entered a hospital for routine tests. In just a few days the value of the rand, South Africa’s currency, plunged 7 percent, and it has yet to recover-a reversal whose significance is clear to the business community.
But what may not be so clear to global investors is that midway through his five year presidential term, having publicly declared that he will not run again, Mandela has already ceded control of the daily affairs of government-and the formulation of economic policy-to Thabo Mbeki, his deputy president and presumed heir.
The applause you hear is from big business in South Africa.
Mbeki, a pipe-smoking diplomat with a fondness for three-piece suits, is regarded as the man who successfully persuaded the African National Congress to jettison its Marxist philosophy and to embrace private enterprise and free markets. “After 1990, when it was clear where South Africa was heading, Mbeki was the real darling of business,” says Gavin Keeton, an economic consultant to Anglo American Corporation. “Everybody just thought he was the greatest. If you asked [business] people who they would have wanted then as president, they would have much preferred Mbeki to Mandela.”
Cabinet ministers already report directly to Mbeki, and he regularly chairs cabinet meetings-in a highly efficient and businesslike manner, African National Congress officials say. The truth, in short, is that while the nation may still be Mandela’s, the government is Mbeki’s. South Africa’s post-andela period has already begun.
Today Mbeki is overseeing an economy whose growth performance has improved considerably after three years of steep decline in the waning days of white rule. Gross domestic product has risen steadily by 1.3 percent in 1993, 2.7 percent in 1994, and 3.3 percent in 1995, with an expected rate of close to 4 percent in 1996. Inflation is down to about 7 percent a year, a level not seen since the 1970s. Exports to the rest of Africa have mushroomed from $837 million in 1987 to $3.65 billion in 1995. And as trade unions are drawn into the economy through the strategy of black empowerment, there are clear indications that they are softening their opposition to government plans to privatize some state-held industries-a move the unions fear will cost them jobs and further erode their influence on the government.
Recently the African National Congress introduced a macroeconomic plan for growth. This blueprint, drawn up under the direction of Mbeki, sets ambitious targets of 6 percent growth per year and the creation of 400,000 jobs annually by the year 2000. It also challenges industry to meet international demands for competitiveness. Well received by investors, it is business-friendly and decidedly pro-free market, calling for increased union flexibility, a lowering of remaining tariffs on imports, and an end to currency-exchange controls.
The need for a radical long-term economic plan was evident, for government and business leaders have expressed frustration with the flow of investment funds into South Africa. While multinational companies such as BMW, Daewoo Group, Ford Motor Company, IBM, Nestle, Pepsi Co, and Samsung Group have invested heavily in the last two years, most of the country’s $6.8 billion surplus of capital inflow between mid1994 and the end of 1995 (compared with a net outflow of $19.6 billion between 1985 and mid-1994) came in the form of portfolio investment on the Johannesburg Stock Exchange-money that can easily flee if investors become nervous.
Between May 1994 (a month after Mandela’s election) and May 1996, a total of 159 foreign companies opened for business in South Africa-a number the government views as disappointing. Foreign companies (mostly those that ignored United Nations sanctions in the 1970s and ’80s and continued to do business here throughout the apartheid years) employ more than half a million South Africans and sell more than $55 billion in goods and services in South Africa’s $130 billion market.
Multinationals that have recently come into the market have found the country stuck in a time warp. Excluded from the world economic community by the sanctions, South African businesses failed to keep pace with global business trends.
Ford Motor Company, which disinvested in the 1980s and turned over its stake in South African Motor Corporation (Samcor) to its employees and to Anglo American Corporation, has returned to find that little has changed. Its biggest problem: a poorly educated workforce that is having difficulty meeting new world-quality standards. Chris Ray, executive director of finance for Samcor, says that when the company left in 1987, literacy and numeracy among its hourly workforce was “virtually nonexistent.” Ray says that it really didn’t matter then. “Quality was not an issue in those years, and I guess you could get by with an undereducated workforce.”
But changes in production techniques, inspired by Japanese car manufacturers, meant that when Ford returned in 1994 and inherited the same illiterate workforce it had before, serious problems arose. The new emphasis on quality teams and interchangeable jobs meant that workers had to read and do basic arithmetic. Most of Ford’s workforce could do neither.
Samcor now operates adult literacy classes and expects to have all 3,500 of its hourly workers reading and writing by the end of the century. Production and morale have improved markedly. “We have had nothing but good news since we came back,” says Ray.
Ford’s decision to reinvest in Samcor and to spend $35 million on factory improvements in 1996 suggests that Western international investors are finally getting over their hang-ups about the Mandela succession. “In 1994, when government bonds were initially being raised abroad, we couldn’t get anything beyond five years [the length of Mandela’s presidential term], and the market used to jokingly refer to them as `Mandela put options,”‘ says Anglo American’s Keeton. In September 1996, South Africa successfully floated a seven-year Eurobond issue of 500 million marks-a time span that reaches well into Mbeki’s first presidential administration. “In terms of capital markets, I think the initial nervousness has dissipated,” says Keeton.
And that was exactly the reaction the African National Congress hoped for by naming Mbeki as the designated heir years before the end of Mandela’s presidency in 1999. The strategy was a master stroke, for the continent’s history has been filled with violent and economically chaotic presidential successions, and the party did not want that to be the case in South Africa. But while the issue of presidential succession may be settled, the transfer of the economy into black hands is not. Enter Cyril Ramaphosa, secretary-general of the African National Congress and once Mbeki’s closest political rival.
Regarded by many in the government as too young (Ramaphosa is forty-four, Mbeki fifty-four) and too deficient in international experience to be considered as Mandela’s successor, Ramaphosa has been tapped by the African National Congress as the point man for its black empowerment strategy. It is a position that will leave him well placed to seek the presidency in the future.
While he says that Mbeki will be a good and effective president, Ramaphosa makes it clear that he has not entirely given up his own political ambitions. Asked if he would be prepared to run against Mbeki in 2004, he laughs and dodges the question (certainly a political skill). “You know,” he says, “life is long and nobody really knows what is going to happen to them from time to time. Life turns a number of corners. Before, I was in the business of politics. Now I am in the politics of business.”
Today Ramaphosa is the ultimate dealmaker and the most sought-after black businessman in South Africa. His career is a metaphor for the progression of black aspirations. He has gone from student activist to head of the mine workers’ union, to chairman of the committee drafting South Africa’s new constitution, to deputy director of New Africa Investments Ltd., a venture capital company and investment house (total assets, $1.9 billion) run by Mandela’s personal physician, Nthato Motlana. Ramaphosa was bloodied in the battle against apartheid, being detained twice for his union activities.
Despite his new role, Ramaphosa is little changed from when we first met in the 1980s during union strikes in Cape Town. He still looks uncomfortable in a suit and tie as he storms into the New Africa Investments offices in the once whites-only Johannesburg suburb of Hyde Park. He apologizes for being fifteen minutes late (traffic was bad), then pours tea for his guests.
It was Ramaphosa who negotiated what the Financial Mail, South Africa’s well-respected business weekly, has called the deal of the century: the purchase by a black investment consortium of a 48 percent stake in the Johnnies Industrial Corporation (Johnnic), a subsidiary of Anglo American’s with holdings in manufacturing, media, and retail enterprises. The deal, the first big boost for black economic empowerment that the country has seen, was valued at $900 million. The consortium, which Ramaphosa effectively runs, comprises twenty-three black investment interests, from union and hospital-worker pension funds to private investment houses.
Ramaphosa is passionate about black economic empowerment, a term he says is misunderstood. “One is wrong if one thinks that through the Johnnic transfer there is going to be empowerment of all black people in the country,” he says. “Empowerment is very broad and has many facets. It needs to be supported by a number of pillars. The government is one, the private sector is another, and foreign investment is a third.”
A cynical view of black empowerment is that the large white-owned conglomerates such as Anglo American are trying to buy off black aspirations-along with government intervention and regulation. This view holds that by having union pension funds as shareholders, the conglomerates will diminish the power of the unions and force them to choose between profit-reducing strikes and income-producing dividends. Cynics also warn that black empowerment will simply create a new rich black elite, one that will serve as a buffer between the expectations of the poor and continued white privilege.
There is probably a touch of truth in all these views, but Ramaphosa prefers to see black empowerment in a much broader context (as do many of the country’s largest businesses). His view, quite simply, is that if the black majority is not given a meaningful stake in the economic future of the country, there is a real danger of social explosion.
Anglo American’s Spicer says that the Johnnic sale wasn’t charity, even if Ramaphosa’s consortium purchased the shares at an 11 percent discount from market value. The deal, says Spicer, was simply good business; it was about corporate survival and should be a signal to other white-controlled companies to get on board.
Anglo American has been through this before-and not only survived but flourished. When the Afrikaner-dominated Nationalist Party came to power in the late 1940s threatening to nationalize private assets, Anglo American eventually sold a large stake in its General Mining holdings to Afrikaner businesses to create Gen Corp. For the first time, the Afrikaans-speaking community had an economic stake in a country that until then had been dominated by English-speaking South Africans. Anglo American was left virtually alone to go about its business.
But Ramaphosa says that black empowerment isn’t just about creating black shareholders. It must go deeper, to the creation of a black middle class. “Economic empowerment in my view encompasses things like enabling people to get jobs…giving people skills…changing the ownership of companies,” he says.
While teaching the black majority about the fundamentals of empowerment is a daunting task, it is no less daunting than convincing whites that it is necessary. The signs of a white backlash are growing. Emigration, especially of highly skilled whites, is again on the rise. In the first five months of 1996, the country experienced a net loss of 2,810 people, compared with 1,731 in the same period in 199S.
Several international companies that have instituted affirmative action programs talk about resistance by white middle managers. A recent survey by FSA-Contact, a human resources consultancy, found that 71 percent of company respondents said they’d had difficulties implementing such programs in 1996, compared with 56 percent in 1995. And residents in two mostly white Johannesburg suburbs, Sandton and Randburg, are refusing to pay property tax increases of between 200 and 300 percent to the blackrun regional government, claiming incompetence, waste, and racist management.
“The question [from whites] is always, `Why do we have to do this?”‘ says Dudu Nyamane, the equal opportunity programs manager for IBM South Africa.
This spirit of denial among whites-their refusal to acknowledge that any wrongs were committed against blacks during the days of apartheid and that reparations need to be made-annoys Ramaphosa. “I think, at a symbolic level, white South Africans did buy in [to the idea of black rule], but when it comes to material terms they clearly haven’t,” he says.
“They don’t see themselves walking the extra mile, helping those who have been previously disadvantaged. They just don’t see themselves doing that, and in the end they don’t even want to lift a finger.”
The white community, he says, must realize that black expectations are high and that there is no point in resisting the inevitable. till minutes away from his first deal, Lediga talks about his own desires. He says he wants to build Legae Securities into the Goldman Sachs or PaineWebber of South Africa. “My expectations are high, but they are not much different from other black South Africans,” he says. “We all want a better life. There is no shame in being rich.” It is on the streets of Johannesburg’s Hillbrow section, a vast expanse of twenty- and thirty-story high-rise apartment blocks and one of the most densely populated square miles in Africa, that the pressures Ramaphosa and Lediga talk about-the pressures of black expectations-can be most easily felt.
Formerly a whites-only neighborhood of yuppie cafes, bars, and boutiques, its sidewalks are now a bazaar of open-air barber shops, vegetable sellers, prostitutes, and knots of unemployed men killing time. Whites no longer go to Hillbrow, and the once pleasant backstreet hotels have turned into flophouses and drug dens. At night, scores of homeless people build campfires on the curbsides and beg for handouts.
Poverty in Africa’s richest nation is black. A government survey in 1993 found that 44 percent of the country, or 16.3 million people in 2.7 million households, were poor, and that 95 percent of those households were black. A startling 65 percent of those households earned no wage income at all.
This enormous disparity reflects the essence of South Africa, a nation of contrast and contradiction. Nowhere else in Africa is there such a mix of a relatively developed economy and infrastructure with the poverty and deprivation associated with the world’s poorest nations. Typical of the contradictions is that, while plagued with a 32 percent unemployment rate, probably the highest in the world, South Africa is faced with a labor market as rigid as those found in uniondominated Western Europe. Employers complain that it is expensive to hire workers and even more expensive to fire them.
Another contradiction: South Africa’s trade unions helped bring the African National Congress to power, but now they are one of the government’s major problems. Estimates suggest that the gap between the wages of unskilled workers in unionized jobs and those in nonunionized sectors have recently been as high as 40 percent. The country’s unions have pushed wages far above market levels, impeding the creation of desperately needed new jobs. The number of manpower days lost to strikes reached almost four million in 1994, Mandela’s first year in office, and was still above 1.5 million in 1995.
The annual World Competitiveness Report produced by the World Economic Forum with the International Institute for Management Development ranks South Africa near the bottom of the fortyeight countries surveyed, citing as problems a shortage of skilled labor, high unemployment, relatively high wages, and low computer literacy.
The report also cites what is frighteningly clear in the streets of Johannesburg-the explosion of crime. It is impossible to hold a conversation with a South African, white or black, and not end up discussing crime. Everyone has been either mugged or carjacked or knows someone who has. South Africa has always been a violent society, but the worst crime was largely confined to the black townships. Now it has entered the white communities.
Even though statistical comparisons can be dubious, South Africa has one of the highest murder rates in the world: 85.1 murders per 100,000 population. Only neighboring Swaziland, with 88 murders per 100,000 population, is worse.
Such figures hardly suggest a new nation that is Africa’s last best hope of economic success; yet, again, South Africa is a country of contradictions. Its basic infrastructure its roads, railways, harbors, and telecommunications-is by far the best in Africa.
Its potential as the gateway to a continental market of one billion people is already being tapped by local businesses, proving to multinational investors that there is money to be made here.
South African Breweries Limited, now the fifth largest brewery in the world, has expanded its holdings in Botswana, Mozambique, Tanzania, and Zambia. South Africa’s Shoprite/Checkers supermarkets are moving into Botswana, Mozambique, and Zambia, and are looking at expanding into Ghana, Kenya, and Zimbabwe.
Lediga is seconds away from making history. He smiles and speaks with confidence about the future. He says that the new South Africa is too smart, too sophisticated, and in the end too obsessed with money and comfort to fail. The whites will get on board; it may take time, but in the end they will act in their own interest, regardless of who is in charge.
At a few ticks before 9:45 a.m. Lediga completes his first transaction, a deal for $2 million worth of Malbak Ltd. shares. The trade nets him $5,000 in commission, almost equivalent to the annual wage of a black laborer in South Africa. “This,” says Lediga, embracing Cox, “is a great beginning.”
In the past, South Africa has shown great resilience and an amazing capacity to prove its critics wrong. Its economic future does not rest on the shoulders of just one man, great as Mandela may be. Those doing business here have come to understand that. The future, even without the Old Man, looks bright.